Changes in Penal Provisions under Service Tax

Changes in Penal Provisions under Service Tax

Prepared By:
CA Pradeep Jain and
Sukhvinder Kaur, LLB[FYIC]

The Budget 2011 has proposed to bring effective changes in the penal provisions for violation of Service Tax laws. The changes brought in the Finance Act, 1994 are as under:

Section 70contains the provisions for furnishing returns. Therein it is prescribed that in case of delay in furnishing of return a late fee not exceeding Rs. 2000 will be charged.

Now, vide the Finance Bill, 2011 the maximum penalty for delay in filing of return under Sector 70 is proposed to be increased to Rs. 20, 000/-.

However, in the TRU letter it is provided that the existing rate of penalty is being retained under Rule 7C of the Service Tax Rules, 1994. The maximum penalty is presently reached after a delay of 40 days. The new limit will impact only those who delay filing of return for longer durations. But this hike is too much and will kill the small scale assessee.

Section 73provides for Recovery of Service tax not levied or paid or short-levied or short-paid or erroneously refunded. Sub-section (1A) of Section 73 provided for payment of penalty @ 25% only if the defaulter paid the full amount of service tax with interest and penalty @ 25% after show cause notice is issued to him.

The said provision read as under:

(1A) Where any service tax has not been levied or paid or has been short-levied or shortpaid or erroneously refunded, by reason of fraud, collusion or any wilful mis-statement or suppression of facts, or contravention of any of the provisions of this Chapter or the rules made thereunder, with intent to evade payment of service tax, by such person or his agent, to whom a notice is served under the proviso to sub-section (1) by the Central Excise Officer, such person or agent may pay service tax in full or in part as may be accepted by him, and the interest payable thereon under section 75 and penalty equal to twenty-five per cent. of the service tax specified in the notice or the service tax so accepted by such person within thirty days of the receipt of the notice.

Now, this provision has been proposed to be deleted from Section 73.

Also, the both the provisos of Section 73(2) is proposed to be deleted. The said proviso provided that

Provided that where such person has paid the service tax in full together with interest and penalty under sub-section (1A), the proceedings in respect of such person and other persons to whom notices are served under sub-section (1) shall be deemed to be concluded:

Provided further that where such person has paid service tax in part along with interest and penalty under sub-section (1A), the Central Excise Officer shall determine the amount of service tax or interest not being in excess of the amount partly due from such person.

Thus, the benefit of paying penalty at the reduced rate will not be available in cases of fraud, collusion or any wilful mis-statement or suppression of facts etc.

However, a new Sub-section (4A) is being inserted which provides that if the fact of non-payment of service tax has been discovered during the course of any audit, investigation or verification but the true and complete details of transactions have been maintained in the specified records by the defaulter, and he pays the tax dues, together with interest and the reduced penalty during the course of audit, verification or investigation, then the benefit of reduced penalty will be available to the defaulter.

It is also provided in the sub-section that the assessee can avail this benefit on his own also.

The extent of penalty is being further reduced to 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount.

Vide Explanation the meaning of “specified records” has been prescribed to mean records including computerized data as are required to be maintained by as assessee in accordance with any law for the time being in force or where there is no such requirement, the invoices recorded by the assessee in the books of account shall be considered as the specified records.

This will also be relevant for the provisions of Section 78.

Section 76contains the provisions for Penalty for failure to pay service tax. It prescribes that in case of failure to pay service tax as per provisions of Section 75, a penalty of not less than two hundred rupees for every day during which such failure continues or at the rate of two per cent. of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax.

The Proviso to this section provides that the total amount of penalty payable in terms of this section shall not exceed the service tax payable. An illustration has also been given to explain the levy of penalty.

The Finance Bill, 2011 proposes to reduce the penalty from Rs. 200 to Rs. 100. And the rate of 2% in case of continued default has been reduced to “One per cent (1%).

The proviso has also been amended to provide that the penalty shall not exceed the 50% of the service tax payable. An illustration has also been provided to explain the manner of levy of penalty under this section.

