The tax system is the government’s largest source of income. Tax revenue is used for various projects for the development of the nation by the government. Taxation in India is well structured and consists of different levels.
The Indian tax system is well structured and has a three-tier federal structure. The tax structure consists of the central government, state governments, and local municipal bodies.
India’s central government imposes several taxes such as customs duties, central excise duties, income taxes, and service taxes. The state government collects several types of taxes, including farm income taxes, state excise taxes, professional tax, land revenue tax, and stamp duty. On services such as water and drainage supply, local governments are allowed to collect octroi and property tax.
An income tax is a tax imposed on individuals or entities on the basis of their income or profits. Generally, income tax is computed by multiplying the tax rate by the taxable income. There may be variations in tax rates according to the taxpayer’s characteristics and the income being received.
Income tax in India is governed by Entry 82 of the Union List of the Seventh Schedule to the Constitution of India, empowering the central government to tax non-agricultural income; agricultural income is defined in Section 10(1) of the Income-tax Act, 1961. The Income Tax Department is the central government’s largest revenue generator; total tax revenue increased from ₹1,392.26 billion (US$20 billion) in 1997–98 to ₹5,889.09 billion (US$83 billion) in 2007–08. In 2018–19, direct tax collections reported by the CBDT were about ₹11.17 lakh crore (₹1.117 trillion).
Income tax dispute resolution in India is multi-layered and time-consuming, which negatively affects doing business in India. Tax appeals in India are handled by the Supreme Court of India, which has an extensive jurisdiction. The system, however, can be abused. In the present dispute resolution procedure, tax appeals filed by the income tax department are the most common.
The Indian Government, to clear the backlog of appeals, has launched a direct tax litigation settlement scheme named the ‘Direct Tax Vivad Se Viswas Scheme’ (VSV scheme) on March 17, 2020. The ‘VSV scheme’ provides taxpayers with an option to put a full stop to the entire litigation process and achieve finality merely by paying the tax component of the dispute. The Indian Government shall waive penalty and interest, and is offering a 50 percent discount to settle revenue appeals and appeals where the taxpayer has a favourable precedent by a higher court. An important aspect is that the ‘VSV scheme’ is not an amnesty scheme and explicitly clarifies that availing this option shall have no precedence value qua the principal issues. Thus, taxpayers can decide to settle their appeals based on an objective comparison of future litigation costs with the cost of availing the settlement option.“The last date of payment under ‘Vivad se Vishwas Direct Tax 2020 (without additional amount) was extended to 30th September 2021 and with the additional amount the due date is 31st October 2021.”
With respect to the matters covered in the declaration, the taxpayer is immune from interest, penalties, and prosecution for any offence under the Income-tax Act.