Updated: Aug 22
This article has been authored by Saoumya Vashisht, a final year student at Amity Law School, Delhi.
“The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.”
-Jean Baptist Colbert
Taxation is an instrumental tool to procure resources for the government to enable it to formulate policy schemes for the overall development of the economy. In simpler terms, taxes amount to a citizen’s financial accountability towards the government. The degree of accountability differs based on the monetary gains received by the individual in lieu of the labor provided by them. Hence, the word ‘taxation’ bears heavy on the minds of the people subjected to it. It instills the feeling of frustration and duteousness among the population. The government infuses new incentives into the financial infrastructure of the country on an annual basis to strike a balance between these two feelings, to ensure maximum turnout.
India’s taxation system has always been meticulously measured out to serve the purpose of revenue expenditure on social services. A contemporary instance being Rule 26 of the GFR 2017, which assigns a Controlling officer the responsibility to ensure that the expenditure should never exceed the budget allocation for the year. The Finance Minister in her Budget 2020 Speech presented a ballpark measure placing Income Tax collections at 17 paise to 1 Rupee ratio in the government’s tax kitty. This placement itself makes direct taxes which are only a subset of the taxation system, one of the main sources of revenue for the Government.
The Need for the Scheme
The Direct Taxes Vivad Se Vishwas Scheme (DTVSV Scheme) materialized into a Central Act on 17th March 2020. Aligned with the ruling government’s agenda of alleviating India’s position in the Ease of Doing Business Index, this Act facilitated a tax friendly haven for individuals and corporates alike. The Act is aimed at drastically reducing income tax litigations while giving a way out to taxpayers to settle their direct tax disputes through a medium of prompt payments of the disputed amount or less, surpassing excruciating formal proceedings.
The Central Board of Direct Taxation through a string of tweets on February 13, 2020 shed light on the strikingly low statistics associated with number of direct taxpayers in the economy. With only top 1 percent population making the mark accompanied by the pre-COVID 19 economic slump, there was a need to extrapolate a new economic strategy to realize the projected revenue collections for the year. The lack of adequate revenue generation could either be countered by charging higher tax on a selective bracket of people that means imposition of a wealth tax by augmenting already existing tax base, a theory closer to the Laffer curve, which favours a systematic balance between the prevailing tax rates and the revenue generated based on those tax rates. By adopting the latter approach, the government aimed to collect a whopping amount of approximately 9 lakh crore rupees from around 5 lakh pending litigations on various tax levels as they stood on November 30, 2019.
Apart from the aforementioned Dispute Resolution, the Act serves as an incentive to taxpayers through its amnesty component which pardons them from any penalty, fee or interest by providing immunity against legal proceedings. The scheme is certainly an ‘end all be all’ approach to tax appeals with no provision to deal with specific issues within those appeals.
DTDSV ACT 2020: A Mogul to Direct Tax Dispute Resolution Scheme, 2016
Through Chapter X of the Finance Act, 2016 the government came up with a predecessor to the current Vivad se Vishwas Scheme, namely Direct Tax Resolution Scheme of 2016 (DTDR) The objective of this Scheme was to promote timely and expeditious payment of disputed tax amount with a partial or full waiver of interest, penalty and fee. The other objective of this scheme was to marginally reduce the existing pending litigation in the appellate authority. The scope of this scheme was far less reaching than its 2020 successor due to its limited range on appellate cases which were solely taken up in front of the first appellate authority, being Commissioner of Income-Tax (Appeals).
This criterion now encompasses all the appellate bodies, serving the aim of reduced litigation much more efficiently. Barring the differing timelines given in both the schemes, the grounds on which tax relief allocations are based have also been different. The former scheme, DTDR, had a threshold amount of 10 lakh rupees which served as a determinant to the percentage of relief one would be getting, whereas in its 2020 counterpart the deadlines were determinants of the relief percentage. It can be safely said that the two schemes are marginally yet significantly distinct in their features to cater to the same ideals of the government. The need for arriving at a more comprehensive layout arose when DTDR Scheme fell flat as a result of increasing cases post demonetization.
