Resolving tax disputes has been a longstanding challenge in the Indian direct tax system. The Vivad se Vishwas Scheme, introduced by the government in 2020, seeks to settle pending direct tax disputes quickly and amicably. Central to this scheme are the concepts of tax arrears and disputed tax. A thorough understanding of these terms is essential for any taxpayer considering availing of the scheme.
This article explores the statutory definitions and scope of tax arrears and disputed tax under the Vivad se Vishwas Act, 2020. It also highlights why accurate computation of disputed tax is crucial for making informed decisions.
What Are Tax Arrears?
Tax arrears represent the total amount of tax-related dues that are unpaid and subject to dispute between the taxpayer and the tax authorities. The Vivad se Vishwas Scheme specifically covers disputes relating to tax arrears as defined under Section 2(1)(o) of the Direct Tax Vivad se Vishwas Act, 2020.
Statutory Definition of Tax Arrears
Under Section 2(1)(o), tax arrears include the following:
- The total amount comprising disputed tax, interest chargeable or charged on such disputed tax, and penalty leviable or levied on such disputed tax.
- Disputed interest.
- Disputed penalty.
- Disputed fees.
This broad definition ensures that all components of a tax dispute, including the principal tax amount, interest, penalties, and fees related to the disputed tax, are covered within the ambit of the scheme.
Importance of Tax Arrears in Dispute Resolution
Tax arrears form the basis for determining the scope of disputes eligible for resolution under the Vivad se Vishwas Scheme. A dispute involving tax arrears means the taxpayer is contesting not just the tax amount but also related interest and penalties that have accrued.
The scheme offers relief by focusing primarily on the disputed tax amount, thereby exempting taxpayers from paying additional interest and penalty if they settle the dispute under the scheme. This makes it critical to understand the composition and calculation of tax arrears to determine eligibility and benefits.
Defining Disputed Tax under the Vivad se Vishwas Scheme
One of the most significant features of the Vivad se Vishwas Scheme is that the taxpayer is required to pay only the disputed tax amount to settle the dispute. The interest and penalty on the disputed tax are waived, which represents a major concession.
Thus, knowing the exact meaning and calculation method of disputed tax is essential to evaluate the financial impact and feasibility of opting for this scheme.
Statutory Meaning of Disputed Tax
According to Section 2(1)(j) of the Direct Tax Vivad se Vishwas Act, 2020, disputed tax refers to the income tax payable by the appellant for a particular assessment year, including surcharge and cess, calculated depending on the status of the appeal or order as of the specified date (January 31, 2020).
The Act outlines several scenarios for calculating disputed tax based on different stages of the dispute:
- Pending Appeal or Petition: If an appeal, writ petition, or special leave petition is pending on the specified date, the disputed tax is the tax payable if the appeal or petition is decided against the appellant.
- Order Passed But Further Appeal Time Open: Where an appellate order has been passed before the specified date and the time for filing a further appeal has not expired, disputed tax is the tax payable after giving effect to that order.
- Assessment Order Passed But Appeal Time Open: If the Assessing Officer has passed an order but the time to appeal has not expired as of the specified date, the tax payable according to that order is the disputed tax.
- Pending Objection Before Dispute Resolution Panel: The disputed tax is the tax payable if the panel confirms the proposed variation.
- Directions Issued by Dispute Resolution Panel Without Final Order: Disputed tax equals the amount payable as per the eventual assessment order.
- Pending Application for Revision: The disputed tax is the tax payable if the revision application under section 264 is not accepted.
Additional Statutory Provisions Affecting Disputed Tax
If the Commissioner (Appeals) issues a notice of enhancement on or before the specified date, the disputed tax increases by the tax related to those issues.
In cases involving reductions of tax credits or losses, the taxpayer has the option either to include the tax amount related to those credits or losses as disputed tax or to carry forward the reduced credits or losses as prescribed under the scheme. This flexibility can impact the taxpayer’s future tax liabilities and must be evaluated carefully.
Why Is the Concept of Disputed Tax Critical?
