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Tax dispute solution scheme: is it for you?
September, 02nd 2016

The scheme essentially asks the taxpayer to pay the disputed tax, penalty and interest, and settle the case

According to reports, the Central Board of Direct Taxes (CBDT) is going to send emails to about 259,000 income tax assessees asking them to avail the benefits of the Direct tax dispute resolution scheme (DTDRS) 2016. These assessees have tax-related disputes (either related to income or wealth tax) with the tax department. The scheme opened?on?1 June and is valid till 31 December 2016. Similar to the Income Declaration Scheme, 2016, this scheme is also voluntary, and an assessee is free to decide whether she wants to end the dispute by paying the due tax and penalty, or continue with it.

Read on to find out more about the scheme, how much one needs to pay to settle a dispute, and whether one should opt for it or not.

What’s it about?

The main aim of the scheme is to settle disputes between the tax department and the income tax assessees. In his budget speech, finance minister Arun Jaitley had said there are about 300,000 tax cases pending with the first appellate authority, and the disputed amount is around Rs.5.5 lakh crore.

Usually, disputes arise when there is a mismatch between the tax liability assessed by the taxpayer and what the tax department thinks it should be. Changes or amendments in tax laws with retrospective effect may also result in tax disputes. If the assessee disagrees with the tax department’s evaluation, she can raise the issue with the authority concerned. Till the time the tax demand is paid or it is withdrawn by the taxman, the case is considered to be disputed.

DTDRS covers litigation cases pending before the Commissioner of Income-tax and Wealth-tax (Appeals), which is the first appellate authority, or the Income Tax Appellate Tribunal, the high courts, the Supreme Court or before any other authority. The cases have to be pending as on 29 February 2016. “Every person, including an individual, a Hindu Undivided Family (HUF), company, firm, Association of Persons or Body of Individuals can avail of the scheme. Therefore, even Trusts (public or private) or Limited Liability Partnerships and corporate as well as personal taxpayers can claim the benefits of this scheme,” said Suresh Surana, founder, RSM Astute Consulting Group.

But in certain circumstances the scheme can’t be used. For instance, in cases related to ‘search and survey’ (declaration is in terms of tax arrears), undisclosed foreign income and foreign assets, where decision has been taken and intimated on or before the date you opt for the scheme, and so on.

Interest and penalty

There can be two scenarios. In the first, there could be additional tax liability that an assessee needs to pay, and on which interest and penalty for delay also applies. In the second scenario, only the penalty has to be paid for delay in paying tax.

The scheme provides that, in the first scenario, to settle the case, if the disputed tax liability is below Rs.10 lakh, only interest and disputed tax amount has to be paid. But if this amount is more than Rs.10 lakh, the penalty equals 25% of the minimum applicable penalty along with interest. So, if the disputed tax amount is Rs.8 lakh, one has to pay Rs.8 lakh along with interest to settle the dispute. If the disputed tax amount is Rs.12 lakh, the assessee has to pay Rs.12 lakh plus 25% of the minimum applicable penalty, along with interest, to settle the case.

In case of second scenario, you can settle the case by just paying 25% of the minimum applicable penalty.

So, in any case, interest has to be paid on the disputed tax amount. However, one must note here that the interest has to be calculated only up to the point when assessment or reassessment of the order started.

The interest is 1% per month (under section 234A of the income tax Act). So, if the tax department sends you an assessment order in December of the assessment year, stating tax liability of Rs.5 lakh on an income earned in March of respective financial year, the interest will be 1% of Rs.5 lakh for each month from March to December (10 months) or Rs.50,000 (1% of Rs.5 lakh * 10).

Should you opt for it?

“A taxpayer seeking peace of mind should opt for the scheme to resolve their tax disputes,” said Suraj Nangia, partner, Nangia & Co. But before you decide to opt for the scheme, do some calculations to see if you really benefit.

“First, you should check whether your case is pending before CIT(A) or CWT(A) (Commissioner of Income-tax (Appeals) and Commissioner of Wealth-tax (Appeals)) as on 29 February 2016, and hasn’t been disposed of yet. Also, check that your case comes under the disqualification list,” said Surana.

Even if you are eligible to take the advantage of the scheme, do a cost benefit analysis. “You should calculate the total tax exposure (tax, interest and penalty) under both the scenarios, i.e., continuing to pursue the matter under appeal vis-a-vis opting for this scheme. Thereafter, consider the probability of success based on past history or case laws or expert legal opinion,” added Surana.

After considering all the factors, if it seems that it makes financial sense to pursue the dispute, you could do so. However, if it seems that getting an order in your favour is unlikely, it is better to take advantage of this scheme and settle the matter.

How to go about it?

If you decide to opt for the scheme, you need to use separate forms for declaration and undertaking. Form 1 under the scheme can be used to declare tax arrears and specified tax. Details such as name, address, Permanent Account Number (PAN), legal status, tax residential status and so on need to be mentioned in the form. Apart from that, details of appeals, assessment and penalty orders also need to be mentioned.

Along with Form 1, you have to also file an undertaking regarding ‘specified tax’. In this you have to undertake to voluntarily waive all rights in respect of specified tax, whether direct or indirect, and also waive off the right to seek or pursue any remedy or any claim related to it.

Once the tax authority receives the declaration and undertaking forms, it will issue a certificate of intimation in Form 3, within 60 days of receiving Form 1. After receiving the certificate, the taxpayer has to use Form 4 to give details of tax and penalty paid, within 30 days from receipt of Form 3.

“The timeline for payment of tax and penalty is 30 days, therefore, appropriate cash flow assessment should be done to ensure that there is no delay in payment of tax and penalty,” said Nangia. If the payment is delayed, the declaration will be considered void.

After receiving Form 4, the tax authority will pass an order stating full and final settlement of tax arrears (Form 5) and specified tax (Form 6). These will certify the tax settlement and grant immunity from proceedings for any offence or penalty under the income tax Act or wealth tax Act.

Mint Money take

If you think your argument against the tax department is strong, then pursue the matter and don’t opt for this resolution scheme. But if you think your argument is not strong enough, or if you do not want to pursue the matter for any other reason, and you want the dispute to end, this scheme gives you an opportunity to do that. However, do check the penalty and interest you will have to pay if you opt for the scheme.

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