Introduction
The Vivad Se Vishwas Scheme (VSV 2.0) came into effect on 1st October 2024 and has the potential of clearing the backlog of the pending direct tax litigations. The schemehas been introduced in response to the increase in pending litigation at the appellate level, with many cases remaining unresolved rather than being disposed of at earlier stages. The success of the Vivad Se Vishwas Act, 2020 (VSV Act), coupled with the growing pendency of appeals, led to the implementation of this new scheme. Approximately 5.6 lakh direct tax cases were pending at various levels in FY 2020-21 andaround 80% of cases that are still ongoing are halted at the Commissioner (Appeals) level. The Economic Survey 2017–18 revealed that the Income Tax Department initiated 80–85% of appeals, with a success rate of less than 30%, indicating that the government is able to recover only 30% or less of the outstanding tax demand. Thus, while pending cases at appellate levels have been rising, an efficient mechanism to address the backlog has been lacking.This article is structured as follows: First it gives the background of the scheme, which then leads to a comparison of the scheme with its first leg. Eventually, it goes into the critical analysis of the scheme, wherein various loopholes of the scheme are discussed. At the end, the conclusion discusses the implications of the new scheme and a way forward.
Background
The scheme was announced by the finance minister Nirmala Sitaraman in the Union Budget 2024-25 and was introduced vide the Finance Act (No. 2) Act, 2024. The primary goal of the scheme is to alleviate the logjam of the unresolved income tax litigation. It allows taxpayers involved in ongoing income tax litigation before the Income Tax Appellate Tribunal, Commissioner of Income Taxes, High Court, or Supreme Court to settle the case by paying the disputed amount to the government.
The scheme is accessible only when there is a pending appeal, petition or writ as on 22 July 2024 and can be utilized by filing four separate forms. It provides for lesser settlement amounts for the taxpayers who file the application before 31 December 2024.
The benefits of the scheme can be availed under certain circumstances. These include situations where a taxpayer has lodged objections against a draft assessment order with the Dispute Resolution Panel (DRP) under Section 144C (deals with the procedure for a draft assessment order) of the Income Tax Act, 1961, provided that the DRP has yet to issue instructions to the assessing officer. Additionally, if the DRP has issued an order but the assessment is still pending, or if a revision request under Section 264 (gives powers to Income Tax authorities to revise orders) is still awaiting resolution as of the specified date, the taxpayer may access the scheme’s benefits. Essentially, this scheme is designed to help taxpayers settle ongoing disputes efficiently.
The Vivad Se Vishwas Scheme (VSV 2.0) will not apply in some situations. It does not include developments resulting from search done under Section 132 and Section 132A of the Income Tax Act, 1961 which are the legal provisions enabling the competent authorities for search and seizure operation. It is also not available where prosecution under the Act has been started prior to filing of the declaration or where the undisclosed income or assets being declared are situated in other countries. Also, it does not apply where the assessment or reassessment is made with reference to information acquired under Double Taxation Avoidance Agreement.
Comparison With Vsv Act, 2020
The Vivad se Vishwas Scheme (VSV 2.0) bears similarities to the earlier VSV Act, 2020. However, VSV 2.0 scheme introduces certain exclusions and will not be applicable to specific types of cases, like in search and seizure matters where unreported assets or income has been discovered. In VSV 2.0 scheme, the distinction between search cases and non-search cases has been removed for the purpose of calculating the final tax amount payable by the assessee. Under the new scheme, if an assessment or reassessment is done after a search, the taxpayer is prohibited from availing the benefits of VSV 2.0. In contrast, the VSV Act, 2020 permitted taxpayers to participate in the scheme in search cases involving a disputed tax amount of up to Rs. 5 crores.
The scheme has a narrower scope compared to its earlier version. In the VSV Act, 2020, one of the key aspects was that the benefits could be availed even when appeal was not pending, provided the filing period had not expired. However, in contrast, VSV 2.0 provides a scanty window for resolving disputes by limiting the benefit to cases where the appeal was pending as of July 22, 2024.
