Section 76, 77, 78 and 78A of Finance Act, 1994 (‘Act’ for short) provides for penalty.  The Finance Bill, 2015 brings amendments to Section 76 Section 78 and omitted Section 80 of the Act.

Penalty for failure to pay service tax

The existing Section 76 of the Act provides the levy of penalty for failure to pay service tax.   The section provides that any person, liable to pay service tax in accordance with the provisions ofsection 68 or the rules made under this Chapter, who fails to pay such tax, shall pay, in addition to such tax and the interest on that tax amount in accordance with the provisions of section 75, a penalty which shall not be less than one hundred rupees for every day during which such failure continues or at the rate of one per cent of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax.     The total amount of the penalty payable in terms of Section 76 shall not exceed 50% of the service tax payable.

The proposed Section 76 substitutes the existing Section 76.  Section 76 (1) provides that where service tax has not been levied or paid, or has been short levied or short paid or erroneously refunded, for any reason, other than the reason of fraud or collusion or willful mis-statement or suppression of facts of any of the provisions of this Chapter or of the rules made there under with the intent to evade payment of service tax, the person who have been served notice under Section 73(1)shall, in addition to the service tax and interest specified in the notice, be also liable to a penalty not exceeding 10% of the amount of such service tax.

The proviso to this section provides that where such service tax and interest is paid within a period of ninety days of the date of service of notice no penalty shall be liable.  If the date of receipt of the order of the Central Excise Officer determining the amount of service tax under Section 73(2), the penalty payable shall be 25% of the penalty imposed in that order, only if such reduced penalty is also paid within such period.

The proposed Section 76 (2) provides that where the Commissioner (Appeals), the Appellate Tribunal or the Court, as the case may be, modifies the service tax determined under Section 73(2), then, the amount of penalty payable thereon, shall also stand modified accordingly, and the benefit of reduced penalty under the proviso to Section 76 (1) shall be available if such interest and reduced penalty so payable within a period of 30 days from the date of receipt of the order by which such modification is made.

Penalty for failure to pay service tax for reasons of fraud etc.,

The existing Section 78 (1) provides that where any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, by reason of-

• Fraud; or
• collusion; or
• willful mis-statement; or
• suppression of facts; or
• contravention of any of the provisions of this Chapter or of the rules made there under

with the intent to evade payment of service tax, the person, liable to pay such service tax or erroneous refund, as determined under sub-section (2) of section 73, shall also be liable to pay a penalty, in addition to such service tax and interest thereon, if any, payable by him, which shall beequal to the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded:

The first proviso provides that where true and complete details of the transactions are available in the specified records, penalty shall be reduced to fifty per cent of the service tax so not levied or paid or short-levied or short-paid or erroneously refunded:

The second proviso provides that where such service tax and the interest payable thereon is paid within thirty days from the date of communication of order of the Central Excise Officer determining such service tax, the amount of penalty liable to be paid by such person under the first proviso shall be twenty-five per cent of such service tax:

The third proviso provides that the benefit of reduced penalty under the second proviso shall be available only if the amount of penalty so determined has also been paid within the period of thirty days referred to in that proviso:

The fourth proviso provides that in case of a service provider whose value of taxable services does not exceed sixty lakh rupees during any of the years covered by the notice or during the last preceding financial year, the period of thirty days shall be extended to ninety days.

Section 78 (2) provides that where the service tax determined to be payable is reduced or increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, for the purposes of this section, the service tax as reduced or increased, as the case may be, shall be taken into account:

The first proviso to this section provides that  in case where the service tax to be payable is increased by the Commissioner (Appeals), the Appellate Tribunal or, as the case may be, the court, then, the benefit of reduced penalty under the second proviso to sub-section (1), shall be available, if the amount of service tax so increased, the interest payable thereon and twenty-five per cent of the consequential increase of penalty have also been paid within thirty days or ninety days, as the case may be, of communication of the order by which such increase in service tax takes effect:

The second proviso to this section provides that if the penalty is payable under this section, the provisions of section 76 shall not apply.

