Sabka Vishwas Scheme: Who’s Benefited And Who’s Chosen To Stay Away?

More than Rs 3.75 lakh crore is blocked in litigations in service tax and excise. With the need to “unload this baggage and allow business to move on”, in Budget 2019, the finance minister had introduced the Sabka Vishwas Scheme—a Legacy Dispute Resolution scheme meant to settle indirect tax litigation before the goods and services tax was implemented.

As of this week, 87 percent taxpayers have availed of this scheme and committed Rs 35,094 crore under it, according to the finance ministry.

Perhaps why the ministry has extended the scheme till Jan. 15, 2020, saying remaining taxpayers must take advantage of this “never before, never again” scheme.

The scheme can’t be called a great success — what matters is not the number of applicants but the quantum of litigation that’s been resolved, which has been comparatively very less so far, Jigar Doshi, executive director at SKP Business Consulting, said.

Sabka Vishwas: Who’s Benefited?

Full waiver of interest, penalties, fines and amnesty from prosecution proceedings are the key features of this scheme. Yet, taxpayers have taken a measured approach in deciding whether or not to avail of it. Taxpayers have assessed various factors such as merits of their case, quantum of demand involved, availability of evidence or documentation, cost of litigation or even simply an opportunity to close litigation while deciding on whether to opt for the scheme or not, Ritesh Kanodia, partner at Dhruva Advisors, told BloombergQuint.

As a broader principle, where on interpretation they have found their chances of winning to be even at 50:50, they have applied under the scheme if on cost-benefit analysis, the scheme has been found to be beneficial, Kanodia said.

Pratik Jain, partner at PwC India, said these were cases where the tax demand was less that Rs 50 lakh. The tax abatement for such cases is 70 percent—litigation has been pending for more than 10 years and with interest, penalty, the amount has become, say, Rs 2.5 crore. They have to pay only Rs 15 lakh [30 percent of Rs 50 lakh], he said.

In terms of the nature of cases that have been settled, they range from classification of goods under central excise to whether a particular activity will attract service tax.

For instance, according to Doshi, non-dairy whipped cream toppings were considered as outside the levy of excise. This was well accepted by the central excise departments across India till 2016, he said.

The Sabka Vishwas scheme has provided an easy route to industry to close the undue litigation and amicably settle the disputes with regard to such classification ambiguities, he said.

Some service tax cases, too, have benefited from the scheme.

One case pertained to whether the services being offered by the taxpayer qualified as advertising services or sale of space service. Advertising service is liable to service tax, while sale of space was exempted under erstwhile tax regime, Kanodia said.

The allegation by the department was that the taxpayer was engaged in providing service connected with the making, preparation, display or exhibition of advertisement and therefore, was liable as an advertising agency, whereas, the contention of the taxpayer was that it was simply providing space on the internet, he said.

Jain of PwC India said there has been a long-pending dispute on applicability of service tax on rentals from immovable property. The case is pending in the Supreme Court—taxpayers have been arguing that it’s a state subject but the department wants to levy a service tax. Due to a seemingly unfavorable ruling from the apex court on a similar matter, taxpayers suspect that the department’s view might be upheld, and so such cases have availed of the Sabka Vishwas scheme, he said.

Some other issues that taxpayers have preferred to settle include service tax on works contract, where ambit and scope of “intermediary services” was disputed, intellectual property and select banking transactions, he added.

Finally, according to Doshi, there are interesting cases where the scheme has resulted in a payout to taxpayers.

For instance, say a case where the taxpayer had claimed credit twice due to a technical error. The taxpayer admitted to the error in litigation, agreed to reverse the credit but refused to pay the interest and penalty. In some cases, the way the calculations work out, it will result in an undue benefit to the taxpayers.

“They know the right amount of credit is Rs 100 but they will be getting Rs 150 because of this scheme. In such cases, taxpayers are obviously using the scheme in a negative manner but they are saying, if it’s available, why will we not?” Doshi said.

Sabka Vishwas: Who’s Chosen To Stay Away?

Since there is no explicit relief for cases where taxes were paid under protest, such cases haven’t availed of this scheme. Paying tax under protest means that the taxpayer continues to litigate the issue but is spared the interest liability if he loses the case.

For instance, assume Rs 100 was paid by the taxpayer under protest. After applying the 50 percent relief under the scheme, the taxpayer should get a Rs 50 refund. But the department has clarified that no refunds will be made in under protest cases, so huge number of such cases will continue to be litigated, Doshi said.

Add to this, situations where demands have been raised on the same issue or there is duplication of amounts or where amount of turnover considered for raising demand is incorrect.

“Clearly, these were erroneous demands and would not have sustained before courts and therefore the scheme was not opted for,” Kanodia said.

Cases where taxpayers have a favourable precedent have also not availed of this scheme. Experts pointed to cases in the logistics industry, where the department has alleged levy of service tax on transport of goods by vessel which during the relevant period was not taxable.

In a particular case, the taxpayer was buying slots from the vessel owner and selling it to customers, and hence acting as a principal service provider of transport of goods by vessel. But the department has been arguing that these are agency services liable to service tax and therefore, the differential between sale and purchase is nothing but agency commission.

Another category of cases, which is strong on merits, is stock-broking services being provided to foreign institutional investors. The department’s argument has been that the broker provided services with respect to goods provided by the FIIs and therefore, since the companies are listed in NSDL (National Securities Depository Ltd.) and are in demat accounts in India, the services being performance based services are liable to service tax, Kanodia said.

The industry’s argument, however, is these are not services to be performed on goods and that FIIs don’t give these stocks to provide services, specifically where it is purchase transaction or short sales. Such cases, too, have stayed away from settlement under the scheme, according to Kanodia.

But the department’s view is that large taxpayers staying away is probably because of intermediaries like lawyers and tax consultants. For obvious reasons, the immediate settlement of these long pending cases is not seen in the best interests of these intermediaries. But even “if a taxpayer is advised its case is legally strong, economic prudence would justify” availing the scheme, according to the latest communication by the department.