One of the key thrust areas of the Central Government has been to reduce the tax litigation. In line with this objective, the Hon’ble Finance Minister (‘FM’) in the 2016 Budget Speech stated that litigation is a scourge for a tax friendly regime and creates an environment of distrust, in addition to increasing the compliance costs for tax payers and administrative costs for the Government. TheFM further stated that 300,000 tax cases are pending at the first appellate level (as compared to 100,000 at the next appellate level of the Tribunal) with the amount under dispute pegged at INR 5.5 lakh crores. In order to reduce this statistic, a separate dispute resolution scheme was introduced for indirect (and direct) taxes.
Mechanics of Indirect Tax Dispute Resolution Scheme, 2016
The provisions governing the Indirect Tax Dispute Resolution Scheme, 2016 (‘DRS’) are documented at Chapter XI (section 212 – 218) of the Finance Act, 2016 (‘Finance Act’); the enabling processes were recently introduced through the Indirect Tax Dispute Resolution Scheme Rules, 2016 (‘DRS Rules’) vide Notification No. 29/2016 – CE(NT) dated May 31, 2016.
Under DRS, any person with an appeal pending before the Commissioner (Appeals) as on March 1, 2016, for an issue under the Customs Act, 1962 (‘CA’) or the Central Excise Act, 1944 (‘CEA’) or Chapter V of the Finance Act, 1994 (‘FA 1994’), can opt to immediately resolve the matter. The process involved is as under:
- A declaration needs to be filed before the ‘designated authority’.
- The designated authority will issue an acknowledgement of the option being exercised within seven days of receipt of the declaration.
- Within fifteen days of issuance of this acknowledgement, the person making the declaration needs to deposit the tax dues, applicable interest and 25 percent of the penalty imposed in the order being appealed against. Thereafter, within seven days of payment, the taxpayer needs to file an intimation and submit the proof of payment before the designated authority.
- The ‘designated authority’, within a period of fifteen days of receipt of proof of payment, would issue an order acknowledging discharge of dues that are subject of the appeal.
In addition to the above, the DRS Rules also prescribe for filing of intimations to the Commissioner (Appeals) at the time of making declarations and issuance of an order acknowledging discharge of dues for disposal of pending appeal.
Past schemes and objective for introduction of DRS
In the past, Service Tax Voluntary Compliance Encouragement Scheme, 2013 (‘VCES’) was introduced with the objective of payment of unidentified service tax liabilities. Under VCES, a person could declare unpaid service tax dues in respect of which no proceeding has yet been initiated, and claim immunity from interest and penalties. Unlike VCES, the DRS provides an opportunity to taxpayers with pending cases before the Commissioner (Appeals) to close the matter by paying the tax dues, the applicable interest, and 25 percent of the penalty imposed at the assessment level. While the objective for introducing VCES was to generate revenues (which even surpassed estimates) and promote tax compliance, DRS is directed to resolve tax disputes/ litigation pending before the first appellate authority.
Historically, it is observed that the first appellate authority, due to the comparatively limited number of benches in comparison to the number of the tax assessments that are appealed against; this is mainly due to the fact that each appellate commissioner has multiple underlying assessing authorities who have raised tax demands. As a result, it acts as a classic funnel for tax disputes and thereby generating a huge backlog of cases. Further, the Commissioner (Appeals) is typically (with few exceptions) adjudicating matters below a value threshold of INR 50 lakhs. Due to small ticket size, the number of cases in comparison to the value of tax involved in the dispute is also higher.
Comparison with existing provisions
DRS is a welcome step taken by the Government in the direction of reducing number of pending tax disputes/ cases and creating a tax friendly environment. Although DRS is aimed at reducing the tax disputes by providing a concession on the applicable penalty, it is relevant to note that statutory provisions already provide similar benefits (for example section 76(1) and 78(1) of FA 1994 for service tax; section 11AC(1) of the CEA for central excise; section 28, 112, 114, 114A of the CA for customs). The said provisions allow identical benefits upon assessment if the tax, interest and 25 percent of the penalty imposed is paid within thirty (30) days from assessment. Consequently, DRS can be viewed as an extension of such provisions to assessments that were appealed against before Commissioner (Appeals) as the taxpayers are likely to have made a similar judgement at the time of assessment.
DRS is therefore likely to be attractive to situations where the tax payer believes that the:
- chances of ultimate success at the Commissioner (Appeals) level or beyond are limited;
- costs for continuing the current and further litigation at higher levels is not justifiable in light of the overall value of the dispute;
- admission of tax liability on the matter does not result in a domino effect for subsequent periods.
Any step in reducing tax disputes and creating a friendly environment is usually welcomed by the tax payers. However, the success of such measures depend on their acceptance by the tax payer community. Since the instant scheme is aimed at resolving the disputes pending before Commissioner (Appeals), it may find acceptance for closing small disputes though it leaves very little on the table for tax payers. Given the past experience of VCES, which adopted a liberal outlook, it would be interesting to see if DRS finds meaningful traction. Given this, leniency towards interest liabilities with a cost of funds based approach (say at 7-9%) and waiver of penalty would have made this DRS more attractive.
Kaustuv Sen - Partner, BMR & Associates LLP
Nimesh Vyas - Assistant Manager Indirect Tax, BMR & Associates