Background With effect from 01/10/2014, vide Notification No.12/2014– ST dated 11/07/14 issued u/s. 75 of the Finance Act, 1994 (‘Act’), the following rates of interest have been prescribed, for delayed payment of service tax:
The intention of the government behind prescribing higher rates of interest for delayed payment service tax, brought out and as stated in the post budget press interview by the then CBEC Chairperson Ms. J. M. Shanti Sundharam, is under:
“Question
The Budget proposed an increase in the rate of interest from 18 % to 30 % on delay in payment of service tax beyond six months.
Reply
This is for service tax which is collected and not paid by a particular date. The person has used this amount. So, interest will act as a deterrent. It is only simple interest.”
However, the law as amended is not indicative of the government’s intention stated above. Hence, it is the understanding of trade & industry and tax payers generally that abnormally high rates of interest would apply to all cases of delayed payments (including tax demands arising out of actions u/s. 73 of the Act)
Concerns
The principal concerns of the trade & industry and tax payers generally are as under:
Service tax department is empowered under law to initiate actions upto 5 years (including 18 month normal period) for demanding & recovering tax with interest and penalty tax. It is common knowledge that tax litigations usually take a long time to settle (invariably litigation upto CESTAT takes around 5 years and could take upto 15 years if the matter goes upto the Supreme Court) for no fault of the tax payer. In that context, rate of interest of 30% is unjustified, unwarranted and totally unfair to tax payers.
The rate of interest is significantly higher if compared to the prevailing market rate of interest.
The rate of interest is abnormal considering the rates of interest prevalent in other Central Tax Laws / State VAT Laws / VAT GST Laws prevalent worldwide. Details are given at the end of this write up for ready reference.
For delayed payment of tax penal provisions are already existing in the Act, (viz. penalty u/s. 76, power to arrest etc.) Hence, in that context prescribing abnormally high rates of interest for delayed payments is unwarranted.
Further, it is pertinent to note that compared to the abnormally high rates of interest for delayed payment of service tax, the rate of interest payable by the government on refunds payable to a tax payer is only 6% pa. The disparity in rate of interest to be paid by a tax payer and tax department is glaring.
Recommendations
In order to avoid adverse consequences on trade & industry and tax payers generally and to promote & encourage fair tax administration practice considering the imminent introduction of GST regime, the following is suggested:
a) The rate of interest for delayed payment of service tax be restored to 18% pa with immediate effect,
b) As a deterrent, a higher rate of interest of 24% pa may be prescribed in cases where tax is collected but not paid to the government,
c) Parity should be brought in rate of interest payable by a tax payer & tax department at the earliest, under all tax laws. This would also help in establishing accountability of tax department.
(Note: Research inputs from Pradeep S. Shah & Udayan D. Choksi are acknowledged)
