Given the current fiscal deficit and subdued revenues from GST, it is no secret that the Government is exploring incremental revenue streams. Excessive tax litigations pending at various levels of the judicial process is one of the major hindrances towards achieving this objective. With the introduction of GST in India, the Government is also keen to unburden itself of the “baggage” of pending litigations to free up the judicial process. 

If one goes by estimates, total indirect taxes litigations pending at various levels (under the legacy central indirect tax laws) amount to INR 3.75 lakh crores. Given this context, the Finance Minister has introduced the ‘Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019’ (‘the Scheme’)– an amnesty scheme to primarily dispose of the pending litigations under Service Tax, Excise and the other (26) central indirect tax laws. 

Our article highlights the key features of this Scheme and elaborates on its interplay with other parallel developments in the financial ecosystem , mainly the Insolvency and Bankruptcy Code, 2016 (‘IBC’). 

 Scheme highlights 

The Scheme (currently open till 31 December, 2019) provides significant relief from tax dues and associated costs of interest and penalty, summarised in the following table: 

*Matters related to refund are not eligible 

Situations where tax dues have been quantified on or before 30 June, 2019 are eligible under the Scheme. The Scheme also offers a complete waiver from prosecution under the concerned indirect tax laws.  Further, once a matter is finally concluded under the Scheme (for the particular period), neither the tax office can claim that the taxpayer has legally acceded a particular tax position, nor can the matter be re-opened or re-assessed. As a result, the Scheme intends to insulate future periods from a follow-on impact of the same “issue”. 

While the Scheme is aimed at decreasing the number of pending litigations, there are restrictions on certain categories of taxpayers availing of its benefit as listed below: 

(a)  Taxpayers convicted under the earlier laws for the particular matter

(b)  Matters for which an application is pending with the Settlement Commission

(c)   Litigations for which the final hearing has not been held till 30 June, 2019

(d)  Issues arising from any enquiry, investigation or audit proceeding if the amount due has not been quantified by 30 June, 2019 

An eligible taxpayer can electronically apply for the Scheme along with proof of withdrawal of appeal. The application is then reviewed by the ‘Designated Committee’, post which a hearing is held and a statement indicating the tax amount due is issued. The taxpayer will have to mandatorily pay the tax dues in cash within (30) days, post which a discharge certificate will be issued by the Designated Committee relieving the taxpayer of any further liabilities for that matter. 

Interplay of the Scheme with the IBC 

Apart from offloading the taxpayer with overheads associated with tax litigation such as finance cost, legal costs, fees, interest and penal liabilities, the Scheme may potentially go a long way in adding value to the insolvency proceedings currently in vogue in India. 

The IBC was introduced in 2016 to specifically deal with insolvency and liquidation of companies in India. The IBC provides that a Resolution Plan (‘RP’), approved by the stakeholders, should be the basis for distribution of the assets. However, if this RP has not been approved and the company goes into liquidation, a ‘waterfall’-based approach has been prescribed under the IBC. This approach entails  government dues (which includes tax dues) and dues to secured creditors (balance due, post realisation of secured assets) are given equal weightage and are settled after meeting the dues of liquidator, workmen, employee and unsecured creditors of financial debt. 

The question that then arises is whether the pending litigations with the tax office (forming part of Government dues) can be reduced using the Scheme? This may potentially increase the share in assets for the remaining stakeholders leading to better yields from the limited assets under liquidation. However, the Scheme is valid only for a short time period till 31 December, 2019, and given the potential tax savings, it is important for all key stakeholders under IBC to re-group and evaluate the value addition of this proposition on their current negotiations. 

Reading the fine print 

While the Scheme provides various tax and associated reliefs, there are certain challenges associated with it. Potential claimants need to factor in the following issues before opting for the Scheme: 

• One of the restrictions for applying for this Scheme is that the taxpayer’s final hearing on the matter should not have been concluded prior to 30 June, 2019. It has been clarified that if hearings for a particular matter are rescheduled due to any reason, it would be deemed that the final hearing has not been held. With this clarification, if the tax office reschedules a hearing even though a prior hearing was successfully conducted, the eligibility of such case for the Scheme could be diluted. Similarly, if a matter has been finally heard over six months ago, the question remains if such a situation will qualify to be eligible under the Legacy Dispute Resolution Scheme, as judicial norms prescribe that matters for which an order has not been passed within six months from conclusion of hearings needs to be reheard. 

• Relief under the Scheme will allow a deduction of any amount paid as pre-deposit for matters in appeal. To illustrate, if the tax due is INR 100 and the taxpayer has already pre-deposited INR 20, the relief under the Scheme will be computed on INR 100. On the contrary, the CBIC has clarified that the for matters with undisputed admitted liabilities, the relief is computed as a percentage of the pending amount i.e. on INR 80. This results in a slight imbalance. 

• The Scheme mandatorily requires the taxpayer to deposit the tax dues in cash – this would create a short-term cash outflow requirement for taxpayers and may be challenging for those with substantial input credit balances. Further, the taxpayer is also barred from availing tax credit for any tax paid under the Scheme (for reverse charge liabilities). 

• No tax relief (beyond interest and penalties) has been offered where taxpayers make voluntary disclosure i.e. for matters not pending under litigation. The focus, therefore, seems to be only on disposing matters under audit/litigation and not encourage voluntary disclosure. 

Thus, while the Scheme is lucrative in terms of the relief offered and given that the Scheme expires on 31 December, 2019, the need of the hour is for the taxpayer to conduct a cost-benefit analysis of pursuing the litigation vis-a-vis settling the litigation under the Scheme. The taxpayer would also need to evaluate unique situations such as parties covered under the IBC which could potentially offer higher future yields (at  a current cost of settlement that needs to be funded). 

Extending the Scheme for applications filed till 31 March, 2020 could be considered to increase its appeal.