Vivad Se Vishwas may help clear the backlog of pending tax cases

For long, tax experts in India have urged the Centre to do something about the mountain of litigation run up by the tax administration. The ‘Vivad Se Vishwas’ scheme for direct taxpayers announced in the Budget, close on the heels of Sabka Vishwas for indirect taxes, is an attempt to meet this demand while also netting the Centre a tidy sum to make up its FY20 revenue shortfall. The Vivad Se Vishwas Bill aims to clear the ₹10 lakh crore backlog of direct tax cases, by incentivising taxpayers with disputed claims to opt for a one-time settlement in return for expedient closure of their cases. The Bill proposes relief on a graded scale. Taxpayers who have appealed against the department are expected to cough up dues in full with interest and penalty waivers, while those who have won an initial round can settle at lower rates. With an eye on the deficit target, the terms are more lucrative for those who take it up before the fiscal year end of March 31, 2020.

Despite warnings about moral hazard, tax amnesty schemes have been a regular ploy used by successive governments to improve revenue mop-ups when in dire straits and have yielded mixed results. The distinguishing feature of the Vivad Se Vishwas compared to its predecessors is that it focusses on settling pending lawsuits with existing taxpayers, rather than trying to lure new taxpayers into the net by getting citizens to voluntarily disclose undeclared assets. As taxpayers who opt for it will not need to make any new disclosures that expose them to future probes, they may be willing to give it a go instead of spending years navigating the legal labyrinth. The scheme however has its downsides. First (once it is passed into law) is its short deadline which barely allows breathing space for taxpayers to evaluate it. The expectation that taxpayers who have already won cases will be willing to cough up 50 per cent of demands is optimistic. Two, both taxpayers and the CBDT are aware that a major proportion of the legacy disputes of ₹10 lakh crore pertain to superficial demands. In the past, the Standing Committee on Finance and CAG have estimated recoverable dues for the taxman at about 1-2 per cent.

Even if the scheme should prove successful, the Centre must bear in mind that it offers only a quick-fix solution to resolve legacy tax litigation and does not address its root cause. The root causes for much of the direct tax litigation in India lie in the Centre’s unrealistically high tax targets set in the annual budget, collection-based performance incentives for tax officers and the discretionary powers vested in assessing officers owing to loosely drafted tax laws and rules. Using this spring-cleaning approach to settling tax disputes can also result in the basic points of law raised by the litigants remaining unresolved, offering room for the proliferation of similar disputes in future.

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