Illustration

X, an assessee, fails to pay service tax of Rs. 10 lakhs payable by 5th March. X pays the amount on 15th March. The default has continued for 10 days. The penalty payable by X is computed as follows:—

1% of the amount of default for 10 days = 1/100 x 10, 00, 000 x 10/31= Rs. 3, 225.80
Penalty calculated @ Rs. 100 per day for 10 days =Rs. 1,000
Penalty liable to be paid is Rs. 3, 225.80.”;

Thus, the penalty imposed under the said section is reduced by 50%.

Section 77provides for penalty for contravention of rules and provisions of Act for which no penalty is specified elsewhere. It proposes to impose a penalty which may extend to five thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after the due date, till the date of actual compliance;

Now, the Section 77 is being amended to increase the rate of penalty from Rs. 5000/- to Rs. 10, 000/-.

Section 78prescribes the penalty for suppressing the value of taxable service is completely substituted. The new Section 78 reads as under:

“78. (1). Where any service tax has not been levied or paid or has been short-levied or short paid or erroneously refunded, by reason of-

(a) fraud; or

(b) collusion; or

(c) wilful mis-statement; or

(d) suppression of facts; or

(e) contravention of any of the provisions of this chapter or of the rules made thereunder with intent to evade payment of service tax,

the person, liable to pay such service tax or erroneous refund, as determined under sub-section (2) of section 73, shall also be liable to pay a penalty, in addition to service tax and interest thereon, if any, payable by him, which shall not be equal to the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded;

Provided that where true and complete details of the transactions are available in the specified records, penalty shall be reduced to fifty per cent. Of the service tax so not levied or paid or short-levied or short-paid or erroneously refunded:

Provided that where such service tax and the interest payable thereon is paid within thirty days from the date of communication of order of the Central Excise Officerdetermining such service tax, the amount of penalty liable to be paid by such person under the first proviso shall be twenty-five per cent. of such service tax:

Provided also that the benefit of reduced penalty under the second proviso shall be available only if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:
Provided also that in case of a service provider whose value of taxable services does not exceed sixty lakh rupees during any of the years covered by the notice or during the last preceding financial year, the period of thirty days shall be extended to ninety days.

(2) Where the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the service tax as reduced or increased, as the case may be, shall be taken into account:

Provided that in case where the service tax to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the second proviso to sub-section (1), shall be available, if the amount of service tax so increased, the interest payable thereon and twenty-fice per cent. of the consequential increase of penalty have also been paid within thirty days or ninety days, as the case may be, of communication of the order by which such increase in service tax takes effect:

Provided also that if the penalty is payable under this section, the provisions of section 76 shall not apply.

Explanation.-For the removal of doubts, it is hereby declared that any amount paid to the credit of Central Government prior to the date of communication of the order referred to in the second proviso to sub-section (1) or the first proviso to sub-section (2) shall be adjusted against the total amount due from such person.”;

Thus, the penalty imposed under Section 78 is changed to be paid to an amount equal to the service tax demanded. Earlier this was double the amount of service tax. But it has been reduced and it will be equal to service tax only. Thus, this is welcome step.

In case the assessee has maintained the true and complete information in the specified records, the penalty imposed will be 50% of the tax amount. And in case the service tax due is paid with interest and reduced penalty within one month, the penalty at the reduced rate of 25% shall be payable.

Also, for assessee having turnover upto Rs. 60 lakh, for penalty to be payable at reduced rate the period of one month from the date of the order has been increased to 90 days. This is also a welcome step for small assesses.

Section 80 of the Finance Act, 1994 which provides that Penalty will not be imposed in cases where reasonable cause is shown by the assessee for failure for payment of service tax, is also amended.

Instead of Section 78 the words “first proviso to sub-section (1) of section 78” are being inserted. Thus, the penalty will be waived only in those cases where the information is captured properly in the specified records.

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Changes in Penal Provisions under Service Tax

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