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Tough action against service tax evaderson the cards
January, 24th 2011

Service tax authorities are seeking powers to prosecute violations that result in delayed and lost earnings running into thousands of crores to the national exchequer, two officials said.

The Central Board of Excise and Customs (CBEC), which regulates and administers the collection of indirect taxes, is considering the proposal submitted by zonal heads of service tax across the country, said a service tax official in Mumbai.

In a 24 November letter to the director general of service tax, the nodal agency between the directorate of service tax and CBEC, the Mumbai service tax department has proposed to make evasion of service tax liable for prosecution.

Introduction of prosecution provision will help in curbing the cases where the service tax was paid with interest by the defaulting assessee on being pointed out by the department and could deter the assessee in resorting to such practices, said the letter, a copy of which has been reviewed by Mint.

We are unable to catch habitual offenders because we dont have the power to arrest, unlike the customs, which can arrest and prosecute defaulters, the official cited above said.

The Customs Act empowers an officer to make arrests in suspected cases of violations.

The service tax department in Mumbai detected Rs.580 crore in unpaid taxes in fiscal 2009-10, up 31% from 2008-09. This pertains only to the Mumbai region and the national figure of tax evasion could run into thousands of crores, the official said.

Service tax is an indirect levy imposed on services such as broadcasting, banking, advertising, sponsorship and intellectual property services, among others. Introduced in July 1994, it covers all service providers in India, except those in Jammu and Kashmir. The current rate of service tax is 10.3% of the cost of services rendered and is usually paid by the provider.

A CBEC official confirmed the development. At this stage, its too premature to say anything, he said. Its a part of the budget exercise and no decision has been taken on the proposal as yet. Both officials spoke on condition of anonymity.

If CBEC accepts the proposal, it will suggest changes in norms to the finance ministry before Pranab Mukherjee presents the budget in Parliament next month.

Under current rules, in case of service tax evasion, the department has the power to issue show-cause notices. A show-cause notice is not an indictment and requires a company to explain its position, typically within a month.

Usually such notices are challenged before the appeals commissioner of service tax and at the appellate tribunal. The entire process can take three to four years before a final decision is reached.

It is a long-drawn process and we have no powers to speed up things while the government loses revenue, the official quoted first said.

Indirect tax of Rs.50,000 crore is locked up in disputes across the country, according to him. In Mumbai alone, over Rs.500 crore of unpaid service tax is locked up in disputes pending at various levels of adjudication proceedings.

There has been an increase in evasion of service tax by reputed service providers in the last few years, the same official said. In a large number of cases, we found that service tax was collected but not remitted to the government. The money was instead being utilized by the company for other purposes.

The department letter has cited two cases investigated last year to push for the need for more stringent action against defaulters.

A few companies undertaking drilling operations in the high seas had imported various services but they did not pay service tax, the department said. Similarly, some multinational companies had rendered services by setting up site offices in India but in spite of consultation from top legal consultants, they did not bother to enquire about service tax liability, the letter said.

It has suggested tough action against offenders as the lapses are not procedural or technical.

The service tax authority has also proposed a penalty on regular defaulters. The monetary limit for prosecution should be kept at par as per central excise provisionRs.25 lakh and above, and it should apply to repeated offenders, the letter said.

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