Tax Alert: Income Tax Dispute Resolution - Vivad Se Vishwas Scheme 2020 (Consolidated)

In line with the announcement by the Government while presenting the Union Budget 2020, with an aim to reduce tax disputes the Direct Tax Vivad Se Vishwas Act, 2020 (‘VSV Scheme’ or the ‘Scheme’) has been enacted on 17 March 2020. While, the Scheme originally provided a short window for taxpayers to settle their tax disputes by partly paying their tax arrears; in wake of the COVID-19 pandemic the deadline was extended to 30 June 2020. Recently, while announcing second set of stimulus package to counter challenges posed by COVID-19, the Government has further extended the deadline to 31 December 2020. Further relaxations¹ were provided by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. Accordingly, the date for payment without additional amount under the Scheme was extended from 31 December 2020 to 31 March 2021. Further, the last date for filing declaration² under the Scheme was also notified as 31 December 2020 which was extended³ till 31 January 2021. However, the CBDT vide notification⁴ dated 26 February 2021 further extended the deadline under the scheme of filing declaration till 31 March 2021, last date for payment of tax without additional amount till 30 April 2021 and start date for payment of tax with additional amount extended to 1 May 2021.    

In order to administer the scheme, The Direct Tax Vivad Se Vishwas Rules⁵, 2020 has been notified on 18 March 2020 with requisite Forms and procedural aspects. Further, to address queries of stakeholders and provide guidance about the law, the Central Board of Direct Taxes (CBDT) had issued FAQs in clarificatory Circular No. 7 of 2020 dated 4 March 2020 which was rescinded by another Circular No. 8 of 2020 dated 22 April 2020 addressing various FAQs. The CBDT issued second set of FAQs to address unresolved issues and provide clarifications on other aspects of the Scheme vide Circular No. 21 of 2020 dated 4 December 2020.

We, at BDO in India, have analyzed and summarized the key provisions of this new legislature:

What is the Scheme?

The Scheme provides an option for the taxpayers to settle their tax disputes under the Indian Income Tax Act, 1961 (IT Act) by paying a portion of tax arrears.

Which tax disputes are covered by the Scheme?

• The appeals (whether filed by the taxpayer or the Revenue Authority) pending as on 31 January 2020, before any of the following appellate forum:
  • Supreme Court; or
  • High Courts. It would include cases where the appeal is pending for admission; or
  • Income Tax Appellant Tribunals (‘ITAT’); or
  • First Appellate Authority.
• Order has been passed by tax officer or appellate authorities or the High Court but the time limit for filing appeal has not expired as on 31 January 2020. It would also cover the orders where the appellate authority has set aside (except where the tax audit is cancelled with a direction that it be conducted afresh) the file of tax officer for giving proper opportunity or to carry out fresh examination of the issue with specific direction;
• It is clarified that where appeal/arbitration proceedings is pending / time-limit to file an appeal has not expired as on 31 January 2020 and subsequently, the appeal has been disposed of before the date of filing declaration, the taxpayer can opt for the Scheme. In such cases, amount of disputed tax shall be computed with reference to position as on 31 January 2020;
• Where the enforceability of order passed by the tax officer has been stayed by the High Court or Supreme Court, such matters can be referred to the Scheme. However, writ petition / Special Leave petition pending before High Court or Supreme Court needs to be withdrawn by taxpayer;
• Appeal against revision order under section 263 of the IT Act which containing specific direction and income is also quantifiable;  
• In case for Condonation of delay satisfying following conditions-
  •  Time-limit for filing of appeal expired during the period from 1 April 2019 to 31 January 2020 (both dates included in the period); and
  •  Application for condonation of delay is filed before 4 December 2020; and
  • Appeal is admitted by appellate forum before the date of declaration;
• Cases pending before the Dispute Resolution Panel (DRP) as on 31 January 2020; or the DRP has issued direction(s) but the tax officer has not passed final order as on 31 January 2020;
• Revision petition filed before the Commissioner under section 264 of the IT Act is pending as on 31 January 2020;
• While the VsV Scheme is not available for disputes pending before Authority of Advance Ruling (‘AAR’), if the order passed by AAR has determined the total income of a tax year and writ against such order is pending before the High Court, the taxpayer can avail the VsV Scheme. However, if the AAR’s order has not determined the total income, such cases would not be covered by the VsV Scheme as it would not be possible to calculate disputed tax;
• Cases where Mutual Agreement Procedure (MAP) resolution is pending/ taxpayer has not accepted MAP decision, the related appeal shall be eligible provided the declarant withdraws both MAP application and appeal;
• Proceedings set aside before First Appellate Authority/ DRP and pending as on 31 January 2020 are deemed to be pending and accordingly eligible for the Scheme. However, taxpayer is required to settle all issues which were either pending in appeal or in respect of which time to file appeal has not expired as on 31 January 2020;
• Cases where prosecution complains has either been quashed or decided in favour of taxpayer by Appellant Authority and no further appeal is filed by Revenue Authority (with/without condonation of delay application);
• Appeal filed against intimation under section 143(1) of the IT Act is eligible under the Scheme if adjustment has been made under sub-clauses (iii) to (vi) of clause (a) of section 143(1) of the IT Act (other than arithmetical error or any apparent incorrect claim in tax return); 
• Appeal filed under section 248⁶ of the IT Act
• Cases involving identical question of law pending in appeal before High Court/ Supreme Court where taxpayer/ Revenue Authority has filed a declaration/application under section 158A/158AA of the IT Act on or before 31 January 2020.

