Budget 2025 needs settlement scheme for clearing huge tax litigations

Budget 2025: Settlement scheme like Vivad Se Vishwas needed to clear high backlog of legal tax disputes, say experts

Due to difference in interpretation of the law, sometimes tax dispute cases can go on for years, costing both India’s judicial system’s resources and taxpayers' time. Government understands this pain point and hence it often cames out with special schemes like Income Tax Vivad Se Vishwas, GST Section 128A Amnesty Scheme, etc. But the problem is not with these special schemes to resolve tax disputes. Experts say the problem is these schemes run for a specific time period and once they are over taxpayers are left with ITAT, high court and Supreme Court where a different set of challenges awaits them.

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According to the Deloitte’s Budget 2025 recommendations, rationalisation measures for assessments and appeals are the need of the hour. Deloitte says protective assessments must be allowed on issues where taxpayers have succeeded, but revenue authorities contest the issue at higher forums.

According to Deloitte, “Repetitive additions are made in assessments as a revenue appeal for the same issue in an earlier year (which has been held in favour of the taxpayer by the Income Tax Appellate Tribunal (ITAT)) is pending before the High Court (HC)/ Supreme Court (SC).”

Deloitte says this long duration of dispute litigation is costing taxpayers money. “This blocks taxpayer’s working capital flow even though they have succeeded at the ITAT. The tax amount on these repeated additions also adds to the high “disputed demand” statistics of the tax department,” says Deloitte.

Deloitte recommends any addition made on a disputed issue already ruled in favour of the taxpayer by the ITAT should be made in subsequent assessments on a “protective basis” so that no demand is raised/crystalised on that issue.

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India needs a permanent tax settlement mechanism for general income tax cases to clear legal dispute backlog

Experts say India should follow other countries and come out with a permanent tax settlement mechanism as the specialised short term Amnesty schemes, ITAT and courts are not enough.

Gouri Puri, Partner, Shardul Amarchand Mangaldas & Co. has a recommendation for the government.

“Given the pendency of tax disputes, the Indian government has been looking for alternate dispute resolution mechanisms to clear the litigation backlog and promote ease of doing business in India. Several tax disputes are genuine and emanate from legislative gaps or competing interpretations of laws. A permanent tax settlement mechanism (as exists in other countries) will aid in reducing tax administration costs and give taxpayers an outlet when engaging in protracted litigation does not seem commercially viable,” says Puri.

Karishma Phatarphekar, Partner, Deloitte India, says, the existing Vivad Se Vishwas 2024 scheme allows settlement of pending appeals, but complicated cases need a mediation or settlement scheme.

Phatarphekar says: “By availing the VSV 2024 taxpayers can get interest and penalty waiver along with immunity from prosecution. However, given that cases which involve differential treaty interpretations are extremely complex cases both from a factual as well as legal perspective, having a meditation or settlement scheme would be helpful for taxpayers who wish to attain certainty in a single jurisdiction and who do not wish to avail the Mutual Agreement Process prescribed by the double taxation respective treaties which provides certainty in both jurisdictions.”

DTAA treaty related interpretation differences and disputes issue

Recently from January 1, 2025, Switzerland had amended the rules of its DTAA with India and decided to withdraw the Most Favoured Nation (MFN) clause for dividend income. However, if you recall this was a long pending dispute and, in this regard, the Supreme Court of India rejected the interpretation favourable to the Swiss (Case - Nestle SA [2023] 458 ITR 756 (SC)). Cases like this highlight the need for a settlement scheme.

However, Gaurav Makhijani (Head of Tax, North India and Gujarat) at Roedl & Partner India says introducing a settlement scheme for such cases seems difficult.

“This is because a settlement scheme in such cases might create different forms of expectations of government intervention even in judicially resolved matters that have attained finality by the order of the Supreme Court,” says Makhijani.

Makhijani says “Where this same issue as highlighted above is still pending before appellate authority or any court) can settle the disputes through the Vivad Se Vishwas Scheme 2024.”

Experts opine that while these special amnesty schemes are good in the first instance but from a long-term perspective these schemes are counterproductive.

According to Phatarphekar, “While it may seem attractive at the first blush, but in the long run having a permanent scheme like Vivad Se Vishwas would be counterproductive to the tax regime. “Since it may instigate taxpayers to take chances on their aggressive positions in hope that if they get caught in the litigation net, there is always a golden parachute of VSV which they can avail. Further, even from an equality perspective genuine taxpayers may feel that aggressive taxpayers are getting more favourable treatment.”

Makhijani highlights a fundamental problem about some of the past cases where judgements were favourable to taxpayers.

“The government itself had introduced the Taxation Laws (Amendment) Act of 2021 to annul the ‘retrospective’ applicability of indirect transfer capital gains tax. On indirect transfer matters involving taxpayers including Vodafone and Cairn, the Supreme Court had ruled in favor of taxpayers holding there shall be no capital gains tax on indirect transfer of shares. Thereafter, the government introduced clarificatory amendments to tax such indirect transfers nullifying the impact of favorable Supreme Court decisions. Some of these taxpayers then pursued relief through international arbitration which they won. This ultimately led to settlement discussion with the Indian government,” he says.

This story originally appeared on: India Times - Author:Faqs of Insurances