Remission and Extinguishment of Tax Demand

The Hon'ble Finance Minister, in the interim budget on February 1, 2024, made an announcement in her speech to withdraw direct tax demands up to Rs. 25,000 pertaining to the period up to financial year (FY) 2009–10 and up to Rs. 10,000 for FY 2010–11 to FY 2014–15. The intention behind such a proposal was to reduce the burden on taxpayers. This proposal will withdraw the plethora of disputed direct tax demands and provide relief to many taxpayers (about one crore, as stated in the budget speech).

This article summarizes a recent order issued by the Central Board of Direct Taxes (CBDT) on the remission or extinguishment of small tax demands outstanding as of January 31, 2024, under the Income Tax Act 1961 (ITA), Wealth Tax Act 1957, or Gift Tax Act 1958 (referred to as relevant Acts).

• The CBDT order broadly provides below guidelines and conditions based on which the tax demands will be withdrawn, and the same will be implemented by the Directorate of Income Tax (Systems)/Centralized Processing Centre (CPC), Bengaluru, preferably within two months.
• The tax demands to be waived will be those for the financial year up to 2014–15.
• The monetary limits of outstanding tax demands that are to be remitted or extinguished are as follows:

• However, there is a cap of Rs. 1,00,000 per taxpayer on the principal component of tax demand under these Acts. Additionally, demands exceeding Rs. 10,000 or Rs. 25,000 will be disregarded for the purpose of this calculation. While computing the maximum ceiling limit, the following shall also be considered:

1. Tax demand entries would include the principal component of tax demand and any interest, penalty, fee, cess, or surcharge under the relevant Act.
2. Any demand entry exceeding the individual monetary limit shall not form part of the maximum ceiling limit.
3. Remission or extinguishment of demand will be undertaken in a chronological manner, i.e., from the earliest assessment year to subsequent assessment years.
4. In order to compute the ceiling limits of Rs. 1 lakh, any demand entries exceeding individual monetary limits shall not be considered.
5. The fraction of any demand entry shall not be considered for computing the ceiling limit of Rs. 1 lakh.
6. The demand waived will not be regarded as income of the taxpayer, and hence no additional tax liability shall arise in the hands of the taxpayer pursuant to the remission or waiver of tax demands.
7. There shall be no remission or extinguishment of outstanding demands with respect to the tax deduction at source (TDS) and tax collection at source (TCS) provisions of the ITA.
8. After the remission or extinguishment of demands, no interest on account of a delay in payment of the demand shall be levied under any relevant Acts.
9. No audit will be required pursuant to Rule 19(1) of the General Financial Rules of 2017 for the remission or extinguishment of outstanding demands.
10. Withdrawal or remission of tax demands under this order will not give any right to the taxpayers to claim credit or refund of the waived amount, and such waiver shall also not grant immunity from any ongoing criminal proceedings or litigation in the case of a taxpayer.
11. In the below example, all the demand entries are related to different matters where separate demand notices have been issued to the taxpayers or assessees, and these demands are outstanding as of January 31, 2024. Further, these demands are net of refund or any other credit adjusted in respect of that FY or any other FY. These demands also include any interest, cess, or surcharge, if any, until the date of the demand notice issued, created, or modified.

Comments

This proposal is going to benefit small taxpayers who have pending demands, and it will certainly improve the ease of doing business. Further, it will also help in expediting and releasing many refund claims for subsequent years that were otherwise not issued due to pending tax demands.

The timeline to complete this process has been stated to be two months, which would also provide a quick resolution for eligible taxpayers, and it is expected that this remission is likely to benefit 1 crore taxpayers in India.

However, the same may not necessarily reduce litigation at the higher levels, as the limits before the higher levels were enhanced in the previous budget: for appeals before the Income Tax Appellate Tribunal, the limit was enhanced to Rs 50 lakh; for appeals before high courts, the limit was enhanced to Rs 1 crore; and for special leave petitions and appeals before the Supreme Court, the limit was enhanced to Rs 2 crore. Hence, appeals pending before higher authorities may not see a significant reduction.