Sunset of the Settlement Commission — Impact, Challenges and Interim Measure

The Customs and Central Excise Settlement Commission (Settlement Commission) is an alternative dispute resolution mechanism which enables taxpayers embroiled in tax disputes to voluntarily disclose the details of their case and seek settlement. This mechanism was introduced in Central Excise and Customs laws vide the Finance (No. 2) Act, 1998¹, which inserted Chapter V in the Central Excise Act, 1944 (Excise Act)² and Chapter XIV-A to the Customs Act, 1962 (Customs Act)³ respectively, to lay down the provisions for settlement of cases.

This conciliatory approach serves as a forum for settling cases expeditiously and avoiding the tedious route of litigation. The objective of establishing the Settlement Commission was to avoid the time-consuming and expensive litigation process and encourage assessees to step forward and disclose any oversights or omissions in the duties paid by them.

Catching the taxpayers off guard, the Finance Bill, 2025 has announced the discontinuation of the Settlement Commission from 1-4-2025. While no new application can be filed after 31-3-2025, the vacuum left by the removal of Settlement Commission is sought to be managed by one or more “Interim Boards” which shall exercise the powers and functions of the Settlement Commission to dispose of the pending cases. Notably, this measure is in line with the income tax regime, wherein provisions for Settlement Commission were similarly removed vide the Finance Act, 2021⁴ and Interim Boards filled the gap to dispose of the pending cases.

Although there is no comprehensive rationale for abolishment of Settlement Commission, frequently asked questions (FAQs) accompanying the Finance Bill, 2025 published by the Central Board of Indirect Taxes and Customs (CBIC) evince that due to the existing provisions for compounding offences and graded penalties under Customs law, Settlement Commission grew redundant. One might also surmise that such moves are intended to instil firmness in prosecuting tax evaders and minimising leaks in the system.

Considering these developments, let us dive deeper into the recent amendment and its possible implications on the taxpayers.

Practical implications on taxpayers due to the paradigm shift

The Settlement Commission has been a safety net for taxpayers, which allowed them to come clean and atone. Now that this limb of dispute settlement from the Customs regime has been removed altogether, it is bound to bring about a change in the way Customs-related disputes are resolved. It is therefore significant for taxpayers to understand the implications it can have on pending disputes as well as future cases. Below are some key takeaways and a glimpse into what the future landscape may hold.

No fresh settlement applications post 1-4-2025

The Settlement Commission will cease to take in applications after 31-3-2025. Its discontinuation leaves no recourse for the taxpayers to get their matters settled through a dispute settlement mechanism.

The only recourse would be to rely on the provisions under Section 28 of the Customs Act, 1962 which provides a route for seeking closure of proceedings by payment of duty, interest, and/or penalty. While this route facilitates voluntary compliance, it simply encourages payment of duty proposals made by the authorities and does not entail the feature of negotiated settlement, which is undoubtedly a more favourable alternative for resolving disputes from the perspective of a taxpayer. Additionally, and notably, recourse to Section 28 offers no respite to taxpayers with respect to prosecution, as opposed to Settlement Commission route where taxpayers could seek immunity from prosecution.

Pending cases to be reviewed by the Interim Board

The pending applications, as on 1-4-2025 will automatically stand transferred to one or more Interim Boards which will be constituted under Section 31-A of the Central Excise Act, 1944. The Board will only take up pending cases and has the mandate to settle them within twelve months from the date of its constitution. Thus, while the Settlement Commission is being substituted by the Interim Board, this is a transitional measure rather than a permanent replacement.

Impact on compliance and litigation

Elimination of the Settlement Commission effectively shuts the door for a non-litigious pathway. This will likely spark a surge in tax litigation before the Commissioner (Appeals), Customs Excise and Service Tax Appellate Tribunal (Cestat) and the higher courts.

While taxpayers will witness changes rippling through the sphere of litigation, it is also likely to reshape the way tax investigations will be handled going forward.

Impact on tax investigations

Understanding the potential investigations framework becomes important to avoid uncertainties and align expectations. Let us explore the potential implications of this move on tax investigations.

Proposal for harsher penalties

The Settlement Commission allowed assessees to voluntarily disclose non-compliance on their part and settle cases without inviting severe penalties. Without this mechanism, it is possible that tax authorities may impose harsher penalties as it leaves no room for a conciliatory way to settle disputes.

Higher risk of prosecution

For taxpayers, approaching the Settlement Commission provided a way to mitigate prosecution risks by making voluntary disclosures and paying the dues. By taking a step forward and providing disclosure once a show-cause notice was issued, a potentially punitive legal battle was allowed to be averted. However, in the absence of the Settlement Commission, tax authorities may intimidate assesses with threats of launching prosecution against them taxpayers which could leave them vulnerable to prolonged litigation before civil and criminal courts or force them to make “voluntary deposits”.

Impact on compounding of offences

Section 137 of the Customs Act, 1962 empowers Customs authorities to compound certain offences, rather than pursuing a criminal prosecution. Since engaging in courtroom confrontations is seldom a first choice for a taxpayer, a shift towards compounding mechanism may be plausible.

However, in these circumstances, authorities may tighten conditions under which offences can be compounded, to prevent compounding from becoming a catch-all solution for more serious offences. Hence, taxpayers must be prepared for a more stringent process for allowing compounding of offences.

Further, since compounding is a discretionary process, uncertainty around approval timelines and penalty structures is inevitable. To ensure transparency, it is imperative that CBIC updates guidelines on how compounding applications should be assessed in the post-Settlement Commission regime.

Reflections and concluding comments

As the Settlement Commission bows out, taxpayers are left with a more adversarial legal landscape that leans heavily on traditional litigation and strict enforcement. Once serving as a valuable intermediary, offering a pragmatic balance between uncritical acceptance of departmental demands and an arduous litigation process, the Settlement Commission’s discontinuation signals a decisive shift.

Interestingly, the discontinuance of Settlement Commission in the income tax regime came with a simultaneous constitution of Dispute Resolution Committee. The latter is empowered to entertain cases only from taxpayers having taxable income up to ₹50 lakh and disputed income up to ₹10 lakh. Therefore, it can be seen that lately, the trend of tax governance in India tends to skew towards stricter scrutiny and prosecution measures.

With tax authorities poised to adopt a tougher stance, the risk of severe penalties and protracted investigations rises significantly. In this evolving scenario, taxpayers should bolster their compliance frameworks and brace themselves for a more stringent, uncompromising approach to tax investigations and dispute resolution.