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Service tax voluntary compliance scheme: fair or unfair?

While the scheme seeks to provide immunity to those who haven't paid service tax, it offers little respite to the honest taxpayer

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The Finance Bill 2013 has introduced a fresh tax generation instrument by means of an called the ‘Encouragement Scheme, 2013.

As per the Budget documents, the Scheme has been implemented to encourage voluntary compliance by persons who have not paid service tax dues or filed service tax returns for the period 1 October 2007 to 31 December 2012. Under the Scheme, such persons can make a declaration as regards their service tax liabilities, pay the tax and obtain immunities, including payment of penalty, interest (which, under the service tax regime, is quite steep) and other proceedings.

This write-up briefly analysis the Scheme and highlights certain issues that appear to arise from it.

The Scheme specifies certain eligibility criteria for prospective participants. As per the Bill, the benefits of the Scheme would be available to all persons to whom no notice or order of determination of tax dues has been raised or issue before 1 March 2013. Further, even an assessee who has not filed service tax return for the period in respect to which he seeks to make a disclosure, can also participate.

However, the following persons may not qualify to participate in the Scheme: (i) against whom an enquiry or investigation for non-payment or short levy of service tax has been initiated by way of a search, issuance of summons or action requiring production of documents, accounts or other evidences etc.; and (ii) where an audit is pending.

The procedure for availing the Scheme involves making necessary declarations before the 31 December 2013, depositing at least 50% of the dues in such declaration by that date, and making payment of the remainder by 30 June 2014. It is also provided that the declaration would become final upon issuance of an acknowledgement of discharge by the tax authorities, pursuant to which the declaration would attain finality and the matter would not be reopened. Further, as regards reopening, the Scheme provides the tax department a period of one year to reopen a declaration if it has reasons to believe that the declaration made by the declarant is sustainably false.

The Scheme is a first of its kind to be introduced in the field of indirect taxation. Earlier, a scheme known as the Voluntary Disclosure of Income Scheme had been introduced in the area of direct taxation, which, if sources are to be believed, was widely successful in expanding the tax base.

It is pertinent to note that on an examination of the Scheme, the following issues come to light:

(a)   As per the terminology of the Bill, all persons (subject to certain exceptions) are entitled to participate in the Scheme. Hence, such definition seems to cover even such persons/entities who have not procured registration under the service tax regime for payment of tax. However, as per the extant provisions of the service tax law, any person liable to pay service tax is mandated to obtain registration under the relevant provisions.  The Scheme does not address how non-registered entities would be made to pay their service tax dues;

(b)     The Scheme does not appear to provide any respite to persons who have filed their returns and paid their taxes ‘honestly’ and ‘genuinely’ but due to some genuine reasons, fail to pay complete amounts of service tax and come within the possibility of being prosecuted under the service tax regime. This makes the Scheme extremely defaulter friendly;

(c)    The Scheme does not appear to suggest mandatory scrutiny for all declarations that are presented under the Scheme. It is noteworthy that the Scheme seeks to cover service tax defaulters and an absence of an imperative scrutiny mechanism may provide a leeway to the participants to get away without making true and adequate disclosures, and would result in short recovery of tax;

(d)    As per the Scheme, that an amount paid in connection with a declaration would not be refundable. However, the service tax regime provides a mechanism for refund of service tax payable erroneously to the service tax authorities in certain situation. Such non-refund provision entails that every declarant in the Scheme should be sure of its coverage under the Scheme, should be sure of whether it is required to pay service tax and be diligent at the time of computation its service tax liability; and

(e) Viewing the Scheme from one side, it appears to be extremely attractive for defaulters to comply with and gain immunity for interest, penalties and other proceedings in the process. Another view could be that an amnesty scheme such as the Scheme reflects weak enforcement capabilities of the government. If that be the case, then the entire objective behind spreading the service tax base would be futile if the government does not possess the required infrastructure/capabilities to cast the service tax net widely.

-- The author is a tax lawyer with Krishnomics Legal, a Delhi based corporate law firm

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