Barking up the wrong tree?

Instead of pursuing Vivad Se Vishwas, greater focus on collecting tax dues without dispute may yield better results

The Union finance ministry is understandably keen on the success of its tax dispute settlement scheme — Vivad Se Vishwas. Launched this year, the scheme was aimed at helping direct taxpayers end their disputes with the government by letting them pay the disputed tax amount, get a waiver from the payment of interest as well as penalty and secure immunity from prosecution.

Only those tax disputes against which appeals were filed on or before January 31, 2020, are eligible to claim the benefits under the scheme. The last date for filing declarations for tax dispute settlement is December 31, 2020. Two months ago, the government had extended the deadline for making the payment of the disputed tax amount by three months till March 31, 2021, in view of the Covid-19 pandemic.

The scheme has many other conditions for taxpayers to get their disputes settled. But what has drawn attention of late is the tardy progress the scheme has made so far. It is reported that the declarations made till now are less than 10 per cent of the scheme’s potential. As of November 17, the government had collected just about Rs 72,500 crore of tax under this scheme. Total direct tax revenues under dispute are estimated to be Rs 8 trillion at the end of March 2019.

If the government is unhappy with the performance of Vivad Se Vishwas, it is not a surprise. But the reason for its unhappiness should not be just the fear that its policy instrument of reducing tax arrears, and thereby mobilising more revenues in a year of record low tax collections, could fail or become ineffective. What should be bothering the government more is the possibility that the failure to reduce disputes could be politically damaging for the ruling party.

From a tax administration point of view, the objective of Vivad Se Vishwas was to both reduce the number of pending income-tax disputes and generate additional revenues for the government. After all, the amount of direct tax revenues raised but not realised because of disputes had risen sharply in the first term of the Narendra Modi government. The disputed amount under this head doubled to Rs 8 trillion at the end of March 2019, compared to Rs 4 trillion at the end of March 2014.

In other words, the share of unrealised direct tax revenue in total direct taxes collected went up sharply from 64 per cent in 2013-14 to 71 per cent in 2018-19. This is an alarming increase and is certainly the primary reason for the Modi government’s decision in its second term to come out with a scheme aimed at reducing the amount of revenues that remained unrealised because of disputes. These disputes have remained unresolved for a long period of time— from more than a year to about 10 years.

But note that the high share of direct tax revenues blocked in disputes was not just a Modi government phenomenon. The problem arose in the last five years of the Manmohan Singh government. The total amount of direct tax arrears because of disputes was just about Rs 54,000 crore in 2008-09, or 16 per cent of total direct tax collections that year. In the following five years, the arrears kept mounting and ended up at as high a level as 64 per cent of total direct tax collections of Rs 6.38 trillion in 2013-14. 

In retrospect, it is now easy to understand how, in the run-up to the general elections in 2014, the Bharatiya Janata Party (BJP) could successfully mobilise public opinion against the Manmohan Singh government’s tax administration or tax terrorism, as its leaders would describe it. That is probably why the continued rise in the amount of direct tax revenue blocked in disputes is a cause for concern for the Modi government from a political standpoint as well. If the finance ministry is worried about the lukewarm response to the scheme, it may be because nobody in the government or in the BJP establishment wants the same charges of growing direct tax disputes to be cited as a sign of the Modi government’s tax-unfriendliness, just like the way the Manmohan Singh government had to face and pay a political price.

So, what should the government do in a situation where Vivad Se Vishwas may not succeed as well as it was originally envisaged? Three imperatives become quite obvious. One, it should avoid putting pressure on taxpayers to settle disputes on terms set out in the scheme. Even if the scheme’s response remains poor, it should allow the taxpayers to explore the normal options for settling the disputes through other existing legal routes.

Illustration: Binay Sinha

Indeed, putting pressure on taxpayers to resolve their disputes through Vivad Se Vishwas can be counterproductive. It might give the tax department a bad name and there could be a political backlash on account of charges of harassment of taxpayers. The very purpose for which the scheme was launched — to dispel the impression that the Modi government has not been prompt in resolving tax disputes — would be defeated. Instead, the finance ministry should take proactive steps to prevent fresh tax disputes from arising and adding to the cumulative tax arrears amount.

Two, there are reports that many state-owned enterprises are being coaxed and cajoled into settling their disputes under the scheme so that its performance gets better before the deadline ends. No such attempts should be made to nudge or pressure these public sector enterprises to settle their tax disputes under the terms of the scheme, if the management of these companies had earlier questioned the rationale or legitimacy of the original tax claims made on them. Remember that many of these state-owned enterprises may be listed corporate entities. In the interest of the minority shareholders, the government as the majority shareholder of such companies should stay away from putting pressure on them to settle such disputes.

 Finally, the revenue department in the finance ministry will do well to explore another area to boost its tax collections. An estimated amount of direct tax dues worth Rs 1.38 trillion remains uncollected by the government as of the end of March 2019. This uncollected amount may have increased by the end of March 2020. Note that this amount is not under any dispute. If only the tax administration apparatus of the revenue department is beefed up, collecting this will be relatively easy as the entire amount is not disputed. 

In the remaining 14 weeks in the current financial year, the revenue department could refocus its energies to collect the undisputed direct tax amount and make a positive difference to its total tax revenue collections in the current financial year. Vivad Se Vishwas need not end  on December 31, 2020, and can be extended by another three months. But the pressure on this scheme to deliver will be far less if direct tax arrears without any dispute can make a significant contribution to the exchequer this year.