MARCH 07, 2016

By Sandeep Dasgupta, Senior Manager, Deloitte Haskins & Sells LLP.

ONE of the thrust points of the Union Budget, 2016, direct tax proposals was reduction of tax litigation in India. While presenting the recent budget proposals, the Honourable Finance Minister reiterated that litigation is a scourge for a tax friendly regime and increases taxpayer cost besides administration cost for the Government. In order to provide a stable and predictable taxation regime, the Finance Minister proposed an elaborate 'Direct Tax Dispute Resolution Scheme (DTDRS)' with effect from 1June 2016, to resolve cases pending in any Court, Tribunal, Arbitration or mediation under the Bilateral Investment Protection Agreement (BIPA). A simlar scheme has been proposed for the Indirect Tax Disputes.

As per the Memorandum to the Finance Bill, 2016, the salient features of the proposed DTDRS scheme are as under:

-  The scheme be applicable to "tax arrear" which is defined as the amount of tax, interest or penalty determined under the Income Tax Act or the Wealth Tax Act in respect of which appeal is pending before the first appelate authority as on 29 February 2016.

-  Any person may also make a declaration in respect of tax determined in consequence of or is validated by an amendment made with retrospective effect in the Income Tax Act or the Wealth Tax Act, as the case may be, for a period prior to the date of enactment of such amendment and a dispute in respect of which is pending as on 29 February 2016.

-  The pending appeal could be against an assessment order or a penalty order

-  The declarant under the scheme be required to pay tax at the applicable rate plus interest upto the date of assessment. However, in case of disputed tax exceeding INR 10 lakh, 25% of the minimum penalty leviable shall also be required to be paid.

-  In case of pending appeal against a penalty order, 25% of minimum penalty leviable shall be payable along with the tax and interest.

-  Consequent to such declaration, appeal in respect of the disputed income and disputed wealth pending before the CIT(A) shall be deemed to be withdrawn.

-  For availing the benefit of the Scheme, such declarant shall be required to withdraw any writ petition or any appeal filed against such specified tax before the Commissioner (Appeals) or the Tribunal or High Court or Supreme Court, before making the declaration and shall also be required to furnish a proof of such withdrawal.

-  The person making declaration in respect of specified tax shall be required to furnish an undertaking in the prescribed form and verified in the prescribed manner, waiving the right, whether direct or indirect, to seek or pursue any remedy or claim in relation to the specified tax which otherwise be available to them under any law, in equity, by statute or under an agreement, whether for protection of investment or otherwise, entered into by India with a country or territory outside India.

It may be observed that withdrawal of existing appeals or writ petitions is pre-requisite for application under the scheme. Moreover interest and in some cases, certain part of the penalty may also be required to be paid for being eligible to make the application. It is debatable whether stipulation of upfront payment of large part of tax dues in genuine cases of no or lower tax liability, could anyway facilitate in resolving such disputes around the fundamental of taxability itself.For instance, if tax arrears comprising of tax INR 10 lacs, interest of INR 2 lacs and penalty of INR 10 lacs is subject matter of dispute, it is doubtful whether the concerned taxpayer would choose to apply under DTDRS by withdrawing all appeals against the Government and paying INR 14.5 lacs. Moreover, this scheme is applicable to the following cases:

a. those before the first appelate authorities and

b. those where determination of tax arises out of restrospective amendments in law.

On a bare reading of the new law, the aforesaid scheme could be perceived to be mechanism by the Government to resolve tax disputes by collecting tax upfront and parallelly enforcing withdrawal of appeals against the Government. From the perspective of settlement of prolonged tax disputes, certainly this scheme may prove to a better alternative, in specific situations. This scheme, unless properly administered through proper safeguards, could also lead to untenable resolution of tax disputes.

Upon introspection, it may be evaluated whether post the promulgation of the Dispute Resolution Panel (DRP) framework in 2009towards resolution of essentially transfer pricing disputes, such a measure could achieve the desired objective of minimising litigations. With very little success of measures promised and proposed by the Government thus far to reducetax litigations, it is probably little premature to conclude whether the DTDRS would be aboon or a bane.

It is imperative for the Government to consider a flexible and objective approach towards tax dispute resolution which would permeate an environment of confidence amongst the honest tax payers and tax administrators. It is not a case that India lacks tax dispute resolution forums, what it predominantly lacks is the focus or ability to achieve taxpayer convenience and tax administration efficiency. It is worthy of consideration whether the functioning of the existing forums could be revamped with an aim to objectively fast track dispute resolution and thereby instill tax payer confidence, instead of promulgating new schemes with the same archaic approach.