AVOIDING ARRESTS IN SERVICE TAX

[Dr. Sanjiv Agarwal]

Of late, we have witnessed few arrests of Service Tax assessees all over the country where defaulters of payment of Service Tax to exchequer have been arrested. Not only this, post arrest, they have been denied bail also.

Not to deposit tax, to collect and not to deposit tax and willfully evade payment of Service Tax are all offences which can trigger prosecution and  arrest.

In Service Tax, like any other tax law, prosecution of cognizable and non-cognizable offences takes place. Such offences may include knowingly evasion of payment of Service Tax, wrong availment or utilization of credit of taxes, maintaining false books of accounts or supply of false information, and collection of tax but failure to  pay to the credit of Central Government within six months of due date. Such offences may attract punishment resulting in imprisonment of defaulter assessees ranging from six months to seven years. For subsequent conviction, the imprisonment could be for period upto seven years.

Where the amount of Service Tax involved is more than Rs. 50 lakhs, arrests could be made. While failure to deposit Service Tax collected exceeding Rs. 50 lakh is a cognizable offence, other offences are non-cognizable. From bail point of view, offence could be bailable or non-bailable. In a bailable offence, granting of bail is done in normal course, but in case of non-bailable offence, an arrest can be effected, even for the purpose of investigation implying that offender’s detention is discretionary.

Commissioner of Service Tax / excise is empowered to arrest the defaulter assessee and can authorize any officer to do so. He has same powers as officer-in-charge of police station.

Such arrest could be made of any person, i.e., individual, partner, director etc. However, grounds of arrest should be informed to such person and he should be produced before the Magistrate within 24 hours of arrest. Arrested persons can be released on bail for non-cognizable / bailable offences by Assistant / Deputy Commissioner. 

While 'arrest' is a punitive measure resorted to in extreme cases of habitual and willful offences involving amount of over Rs. 50 lakh, it may be seen as regressive and enhance litigation.

In such a scenario, Service Tax assessees need to ensure that they do not default in payment of Service Tax, more so collecting and not paying Service Tax. Arrest could be avoided by ensuring suo moto compliance, undertaking independent due diligence to identify defaults and ensure corrective measures, promptly attending to notices and summons, ensuring timely and full payment of Service Tax, strengthening internal processes and controls to avoid untended failures and taking aggressive tax positions with utmost care and caution. In fact, compliance management holds the key, which has to be imbibed in the attitude itself.

It should be kept in mind that arrest can be made at the beginning of proceedings itself while investigation may follow. Tax management or arrest management-assessee to decide.