The analysis of the amended provisions as per the Finance Bill, 2016 in respect of “Interest and Penalties” are as under:
I. Amendment under Section 73 of the Finance Act, 1994
Section 73 of the Finance Act, 1994 deals with recovery of Service tax not levied or paid or short levied or short paid or erroneously refunded. This section gives power to Central Excise Officer to serve show cause notice within “eighteen months” from the relevant date.
Whereas, in case of fraud, collusion, willful misstatement or suppression of facts by the person, then in that case the Central Excise Officer is empower to issue such notice within five years from the relevant date.
The Hon’ble Finance Minister in the Budget 2016 had proposed to increase the normal period for issuance of Show cause notices in cases where there is no suppression of facts etc. from "eighteen months" with "thirty months".
This amendment would result in increase in Service tax related litigation as the departmental officers will now have 30 months' time from the end of the relevant half year, to issue SCNs to cover the normal period.
II. Amendment under Section 75 of the Finance Act, 1994
The Finance Budget 2016 had amended the provisions of Section 75 of the Finance Act, 1994 and had proposed that a higher rate of interest would apply to a person who has collected the amount of service tax from the service recipient but not deposited the same with the Central Government.
It is pertinent to understand the term ‘Service tax collected but not paid” for the purpose of calculating interest liability. It is worthwhile to note that the similar provisions also existed under Section 89(1) of the Finance Act, 1994.
Clause (d) of the said Section talks about “collection of any amount as service tax but fails to pay the amount so collected to the credit of Central Government”. The Ministry of Finance vide Circular No. 140/9/2011 dated 12 May 2011 had clarified as under:
“9. Clause (d) of section 89(1) of Finance Act, 1994, will apply only when the amount has been collected as service tax. It is not meant to apply to mere non-payment of service tax when due. This provision would be attracted when the amount was reflected in the invoices as service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.”
The clarification provided by way of circular in respect of prosecution under Section 89 of the Finance Act, 1994 can be applied to understand the amended provisions of Section 75 of the Finance Act, 1994, and accordingly Interest rate of 24% will be applied only in cases where the amount of Service tax has been collected but not paid.
The above mentioned provision can be explained by taking an example:
Mr. A, a Chartered Accountant had raised an invoice of Rs. 1,00,000 plus service tax on 28 December 2015 for which no payment has been received for providing the consultancy service to Mr. B.
Now in this case, on 06 January 2016 (due date of payment of Service tax), can it be said that raising of invoice will tantamount to collection of Service tax and accordingly rate of interest will be 24% as Mr. A had raised an invoice ?
By following the clarification as provided vide Circular No 140/9/2011 dated 12 May 2011 in the instant case, raising of invoice will not tantamount to collection of Service tax and accordingly, rate of interest that will be applicable in this case is 15%.
Further, following the ratio of the clarification, interest rate will always be 15% in case of reverse charge.
Note: The above change will come into effect on the day the Finance Bill receives the assent of the President.
III. Amendment under Section 78A of the Finance Act, 1994
Section 78A of the Finance Act, 1994 deals with the penalty on any director, manager, secretary or officer who is engaged in the day to day operations and conduct of business and was knowingly party to the contravention made by the organization which may extend to one lakh rupees. The cases in which such penalty can be imposed are as under:
- evasion of Service tax;
- issuance of invoice without provision of Service;
- availment and utilization of credit of taxes without actual receipt of taxable service; and
- failure to pay amount of Service tax collected beyond six months
The Finance Bill, 2016 had proposed to insert an explanation under this Section which read as under:
"Explanation: For the removal of doubts, it is hereby clarified that where any service tax has not been levied or paid or has been short-levied or short paid or erroneously refunded, and the proceedings with respect to a notice issued under sub-section (1) of section 73 or the proviso to sub-section (1) of section 73 is concluded in accordance with the provisions of clause (i) of the first proviso to section 76 or clause (i) of the second proviso to section 78, as the case may be, the proceedings pending against any person under this section shall also be deemed to have been concluded."
According to clause (i) of first proviso to Section 76, if Service tax along with interest is paid within a period of 30 days from the date of service of notice under Section 73(1), no penalty shall be payable.
And according to clause (i) of the second proviso to Section 78, if Service tax along with interest and 15% penalty is paid within a period of 30 days from the date of service of notice under Section 73(1), the penalty under Section 78 will be restricted to 15%.
The said explanation provides that if proceedings under Section 76 or 78 have been concluded, then in that case proceedings initiated vide Section 78A will deemed be concluded and consequently no penalty proceedings can be initiated against any director, manager, secretary or officer who is engaged in the day to day operations and conduct of business.
IV. Amendment under Section 89 of the Finance Act, 1994
Section 89 of the Finance Act, 1994 imposes prosecution under the following situations:
- knowingly evades payment of Service tax;
- avails and utilizes credit of taxes without actual receipt of taxable service either fully or partially;
- maintains false books of accounts or fails to supply any information;
- failure to pay amount of Service tax collected beyond six months
The Finance Bill 2016 had proposed to increase the monetary limit for launching prosecution in respect of above mentioned cases from Rs. 50 lakhs to Rs. 2 crore.
V. Amendment under Section 91 of the Finance Act, 1994
The power to arrest in Service tax is being restricted only to situations where the tax payer has collected the tax but not deposited it to the exchequer, and that too above a threshold of Rs 2 crore.
It is pertinent to note that Commissioner of Central Excise may authorize the Central Excise Officer not below the rank of Superintendent of Central Excise to arrest such person. Further the power of releasing an arrest person on bail or otherwise has been withdrawal from Assistant Commissioner, or the Deputy Commissioner by omitting the sub section (3) of Section 91 of the Finance Act, 1994.
Atul Kumar Gupta
B Com (Hons) FCA, FCMA, LLB, MIMA, CIQA, PGDEMM
Central Council Member of ICAI (2016-2019)