Promoting a tax-friendly regime through a new 'Dispute Resolution Scheme'.

While presenting the General Budget 2016-17 in Lok Sabha today, finance minister Arun Jaitley said that litigation was a scourge for tax-friendly regime and created an environment of distrust.

Litigation also led to increasing the compliance cost for the tax payers and administrative cost for the government. There were 3 lakh tax cases pending with the 1st Appellate Authority with disputed amount being Rs 5.5 lakh crores.

In order to reduce this number, a new dispute resolution scheme (DRS) has been proposed wit the following features:

  • A taxpayer who has an appeal pending as of today before the Commissioner (Appeals) can settle his case by paying the disputed tax and interest up to the date of assessment.
  • No penalty in respect of Income-tax cases with disputed tax up to Rs 10 lakh will be levied.
  • Cases with disputed tax exceeding Rs 10 lakhs will be subjected to only 25 per cent of the minimum of the imposable penalty for both direct and indirect taxes.
  • Any pending appeal against a penalty order can also be settled by paying 25 per cent of the minimum of the imposable penalty.
  • Certain categories of persons including those who are charged with criminal offences under specific Acts are proposed to be barred from availing this scheme.

With special reference to government's assurance to not create retrospectivity of fresh tax liability, Jaitley reiterated his commitment to provide a stable and predictable taxation regime.

He has proposed a one-time scheme of Dispute Resolution for past cases ongoing under retrospective amendment. One can settle the case by paying only the tax arrears, with the liability of the interest and penalty being waived.

This is subject to agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc under BIPA.

Identifying that levy of heavy penalty as a cause of large number of disputes, Jaitley proposed to modify the scheme of penalty by providing different categories of misdemeanor with graded penalty and thereby substantially reducing the discretionary power of the tax officers.

The penalty rates will now be 50 per cent of tax in case of underreporting of income and 200 per cent of the tax where there was misreporting of facts. Remission of penalty is also proposed where taxes are paid and appeal is not filed.

Quantification of disallowance of expenditure relatable to exempt income in terms of Section 14A of the Income Tax Act is another issue led to number of disputes. Hence, it has been proposed to rationalise formula in Rule 8D governing such quantification.