VOLUNTARY COMPLIANCE SCHEME IN SERVICE TAX CLARIFIED

[Dr. Sanjiv Agarwal]

The Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES, 2013) was introduced by Finance Act, 2013 w.e.f. 10.05.2013 and to implement it, Service Tax Voluntary Compliance Encouragement Rules, 2013 were notified by the CBEC.

The scheme closes on 31 December, 2013 and there are already about 100 days passed by since the launch of the scheme in May, 2013. The response is neither forthcoming nor encouraging for the simple reason that the scheme is not attracting the defaulters to come forward and declare the tax dues.

Some clarifications were issued by the Central Board of Excise and Customs (CBEC) in May, 2013. However, since many areas were left open to interpretation and nobody would like to take a chance by declaring the value of taxable services and run the risk of its rejection, the CBEC has now issued a new set of clarifications on 8^th August, 2013. These are aimed at clearing the doubts in the minds of aspiring declarants but fall short of encouraging them to file or declare under VCES, 2013 scheme.

Many times, Department seeks information of roving nature from potential taxpayers quoting the authority of section 14 of Central Excise provisions. Since the declarant   is debarred to opt for VCES scheme if such section 14 notice is issued, it has been clarified now that such communication would not be a hindrance even though authority of section 14 would have been quoted. VCES cannot be availed only when documents have been requisitioned or person has been summoned.

Sometimes same company may have more than one unit with separate service tax registration which are also assessed separately. There may be a situation that one of them might have been served with show cause notice. In such cases, it has been provided that two separate service tax registrations are two distinct assessees for the purposes of service tax levy. Therefore, eligibility for availing of the Scheme is to be determined accordingly. The unit that has not been issued a show cause notice shall be eligible to make a declaration under the Scheme. taxmanagementindia.com

Where Cenvat credit has been wrongly utilized for payment of Service Tax, it may be noted that any service tax that has been paid utilizing the irregular credit amounts to non-payment of service tax. Therefore, such service tax amount is covered under the definition of “tax dues” and the scheme covers such wrong credit.

A party, against whom an inquiry, investigation or audit has been initiated after 1.3.2013 (the cut-off date) can make a declaration under the Scheme. In case of audit where an audit para has been issued, declarant can declare the “tax dues” concerning an issue which is not a part of the audit para.

In terms of section 106 (2) of the Finance Act, 2013, the designated authority shall, by an order, and for reasons to be recorded in writing, reject a declaration if any inquiry/investigation or audit was pending against the declarant as on the cut-off date, i.e., 1.3.2013. An order under this section shall be passed following the principles of natural justice.

There may situations where person has made part payment of his ‘tax dues’ on any issue before the scheme was notified and makes the declaration under VCES for the remaining part of the tax dues. In such cases, it has to be borne in mind that the immunity from interest and penalty is only for “tax dues” declared under VCES.

If any “tax dues” have been paid prior to the enactment of the scheme, any liability of interest or penalty thereon shall be adjudicated as per the provisions of Chapter V of the Finance Act, 1994 and paid accordingly.

Under VCES, a declaration can be made only in respect of “tax dues”. A case where no tax is pending, but return has not been filed, does not come under the ambit of the Scheme. However, rule 7C of the Service Tax Rules provides for waiver of penalty in deserving cases where return has not been filed and, in such cases, the assessee may seek relief under rule 7C.

In terms of the second proviso to section 106 (1), where a notice or order of determination has been issued to a person in respect of any issue, no declaration shall be made by such person in respect of “tax dues” on the same issue for subsequent period. Therefore, if an issue is being litigated for a part of the period covered by the Scheme, i.e., October, 2007 to December, 2012, no declaration can be filed under VCES in terms of the said proviso on the same issue for the subsequent period.

The declarant is expected to declare his tax dues correctly. In case the mistake is discovered suo-moto by the declarant himself, he may approach the designated authority, who, after taking into account the overall facts of the case may allow amendments to be made in the declaration, provided that the amended declaration is furnished by declarant before the cut-off date for filing of declaration, i.e., 31.12.2013.  

One of the conditions of the Scheme is that the declarant shall pay atleast an amount equal to 50% of the declared tax dues under the Scheme, on or before the 31.12.2013. Therefore, if the declarant fails to pay atleast 50% of the declared tax dues by 31^st December, 2013, he would not be eligible to avail of the benefit of the scheme.

To allay any apprehension of undue delays and uncertainty, it is clarified that the designated authority, if he has reasons to believe that the declaration is covered by section 106 (2), shall give a notice of intention to reject the declaration within 30 days of the date of filing of the declaration stating the reasons for the intention to reject the declaration. For declarations already filed, the said period of 30 days would apply from 8^th August, 2013.

The declarant shall be given an opportunity to be heard before any order is passed by the designated authority.  However, the Scheme does not have a statutory provision for filing of appeal against the order for rejection of declaration under section 106 (2) by the designated authority.

The Board has also issued a set of frequently asked questions (FAQs) on VCES, 2013, which may be able to clarify certain doubts of the prospective declarants.

It is felt that despite the new clarifications issued by the Central Board of Excise & Customs. There is not likely to be a major enhancement of encouragement so as to have windfall declarations. In order to make it really effective, the Government should extend the VCES, 2013 to cases where audit has been initiated as well as where show cause notices have been issued but not yet adjudicated. The amount of Service Tax locked in disputed demands will get unlocked only them.