Why the government should consider restoring the Income Tax Settlement Commission

The Income Tax Settlement Commission (ITSC) was constituted in 1976 on the recommendation of the Wanchoo Committee as an alternate dispute resolution mechanism with the objective of providing opportunity to taxpayers to settle their income tax disputes through compromise and settlement. As per the Wanchoo Committee, ITSC was set up so that the door for compromise with the errant taxpayer should not forever remain closed. A rigid attitude would not only inhibit a one-time tax evader or an unintending defaulter from making a clear breast of his/her affairs but would also unnecessarily strain the resources of the income tax department in cases of doubtful benefit to revenue, while needlessly proliferating litigation and holding up collections.

The main powers bestowed on the ITSC were to waive penalty and grant immunity from prosecution. Over and above these powers, certain broad principles such as telescoping theory, peak credit theory and real income theory, have been upheld by the ITSC over the last 45 years. Such principles have been developed keeping in mind a lenient adjudication in the interest of settling the tax dispute once and for all.

Budget 2021 abruptly proposed the discontinuance of the ITSC from immediate effect. This has come across as a surprising move as the Government has over the last few years brought about several provisions and proposals to settle disputes and reduce litigations such as the “Vivad Se Vishwas Scheme”, Sabka Vishwas Scheme the recently announced Dispute Resolution Panel etc. It appears the ITSC has outlived its utility in eyes of the Government.

End of the plea bargaining era in Income Tax

As per Britannica, plea bargaining is the practice of negotiating an agreement between the prosecution and the defence whereby the defendant pleads guilty to a lesser offence in exchange for more lenient sentencing, recommendations, a specific sentence, or a dismissal of other charges. Supporters of plea bargaining claim that it speeds court proceedings and guarantees a conviction, whereas opponents believe that it prevents justice from being served.
The move to discontinue the ITSC, the only income tax plea bargaining authority in India, signifies the end of an era where a taxpayer is allowed to voluntarily settle disputes albeit getting lenient adjudication. The Commission played an important role as an independent quasi-judicial authority to decide violation of income tax law and facilitate settlements between the taxpayer and the income tax authorities.

Overseas income tax plea bargaining authorities

It is important for any country to have an independent tax plea bargaining authority or mechanism and its importance is well accepted in most developed countries.

UK’s Her Majesty’s Revenue and Customs or HMRC offers an Alternate Dispute Resolution to resolve tax disputes speedily and agree on settlements between the tax authority and the taxpayer. Under the banner of Collaborative Dispute Resolution, processes such as the High Risk Corporates Programme have been successful in resolving significant portfolios of tax issues for large businesses.

Internal Revenue Service or IRS in the USA also offers a number of optional Alternate Dispute Resolution programs for certain qualifying taxpayers to resolve tax disputes. These programs include: Fast Track Settlement (available at the examination stage); Fast Track Mediation (available at the collection stage); and Post-Appeals Mediation and the Rapid Appeals Process (available at the Appeals stage).

Why should the ITSC be restored?

1.Only Income tax plea bargaining authority in India. It helps avoid prolonged litigation for the assessee and facilitates speedy collection of tax for the Revenue.

2.Solace for the unintending defaulter – Many a times there may be an unintentional violation or non-compliance of income tax laws by a taxpayer. Such a taxpayer will no longer have any forum to settle its dispute and may have to bear severe penalty implications and potential prosecution in the future.

3.Complex cases of taxpayers subjected to search/survey actions involving complicated issues difficult to represent before the Assessing Officer.

Although, a case can be made against the ITSC’s utility as well – The Government has been very explicit and vocal about coming down hard against errant taxpayers and it has done so through this move.

Misused by compulsive tax evaders who have used this once -in -a -life time -opportunity provided by the ITSC to substantially reduce their tax burden and thereon still continue engaging in unaccounted activities.

Creates a huge deterrent for taxpayers dealing in unaccounted transactions or considering any form or structure of tax evasion due to the prohibitive penalty implications and threat of prosecution.

Our recommendation

It is suggested that rather than completely discontinuing the independent commission the Government may restore the ITSC and make modifications in the scheme of the ITSC so as to achieve the purpose of penalising compulsive tax evaders and creating a suitable deterrent:

Tax additional undisclosed income before the ITSC at higher rates as against the current mechanism to charge undisclosed income at normal tax rates itself;

ITSC can levy compulsory penalty in certain cases so that the Income Tax Department is given its due share in cases of gross tax evasion;

In a situation where the ITSC has passed a final order and subsequently the taxpayer or its related concern is found to be engaged in unaccounted activities, then the earlier ITSC order can be considered null and void;

In the Union Budget 2021, a Dispute Resolution Committee (DRC) was created which is an alternate dispute resolution mechanism for cases where the returned income is not more than INR 50 lakhs and the aggregate amount of variation proposed in an order is not more than INR 10 lakh. The ITSC can take up the mantle for DRC cases. This is crucial as ITSC is a quasi-judicial body independent of CBDT.

These modifications of the ITSC scheme would ensure that certain taxpayers are not able to take undue advantage of the Commission while allowing taxpayers who have unknowingly violated the taxation laws to have an option to come clean before a plea bargaining authority by paying due taxes, getting relief from penalty and prosecution while also ending litigation at an early stage to buy peace of mind.



Views expressed above are the author’s own.


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