Should you opt for tax dispute resolution scheme?

By Sudipta Bhattacharjee and Onkar Sharma, Advaita Legal
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With the goods and services tax (GST) well into its second year, the government now wants to focus its resources and enforcement machinery on the collection of GST rather than getting bogged down by disputes from the pre-GST era. The 2019-20 budget has introduced the Legacy Dispute Resolution Scheme, 2019 (LDRS), offering amnesty (without using the word amnesty) from tax demands (up to 70%) under pre-GST tax laws, levied and collected by the central government as well as interest, penalty and prosecution liability arising from such demands.

Sudipta Bhattacharjee
Partner
Advaita Legal

The purpose behind this scheme is to unlock up to ₹2.75 trillion (US$39 billion) held up by litigation pertaining to pre-GST indirect taxes. LDRS covers all disputes under pre-GST federal taxes such as central excise, service tax and specified cesses (local and specialized levies), including education cess, Krishi Kalyan cess and Swachh Bharat cess, except for the following categories of taxpayers or disputes:

  • Where a show cause notice or appeal has been heard finally on or before 30 June 2019.
  • Where a person has been convicted for any offence pertaining to the tax dispute.
  • Where a show cause notice has been issued for an erroneous refund or refund.
  • Where cases of enquiry, investigation or audit have arisen in which the amount of duty has not been quantified on or before 30 June 2019 or voluntary disclosure has not been made after the audit or investigation.
  • Where a person making a voluntary disclosure, having filed a return under any of the indirect tax laws covered under LDRS, and having accepted weak legal basis, may not acknowledge LDRS duty as payable without paying it.
    Matters that are before a settlement commission.
  • Where a person seeks to make declarations with respect to petroleum and tobacco products.

Similar amnesty schemes have recently been introduced for state-level taxes (like value added tax, entry tax, professional tax, etc.) by various state governments.LDRS can offer significant relief for eligible taxpayers faced with tax demands that are tenable or have a strong legal basis as LDRS can not only offer relief of up to 70% of such tax demands but also relief from any further duty, interest or penalty arising from such demands as well as relief from subsequent prosecution.

Onkar Sharma
Onkar Sharma
Managing Associate
Advaita Legal

However, LDRS may not be an attractive option in the following cases:

  • Where the provisions state that litigation settled under this scheme would not act as a bar to proceedings on the same issue for a different period. This may lead to a scenario where industry issues that are common under both service tax and GST (like tax on liquidated damages and ocean freight, intermediary versus export of service, etc.) arise. Payment of service tax under LDRS may lead to investigation and liability under GST given that the LDRS provisions do not provide immunity in such cases. Thus, LDRS may not be an attractive option for such industry issues.
  • Taxpayers faced with higher demands, especially arising out of allegations with a weak legal basis, may not find LDRS an attractive option. Where high value demands for indirect tax result from erroneous interpretations of law or from incorrect calculations by the department LDRS is unlikely to mitigate this type of pending litigation.
  • Where a taxpayer has obtained partial relief during the show cause notice, and appeals have been filed by both the taxpayer and the department. Taxpayers who have obtained partial relief at a lower level may lose this partial benefit if they opt for LDRS. In such cases, it will be prudent for taxpayers to not to opt for LDRS.
  • Taxpayers need to evaluate all pending disputes and litigation and assign them to appropriate categories of settlement and challenge.

When to opt for LDRS
1) In cases where demands are less than ₹500,000
2) In cases where the department’s position is well-founded in law and the taxpayer’s chances of success are low.

When to avoid LDRS.
1) In cases where demands are significantly higher than ₹500,000 and the taxpayer’s chances of success are medium to high
2) In cases where the dispute involves an industry issue, and thus will be contentious, even under GST, and 3) In cases where taxpayers have obtained partial relief at a lower level.

Sudipta Bhattacharjee is a partner and Onkar Sharma is a managing associate at Advaita Legal.

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