Critical Analysis
Although the VSV 2.0 Scheme, 2024 strives to address the problem of pending tax litigation, it contains various loopholes that may hinder its effectiveness. One such issue with the scheme is the availability of only partial benefits. If a taxpayer seeks to settle a particular aspect of the litigation, they are unable to do it through the scheme. The taxpayers, therefore, must compromise on that aspect which they might prefer to be adjudicated by the courts, which limits their authority to solve that particular issue or to get the matter dissolved under the scheme. The scheme resolves all the cases uniformly concerning the matters relating to direct taxes; however, it fails to administer justice in a true sense, as it failed to classify the pending litigations that are of different nature and gravity. The Bombay High Court, in the case of S. Mahendrakumar Devichand V. UOI & Ors., highlighted the importance of clarity in the application of tax laws, circulars, schemes etc. However, the VSV 2.0 Scheme fails to lay down clear guidelines regarding how it can equitably resolve matters of different gravity in the common manner, allowing the disputed party to pay the amount to avoid the litigation. A taxpayer might be justified in his claim, but still must go through the clutches of the scheme for solving the matter to avoid the cost of the litigation. This compels the taxpayer, against whom the proceedings have initiated inappropriately, to opt for the scheme to obliterate the litigation. Those taxpayers who suffered improper or overly aggressive proceedings may feel forced to a compromise that counteracts their legitimate claims and bypasses the opportunity for judicial recourse. This undermines due process by limiting taxpayer’s options and can force them to accept unfavorable terms to escape the burdens of prolonged litigation.The scheme is also prejudicial to the taxpayers who did not take benefit of the scheme in 2020 and seek to apply for the VSV 2.0 scheme. It differentiates between the taxpayers whose litigation was pending during the VSV Act, 2020 and the taxpayers, whose litigation is pending post 2020, imposing higher payment on the latter. The rationale behind such a move is to provide taxpayers who did not utilise the scheme with a second chance, albeit at a 10% premium. This differential treatment between the new and old appellants is not justified for the old taxpayers, who did not rely on the first leg of the scheme to dispose off their litigation. The old taxpayers have not violated any tax legislation and charging an extra 10% from such appellants demonstrates how the window of opportunity for a successful resolution is closing with time. As observed in the case of Principal Commissioner Of Income Tax V. Dinesh Kumar Bansal, the VSV Act, 2020 is optional and there is no compulsion on the assessee to opt for the same. Therefore, the additional charge on the old appellants is arbitrary and not justified. This pressurizes the new taxpayers to opt for the scheme, fearing that they might incur extra charges in the subsequent phases of the scheme.
Although the scheme is beneficial from the government’s perspective, as evidenced by the first phase generating over 1 lakh crores of revenue to the government, there is still scope for improvement in order to facilitate the benefit in an equitable manner. The government should keep in mind the challenges and make sure that the scheme is not prejudicial and against the interest of the taxpayers.
Conclusion
The Vivad se Vishwas Scheme 2024 has significant potential to address the long-standing issue of pending direct tax litigation, drawing success from its first phase. While it is a no-brainer that the scheme is beneficial for the government, its effectiveness is obstructed by various shortcomings. As discussed, the shortcomings of providing partial benefits, uniform treatment of cases irrespective of their complexity, and the imposition of higher charges on appellants who did not avail the earlier scheme highlights the need for refinement of the scheme.
The government should ensure timely and effective implementation of the scheme, as it was a major concern with the VSV Act, 2020, that even after paying the requisite amount under the scheme the cases were not disposed and the litigation continued in appeal manner. The process must be streamlined to ensure swift disposal of cases, which will boost taxpayer confidence and encourage participation. The government should aim to make the scheme more flexible and equitable by allowing taxpayers to settle specific aspects of a dispute, rather than mandating resolution of the entire case. This approach would grant taxpayers greater control over their litigation. Additionally, the scope of the scheme should be widened to include different types of cases, including those with varying degrees of complexity and gravity, ensuring that the interests of all the taxpayers are served through the scheme. Also, removing the additional charges imposed on older appellants would promote fairness and prevent taxpayers from feeling pressured to settle due to fear of future penalties.
The scheme was formed with a pious objective, and for achieving the true ends of the scheme, it should not unilaterally cater to the interest of the government but should also consider the interests of the taxpayers. By resolving the key challenges and refining its application, the VSV 2.0 Scheme, 2024 can become a more balanced and effective tool in resolving tax disputes, which would benefit both the government and taxpayers alike.
This blog is written by Runit Rathore and Saharsh Likhare, 3rd year law students (BA.LLB.) Hons