Introduction:
In the past, in 2004 and in 2008, the Government made not so successful attempts, to provide amnesty to service tax defaulters. Once more, the amnesty scheme termed as the Voluntary Compliance Encouragement Scheme, 2013 is introduced under the service tax law (‘VCES’ or “the Scheme” for short) and has come into force from 10th May, 2013 vide the Finance Act, 2013 (FA 2013). The 2004 scheme was known as Extraordinary Tax Payer Friendly Scheme for instant registration of service providers, (2004 Scheme) and the other one (towards reducing litigation) was named as Service Tax Dispute Resolution Scheme 2008 (2008 Scheme). While presenting the Budget for fiscal 2013-14, the Finance Minister stated that out of 17 lakh registered assessees, only seven lakh tax payers file their periodic returns. Thus in effect, only 41% of the registered tax payers comply with the law and hence the scheme is for such defaulters with expectation to collect a reasonable sum of money for the exchequer. The VCES is contained in sections 104 to 114 of the Finance Act, 2013. Simultaneously, with the enactment of the Budget proposals, by exercising power u/s. 114 of the Finance Act, 2013, the Government has also notified Service Tax Voluntary Compliance Encouragement Rules, 2013 (VCES Rules for short) vide Notification No.10/2013-ST dated 13th May, 2013 and has also issued Circular No.169/4/2013-ST on 13th May, 2013. For all practical purposes, the scheme is one of amnesty only.
Features of VCES:
• Any person who was required to pay service tax and for any reason missed or failed paying such tax and such tax dues remained pending as on 01-03-2013, is permitted to pay service tax under VCES for the period from 1st October, 2007 till 31st December, 2012.
• Who is eligible to declare and pay tax under VCES?
The scheme is available only to those persons who have not filed any return or stopped filing their returns for any reason and also to those persons who filed their returns in the past but did not disclose their true liability in respect of which no notice or any order for determination under sections 72, 73 or 73A of the Finance Act, 1994 (the Act) is issued on or before 28th February, 2013 i.e. the date of introduction of the Budget 2013. However, the list of disqualifications or ineligibility is more important to note, as the Scheme is not open in respect of ST-3 Returns filed declaring true liability but service tax wholly or partly was not paid or in cases where any dispute is pending or where any inquiry or investigation is being made against any person for non-payment or short payment of service tax in the form of:
– A summons issued u/s. 14 of the Central Excise Act, 1944 (as applicable vide section 83 of the Act). – Search of the premises is made.
– Communication requiring production of accounts, documents or other evidence under the law.
– An audit is initiated by the department. If any such inquiry, investigation or audit is pending on 1st March, 2013, then in such cases, the designated officer (as will be notified by the Commissioner of Central Excise for the purpose) is required to reject the declaration made by such a person by issuing an order in writing containing reasons for such rejection. The question therefore arises for a person desiring to avail amnesty under the VCES is when any communication is received from the department asking to provide any information, whether the same would render him ineligible to declare taxable service under VCES. The Government in the above referred CircularNo.169 has clarified that besides summons issued u/s. 14 of the Central Excise Act, unless an inquiry/investigation is conducted u/s. 72 of the Act or Rule 5A of the Service Tax Rules, 1994 and unless such inquiry is pending on 01-03-2013, no other communication would disqualify a person from making a declaration of taxable service under VCES.
• Service tax dues may be paid not only on provision of taxable services but also on receipt of taxable services. Therefore, if any tax liability is not discharged by a person under reverse charge and if no disclosure thereof is made in any ST-3 Return and no inquiry/investigation is pending, such person also may make declaration under VCES and pay service tax towards liability under reverse charge mechanism for any period covered by the period of October, 2007 to December, 2012.
• What is the immunity under the Scheme?
In terms of the Scheme, when a person eligible for making a declaration under VCES makes a declaration and also makes service tax payment in accordance with the Scheme, he would be entitled to get immunity from interest leviable u/s. 75 or u/s. 73B as the case may be, waiver of penalties leviable and prosecution under the law. Generally penalties are imposed u/s. 76, 77 and 78 of the Act and/or similar other provisions. For instance, when a person who was liable for obtaining registration earlier did not register at all and now seeks registration for the first time under VCES would get immunity from penalty for non-registration also. This is also clarified in the above referred Circular No.169 of 13th May, 2013. The distinct feature of VCES is that waiver of interest is provided. The current rate of interest @ 18% is an extremely heavy burden on any assessee. For those who did not have the intention of evasion but did not pay either on account of genuine error or were uncertain about taxability, have a good opportunity to put an end to the liability in case of disputable area of taxability as outcome of litigation is uncertain and long-drawn litigation process may result into manifold liability in case of adverse outcome after a long wait.
