While presenting the General Budget 2016-17 in Lok Sabha today, the Union Finance Minister Shri Arun Jaitley said that litigation is a scourge for tax friendly regime and creates an environment of distrust. Litigation also leads to increasing the compliance cost of the tax payers and administrative cost for the Government. There are 3 lakh tax cases pending with the 1st Appellate Authority with disputed amount being 5.5 lakh crores. In order to reduce this number new dispute Resolution Scheme (DRS) is launched. Following are highlights of dispute resolution scheme:

• 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 ₹ 10 lakh will be levied.
• Cases with disputed tax exceeding ₹ 10 lakhs will be subjected to only 25% 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% 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 of not to create retrospectively of fresh tax liability, Union Finance Minister Shri Arun Jaitley reiterated this commitment to provide a stable and predictable taxation regime. He proposed one-time scheme of Dispute Resolution for past cases ongoing under retrospective amendment. One can settle the case by paying only the tax arrears in which case liability of the interest and penalty shall be 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, Shri 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% of tax in case of underreporting of income and 200% of the tax where there is 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 rationalize formula in Rule 8D governing such quantification.

Dispute Resolution Scheme enabling settlement by payment of disputed tax with conditional waiver of interest and penalties. A new Dispute Resolution Scheme allows taxpayers to settle pending appeals by paying disputed tax and interest to the date of assessment, with penalty waivers or capped reduced penalties for specified cases; excludes certain categories including those facing specified criminal charges. A one time settlement for retrospective amendment cases permits payment of tax arrears with interest and penalty waived if all pending proceedings are withdrawn. Penalty reform grades misconduct with calibrated penalty rates and provides remission where tax is paid and appeals are not filed; the rule for quantifying disallowance attributable to exempt income will be rationalized.