Tax Dispute Resolution Scheme for Contractors in Government Procurement in India

We discuss the Vivad Se Vishwas Scheme II (VsV), a voluntary tax dispute settlement initiative in India that was first introduced in 2020 and updated in 2023 and again in 2024. In July 2024, an increase in the monetary thresholds for filing tax dispute appeals was announced.

This article provides detailed insights into how VsV Scheme II works for contractors.

In July 2024, the Indian government announced an increase in the monetary thresholds for filing tax dispute appeals under the Vivad Se Vishwas Scheme II, a voluntary tax dispute settlement option.

The new limits are set at INR 6 million (US$71,650) for tax settlement disputes that can be lodged at the Income Tax Appellate Tribunal, INR 20 million (US$238,833) for the High Courts, and INR 50 million (US$597,083) for the Supreme Court.

This move aims to reduce the backlog of pending tax cases. Previously, the limits were INR 2 million (US$23,883) for the Income Tax Appellate Tribunal, INR 10 million (US$119,416) for High Courts, and INR 20 million (US$238,833) for the Supreme Court.

Different tax dispute settlement mechanisms in India

To address the increasing number of tax dispute cases, India has launched various Limited Special Dispute Resolution and Prevention (LDRP) methods. These LDRP strategies serve as temporary solutions to manage disputes outside of traditional litigation, easing the financial strain on taxpayers and enhancing the country’s fiscal health by introducing alternative approaches to dispute resolution.

In India, LDRP options are available for both international taxpayers and domestic taxpayers.

Tax dispute-governing bodies

The Income Tax Act of 1961 provides taxpayers with the right to appeal, enabling them to address grievances through appellate authorities or seek revision by the Commissioner of Income Tax.

Appeals under the Income Tax Act, 1961:

1. The first appeal is made to the Income Tax Commissioner (Appeals), handled by an Assessing Officer.

2. The second appeal can be pursued at the Income Tax Appellate Tribunal (ITAT), involving two parties, i.e., the assessee and the Assessing Officer.

If an assessee wishes to escalate their appeal further, they may opt for suo moto, allowing them to file a writ petition under Article 226 of the Indian Constitution in the High Court against the Income Tax Department.

The Income Tax Appellate Tribunal serves as the highest fact-finding authority in the country. Under the Income Tax Act, 1961, appeals to a High Court under section 260A[4] are permissible only if there is a substantial question of law. Additionally, an assessee can approach the Supreme Court under section 261 of the Income Tax Act, 1961 or file a Special Leave Petition under Article 136 of the Indian constitution.

What is the VsV scheme?

The VsV scheme is a voluntary option that can be availed by parties who opt to settle their tax dispute outside the ambit of a tribunal or court. It was first launched in 2020 for direct taxpayers to settle their tax disputes by partly paying their tax arrears. This settlement’s scheme 2.0 version (contractual disputes) was launched on May 29, 2023, to resolve contractual disputes between public and private entities.

It is only applicable to Indian nationals and corporate entities registered in India. It may also be noted that the VsV scheme is a one-time tax dispute settlement mechanism. 

Who is covered under the VsV scheme II?

The scheme covers contractual disputes between ‘Procuring Entities’ (buyers) and ‘Contractors’ (sellers). The application window for VsV II (contractual dispute) was launched on July 15, 2023, and the last date for submitting claims by contractors was originally set to October 31, 2023. The deadline was later extended till December 31, 2023.

VsV II scheme lists the below procuring entities:

• Central Government Ministries/Departments and their subordinate bodies.
• Autonomous bodies such as the National Highways Authority of India (NHAI), major ports, Central Government Employees Welfare Housing Organisation (CGEWHO), the Central Power Research Institute (CPRI), the Council of Scientific and Industrial Research (CSIR), and the and the Indian Railways Institute of Civil Engineering (IRICEN), among others,.
• Public sector banks and financial institutions like SBI, BoI, BoM, and Bank of Baroda.
• Central Public Sector Enterprises such as ONGC, BPCL, HPCL, GAIL, EIL, AAI, HAL, IRCTC, BEML, DFCCIL, BSNL, CCL, CIL, NMDC, MMTC, NALCO, NTPC, PEC, and PFC.
• Union Territories without legislatures and their agencies/undertakings.
• Organizations with at least 50 percent central government holding, unless they have opted out.

Contractors, within this scheme, are defined as:

• Any contractor willing to participate, including those from Central Public Sector Enterprises, that work with the procuring entities.
• The scheme does not apply to cases under international arbitration, which generally means disputes with an international seat. If interpreted as international commercial arbitration under the Arbitration and Conciliation Act, 1996, the scheme will only apply to Indian nationals and corporate entities registered in India.
• Contractors do not need to be award-holders. Even if a contractor is the debtor of an award or judgment, they can still opt for settlement under this VsV II scheme. This allows contractors to potentially reduce their liability by settling through this scheme, following the provided calculation.

Organizations where the Government of India has shareholding of 50 percent can opt out of the scheme at their discretion, with approval of the board of directors. 

Tax dispute settlement provisions under VsV scheme II

An applicant under VsV II will be granted immunity from initiation of any proceedings related to offenses, penalties, or interest on tax arrears. Additionally, declarations made under VsV II will not serve as precedents for the taxpayer or the tax authority for the issues covered.

However, one may note that the scheme does not apply to cases involving search and seizure, prosecution, undisclosed income/assets located overseas, or proceedings under other specified laws.