• What is the time limit for filing declaration and in what manner is it to be made? VCES requires an eligible person desiring to declare any taxable service to file such declaration in a prescribed format viz. Form VCES-1 on or before 31st December, 2013. The said form prescribed under VCES Rules is to be submitted to the designated authority (Assistant/Deputy Commissioner or any officer above him prescribed for the purpose). The said designated authority would issue an acknowledgement within 7 working days of the receipt of declaration in Form VCES-2 prescribed for the purpose.
Important points while making declaration:
— The declaration should be truthful leaving no scope for the Commissioner of Central Excise to issue Show Cause Notice for false declaration resulting in short payment or nonpayment of tax dues.
— At the time of filing the declaration and before the due date of 31-12-2013, declarant has to ascertain, declare and calculate the exact sum of tax dues he is going to pay and therefore a separate calculation sheet is required to be attached with the declaration in Form VCES- 1 showing separately computation for each category of service if service tax dues relate to more than one service for the period under declaration.
— Calculation of the dues should be furnished in the manner prescribed at Sr.No. 3F(1) of the old form of ST-3 Return or Part B of the new form of ST-3 Return as the case may be, as existing during the relevant period. The said calculation must be submitted per Return period i.e. half yearly period of April- September and/or October-March of the respective financial year depending upon the period for which the declaration is made.
• Payment of service tax under VCES:
A minimum of 50% of service tax due on the value of declared taxable service has to be paid on or before 31st December, 2013 and the balance is required to be paid on or before 30th June, 2014. If any amount remains unpaid as on 1st July 2014, it would be payable before 31st December, 2014 along with interest for the delayed period beginning from 1st July, 2014 till the date of payment. However this would in any case be prior to 31st December, 2014. The applicable rate of interest would be in accordance with section 75 (currently prescribed at 18%) or section 73B of the Act, as the case may be. On making the payment of service tax dues, the declarant is required to furnish full details of payment and interest if any payable for any delayed payment. Service tax is to be paid in the same manner as ordinarily paid through GAR-7 challan as prescribed under the Service Tax Rules. However, two important points should be noted here:
(i) No payment is permissible to be made through CENVAT credit as per Rule 6(2) of the VCES Rules.
(ii) Amount once paid in pursuance of declaration will not be refunded by the Government under any circumstances as provided in section 109 of the FA 2013.
• When does the declaration become conclusive?
When the declarant has truthfully made a declaration by the due date of 31st December, 2013 and has made the payment of service tax dues by the due dates discussed above and has also paid interest in accordance with the law if the payment is made after 30th June, 2014 but before 31st December, 2014 and the details of the payment are furnished to the designated authority as and when the payment of tax is made along with the copy of acknowledgement i.e. Form VCES-2, the designated authority will issue an acknowledgement of discharge in the prescribed Form VCES-3. On receipt of the acknowledgement of discharge in VCES-3, the declaration made under the scheme stands concluded according to section 108 of the FA 2013.
• What is the consequence if declaration is not true?
No case would be reopened for the period covered under the declaration, unless the Commissioner of Central Excise finds that the declaration made is substantially false. In such cases, after recording reasons in writing, the Commissioner may issue a Show Cause Notice. Such Show Cause Notice would be considered as issued u/s. 73 or 73A of the Act as if issued under the law in ordinary course. However, no action is permissible to be initiated beyond a period of one year from the date of declaration. This provision of the scheme is likely to prove to be a deterrent for many persons coming forward to declare. Further, the use of the term “substantially false” is extremely subjective and therefore it could be hard to interpret as to what constitutes “substantially false” declaration. Skepticism prevails on account of such vague term and consequently the area would remain vulnerable to litigation.
Other Provisions:
• Service tax obligations in respect of period from 1st January, 2013 are to be complied with in the normal course and therefore immunity from interest and other consequences will not be available.
• Declarants who fail to pay at least 50% of their tax dues as declared on or before 31st December, 2013 would not remain eligible for the Scheme. Similarly, those who fail to declare by 31st December, 2013 also will be disqualified to avail benefit under VCES.
• Declarants who pay 50% of their tax dues after making declaration before 31st December, 2013 but fail to pay the balance amount or interest before 31st December, 2014 would be visited with provisions of section 87 of the Act whereunder the liability can be recovered by attaching movable or immovable property of the declarant and all other consequences under the law would follow.
– Is the Scheme fair to honest taxpayers?
Interest is essentially compensatory in nature. Total waiver of interest for five years and thereafter for a further period of 01-0102013 to 30-06-2014 is most unprecedented and totally unfair vis-à-vis honest taxpaying fraternity. In no tax amnesty scheme announced by the government, interest was totally waived. In this context, the question may arise as to what would happen to assessees who availed penalty waiver facility announced in the Finance Act, 2012 and paid tax on renting of immoveable property with interest? Are they entitled to claim refund of interest? Thus the Scheme is certainly discriminatory against all regular taxpayers.
