NEW PENAL PROVISIONS IN SERVICE TAX (PART -I)

[Dr. Sanjiv Agarwal]

Amendments in Penal Provisions made by Finance Act, 2015 (w.e.f. 14.05.2015)

Finance Act, 2015 has made the following amendments in penal provisions –

1. Penalty for failure to pay Service Tax - Section 76 has been substituted to rationalize penalty for non-payment or short payment or erroneous refund without any malafide intention to evade tax.
2. Penalty for failure to pay Service Tax for reasons of frauds etc – Section 78 has been substituted to rationalize penalty for non-payment or short payment or erroneous refund due to fraud, collusion or willful contravention of provisions of Act or rules with an intent to evade payment of Service Tax, i.e. with malafide intention.
3. Transitory provision – New section 78B has been inserted to fix the effective date for application of new penal provisions of section 76 and 78.

Change in Section 76

According to Statement of Objects and Reasons of Finance Bill, 2015, objective of the amendment is to substitute a new section for section 76 of 1994 Act relating to penalty for failure to pay service tax in cases other than by reason of fraud, collusion, willful misstatement, suppression of facts or contravention of the provisions of the Act or the rules made thereunder with the intent to evade payment of service tax.

Accordingly, section 76 has been amended to rationalize the provisions relating to penalties, in cases not involving fraud or collusion or willful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of Service Tax, in the following manner,-

1. penalty not to exceed ten per cent. of Service Tax amount involved in such cases;
2. no penalty is to be paid if Service Tax and interest is paid within 30 days of issuance of notice under section 73 (1);
3. a reduced penalty equal to 25% of the penalty imposed by the Central Excise officer by way of an order is to be paid if the Service Tax, interest and reduced penalty is paid within 30 days of such order; and
4. if the Service Tax amount gets reduced in any appellate proceeding, then the penalty amount shall also stand modified accordingly, and benefit of reduced penalty ( 25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

The new provision of penalty u/s 76 is much simplified and easy to determine penalty. Also, penalties have been significantly reduced. It may be noted that benefit of waiver or reduction of penalty in terms of section 80 has been omitted by Finance Act, 2015 and no longer available to assessees. However, no penalty shall be leviable if Service Tax and interest is paid within thirty days from the date of service of show cause notice.

As per new section 76, where Service Tax has not been levied or paid or any assessee has not paid or short paid Service Tax or Tax has been erroneously refunded due to any reason but not due to the reason of any of the following –

1. fraud, or
2. collusion, or
3. willful mis-statement, or
4. suppression of facts, or
5. contravention of facts, or
6. contravention of any provision or rules

with an intent of evading payment of Service Tax, the penalties leviable shall be as under-

1. Where SCN has been issued -

(i) Penalty not exceeding 10 percent of the Service Tax not paid / short paid / erroneous refund (maximum penalty shall be 10 percent) (A lower penalty may be imposed but maximum shall be 10 percent).

(ii) No penalty is leviable or payable if Service Tax short paid / not paid / erroneously refunded is paid within 30 days of service of notice.

In such a case, proceedings shall be deemed to have been concluded.

2. Penalty payable or reduced penalty shall be 25 percent of the penalty determined where adjudication order or an appellate order has been issued and Servicer Tax as demanded or confirmed alongwith interest and 25 percent of penalty is paid within 30 days of such order.
3. In cases where amount of penalty is increased by appellate authority which could be Commissioner (Appeals), Tribunal or court, period of 30 days for penalty payable on the basis of increased amount of penalty for such increased amount shall be counted from the date of order of such appellate authority.

In short following penalties shall be imposable under section 76 w.e.f. 14.05.2015 -

(i) Penalty not to exceed ten per cent of service tax amount involved in such cases;

(ii) No penalty is to be paid if service tax and interest is paid within 30 days of issuance of

notice under section 73(1);

(iii) A reduced penalty equal to 25% of the penalty imposed by the Central Excise officer by way of an order is to be paid if the service tax, interest and reduced penalty is paid within 30 days of such order; and

(iv) If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25%) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

(To be continued…….)