People paying service tax arrears before May 10 can get relief from penalty, the Finance Ministry has indicated.

In a statement issued here on Monday, the Ministry clarified that in cases where service tax dues have been paid in between the date of announcement and actual implementation of Service Tax Voluntary Compliance Encouragement Scheme (VCES) – March 1 and May 10 – relief from penalty can be considered.

VCES gives a one-time opportunity to defaulters to come clean and is a ‘no penalty, no interest’ scheme.

Under it, defaulters have to pay at least 50 per cent of arrears for the five-year period ending 2012 and the balance in another six months without interest.

During the interaction with trade and industry bodies earlier this month, the Finance Ministry had received a lot of queries on the status of tax arrears paid during the lag period (March 1 and May 10) before the actual implementation of VCES.

The question was, “Whether declaration can be made in such case where service tax pertaining to the period covered by the scheme along with interest has already been paid by the parties, before it came into effect, so as to get waiver from penalty and other proceedings?”

The Ministry has now clarified that since no ‘tax dues’ are pending in such cases, declaration cannot be filed under VCES.

“However, there may be a case for taking a lenient view on the issue of penalties under the provision of the Finance Act, 1994,” it added. The scheme is closing on December 31.

As of now, the scheme has got over 5,000 applications with tax payment of over Rs 1,000 crore.

During the interactions with trade and industry bodies, another apprehension was raised that declarations are being considered for rejection even though the ‘tax dues’ pertain to an issue or a period, which is different from the issue or the period for which inquiry, investigation or audit was pending as on March 1, 2013.

To this the Finance Ministry clarified that conditions for rejecting application under the scheme might be construed strictly and narrowly.

It explained that if an inquiry, investigation or audit, pending as on March 1, 2013, was being carried out for the period from 2008-11, benefit of the scheme would be eligible in respect of ‘tax dues’ for the year 2012. The year 2012 is the period not covered by the inquiry, investigation or audit.

Also, if an inquiry or investigation, pending as on March 1, 2013 was in respect of a specific issue, say renting of immovable property, benefit of the scheme would be eligible in respect of ‘tax dues’ concerning any other issue in respect of which no inquiry or investigation was pending as on March 1, 2013.