Tax dispute settlement process under VsV II

Under the VsV II scheme, MSMEs and contractual tax settlement applications can be submitted on the webpage of the Governmente-Marketplace (GeM). It has been notified that all the eligible claims will be processed only through this portal.

For a contractor or seller to be eligible to raise settlement requests, they will need to complete the below mandatory details during registration and profile update:

• Validation of PAN of Enterprise
• Date of incorporation or registration of business
• CIN (Company Information Number) in case registering as a Private/Public Limited Company

Steps to follow for contractor

1. The applicant must login through the GeM portal via seller (contractor) i.d. The site can be accessed via https://sso.gem.gov.in/ARXSSO/oauth/doLogin
2. Close all the pop-ups which are not required under VsV II. Click Ok to go to ‘Account Profile’ page.
3. Next, complete business PAN validation. Update organization details and date of incorporation.
4. Once validated, click on ‘Dashboard’ on the webpage and then ‘Vivad se Vishwas ’ link at the top of the webpage to land on the VSV-2 dashboard.
5. After this, eligible contractors can raise their settlement request or view existing settlement requests.

At any point of time, contractors can go to ‘My Account’ to update their profile. They can also filter the settlement requests based on the respective status.

To lodge any new settlement request:

1. Login with the GeM ID, go to the dashboard and click on the button ‘New settlement Request’.
2. Contractors need to select if the respective contract was raised on GeM or was outside of GeM along with contract number and contract date.
3. For contracts raised on GeM, the entire section of ‘Organization Details’ will be auto filled.
4. For all contracts raised outside of GeM, the contractor will need to select the buyer details.
5. The contractors will then need to fill in the rest of the settlement request form details (dispute details, settlement details, document upload) and upload applicable documents as per the settlement request.
6. Once the form is complete, contractors can click on ‘Save and Preview’ button to view settlement details and ensure no misinformation has been provided.
7. Upon reviewing the details of both the contractor and the buyer, check the ‘I Agree’ box and click on submit button for request submission.
8. The submitted settlement request will now be visible on Dashboard. Click on ‘Request ID’ to view details at any point of time.

Documents required

The GeM portal suggests having the following list of documents handy:

1. Authorization letter from the organization
2. Contract copy
3. Settlement amount calculation sheet (as per scheme guidelines)
4. Settlement specific document (copy of last court order , copy arbitration order, BG document )

It must be noted that for any non-GeM contracts related to buyers from the Ministry of Railways, the contractor needs to raise their settlement request on the iREPS portal.

If any of the respective buyer organization details are not available in the drop-down list, the contractor needs to connect with the procuring entity and ask them to register on GeM. Only after the buyer organization registers on the GeM portal, will the contractor be able to raise the settlement request. An applicant may contact the respective controlling ministry of that procuring entity organization.

Registered matters under dispute will reflect the following status based on the progress of the process:

• Pending – The settlement request pending for action from the buyer’s end.
• In-Progress – The procuring entity has asked a query via communication channel.
• Offer in Progress – The offer has been generated by the buyer and is pending for
• contractor’s acceptance/rejection.
• Agreement Pending (Buyer) – The offer is accepted by the seller/contractor and
• pending for agreement upload by the buyer/procuring entity.
• Agreement Pending (Seller) – The contractor must upload the agreement on
• stamp paper.
• Rejected – The settlement request has been rejected by the procuring entity and
• The rejection reason will be visible in contractor Vivad se Vishwas dashboard.
• Payment Pending – Pending payment.
• Settled – The payment has been made by the respective party.

There are four offer status:

1. Offer Accepted – The offer has been accepted by the contractor.
2. Offer Rejected – The offer has been rejected by the contractor.
3. Offer Withdrawn – The offer has been withdrawn by the procuring entity before offer acceptance/rejection.
4. Offer Generated – The offer has been generated by the procuring entity.

VsV scheme II 2024

The VsV scheme II was reopened for MSMEs and contractors on April 17, 2024, with the application submission deadline set to July 31, 2024.

A finance ministry statement highlighted that various government ministries and departments have granted more than INR 2.56 billion (US$ 30.5 million) to MSMEs, enhancing bank credit flow by freeing up guarantees.

The Ministry of Petroleum and Natural Gas provided the highest relief of INR 1.16 billion (US$13.85 million), followed by the railways and defense ministries at INR 791.6 million (US$ 9.4 million) and INR 234.5 million (US$2.8 million), respectively. The steel and power ministries settled claims worth INR 144.8 million (US$1.72 million) and INR 66.9 million (US$798,897), respectively. The scheme also covers works procurement and earning contracts and provides relief to MSMEs debarred for contract execution defaults.

In July of this year, finance minister Nirmala Sitharaman proposed to reintroduce the VsV scheme and increase the monetary thresholds for filing tax dispute appeals. The Vivad Se Vishwas scheme will enable the review of tax disagreements and appeals, including writs and special leave petitions filed by either taxpayers or tax authorities, pending as of July 22, 2024, which are being dealt with in the following forums:

• Supreme Court, High Court, Income Tax Appellate Tribunal, Commissioner/Joint Commissioner (Appeals).
• The Dispute Resolution Panel (DRP) or where DRP directions have been issued but the final assessment order is awaited.
• Revision petitions pending before the Commissioner of Income Tax.

(US$1 = INR 83.74).

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