Which tax disputes are excluded from the Scheme?

• Disputes not covered above;
• Search cases where disputed tax amount exceeds INR 5 crore. The limit of INR 5 crore is per tax year. Further, the CBDT vide Circular No. 4/2021⁷ dated 23 March 2021 clarified that ‘search case’ means an assessment or reassessment made under section 143(3)/ 144/ 147/ 153A/ 153C/ 158BC of the IT Act in the case of a person referred to in section 153A or 158BC or 158BD of the IT Act on the basis of search initiated under section 132, or requisition made under section 132A of the IT Cases involving undisclosed income from a source outside India or undisclosed asset located outside India;
• Cases of tax disputes pursuant to assessment or reassessment made on the basis of information received under tax treaties or information exchange agreements;
• Cases pending before Income tax Settlement Commission or writ petition filed against order of Settlement Commission;
• Cases involving appeal against denial of charity registration to a trust;
• Appeal against revision order under section 263 of the IT Act containing general direction and income is not quantifiable;

Who cannot take benefit under the Scheme?

• Persons against whom an order of detention has been made under the provisions of the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 (certain exceptions prescribed);
• Persons prosecuted or convicted for any offence punishable under the provisions of the Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Prevention of Corruption Act, 1988, the Prevention of Money Laundering Act, 2002, the Prohibition of Benami Property Transactions Act, 1988;
• Persons against whom prosecution has been initiated by revenue authorities for any offence punishable under the provisions of the Indian Penal Code, or for the purpose of enforcement of any civil liability under any law;
• Cases where prosecution has been initiated for a particular tax year, taxpayer will not be eligible for opting for the Scheme in respect of all appeals for that year;
• Cases where prosecution has been initiated for TDS default in a tax year on or before the date of filing of declaration;
• Persons notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

Which tax arrears can be settled under the Scheme?

The following tax arrears as determined under the provisions of the IT Act could be settled under the Scheme:

• The aggregate amount of
  • Disputed tax,
  • Interest chargeable or charged on such disputed tax and
  • Penalty leviable or levied on such disputed tax; or
• Disputed Interest; or
• Disputed Penalty; or
• Disputed Fee

How is the Disputed tax determined in certain circumstances?

Status of case as on 31 January 2020	Disputed tax*
1. Order has been passed by the Tax Officer on or before 31 January 2020 and the time limit for filing appeal against such order has not expired	Tax payable in accordance with such order
2. Order in an appeal or in writ petition has been passed by the appellate forum and the time limit for filing appeal or SLP has not expired	Tax payable after giving effect to the order so passed
3. Objections filed before the DRP but are yet to be disposed off	Tax payable, if DRP was to confirm the proposed variation in the draft order
4. DRP has issued directions but the Tax Officer is yet to pass final order	Tax payable as per the final order to be passed by the Tax Officer
5. Pending revision petition filed under section 264 of the IT Act	Tax payable if such revision application was not to be accepted
6. Appeal, writ petition or special leave petition (SLP) pending before the appellate forum	Tax payable if such appeal / writ / SLP is decided against the taxpayer
7. Where First Appellate Authority has issued enhancement notice under section 251 of the IT Act	Disputed tax computed is to be increased by the amount of tax pertaining to issues for which such notice has been issued
8. Enhancement notice issued by First Appellate Authority post 31 January 2020	Notice issued post 31 January 2020 but before 4 December 2020 should be considered for computing disputed tax.
9. Additional ground filed in relation to an appeal on or before 31 January 2020	Such ground shall be considered in computing disputed tax
10. Appeals pending against both assessment and reassessment where addition is repeated on same issue	Disputed tax in respect of repeated addition will be payable only once, both the assessment and reassessment appeals are required to be settled together. In case of any difference between tax liability in respect of such addition, then higher of the two liabilities will be considered for computing disputed tax
11. Adjusting prepaid taxes against disputed and undisputed tax liability	Prepaid taxes clearly identifiable with the source of income should be adjusted against tax liability with respect to such income. Prepaid taxes which cannot be clearly identified with the source of income, should be apportioned against the remaining tax liability

