Officials of Indian businesses houses, MNCs and Big Four consultants suggested an extension of the cut-off date of the scheme, the need to clarify the stand on settling tax disputes of merged companies, and transfer pricing matters. They also told the commerce and industry minister that the scheme would evoke a better response if it is structured ‘issue wise’ — where a taxpayer is allowed to choose and settle some disputes, under the scheme — instead of the ‘year wise’ requirement where the scheme, once availed, must include settling all disputes.
Under the scheme, a taxpayer can settle litigations pending as on January 31, 2020 by paying tax on the disputed income and obtaining a full waiver of interest and penalty.
The Direct Tax Vivad se Vishwas Act, 2020 was enacted on March 17, 2020 to settle direct tax disputes stuck in various appellate forums. Recently, the government once again extended the deadline for making payments under the scheme by three months to March 31, 2021. Till now, the response to the scheme has been comparatively more from state-owned enterprises.
“If organisations like PSU banks opt for the scheme, they may have to make higher provisioning and end up with lower capital adequacy ratio. It’s an issue that cropped up in the course of the meeting. On this the minister asked the views of chartered accountants whether there could be leeway under accounting standards to allow staggered provisioning,” said a person who attended the meeting.
Typically, provisioning against tax disputes are made only if a PSU believes there is no reasonable chance to win the litigation. Otherwise, such disputes appear in the list of ‘contingent liabilities’ in the annual report.
“It’s widely felt that the cut-off date of January 31, 2020 should be extended to at least October 31, 2020 so that assessments made after March 31, 2020 but before October 31 be included. This is because the erstwhile scheme which has now been amended had placed emphasis on matters being settled in the previous financial year,” said another person.
“Mr Goyal had a general interaction with the industry and experts on the subject,” said a senior consultant who participated in the discussion. “Probably, the minister was trying to figure out the reasons behind the relatively lukewarm response to the scheme from the private sector and make efforts in consultation with the revenue department to enable the scheme to succeed,” he said.
There was no response to ET’s text and email query to a ministry spokesman. Anuj Gupta, the OSD to the minister said, “…we have no comments on this alleged meet.”
It was pointed out by tax professionals that private companies are reluctant to settle disputes where they think that the Income Tax department was on weak ground. “If there are five ongoing disputes — say, on various matters such as bad loans, inflation of stocks, TDS etc. — and a company thinks it can eventually win in two of them, it would not mind continuing with the litigations in these two cases. But the scheme is clear that a taxpayer cannot pick and choose — so, a company opting for the scheme, would have to settle all outstanding cases in the year,” said a chartered accountant.
While total collections could increase if rules are tweaked to bring in greater flexibility, tax practitioners feel the government is unlikely to change the Scheme from a ‘year-wise’ to an ‘issue-wise’ settlement framework.
“Also, there should be clarifications on the settlement of old disputes of companies which have merged or ceased to exist,” he said.
A large area pertaining to tax dispute relates to transfer pricing — arising out of related party transactions, like an Indian subsidiary charging its overseas parent for back-office work or other services.
“Some companies, particularly MNCs, want the government to allow them to keep transfer pricing matters outside the special settlement scheme. And, since many transfer pricing disputes are resolved under the advance pricing agreement mechanism with the department, most taxpayers feel that the disputed tax under the scheme should be computed while excluding what has been agreed in the advance pricing agreement,” said an industry official.