The definition and computation of disputed tax form the foundation for assessing the financial liability under the Vivad se Vishwas Scheme. The benefit of paying only disputed tax (without interest or penalty) can lead to substantial savings for the taxpayer.
An accurate understanding helps the taxpayer avoid paying more than necessary and ensures smooth settlement with the tax authorities.
Components Included in Disputed Tax
Disputed tax includes the income tax payable on the contested income or additions, incorporating:
- Basic income tax liability.
- Applicable surcharge.
- Health and education cess.
It explicitly excludes interest and penalties, which are waived under the scheme. This separation is essential to understanding the real cost of settlement.
The Specified Date: Why January 31, 2020, Matters
January 31, 2020, is the cut-off date for determining the status of disputes under the Vivad se Vishwas Scheme. The disputed tax is computed based on the status of the appeal, petition, or order as of this date.
This means:
- Pending appeals or petitions as of this date are considered in one category.
- Orders passed before this date but subject to further appeal time limits as of this date fall into another category.
- Pending objections before the Dispute Resolution Panel or revision applications on this date are similarly treated.
This date is crucial for determining the applicable category for disputed tax calculation and ensuring eligibility for the scheme.
Practical Implications of the Definitions in Decision-Making
For taxpayers with pending disputes, the key questions are:
- What amount will be considered as disputed tax?
- How does this compare with their current outstanding demand?
- What savings can they expect if they opt for the scheme?
- How does the status of their appeal or order as of January 31, 2020, affect the calculation?
Answering these questions requires detailed knowledge of the statutory provisions and careful computation.
Role of Interest and Penalty in Tax Arrears
Interest and penalty amounts often constitute a significant portion of total tax arrears. However, under the Vivad se Vishwas Scheme, these amounts are waived if the disputed tax is paid, making the scheme highly attractive for resolving longstanding disputes.
Separating disputed tax from interest and penalty is, therefore, a fundamental step in calculating the amount payable under the scheme.
Tax Credits, Losses, and Their Impact on Disputed Tax
Tax disputes sometimes involve disagreements over tax credits or carry-forward losses. The scheme allows taxpayers two options:
- Include the tax impact of reduced credits or losses in the disputed tax amount.
- Forego the dispute resolution on these credits or losses and carry them forward under normal tax provisions.
This choice can significantly influence the taxpayer’s tax liability in future years and should be made after careful analysis.
Practical Illustrations and Case Studies on Computation of Disputed Tax
Understanding the theoretical definitions of tax arrears and disputed tax is crucial, but practical application through real-world scenarios helps clarify the concept further. The Vivad se Vishwas Scheme provides specific guidelines for calculating disputed tax depending on the status of the appeal, assessment order, or objection as on the specified date of January 31, 2020.
It presents detailed case studies illustrating the computation of disputed tax under various situations, helping taxpayers understand how the disputed tax amount is arrived at in different dispute scenarios.
Overview of Disputed Tax Computation Under Different Scenarios
The computation of disputed tax varies depending on the stage of the tax dispute as per Section 2(1)(j) of the Direct Tax Vivad se Vishwas Act, 2020. The key scenarios are:
- Pending appeal, writ petition, or special leave petition as of the specified date.
- Appellate order passed before the specified date but with the appeal window still open.
- Assessment order passed but time to appeal not expired.
- Objection pending before the Dispute Resolution Panel (DRP).
- Directions issued by DRP but final assessment order pending.
- Revision application pending under section 264.
Each of these scenarios demands a different approach to calculate the disputed tax.
Case Study 1: Disputed Tax under Pending Appeal as on January 31, 2020
Background
Mr. P has an ongoing appeal related to the assessment year 2017-18. The appeal concerns an addition of ₹50,00,000 for unexplained cash deposits during the demonetization period. The issue was taxed under section 69A read with section 115BBE at 78%. The assessment order was passed on December 28, 2019, and the appeal was filed before the Commissioner of Income Tax Appeals on January 27, 2020.