The explanation to this section provides that for the removal of doubts, it is hereby declared that any amount paid to the credit of the Central Government prior to the date of communication of the order referred to in the second proviso to subsection (1) or the first proviso to sub-section (2) shall be adjusted against the total amount due from such person.

 The newly proposed Section 78 (1) provides that where any service tax has not been levied or paid, or has been short levied or short paid or erroneously refunded by reason of  fraud or collusion or willful mis-statement or suppression of facts or contravention of any of the provisions of this Chapter or of the rules made there under with the intent to evade payment of service tax, the person who has been served notice under Section 73(1) shall, in addition to the service tax and interest specified in the notice, be also liable to pay a penalty which shall be equal to 100% of the amount of such service tax. 

The first proviso to this section provides what where such service tax and interest is paid within a period of 30 days of the date of service of notice under Section 73(1), the penalty payable shall be 50% of such service tax.  Where such service tax and interest is paid within a period of days of the date of receipt of the order of the Central Excise Officer determining the amount of service tax underSection 73(2), the penalty payable shall be 25% of the service tax so determined.

The second proviso to this section provides that further that the benefit of reduced penalty under the first proviso shall be available only if the amount of such reduced penalty is also paid within such period.

The newly proposed Section 78(2) provides that where the Commissioner (Appeals), the Appellate Tribunal or the court, as the case may be, modifies the service tax determined under Section 73(2),then, the amount of penalty payable thereon, shall also stand modified accordingly, and the benefit of reduced penalty under the first proviso to sub section (1) shall be available if such service tax, interest and reduced penalty is payable, is paid within a period of 30 days from the date of receipt of the order by which such modification is made.

Analysis

Section 76 is a penal provision that imposes penalty for nonpayment of or delayed payment service tax.   It does not require a guilty mind on the part of the tax payer.  The existing provisions of Section 76 give a penalty of ₹ 100/- per day from the date of default to the date of payment subject to the maximum of 50% of tax payable.  The proposed section is to penalize the assessee at the steep hike rate of 10% of service tax as penalty.  This will make the assessees to suffer a lot. 

In respect of Section 78 the proposed section does not take note of the first proviso and the fourth proviso of the existing section.  The first proviso provides that where true and complete details of the transactions are available in the specified records, penalty shall be reduced to fifty per cent of the service tax so not levied or paid or short-levied or short-paid or erroneously refunded.  This benefit is not available to the genuine assessee under the new section. 

The fourth proviso provides that in case of a service provider whose value of taxable services does not exceed sixty lakh rupees during any of the years covered by the notice or during the last preceding financial year, the period of thirty days shall be extended to ninety days.  This benefit of extended period available to the small service tax payers is also not available after the effect of the new section.

The first proviso to Section 78 (1) (proposed) provides a new one that where such service tax and interest is paid within a period of thirty days of the date of service of notice under Section 73(1), the penalty payable shall be 50% of such service tax.

Benefit of Section 80 withdrawn

Section 80 of the Act provides that notwithstanding anything contained in the provisions of section 76, or section 77 no penalty shall be imposable on the assessee for any failure referred to in the said provisions, if the assessee proves that there was reasonable cause for the said failure.  The term ‘reasonable cause’ may be based on the facts and circumstances of the case.   Many a case has been won by the assessees who could able to prove that the failure on their part is beyond their control and a reasonable cause existed.   By invoking this Section 80 penalties imposed have been set aside by the higher authorities.   By omitting this Section 80 the genuine assessees will lose their chance to prove their genuinely and subject to the penalties under Section 76 and 77.

Thus the proposed amendments in this Finance Bill, 2015 are against the interest of the service tax assessees and the Government is to reconsider the same again.   Section 80 may be retained again for the benefit of genuine assessees.