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Notices to pharma firms for service tax evasion
December, 15th 2012

Over the past three years, the Central Board of Excise and Customs has issued 66 show-cause notices to manufacturers of pharmaceutical products who did not pay service taxes worth Rs 207 crore.

Information obtained under the Right to Information Act from the ministry of finance shows that 24 of the total number of cases of service tax evasion by pharmaceutical companies belonged to companies based in Hyderabad and involved evasion to the tune of Rs135 crore. The CBEC, however, refused to provide copies of the show-cause notices and names of the companies stating that the information is not available with them.

According to the information, pharmaceutical companies in New Delhi evaded service tax to the tune of Rs42 crore in the last three years. According to minister of state for chemicals and fertilisers Srikant Kumar Jena, the finance ministry has taken necessary action.

"The audit wing has been directed to thoroughly verify the records of pharmaceutical companies so as to detect evasion, if any, by the companies concerned," said Jena.

As per the Finance Act, 1994, failure to deposit service tax attracts penalty equal to the service tax not paid, but it is not known whether government is able to recover the evaded tax with penalty. The CAG in its report of 2010-11 on taxes paid by pharmaceutical companies cited several instances where companies have not paid or short paid service tax and recommended measures to curb it.

"In our opinion, the root cause of cases of non-payment of service tax was the absence of any mechanism to ascertain whether manufacturers were providing any output services. This facilitated 67 manufacturers of pharmaceutical products to avoid payment of total service tax of Rs182.81 crore," said the report.

In fact, even the annual report of the Director General of Service Tax, who is responsible for administrating service tax, pointed out that only Rs694.06 crore of the Rs4,132.68 crore service tax evaded during 2009-10 was recovered. The show cause notices are pending for a long time, it added.

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