PENALTIES UNDER SERVICE TAX TO BECOME STRINGENT

[Dr. Sanjiv Agarwal]

Backdrop

Very soon, Service Tax, which is considered to be a relatively young baby in the tax universe, will make the assessees scared of penalties and prosecution. The Budget 2013-14 which is likely to be passed by both the houses of the Parliament in April, 2013 will soon become enactment and all provisions shall become operational, could be by May, 2013.

Service Tax law has always been considered as a simple and an assessee friendly law but now it may not be so. The government has thought it fit, after 19 years of Service Tax in the country, to have in place stricter penal and prosecution provisions. The ongoing advertisement campaign of Central Board of Excise and Customs is only a reflection of serious intention of the government. Some of the advertisements read like this - 'pay your Service Tax correctly and on time or be ready to face the consequences - recovery of duty alongwith interest and penalty going upto 100%, attachment of property, prosecution'; 'What would you like to be served – relaxation or legal consequences'; 'you can't get away – wrong actions, strong reactions' and so on.

Recovery by Coercive means

Even now, w.e.f. January 1, 2013, the CBEC is behind the Service Tax assessees, both willful and genuine defaulters (disputes arising out of interpretation or difference of opinion) and applying coercive methods to effect recovery of Service Tax. This is being done despite the fact that in many cases, demands are under appeal awaiting an appellate order or have already been stayed by the appellate authority or the Tribunals. In such cases, the assessees have filed writ petitions across the country and courts have generally stayed such coercive measures and even quashed the recovery Circular itself.

Personal Penalty on Officials

The new provisions in section 78A inserted by Finance Bill, 2013 provide for personal penalty on company officials. Thus, where a company is a defaulter, besides the company, its officers (director, secretary manager or officer) can be punished for defaults made by the company provided such defaults have been made knowingly in respect of Service Tax evasion, issuance of fake invoices, availment of wrong credit or failure to pay Service Tax beyond six months of due date. The personal penalty could go upto Rs. one lakh in each case.

In respect of personal penalty, the provisions will be applicable only on company officials or directors and not on proprietor or partners of firms or officials of others entities. The directors, officers, manager or secretary of a company shall be personally liable for a penalty if the defaults are committed knowingly in relation to evasion of Service Tax, issuance of wrong or improper invoices etc, availment and utilization of credit of taxes without actual receipt of taxable service and failure to pay to the credit of government any amount collected as Service Tax beyond six months of the due date. The penalty could be go upto a maximum of Rs. one lakh in each case. For example, if in a company, two officers are held to be responsible, a penalty upto Rs. two lakh could be imposed. Whether the company bears this cost is a different issue.

Cognizable Offences and Power to Arrest

As if this was not enough, another penal provision talks of making these offences cognizable and power to arrest has been granted. While other offences will be bailable (arrest warrant is a must), non-payment of Service Tax will be a cognizable offence and arrest can be made without a warrant. However, reasons for arrest would have to be informed and arrested person produced before the Magistrate within 24 hours. Such arrests could be made by officer of the rank of Superintendent or above, of course, duly authorized by the Commissioner. Bail could be granted by Assistant or Deputy Commissioner.

Impact of Power to Arrest Punitive punishments measures Possible harassment of small service providers (sole proprietors etc.) May improve compliances Regressive Increase litigation May penalize even genuine defaults.

Such arrest will be made under Code of Criminal Procedure and the arresting authority will have all powers of an Incharge of a Police Station. Arrests for various offences shall range between 6 months and 7 years.

Once the Finance Bill, 2013 is enacted, the offence of failure to pay Service Tax collected where it exceeds Rs. 50 lakhs shall be a cognizable offence and other offences shall be non cognizable and bailable. The power to arrest has been given to. Commissioner of Central Excise who can authorize any officer of Central Excise not below the rank of Superintendent to arrest a person. An arrested person can be released on bail by Assistant or Deputy Commissioner in case of non cognizable and bailable offences and shall have the same powers as that of officer in-charge of a police station under code of criminal procedure, 1973. 

Conclusion

All said and done, such powers goes against the fiscal and tax policy of the government and may prove to be retrogatory in result. Assessees are cautioned to comply with the law in letter and spirit and in cases, where there is a doubt, it would be desirable to follow a conservative path. Being an indirect tax, the stakes are large and one would not want to be of pocket.