“Tax payment always happens in rupees at the applicable exchange rate on that day. So whatever the payments ultimately companies have to make will depend on exchange rate of that day. We have recently received some enquiries in this regard where foreign subsidiaries are willing to opt for the scheme to settle their pending tax related matters, said an official privy to the development.
To illustrate, if the disputed tax amount in a pending appeal of an Indian subsidiary is Rs 75, then, with an exchange rate of 1 $ = Rs 75, the effective cost for Indian Sub to participate in this Scheme today would be 1 $ and by doing so, it will be free from any interest levy.
However, if such Indian subsidiary decides not to take the benefit of this scheme and if the Indian rupee appreciates to 1 $ = Rs 67.50 when its appeal gets decided against it, then, the effective tax cost for Indian Sub would be 1.11 $ along with the penal interest.
“Indian subsidiaries of offshore entities (“Indian Subs”) should consider the rupee factor. Since these subsidiary belongs to foreign group, the MNC can use the value of rupee to their advantage, Interestingly, with the sharp fall in the value of Indian Rupee (around 10% fall in the last one year itself), the effective cost of participating in this scheme for Indian Subs has reduced. It is rightly said that one person’s loss is another person’s gain. Hence, the Indian Subs should assess whether the fall in the value of Indian currency and accordingly consider participating in the VsV, said Sanjay Sanghvi is Partner at Khaitan & Co.
The tax department has started getting several enquiries after the government extended the date for making tax payment under the Scheme (without any interest) to 30 June 2020. Under the original Scheme, if a taxpayer were to make payment after 31 March 2020, then, some additional amount of tax was required to be paid. This will also be a relevant factor for foreign subsidiaries based out in India while determining whether to opt for the VSV Scheme.
The extension has given time to many taxpayers (especially the corporate taxpayers) to take stock of their pending tax disputes to evaluate the pros and cons of VSV Scheme.
Some of the recent enquiries which tax department has received was based on the merit of dispute. For instance, the taxpayers are doing cost benefit analysis considering how old is the tax dispute.
“One of the most attractive features of this Scheme is that if the taxpayer pays the disputed tax amount before the prescribed date, then, there is complete waiver from inter alia penal interest. For tax disputes which have been pending for many years now, the penal interest component can sometimes be more than the disputed tax amount itself. Hence, taxpayers may also undertake a ‘cost benefit analysis’ to calculate the saving of substantial interest if they were to opt for this Scheme, said Sanghvi.
While some of them looking at the cash flow position. Since the benefits of VSV Scheme would be available only if the disputed tax amount is paid before the prescribed date, taxpayers will also need to consider their cash flow position in their evaluation of the participation in the scheme.