Financial Details
- Returned income: ₹8,00,000
- Addition: ₹50,00,000
- Assessed income: ₹58,00,000
- Total tax liability (including surcharge and cess): ₹39,87,370
- Interest under sections 234B and 234C: ₹14,76,000
- Total tax demand including interest: ₹54,63,370
- Tax already paid: ₹87,370
- Net tax liability: ₹53,76,000
Calculation of Disputed Tax
Since the appeal was pending on January 31, 2020, the disputed tax is the tax payable if the appeal is decided against Mr. P, excluding interest and penalties.
Disputed tax is calculated as:
- Total tax arrears excluding interest = ₹53,76,000 – ₹14,76,000 = ₹39,00,000
Therefore, the disputed tax under the scheme for Mr. P is ₹39,00,000.
Case Study 2: Disputed Tax Under Appellate Order Passed But Appeal Time Not Expired
Background
Mr. Q had an assessment for the year 2016-17 with an addition of ₹1,00,00,000 related to bogus long-term capital gains from penny stock sales. The assessment order was passed on December 28, 2018, and an appeal was filed on January 27, 2019, before the Commissioner of Income Tax Appeals (CIT(A)). The CIT(A) order was passed on January 29, 2020, against the assessee. However, the time to file an appeal before the ITAT (60 days) had not expired by January 31, 2020.
Financial Details
- Returned income: ₹15,00,000
- Addition: ₹1,00,00,000
- Assessed income: ₹1,15,00,000
- Tax liability (including surcharge and cess): ₹35,84,000
- Interest under sections 234B and 234C: ₹12,20,000
- Total demand including interest: ₹48,04,000
- Tax paid: ₹2,84,000
- Net tax liability: ₹45,20,000
Calculation of Disputed Tax
Since the CIT(A) order was passed before the specified date but the time to file further appeal had not expired, the disputed tax is the tax payable after giving effect to the CIT(A) order, excluding interest.
Disputed tax = Net tax liability – Interest
= ₹45,20,000 – ₹12,20,000
= ₹33,00,000
Hence, disputed tax under this scenario amounts to ₹33,00,000.
Case Study 3: Disputed Tax Under Assessment Order Passed But Appeal Time Not Expired
Background
Ms. R had an assessment for AY 2018-19, where an addition of ₹30,00,000 was made under section 68 for unexplained share capital. The assessment order was passed on December 10, 2019. The time limit to file an appeal before CIT(A) had not expired by January 31, 2020.
Financial Details
- Returned income: ₹5,00,000
- Addition: ₹30,00,000
- Assessed income: ₹35,00,000
- Tax liability (including surcharge and cess): ₹10,50,000
- Interest under sections 234B and 234C: ₹3,00,000
- Total demand including interest: ₹13,50,000
- Tax paid: ₹1,00,000
- Net tax liability: ₹12,50,000
Calculation of Disputed Tax
Since the appeal window was still open, the disputed tax is the tax payable as per the assessment order, excluding interest and penalty.
Disputed tax = Net tax liability – Interest
= ₹12,50,000 – ₹3,00,000
= ₹9,50,000
Therefore, the disputed tax in Ms. R’s case is ₹9,50,000.
Case Study 4: Disputed Tax in Case of Objection Pending Before Dispute Resolution Panel (DRP)
Background
Mr. S had an assessment for AY 2019-20 where the Assessing Officer proposed a variation in taxable income amounting to ₹40,00,000. The objection was pending before the DRP as on January 31, 2020.
Financial Details
- Returned income: ₹10,00,000
- Proposed variation: ₹40,00,000
- Assessed income after variation: ₹50,00,000
- Tax liability (including surcharge and cess): ₹14,00,000
- Interest under sections 234B and 234C: ₹4,00,000
- Total demand including interest: ₹18,00,000
- Tax paid: ₹2,00,000
- Net tax liability: ₹16,00,000
Calculation of Disputed Tax
Since an objection was pending before the DRP, the disputed tax is the tax payable if the DRP confirms the proposed variation, excluding interest.
Disputed tax = Net tax liability – Interest
= ₹16,00,000 – ₹4,00,000
= ₹12,00,000
Thus, Mr. S’s disputed tax amount is ₹12,00,000.
