Before VSV 1.0, a staggering 4.83 lakh direct tax appeals were pending across various appellate forums—from the Commissioner (Appeals) and ITAT to the High Courts and the Supreme Court—locking up an immense ₹4.96 trillion in unresolved disputes. VSV 1.0 successfully resolved 1.46 lakh (30%) of these appeals, recovering ₹0.54 trillion (11%) for the government – an admirable achievement.
Despite this success, over 5.44 lakh appeals are still pending at the Commissioner (Appeals) level alone, presenting an urgent need for action. The total direct tax disputes pending have multifolded to the tune of ₹10.40 trillion, which is a staggering 5.6% of India’s GDP. VSV 2.0, while primarily focused on resolving these disputes, offers businesses a compelling reason to opt for settlement beyond tax implications. The following non-tax considerations highlight why businesses might choose to cut short litigation under VSV 2.0:
Key Non-Tax Considerations:
1. Cleaning Up Balance Sheets and Reducing Contingent Liabilities
Unresolved tax disputes often appear as contingent liabilities on a company’s balance sheet, creating financial uncertainty that can deter investors and lenders. Settling through VSV 2.0 allows businesses to eliminate these liabilities, enhancing financial health and presenting a stronger case to stakeholders, which in turn can boost access to capital and credit. Imagine if 10% of the pending disputes are settled; it will clear the balance sheets to the tune of approx. ₹1 trillion. The impact it will have in improving the valuations of these companies would be significantly positive.2. Enhancing Debt Capacity and Market Capitalization
By resolving disputes and removing contingent liabilities, businesses unlock greater debt capacity. With a healthier balance sheet, securing financing becomes easier, facilitating expansion and innovation. Moreover, companies with a clean financial record are more attractive to investors, positively impacting market capitalization.
3. Unlocking Opportunities for Government Contracts, M&A, and IPOs
Ongoing tax disputes can pose significant barriers to pursuing government contracts, mergers and acquisitions (M&A), or launching an initial public offering (IPO). Resolving these issues via VSV 2.0 removes this roadblock, positioning businesses as financially stable and reliable candidates for growth opportunities.
4. Refocusing on Core Business Growth
With tax disputes settled, companies can reallocate resources—both financial and operational—towards core business activities, value creation, and growth initiatives, enhancing operational efficiency and competitiveness.
How can the government make the scheme more attractive:
To ensure VSV 2.0 outshines its predecessor, the government must address critical concerns raised by the taxpayer community. Here are key areas that deserve immediate attention:
1. Secondary Adjustments: A Need for Flexibility
Transfer pricing adjustments (arising from `cross-border related party transactions) have been one of the most contested issues over the past two decades. These adjustments often involve notional amounts and lead to double taxation, discouraging businesses from opting for settlement. The additional burden of secondary adjustments (tax on primary adjustments) amounting to 18%+ of the transfer pricing adjustment, only exacerbates the issue.
For VSV 2.0 to incentivize more settlements, the government should reconsider its position and clarify that secondary adjustments will not apply in transfer pricing settlements. This change could significantly reduce the volume of these disputes and drive greater participation in the scheme.
2. Commitment to Refunds: Restoring Trust
Many taxpayers who opted for VSV 1.0 are still waiting for their refunds. Adding to the frustration, these taxpayers are not entitled to interest on delayed refunds, and many have incurred additional costs to follow up with the tax department. This has understandably eroded trust, making taxpayers hesitant to engage with VSV 2.0. To restore confidence, the government should incorporate a transparent and efficient refund mechanism into the IT platform for VSV 2.0, ensuring refunds are processed swiftly and accurately.
3. Rectification: Prompt Resolution of Errors
Assessment orders often overlook earlier losses or tax credits, leading to inflated tax liabilities. Taxpayers then face the onerous task of submitting rectification applications, which are frequently ignored. Many appeals, which don’t result in additional payments, could be swiftly settled if tax officers address rectification requests in a timely manner. To encourage greater participation in VSV 2.0, the government should mandate the swift resolution of such errors, thereby ensuring correct tax positions.
4. Access to Favorable Supreme Court Judgments: Ensuring Fairness
Issue-based settlements are not permitted under VSV 2.0. However, many pending appeals involve issues that have already been decided in favor of taxpayers by the Supreme Court in other cases. Under VSV 1.0, only the specific taxpayer in the case benefitted from the ruling, while others were excluded from applying the favorable judgment.
This approach discourages taxpayers from participating in VSV 2.0. To make the scheme more attractive, all taxpayers should be allowed to benefit from favorable Supreme Court rulings, especially when such rulings set legal precedents. This would not only encourage settlements but also ensure fairness.
5. Appeals Still Within the Time Limit: Closing the Gap
There are situations where an order is passed before July 22, 2024 (the cut-off date for appeals under VSV 2.0), but the time to file an appeal remains open. In such cases, no appeal would be considered pending as of the cut-off date, leaving these disputes outside the purview of VSV 2.0.
This gap contradicts the government’s objective of reducing the backlog of disputes. To bridge this oversight, the government should allow cases within the time limit to file an appeal to be included under VSV 2.0. This would further accelerate the resolution of disputes.
It should be always about having a win-win proposition if you wish to settle:
VSV 2.0 has the potential to be a game-changer in resolving tax disputes, but its success hinges on addressing the key concerns relayed above. By offering flexibility on secondary adjustments, ensuring timely refunds, and granting broader access to favorable legal precedents, the government can foster greater participation in the scheme. When coupled with the non-tax benefits for businesses, VSV 2.0 could surpass the achievements of its predecessor, delivering long-term value to both taxpayers and the nation.
The author is Partner, Deloitte India