NEW PENAL PROVISIONS IN SERVICE TAX (PART -2) - Change in section 78

[Dr. Sanjiv Agarwal]

Amendment made by Finance Act, 2015 (w.e.f. 14.05.2015) 

The Finance Act, 2015 has substituted section 78 as under:

Section 78: Penalty for failure to pay Service Tax for reasons of fraud etc

“78. (1) Where any service tax has not been levied or paid, or has been short-levied or shortpaid, or erroneously refunded, by reason of fraud or collusion or wilful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with the intent to evade payment of service tax, the person who has been served notice under the proviso to sub-section (1) of section 73 shall, in addition to the service tax and interest specified in the notice, be also liable to pay a penalty which shall be equal to hundred per cent. of the amount of such service tax:

Provided further that where service tax and interest is paid within a period of thirty days of ––

(i) the date of service of notice under the proviso to sub-section (1) of section 73, the penalty payable shall be fifteen percent of such service tax and proceedings in respect of such service tax, interest and penalty shall be deemed to be concluded.

(ii) the date of receipt of the order of the Central Excise Officer determining the amount of

service tax under sub-section (2) of section 73, the penalty payable shall be twenty-five percent of the service tax so determined:

Provided also that the benefit of reduced penalty under the second proviso shall be available.

"Explanation.-For the purposes of this sub-section, "specified records" means records including computerised data as are required to be maintained by an 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 accounts shall be considered as the specified records.

(2) Where the Commissioner (Appeals), the Appellate Tribunal or the court, as the case may be, modifies the amount of service tax determined under sub-section (2) to section 73, then the amount of penalty payable under sub-section (7) and the interest payable thereon under section 75 shall stand modified accordingly, and after taking into account the amount of service tax so modified, the person who is liable to pay such amount of service tax, shall also be liable to pay the amount of penalty and interest so modified.

(3) Where the amount of service tax or penalty is increased by the Commissioner (Appeals), the Appellate Tribunal or the court, as the case may be, over and above the amount as determined under sub-section (2) of section 73, the time within which the interest and the reduced penalty is payable under clause (ii) of the second proviso to sub-section (1) in relation to such increased amount of service tax shall be counted from the date of the order of the Commissioner (Appeals), the Appellate Tribunal or the court, as the case may be.".

Accordingly to Statement of Objects and reasons of Finance Bill, 2015, objective of the amendment is to substitute a new section for section 78 of 1994 Act relating to penalty for failure to pay service tax by reason of fraud, collusion, willful mis-statement, 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 78 has been amended to rationalize penalty, in cases involving fraud or collusion or wilful mis-statement of 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 shall be hundred per cent of Service Tax amount involved in such cases;
2. a reduced penalty equal to 15% of the Service Tax amount is to be paid if Service Tax, interest and reduced penalty is paid within 30 days of service of notice in this regard;
3. a reduced penalty equal to 25% of the Service Tax amount, determined by the Central Excise officer by 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%) shall be admissible if Service Tax, interest and reduced penalty is paid within 30 days of such appellate order.

Section 78 has been substituted to simplify and rationalize the penal provisions where the Service Tax has not been levied or paid, or short levied or short paid or erroneously refunded by reasons of –

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

with the intent to evade payment of Service Tax.

The issuance of notice is necessary u/s 73(1) for levy of penalty in addition to demand of tax and interest.

The penalties u/s 78 shall be as follows –

(i) Penalty shall be hundred per cent of service tax amount involved in such cases;

(ii) Penalty equal to 15% (earlier 25%) of the service tax amount is to be paid if service tax, interest and reduced penalty is paid within 30 days of service of notice in this regard;

If it is so paid, proceedings in respect of such Service Tax, interest and penalty shall be deemed to have been concluded.

(iii) A reduced penalty equal to 25% of the service tax amount determined by the Central Excise Officer, by an order, is to be paid if the service tax, interest and reduced penalty is paid within 30 days of receipt of such order.

It has been provided that benefit of reduced penalty shall be available.

1. If the service tax amount gets modified in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25%) shall be admissible if modified service tax, interest and penalty is paid within 30 days of such appellate order.
2. In cases where details relating to transactions are recorded in specified records for the period from 8.4.2011 to enactment date of Finance Act, 2015 (14.05.2015), penalty shall be 50 percent of the Service Tax so determined. The transaction must be recorded in specified records.

Specified records means records including computerised data as are required to be maintained by an 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 accounts shall be considered as the specified records.

3. Where amount of Service Tax or penalty is increased from the amount u/s 73(2), by any appellate authority, time limit of 30 days within which such payment shall be paid will be counted from the date of the appellate order.

Section 78B provides for transitional provisions with respect to the amended sections 76 and 78 of the Finance Act, 1994. Accordingly,

(a) amended provisions of sections 76 and 78 shall apply to cases where either no notice is served, or notice is served under subsection (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015 (14.05.2015); and

(b) in respect of cases covered by sub-section (4A) of section 73, if no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Act, 2015 (14.05.2015), penalty shall not exceed 50% of the Service Tax amount.

Thus, section 78B will have been the application of substituted / amended sections 76 and 78 as follows –

1. For the cases, where No SCN is served upto the date of enactment of Finance Act, 2015 (14.05.2015)
2. For the cases where SCN has been served but the order is not passed as on the date of enactment of Finance Act, 2015(14.05.2015)
3. For the cases covered under the benefit of the provision of section 73(4A) (which provides for the concessional penalty in case of transaction on which service tax was not paid, was recorded in the specified accounts), where notice is served u/s 73 (1) or its proviso but no order has been issued upto to enactment of Finance Act, 2015 would be eligible for penalty at 50% of the service tax even after the enactment (14.05.2015).

Amendment in Section 80 by Finance Act, 2015 (w.e.f. 14.05.2015)

Finance Act, 2015 has omitted section 80 of the Finance Act, 1994 w.e.f. 14.05.2015.

Thus, there shall be no provision providing for waiver or reduction of penalties levied under sections 76, 77 or 78 in cases where reasonable cause exist or is shown. This would imply that there is no discretion now and that penalties become mandatory.