Case Study 5: Disputed Tax Where Directions Issued by DRP but Final Order Not Passed
Background
Mrs. T had an assessment for AY 2017-18. The DRP had issued directions confirming additions of ₹20,00,000, but the Assessing Officer had not passed the final order as on January 31, 2020.
Financial Details
- Returned income: ₹7,00,000
- Proposed addition: ₹20,00,000
- Tax liability (including surcharge and cess): ₹7,00,000
- Interest under sections 234B and 234C: ₹2,00,000
- Tax paid: ₹1,00,000
- Net tax liability: ₹8,00,000
Calculation of Disputed Tax
Disputed tax is the tax payable as per the eventual assessment order, assuming the DRP directions are accepted.
Disputed tax = Tax liability excluding interest
= ₹7,00,000
Mrs. T’s disputed tax is ₹7,00,000.
Case Study 6: Disputed Tax Where Application for Revision Under Section 264 Is Pending
Background
Mr. K filed an application for revision under section 264 against an assessment order for AY 2018-19. The application was pending as on January 31, 2020.
Financial Details
- Returned income: ₹6,00,000
- Addition: ₹15,00,000
- Tax liability (including surcharge and cess): ₹5,25,000
- Interest under sections 234B and 234C: ₹1,25,000
- Tax paid: ₹75,000
- Net tax liability: ₹5,75,000
Calculation of Disputed Tax
Disputed tax equals the tax payable if the revision is not accepted, excluding interest.
Disputed tax = ₹5,25,000
Thus, the disputed tax in Mr. K’s case is ₹5,25,000.
Special Considerations in Computing Disputed Tax
Impact of Notice of Enhancement by Commissioner (Appeals)
If the Commissioner (Appeals) issues a notice of enhancement on or before the specified date, the disputed tax increases by the tax related to those enhancements. Taxpayers must factor this in when calculating disputed tax.
Treatment of Tax Credits and Losses
Where disputes involve reduction in tax credits or losses, taxpayers can either:
- Include the tax impact of reduced credits or losses as disputed tax, or
- Opt to carry forward the reduced credits or losses, foregoing their dispute settlement under the scheme.
This decision impacts future tax computations and requires strategic consideration.
Effect of Tax Paid on Disputed Tax Calculation
Tax paid prior to the specified date reduces the total tax arrears but does not reduce the disputed tax itself, which is calculated on the basis of tax payable after effect of pending appeals or orders, excluding interest and penalty.
Taxpayers must ensure correct reconciliation between tax paid and disputed tax to avoid overpayment.
Preparing for Settlement under the Scheme
Taxpayers must gather accurate details about their disputes, including all relevant orders, dates of appeals, and the status as of January 31, 2020. This information forms the basis of calculating the disputed tax and assessing the financial impact of settling under the Vivad se Vishwas Scheme.
Understanding the Scope and Impact of Disputed Tax Settlement
The scheme’s main attraction lies in the concession that the taxpayer needs to pay only the disputed tax amount, without additional interest or penalties. This significantly reduces the financial burden for many assessees. However, a clear comprehension of what constitutes disputed tax and how it is calculated is essential for making an informed choice.
Disputed Tax vs. Total Tax Arrears
Tax arrears encompass disputed tax, interest, penalties, and fees, whereas the disputed tax amount under the scheme excludes interest and penalties. Settling only the disputed tax can result in substantial savings, but requires careful verification to avoid errors in calculation or misunderstanding the scope of disputes included.
Importance of Accurate Calculation
Since disputed tax is determined based on the status of the appeal, order, or objection as on January 31, 2020, errors in assessing the appeal status or incorrect inclusion of tax elements can lead to overpayment or underpayment.
Taxpayers should meticulously review:
- The stage of dispute (pending appeal, final order, objection, etc.)
- The precise amount of disputed tax as per relevant orders
- Impact of any notices of enhancement
- Treatment of tax credits and losses related to the dispute
Factors Influencing the Decision to Opt for the Scheme
Several key factors influence whether an assessee should settle disputes under the Vivad se Vishwas Scheme.
