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Following the success of the Direct Tax Vivad se Vishwas Act, 2020 (DTVSV act), the government has reintroduced the (scheme) under the provisions of chapter IV of the Finance (No. 2) Act, 2024. The scheme was announced in the 2024 budget and came into effect on 1 October 2024. It is designed to resolve the problem of a large number of outstanding income tax disputes.

The scheme applies to all appeals, writs and special leave petitions pending before appellate forums such as the High Court, the Supreme Court, the Income Tax Appellate Tribunal (ITAT) and the Commissioner (Appeals). It also deals with objections before the Dispute Resolution Panel and revisions under section 264 of the Income Tax Act. All matters pending on 22 July 2024 are included.

According to statistics published by the Ministry of Finance, a total of 132,353 declarations have been filed under the DTVSV act, settling disputed tax amounts of almost INR1 trillion (USD11.85 billion). The aim of the revived scheme is to bring an end to contentious litigation and hasten the recovery of tax. The scheme is intended to serve the interests of the government, assessees and the courts. Delineating an effective and economical method of settling disputes, the scheme offers taxpayers a reprieve from the uncertainty caused by procedural delays in appellate proceedings.

The scheme is not without its limitations as it does not apply to cases arising from search assessments under sections 132 and 132A of the Income Tax Act, 1961 (ITA). Additionally, cases are excluded in which prosecutions had already been brought under the ITA or related laws before the taxpayer had filed a declaration under the scheme. Disputes involving undisclosed income or assets located abroad are ineligible, as are cases based on information received through double taxation avoidance agreements. The scheme also excludes individuals detained under the Foreign Exchange and Prevention of Smuggling Activities Act, 1974, and those notified under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

Another important announcement in the 2024 budget, although not part of the scheme, was a proposal to decriminalise late payment of tax deducted at source (TDS) under section 276B of the ITA. Provided payment has been made before the filing of the TDS statement, criminal penalties will not be imposed. This will be a significant response to the longstanding demand of the business community to ameliorate punitive measures caused by procedural delays usually beyond its control. This will achieve a balance between enforcement and procedural fairness. This is particularly welcome for businesses facing operational challenges but which are still determined to fulfil their tax obligations.

Currently, criminal prosecutions are launched against defaulting entities and their principal officers in a routine manner, even after the defaulting entity has deposited the TDS and the penalty. This is because the factum of default itself is saddled with penalty and does not take into account attending circumstances responsible for the delay. The only options currently available to these taxpayers are either to apply to the high court to quash the complaint or to endure a long and arduous trial. The proposed amendment, if enacted, will indeed ease the burden on companies and businesses.

The scheme provides a simple mechanism at the appellate stage by which taxpayers can settle disputes without suffering prolonged litigation. This will promote timely settlements and establish a straightforward way of disposing of pending disputes. Nevertheless, the scheme does have its challenges. With a large proportion of appeals already at the stage of assessment, most of the taxpayers involved may choose to fight their cases on the basis that they stand to win their appeals rather than opt for settlements under the scheme.

Aman Avinav is a partner at Phoenix Legal