*Tax is inclusive of surcharge and education cess

• The taxpayer can claim credit for taxes paid against the disputed tax before filing of the declaration.
• Where the deductor settles TDS appeals or withdraws arbitration (against order passed under section 201 of the IT Act) as deductor of TDS, he would get complete waiver from interest and penalty. The deductee can claim the credit of taxes in respect of which the deductor has availed of VsV Scheme. However, the credit will be allowed as on the date of settlement of dispute by the deductor. The deductee shall be liable to interest/penalty, as applicable. Further, the deductor shall be entitled to get consequential relief of allowable expenditure under section 40(a)(i)/(ia) of the IT Act in the year in which the tax was required to be deducted. However, if the deductor has already claimed deduction of the expenditure under section 40(a)(i)/(ia) of the IT Act in subsequent year on account of payment of such sum, he shall not be entitled to again claim the deduction based on the settlement under the Scheme.
• Tax credit in hands of deductee would be restricted to 100% of the disputed tax in cases where deductor settles TDS appeals or arbitration by paying more than 100% of disputed tax (in case disputed tax is discharged after 31 March 2021).
• In case of converse situation (i.e. deductee settles his appeal and such appeal is with reference to tax audit of an income which was not subjected to TDS by the payer of such income and an order under section 201 of the IT Act has been passed against such deductor in default), the deductor in default would not be required to pay corresponding TDS amount. However, he would be required to pay the interest/penalty under section 201(1A) of the IT Act. If such levy of interest qualifies for VsV Scheme, the deductor can settle this dispute at 25% or 30% of the disputed interest, as the case may be.
• In case where issue of disallowance under section 40(a)(i)/(ia) of the IT Act is settled under the Scheme, no consequential relief in proceedings under section 201 of the IT Act shall be available.

How does the Scheme work?

• A taxpayer eligible and desirous to settle tax arrears under the Scheme, is required to file online a declaration in Form 1 before the Designated Authority (i.e. Commissioner of Income-tax). On receipt of the declaration, the Designated Authority to issue acknowledgement electronically.
• Upon filing of such declaration, the taxpayer should withdraw the relevant appeal filed before the appellate forum. If the same pertains to appeal filed by the Tax Department, the same shall be deemed to have been withdrawn.
• Within 15 days of receipt of the declaration, the Designated Authority shall compute tax arrears payable, in following manner and grant a certificate electronically vide Form 3 containing the particulars of the tax arrear and the amount payable.

Particulars	Payable up to 31 December2020**	Payable from 1 January 2021 up to the last date to be notified **
Cases involving disputed tax, interest and penalty   1. All eligible cases (except search cases)   2. Search cases	100 % of the disputed tax     125 % of the disputed tax	110% of the disputed tax     135 % of the disputed tax
Cases involving disputed penalty or interest or fee	25% of disputed penalty or interest or fee	30% of disputed penalty or interest or fee
** In the following cases, only 50% of the disputed tax/interest/penalty/fine as calculated above would be payable: Where the taxpayer has filed objection / appeal before the DRP / First Appellate Authority / Tax Tribunal, as the case may be, and the issue is already covered in favor of the taxpayer in its own case by a decision of Tax Tribunal / High Court / Supreme Court, as the case may be; or The appeal is filed by the Revenue Authority.

• The taxpayer shall pay the amount within 15 days from the date of receipt of the certificate and intimate the details of such payment to the Designated Authority.
• Once the taxpayer has paid the above tax arrears, the Designated Authority shall pass an order confirming the payment of tax arrears.
• No further tax, interest or penalty is payable by the taxpayer on the tax disputes so settled.
• However, if the taxpayer fails to pay the amount, the declaration filed under VsV Scheme will be void
• If any proceeding for arbitration, conciliation or mediation have been initiated by the Taxpayer, or any notice thereof has been given by the Taxpayer under any law or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, the Taxpayer shall furnish an undertaking withdrawing the claim in Form 2. The proof of such withdrawal shall be submitted along with intimation of payment i.e. after issuance of certificate by the Designated Authority containing particulars of the tax arrear and the amount payable in Form 4. Where the taxpayer has made request for withdrawal and such request is under process, proof of request made needs to be submitted.
• Thereafter, the Designated authority shall pass an order in Form 5, stating that the taxpayer has paid the amount.
• On intimation of payment to the Designated Authority by the taxpayer pertaining to department appeal / write / SLP, the department to withdraw such appeal / writ / SLP
• No appellate forum or arbitrator, conciliator or mediator shall proceed to decide any issue relating to the tax arrear mentioned in the declaration in respect of which an order has been made by the Designated Authority or the payment of sum determined under that section.
• Every such order passed shall be conclusive and no matter covered by such order shall be reopened in any other proceedings under the IT Act or any other law. The Designated Authority shall be able to amend his order under section 5 to rectify any apparent errors.
• The Designated Authority shall not institute any proceeding in respect of an offence or impose or levy any penalty or charge any interest under the IT Act in respect of tax arrears. This shall be reiterate in order in Form 5.
• If the taxpayer is required to file its tax return under digital certificate, Form 1, Form 2 and Form 4 needs to be digitally signed. Where the taxpayer is not required to digitally sign the tax return, these forms need to be furnished through electronic verification code.

