Vivad se Vishwas: Firms reconsider participation in tax resolution scheme

Firms looking at reverting to normal litigation in a bid to conserve cash

With the coronavirus halting economic activity, businesses are re-evaluating their participation in the Vivad se Vishwas direct tax resolution scheme, under which payment is required to be made by the end of quarter ending June (Q1).
 

With Q1 earnings either negative or flat in most cases, companies are looking to save cash and are opting to settle disputes via normal litigation, which will take at least 2-3 years to resolve.
 

Vivad se Vishwas offers a waiver of interest, penalty, and prosecution for firms that pay before the June 30 deadline under the scheme, for settling tax disputes due up to January 31. After this deadline, which was extended from the earlier one of March 31 because of Covid-19, lapses, an additional 10 per cent payment comes into force.
 

“The scheme will need to be reassessed with respect to payment terms, as survival will be key for most businesses rather than settling disputes,” said a government official.

A construction company, for instance, had decided to opt for the scheme in March to ensure early settlement, despite higher chances of winning the case. The litigation pertains to mismatch in revenue reflecting in Form 26AS and that reflecting in the financial statement. However, now it plans to fight the case on merit via the litigation route.
 

“The construction sector has been badly hit as our key activity phase before monsoons has been wiped out. We are facing an existential crisis. We will go by the normal litigation route now, which will take time, but we are anyway sure of getting a favourable judgement,” said the head of the construction firm.
 

Similarly, a major auto component supplier with networks spread across the globe, had decided to opt for the scheme to settle a dispute related to payment of royalty under transfer pricing. However, it has now dropped the idea with its entire supply chain affected by Covid-19.

Amit Maheshwari, tax partner at AKM Global, a consulting firm, said in light of the severe cash crunch being faced by several firms, taxpayers were re-evaluating their decision to go for Vivad se Vishwas.

“Some taxpayers may continue with litigation instead. We don’t see much impact on cases where there would be no cash outflow, like loss cases, and they may continue to opt for the scheme,” he added.
 

However, a few multinational companies (MNCs) are evaluating the option now with rupee appreciation making the scheme attractive. Besides, where refunds are stuck, more companies are planning to opt in as cash flow is important at the moment. In fact, even tax consultants are advising firms to save cash as the scheme involves immediate outflow in Q1.

Rajat Mohan, partner at AMRG Associates, said businesses have no visibility of restarting the same level of commercial activity in the immediate future. “Top lines of businesses have suffered an immediate setback, whereas getting rid of fixed expenses is tough, leading to an immediate cash crunch. Taxpayers facing liquidity crunch are expected to pull out from the scheme to fund their immediate survival,” said Mohan.

With revenue collections under pressure, the government was hoping to garner at least Rs 2 trillion from the Scheme. The direct tax collections missed the downward revised target for financial year 2019-20 (FY20) by Rs 1.42 trillion at Rs 10.27 trillion, an 8 per cent fall over the previous year. This makes the FY21 target meaningless, according to income tax officials. A growth of 28.2 per cent will be needed as against the assumed rate of 12 per cent in the Budget to meet the collection target of Rs 13.19 trillion.
 

There are over 400,000 cases eligible to avail to participate in the scheme, with a cumulative value of around Rs 9.3 trillion.

Disputes relating to wealth, securities transactions, commodities transaction tax, and the equalisation levy are not covered under the scheme.