1. Financial Implications and Cash Flow
Paying only disputed tax (without interest or penalties) may ease immediate financial pressure. Taxpayers facing liquidity constraints may benefit from the reduced payment demand, avoiding mounting interest and penalties that increase the tax burden over time.
2. Likelihood of Success in Pending Appeals
If taxpayers believe they have strong grounds to win in ongoing appeals, they may prefer to continue litigation rather than opt for settlement. Conversely, when chances of favorable appeal outcomes are slim or uncertain, settling disputed tax can be a prudent option.
3. Impact on Future Tax Assessments and Compliance
Settlement under the scheme results in waiver of interest and penalties but may also mean acceptance of the tax demand as final. This can prevent future litigation but might also limit options for contesting the issue later or carrying forward disputed losses or credits.
4. Availability of Carry Forward for Reduced Credits or Losses
Taxpayers should evaluate whether to include the tax effect of reduced credits or losses as disputed tax or to opt for carrying forward such losses as prescribed. This decision affects both the immediate settlement amount and future tax liabilities.
5. Effect of Notice of Enhancement
If a Commissioner (Appeals) has issued a notice of enhancement by January 31, 2020, the disputed tax amount increases accordingly. Taxpayers must factor this into their calculations to avoid surprise liabilities post-settlement.
Challenges in Computing Disputed Tax
Computing disputed tax accurately can be complicated due to the interplay of multiple factors and the diversity of dispute scenarios.
Ambiguities in Appeal Status and Order Dates
Determining the exact status of appeals or petitions as of the specified date can be challenging. For instance, the date of receipt of orders, the timelines for filing further appeals, and whether appeals or objections are pending require careful scrutiny.
Handling Multiple Appeals or Issues in a Single Assessment
An assessment year may involve several disputed issues, each at different stages of appeal. Calculating the disputed tax requires segregating each issue’s tax impact and aggregating accordingly, especially if some appeals have been decided and others remain pending.
Treatment of Interest and Penalties
While interest and penalties are excluded from the disputed tax amount, taxpayers may struggle to distinguish the interest related to disputed tax versus interest on other tax liabilities. This requires detailed tax demand reconciliation.
Notice of Enhancement Impact
The tax impact of any notice of enhancement must be carefully added to the disputed tax. Misinterpretation or omission of such notices can result in incorrect disputed tax calculation.
Managing Reduced Tax Credits or Losses
Deciding whether to treat disputed reduced credits or losses as part of disputed tax or to carry them forward requires evaluating potential future tax benefits against immediate settlement costs.
Step-by-Step Approach to Computing Disputed Tax
To ensure accurate computation, taxpayers can adopt the following structured approach:
Step 1: Identify All Disputed Issues and Relevant Assessment Years
List all the disputed additions, deductions, credits, or penalties under dispute, along with the relevant assessment years.
Step 2: Verify the Status of Each Dispute as on January 31, 2020
Classify each dispute based on whether the appeal is pending, an appellate order is passed but appeal window open, objections pending, or revision application filed.
Step 3: Calculate Tax Payable if the Appeal is Decided Against the Assessee
Using applicable tax rates, surcharges, and cess, compute the tax payable on the disputed additions or reduced deductions.
Step 4: Exclude Interest and Penalties Related to Disputed Tax
Carefully deduct interest and penalties charged on the disputed tax. Ensure only the portion related to disputed tax is excluded.
Step 5: Incorporate Impact of Notices of Enhancement
Add tax related to any enhancement notices issued before the specified date.
Step 6: Decide on Tax Credit or Loss Treatment
Choose whether to include tax on reduced credits or losses as disputed tax or to carry forward such amounts.
Step 7: Summarize Disputed Tax Amount
Aggregate the tax impact of all disputes to arrive at the total disputed tax amount payable under the scheme.
Advantages of Opting for the Vivad se Vishwas Scheme
Immediate Relief from Interest and Penalties
The most significant benefit is waiver of all interest and penalties relating to the disputed tax, which often constitute a substantial part of the total demand.
Fast-Track Dispute Resolution
The scheme provides a mechanism for quick resolution of disputes, saving time and costs associated with prolonged litigation.