Legal Validity of the scheme:
There are two landmark Supreme Court judgments on amnesty schemes:
• R. K. Garg vs. UOI (1982) 133 ITR 239 (SC) (Bearer Bond Scheme).
In this case, the constitutional validity of special bearer bonds was challenged mainly on the grounds of inequality under Article 14 of the Constitution. Although as per the majority view of the 5 member bench, the PILs filed were dismissed rejecting the challenge, the extract from the observation made by the dissenting Judge Justice Gupta in the context of bearer bonds in E P Ruyappa vs. State of Tamil Nadu & Anr, is worth looking at. He observed “In fact, equality and arbitrariness are sworn enemies; one belongs to the rule of law in a republic while the other, to the whim and caprice of an absolute monarch. Where an act is arbitrary it is implicit in it that it is unequal both according to political logic and constitutional law and is therefore violative of Article 14.”
• AIFTP vs. UOI (1998) 231 ITR 24 (SC) 98 Taxmann 446 (SC) (97 Amnesty)
In AIFTP (supra) Honourable Supreme Court had insisted on an affidavit from the Finance Minister that in future there will be no amnesty schemes. The immunity of interest and penalty granted being against the principles of natural justice and discriminatory against regular tax payers, (who are not eligible under the scheme) and in terms of the observations made by the Honourable Supreme Court in AIFTP (supra), it is possible that Courts could strike down the Scheme, if challenged.
Some other issues and shortcomings of VCES:
• The VCES Rule 6(2) does not allow CENVAT credit utilisation. This appears unfair, as under the Excise law, even in cases of clandestine clearances of excisable goods when duty liability is accepted and paid, CENVAT credit is allowed.
• As regards CENVAT credit, it is also a matter of concern, whether receiver of the services provided by the declarant would be entitled and allowed to take credit of service tax paid by the persons under VCES by application or otherwise of Rule 9 of CCR. Similarly, when a person has paid service tax under reverse charge u/s. 66A and if such service is otherwise “input service” as per Rule 2(1) of the CENVAT Credit Rules, 2004, whether a provider of service or a manufacturer declaring under VCES would be allowed CENVAT credit of service tax paid under VCES or would it be disputed by the department. This requires clarity from the Government.
• The most unfair and unfortunate point as regards the Scheme is that it is not open to the persons having pending disputes with the department at different levels. There is a kind of discrimination against such persons who could be visited with consequences of interest, penalty etc. Similarly even when inquiry or investigation is initiated, one fails to appreciate the decision of the Government not to allow such persons the benefit of VCES and select only a class of persons which has not been accessed by the department for the interest free amnesty scheme. One fails to understand how such persons are on a better footing than those who are registered and also tax payers but have disputes on account of interpretation of issues or any other genuine reason. During the entire period of 18 years of existence of service tax, the net of tax gradually included different taxing entries on selective basis and disputes based on interpretation issue were quite incidental to the selective approach of taxation of services and therefore propriety of such discriminatory approach undoubtedly remains questionable.
• Further, when the Scheme has become operational on 10th May, 2013, the first half-year period viz. 1st October, 2007 to 31st March, 2008 has already become time-barred. Therefore, why would a person who has not received any notice or inquiry etc. declare value of taxable service for the period October, 2007 – March, 2008 under limitation period, no demand would sustain for the said period.
Similarly, if a person has not been visited with any inquiry/investigation etc. till 1st March, 2013, he is eligible per se to opt for VCES for his defaults. Since he is required to file declaration and pay 50% tax dues on or before 31st December, 2013 and if he files declaration on say 10th November, well before the last date, even the period April, 2008 – September, 2008 gets time barred. It appears therefore that the scheme could rather cover the period at least till 31st March, 2013 instead of 31st December, 2012.
• No provision in VCES relates to maintaining confidentiality of information furnished by a person under VCES. Thus risk of misuse/use by other tax authorities appears to exist. To encourage persons to come forward to declare, it is desired that the scheme is modified whereby assurance is provided to accept declaration as voluntarily done by the declarant or else the persons otherwise wanting to declare may be reluctant to do so as the risk of getting and/or receiving Show Cause Notice would persist in terms of specific provisions in this regard.
• There is a large number of pending cases wherein penalties are proposed although the entire amount of service tax is paid, however either NIL returns were filed or no returns were filed at all. At least such cases ought to have been covered under the scheme.
Caution Note:
Considering the intricate terms and conditions relating to eligibility & otherwise under the Scheme, professional fraternity is advised to exercise caution and appropriate due diligence before advising on matters relating to the scheme.
