Context:Vivad se vishwas Scheme.
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- The Direct Tax Vivad se Vishwas Bill, 2020 was introduced in Lok Sabha by the Minister of Finance, Ms. Nirmala Sitharaman, on February 5, 2020.
Vivad Se Vishwas Scheme: The Direct Tax Vivad Se Vishwas Bill, 2020:
- In essence, the Bill is aimed at resolving direct tax related disputes in a speedy manner. It aims to settle pending cases on direct taxes involving Rs 9.32 lakh crore.
- The Vivad se Vishwas Scheme is to do for direct tax related disputes exactly what Sabka Vishwas did for indirect tax related disputes. In the last budget, Sabka Vishwas Scheme was brought in to reduce litigation in indirect taxes. It resulted in settling over 1,89,000 cases.
- The amnesty scheme, at present, covers disputes pending at the level of commissioner (appeals), Income Tax Appellate Tribunals (ITAT), high courts, the Supreme Court and those in international arbitration.
- It offers a complete waiver on interest and penalty to the taxpayers who pay their pending taxes by March 31.
- The Scheme has two main components:
- Dispute resolution: Reducing tax litigations pending at various forums.
- Amnesty Component: taxpayers given the opportunity to pay the disputed tax and be free from any other consequence under the law.
- Amount Payable For Resolution:
|Disputes relating to||Payable before March 31, 2020||Additional amount payable after March 31, 2020|
|Payment of tax||Amount of disputed tax (any interest or penalty associated with such tax will be waived)||10% of the amount of disputed tax, orInterest and penalty relating to that tax, whichever is lower|
|Payment of fee, interest or penalty||25% of the amount under such dispute||Another 5% of the amount under such dispute|
- Disputes not covered: The proposed mechanism will not cover certain disputes. These include disputes:
- where prosecution has been initiated before the declaration is filed,
- which involve persons who have been convicted or are being prosecuted for offences under certain laws (such as the Indian Penal Code), or for enforcement of civil liabilities, and
- involving undisclosed foreign income or assets
- Withdrawal and waiver of rights: The taxpayer would be required to submit the proof of withdrawal of appeal/writ with the intimation of payment, i.e., before the issuance of the final certificate/order for settling the dispute. Further, no recourse shall be available to the taxpayer against the final order.
- Beneficiary: A taxpayer can avail the benefit under the scheme in respect of Income-tax appeals pending before the appellate forum as on 31-01-2020. These appeals could be filed either by the taxpayer or by the Income-tax authority.
What was the response to the Sabka Vishwas scheme?
- At last count, the government expected to have raised Rs 39,500 crore from the Sabka Vishwas scheme, which was only about indirect tax disputes.
- The amnesty window for Sabka Vishwas closed on January 15 and close to 1.90 lakh crore applications, in relation to taxes worth Rs 90,000 crore was received.
- One of the standout successes of this scheme was Mondelez India Foods Pvt Ltd (which was earlier known as Cadbury India) settled one of its most controversial tax disputes.
- The firm was accused of evading taxes to the tune of Rs 580 crore (excluding taxes and penalties). In the end, Mondelez paid Rs 439 crore on January 20 under the amnesty scheme.
Challenges to India’s tax collection:
- High Rate and Low Yield of Direct Taxes: In India, the rate of direct tax is very high but the contribution to the total tax revenue is very low. This is because high tax rates encouraged tax evasion and avoidance on a large scale.
- Low Contribution of Income Tax: Although the rate of income tax is the highest in India, the contribution from such is very low. Tax evasion seems to be the primary reason. Another reason is the high exemption limit in a country where per capita income is very low. In India, the exemption limit has been raised from time to time, but the levels of national and per capita incomes have failed to increase proportionately.
- Double Taxation of Dividends:
- Due to double taxation of dividend, the rate of domestic saving and capital formation has failed to increase appreciably. Companies pay corporation and other taxes (such as excess profit tax or surtax) to the Government. A portion of net profit after tax is usually distributed among shareholders in the form of dividend. A portion of such dividend income is again taxed away in the form of personal income tax.
- Consequently, those who pay tax on dividend income cannot save much and companies find it increasingly difficult to raise financial resources on a large scale. It is often alleged that one of the cause of industrial stagnation in India has been the high rate of taxation and slow growth of corporate capital.
- Absence of Agricultural Income Tax: Another feature of India’s tax system is that there is no tax on agricultural income. Agriculture is the dominant sector of the Indian economy. The contribution of agriculture and related activities to India’s GDP was 29.3% in 1999-00. Planned investment on agriculture has also increased over the years. But agriculture has failed to make any contribution to the introduction of the Government’s tax revenue.
- Importance of Indirect Taxes: In India, importance of indirect taxes has increased over the years which imply that the importance of direct taxes has diminished. In absolute terms the contribution of direct taxes has increased but the percentage contribution of such taxes in total tax revenue has declined
- Progressive Taxes on Income: The Government has made the system of direct tax progressive and progressiveness is considered desirable in the interest of equity and for reducing the disparities in the distribution of income and wealth. But progressive taxes encouraged tax evasion and avoidance and have failed to reduce inequalities of income and wealth.
- Widening the Indirect of Tax Net: Over the years, the indirect tax net has been spread wide. Almost all the commodities that we buy bear high indirect taxes as sales tax, excise duty, customs duty, octroi, cess and so on. At present, Central Government revenue from two main taxes, viz., union excise duties and customs accounts for about 80% of the total revenue.
- The tax-to-GDP ratio is a ratio of a nation’s tax revenue relative to its gross domestic product (GDP), or the market value of goods and services a country produces. It is a representation of the size of the government’s tax revenue expressed as a percentage of the GDP. Higher the tax to GDP ratio the better financial position the country will be in. The ratio represents that the government is able to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide. It reduces a government’s dependence on borrowings.
- Importance of tax to GDP ratio: A
higher tax to GDP ratio means that an economy’s tax buoyancy is strong as the
share of tax revenue rises in sync with the rise in the country’s GDP. India,
despite seeing higher growth rates, has struggled to widen the tax base. Lower
tax-to-GDP ratio constrains the government to spend on infrastructure and puts
pressure on the government to meet its fiscal deficit targets.
The introduction of the scheme is a welcome move and is expected to reduce tax litigation. The Government is also required to give assurance to the taxpayer that the acceptance of any addition under the scheme will not be used as a tool to punish the taxpayer in other proceedings. The Government should have considered extending the first payment window from March 31, as taxpayers require sufficient time to review the pros and cons of the Scheme, their eligibility, and then take the necessary steps for withdrawing appeals and making payments.
‘Vivad se Vishwas’ will undisputedly benefit the interest of taxpayers looking for an expeditious and rapid settlement of their tax claims raised by the department. A negotiated settlement, between the taxpayer and the CBDT is a sensible way to resolve disputes without moving to court. It is an advantageous scheme for both the taxpayer and the revenue department.