Certainty of Tax Liability
Once settled, the tax demand is final and binding, allowing taxpayers to plan future finances without the uncertainty of pending disputes.
Improved Compliance Environment
By reducing the backlog of disputes, the scheme aims to enhance the overall compliance environment and reduce litigation burden on tax authorities and taxpayers alike.
Potential Pitfalls and Considerations
Risk of Overpayment
Incorrect calculation or misunderstanding of the disputed tax scope may lead to overpayment under the scheme.
Waiver of Rights to Further Appeal
Once disputes are settled, taxpayers lose the right to pursue litigation for those issues, potentially forgoing a chance to reduce tax liability through legal challenge.
Treatment of Credits and Losses
Deciding whether to include reduced credits or losses in disputed tax or to carry them forward requires careful analysis to avoid adverse future tax consequences.
Impact on Subsequent Assessments
Settling under the scheme might influence how similar issues are treated in future assessments or audits.
Real-World Examples of Strategic Decision-Making
Consider a company with multiple pending appeals involving high-value additions and substantial interest demands. The company faces pressure to clear disputed tax to enable smoother business operations and secure bank financing. Opting for the scheme helps avoid mounting interest and penalties, enabling a negotiated settlement.
On the other hand, a taxpayer confident in legal grounds for appeal may prefer to continue litigation despite higher interest and penalties, weighing the potential tax savings from a successful outcome. These contrasting examples highlight the importance of case-specific analysis in deciding on the scheme.
Role of Professional Advice in Disputed Tax Settlement
Given the complexity of disputed tax calculations and strategic implications, seeking advice from tax professionals is essential. Experts can:
- Analyze case facts and legal standings
- Assist in precise computation of disputed tax
- Evaluate benefits and risks of opting for the scheme
- Guide preparation and submission of settlement applications
Monitoring Compliance After Settlement
Once disputes are settled under the scheme, taxpayers must ensure compliance with the settlement terms. This includes:
- Timely payment of disputed tax amount
- Withdrawal or non-filing of further appeals on settled issues
- Proper accounting treatment of settled amounts
- Disclosure in tax returns as required
Failure to comply may attract penalties or reopen disputes.
Strategic Tips for Taxpayers
- Conduct a comprehensive review of all disputes before deciding.
- Confirm the exact status of each dispute as of January 31, 2020.
- Accurately compute disputed tax excluding interest and penalties.
- Factor in notices of enhancement and tax credit/loss treatment.
- Evaluate cash flow and likelihood of successful appeals.
- Consider long-term tax implications of settlement.
- Seek expert advice for complex cases.
- Maintain documentation and compliance post-settlement.
Conclusion
The Vivad se Vishwas Scheme represents a landmark initiative aimed at resolving protracted direct tax disputes efficiently and amicably. Central to the scheme is the concept of disputed tax — the income tax amount genuinely under contention — which, when settled, relieves taxpayers from the burden of interest and penalties. Understanding the precise definition and scope of disputed tax, as well as mastering its computation based on the legal position of each dispute as on January 31, 2020, is critical for any taxpayer considering this resolution option.
The scheme offers a practical and financially attractive pathway for taxpayers to close pending disputes by paying only the tax on disputed income or deductions, thereby easing cash flow pressures and reducing litigation costs. However, the decision to opt for the scheme must be taken with careful strategic analysis, including a thorough evaluation of appeal prospects, the impact of enhancement notices, treatment of tax credits or losses, and future tax implications.
While the benefits of immediate relief from interest and penalties and dispute finality are compelling, taxpayers should remain vigilant about potential pitfalls such as overpayment, waiver of rights to further appeals, and compliance requirements post-settlement. Engaging experienced tax advisors can greatly assist in navigating these complexities to arrive at the best course of action.
Ultimately, the Vivad se Vishwas Scheme, when utilized judiciously, can transform the landscape of direct tax litigation in India, fostering a more cooperative and compliant tax environment. Taxpayers who understand the nuances of disputed tax and carefully evaluate their options stand to gain the most from this unique dispute resolution mechanism.