What are the things to be kept in mind while making an application?

• The declaration form is to be filed tax year wise i.e. only one declaration for one tax year. For different tax years separate declarations have to be filed. Hence, the declarant needs to specify in Form No.  whether he wants to settle his appeal or department's appeal or both for a particular tax year.
• The declaration form can be revised any number of times before the Designated Authority issues a certificate.
• If both quantum appeal covering disputed tax and appeal against penalty levied on such disputed tax for a tax year are pending, the taxpayer is required to file a declaration form covering both disputed tax appeal and penalty appeal. However, he would be required to pay relevant percentage of disputed tax only. Further, it would not be possible for the taxpayer to apply for settlement of penalty appeal only when the appeal on disputed tax related to such penalty is still pending.
• Where only notice for initiation of prosecution has been issued without prosecution being instituted, the taxpayer is eligible to file declaration under the VsV Scheme. However, where the prosecution has been instituted with respect to a tax year, the taxpayer is not eligible to file the declaration for that tax year under VsV Scheme unless the prosecution is compounded before filing the declaration.
• Where the rectification application is pending and such rectification may have an impact on the determination of disputed tax, the disputed tax would be calculated after giving effect to the rectification order passed, if any.
• If the substantive addition is eligible to be covered under VsV Scheme, then on settlement of dispute related to substantive addition, the tax officer shall pass rectification order deleting the protective addition relating to the same issue in case of the taxpayer or in the case of another taxpayer.
• Where the time limit to file the appeal has not expired and the Appellate Authority (including Tribunal and High Court) has granted relief on some issues only, the taxpayer has an option to either settle only his deemed appeal or Revenue Authorities' deemed appeal or both. If the taxpayer decides to settle only his deemed appeal, then the Tax Officer would be free to file an appeal on the issues on which the taxpayer has got relief, as per the extant procedure laid down and directions issued by the CBDT
• If the taxpayer has no decision in his favour from SC on an issue, there is no dispute with respect to that issue and hence he need not settle that issue. If that issue is part of multiple issues, the disputed tax may be calculated on other issues considering nil tax on this issue.
• Under the Scheme, interest and penalty will be waived only in respect of the issue which is disputed in appeal and for which the declaration is filed. Hence, for the undisputed issue, the tax, interest and penalty shall be payable
• In case of an issue settled under the Scheme, the immunity from prosecution with respect to that same issue shall also extend to the director/ partner of the declarant company/firm;
• Appeal against penalty order under section 271B⁸, 271BA⁹, 271DA¹⁰ of the IT Act is required to be settled separately;

What will happen to credit for Minimum Alternate Tax (MAT) and loss or depreciation carried forward?

Where the dispute pertains to either reduction of MAT credit or any loss or depreciation, the taxpayer have an option to either:

• include the amount of tax related to such tax credit or loss or depreciation in the amount of disputed tax; or
• carry forward the reduced tax credit or loss or depreciation. In such case, taxpayer shall be liable to pay tax, including surcharge and cess, along with interest, if any, as a consequence of carrying forward the reduced tax credit or loss or unabsorbed depreciation in subsequent years.

What will happen to recurring issues?

Declaration made under this Scheme shall not set any precedence for any proceedings and neither the Revenue Authority nor the taxpayer can claim in any other proceeding that they had conceded their tax position by settling the dispute.

In what circumstances the benefit under this Scheme could be withdrawn?

The proceedings / claims withdrawn shall be deemed to have revived in case where:

• incorrect material particulars furnished in declaration;
• taxpayer violates any of the conditions referred in this Act;
• acts in manner not in accordance with the undertaking given by him. 

What is the last date for availing settling disputes under the Scheme?

As per the CBDT notification dated 26 February 2021, taxpayer can file a declaration on or before 31 March 2021.  

BDO Comments

While the CBDT has come out with clarification / answers to the queries raised by stakeholders, more clarity is required on computation of tax arrears in certain cases of enhancements, pending rectifications, adjusting refund of one year with disputed tax payable for another year etc. A clarity on whether the declarant will be required to pay any tax at the time of foregoing the loss / MAT credit (and thereby could be liable in subsequent year(s)), would be helpful for taxpayers to decide whether to opt for the Scheme or not.

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