Impact of Direct Tax Vivad Se Vishwas Act, 2020
While the 2016 scheme was hit by unplanned governmental policy and lack of implementation, its newer and modified 2020 version seems to have found itself in a similar pandemonium, except this time its force majeure. An Ordinance promulgated on 24th March 2020, extended the end date of the Scheme from 31st March to 30th June and finally to 31st December 2020. The government’s objective of collecting the projected revenue is seemingly reaching a standstill with the effect of COVID 19 pandemic on the businesses and their earning capacity. Disruptions in the supply chain of commodities, inability to collect payments against credit, negligible demand for the commodities along with rise in e-commerce, led to insufficiency of funds for many enterprises.
With only essential goods businesses thriving for majority of the lockdown period and economy on a definite halt, the businesses found it hard to not only earn profits but to survive in the economy which lead to saving all the cash flow instead of channeling it into dispute resolution. Businesses which in March found it lucrative to end their tax battles through final settlement, settled for a rather extensive prolonged legal proceeding in the lockdown in order to conserve cash to keep their enterprises running.
Transparent Taxation Platform: Anchor to a sinking ship
Two days ahead of the 74th Independence Day, Prime Minister Narendra Modi launched the Transparent Taxation reforms. These reforms seem to directly complement the DTVSV Act 2020, where the former propagate crystalline procedure to the hasty approach of the latter. These reforms give a definite structure to the Act by computerizing all the processes which are to take place between the taxpayer and the tax officials.
It is to provide ‘Faceless’ Income Tax Scrutiny as well as Appeals with no physical interference by any of the Income Tax authorities. Pursuing its ideals of expansion of already existing tax base, the government is working towards ensuring maximum tax collection through a clean, transparent and proper process. While addressing the nation, the Prime Minister expressed due appreciation for the 1.5 crore taxpayers for whom the procedure of taxation has been made effortless and seamless. Transparent taxation through digitalized means came as a requital to the honest taxpayers who have always promptly complied with the laws. These reforms inadvertently solve the problem of tax avoidance as well, there will be no discretion exercised by the assessing officers, making it beneficial for the assessee to pay the due amount on taxable income.
Any likelihood to tamper with appeal allocations will become redundant with the usage of Artificial Intelligence which predominantly makes sure of impartiality. The new system is said to be less time consuming, efficient and fearless for the taxpayers. On the flip side, the notices and summons served to taxpayers will be deemed to be received electronically with no time consuming arguments about not receiving them.
The objectives of these reforms have been mentioned in the Taxpayer’s Charter. While the Charter imposes accountability on Tax Officers for the implementation of standard procedures set in place, it also prescribes the duties of taxpayers which range from maintenance of accurate records to adhering to the specified time limit in a compliant manner. The transparent taxation platform acts as a bone structure to the body of various tax incentives offered to the taxpayers. It firmly grasps the objectives of the DTVSV Scheme 2020 while letting go of age old and stringent processes as it makes way for the new effective ones.
The soaring success of Sabka Vishwas-(Legal Dispute Resolution) Scheme, 2019, which catered to dispute resolution of indirect taxes, created aspirations to achieve similar results with respect to direct taxes. The government felt the need to revamp the DTDR Scheme of 2016 with more effective provisions, needless to say it managed to do so, with the Act being a win-win for all. For most taxpayers, opting for a prompt settlement outside the legal forum, the Act served to be a suitable outlet. Businesses with high accumulated interests or foreign companies with wound up operations waiting for the proceedings to get over, saw this Act as a welcome change in the taxation system.
The Act was aimed at reducing the rate of tax avoidance in the country through its incentives. Tax experts have raised apprehensions when it comes to the big corporates and their inclination towards the Act. Almost all the conglomerates who have multiple issues in ongoing proceedings and who wish to receive favorable outcomes from those proceedings may not opt for the DTVSV Act, limiting its tax base to small businesses. In an attempt to deal with the implicit and explicit lacunas in the Act and make the process easily accessible by all, government came up with new transparent taxation reforms which seem to be a promising catalyst to a higher revenue turnout.