Vivad se Vishwas Scheme – Practical Aspects

Latest Analysis

The Vivad se Vishwas scheme was presented in the Budget 2020 on 1^st February 2020. Due to administrative and procedural delays, the President gave assent to the Scheme on 17th March 2020. The Scheme is applicable to all income tax cases in dispute as on 31^st January 2020. The pending appeal may be against disputed tax, interest or penalty in relation to an assessment or reassessment order or against disputed interest, disputed fees where there is no disputed tax. Further, the appeal may also be against the tax determined on defaults in respect of tax deducted at source or tax collected at source. This scheme is applicable on disputes pending before Appellate Forum. Appellate forum means the Supreme Court or the High Court or the Income Tax Appellate Tribunal or the Commissioner (Appeals).

Procedure

* To avail this scheme, taxpayers have to file declaration in specified form before the designated authority. The designated authority will determine the amount payable by the taxpayer within 15 days of receipt of declaration and grant a certificate to the declarant containing particulars of tax arrears and amount payable in prescribed form. Taxpayer is required to pay the amount determined by designated authority within 15 days from the date of receipt of certificate and inform the designated authority of such payment made in prescribed forms.

Time Constraint

* The amount payable under this Act on or before 31^st March 2020 is 100% of the amount of disputed tax. The amount payable after 1^st April 2020 up to 30^th June 2020 is 110% of Disputed Tax.

There is a time constraint for the assessee since there are  only 12 days left to avail maximum benefit of the scheme. The Government should keep in mind the Coronavirus and the liquidity crunch and liberalize the  last date and extend it by some days. Also, since the prescribed forms have not been declared yet, it is impracticable for the taxpayer to file declaration, receive certificate from designated authority and pay the same with prescribed form, before 31^st March 2020.

No Incentive to pay early after First Cut off 

* Further, the taxpayers opting for the scheme after in the months of April and May have no incentive and might as well opt in June. This might not be beneficial to the Government as the taxpayers probably won’t find it lucrative to deposit tax earlier if already crossed the first deadline of 31^st March.

In the Author’s humble opinion, instead of applying 10% extra tax after the first cut-off date, the Scheme should instead incentivize the taxpayers by charging interest after 31^st march but before 30^th June, based on the date of payment.

10% of Gross Tax or Net Tax?

* Moreover, another issue the author would like to shed light on is the issue of gross and net tax for the purpose of calculating 10% for payments after 31 March.

If the taxpayer paid part of the disputed tax before the first cut-off date(31 March), then he would have to pay along with the unpaid tax amount,  10% of the gross disputed tax instead of net disputed tax. This issue seems to be in similar lines with the interest on late payment of GST, which was corrected in the 39^th GST Council  meeting.  It was clarified that interest for delay in GST payment would be charged on net cash tax liability and not gross tax liability.

A similar clarification is needed in this Scheme as 10% on Gross tax liability is unjust.

The declaration referred to in section 3 shall be filed by the declarant before the designated authority in such form and verified in such manner as may be prescribed

Section 115BBE cases from AY 17-18

* Income under Section 68, 69, 69A, 69B, 69C and 69D are chargeable to tax under section 115BBE at 60% tax plus 25% surcharge w.e.f AY17-18. Thus the effective tax rate comes 77.25%. If a taxpayer opts to come under the scheme, he would still have to pay an exorbitant amount of tax, and he will get relief of only penalty. Thus opting for the scheme for cases pending on and after AY 17-18 which fall under Sec 115BBE, would be a tough call to make for taxpayers.

Reduction of MAT credit or Loss or depreciation 

* As per the amendment in Vivad se Vishwas, in a case where the dispute in relation to an assessment year relates to reduction of the Minimum Alternate Tax (MAT) credit or reduction of loss or depreciation, the appellant shall have an option either to :

(i) include the amount of tax relate to such MAT credit or loss or depreciation in the amount of disputed tax and carry forward the MAT credit or loss or depreciation or

(ii) to carry forward the reduced tax credit or loss or depreciation. CBDT will prescribe the manner of calculation in such cases.

As per the above, the treatment in case of loss  will be that either the taxpayer will pay tax on the income /loss added back by the Department and will be allowed to carry forward the entire loss filed in his return. Alternatively the taxpayer will have to pay 25% of penalty leviable and carry forward only the loss allowed by the department.

This is explained with the help of an example:

Regular Assessment done by Department and loss reduced to Rs.7.5 cr

Penalty leviable on under reported income of Rs.12.5 cr

Appeal Filed in respect of loss reduced to Rs.7.5 cr

Now assessee has 2 options under this scheme:

Option 1

Pay tax on Rs.12.5 cr.

Assessee will not have to pay Penalty leviable on this undisclosed income.

He can carry forward the loss of Rs.20.00 crores(including Rs 12.5cr on which tax is paid)

Option 2

To carry forward the reduced loss  of Rs7.5 cr

Thus forgoing the loss of Rs.12.5cr to be carried forward Pay 25 % of penalty leviable on Rs.12.5 crore

There is ambiguity about payment of penalty under the second option and the taxpayers are advised to wait for further clarification from CBDT.

Unsecured Loans

* In the case of Unsecured Loans, taxpayer assessed under Sec 68, any credit to their accounts will be treated as income for the year. This will give rise to increased Book Profit under AMT/MAT.

Since the MAT and AMT provision don’t give any exemption to the income added in current year’s book profit on which income tax has already been paid under Sec 68, it is reasonable to expect further clarification from the Government, to avoid double taxation under MAT/AMT or in alternate unsecured loans so offered for taxation may be transferred to General Reserve, without routing through Profit & Loss Account. A similar issue arose when the Companies Act 2013 shifted from percentage method depreciation to asset life. This was solved by crediting/debiting any excess/shortfall amount in General Reserve.

Applications for Condonation of Delay

* Lastly, the scheme as of now does not cover applications seeking condonation of delay in filing the appeal. The CBDT should consider including the applications for condonation in delay filed till 31^st Jan 2020 and include bona fide taxpayers under the wider scope of the scheme.