Comparative study of changes brought to Section 73 of the Finance Act, 1994 (Service tax) and Section 11A of the Central Excise Act, 1944

Introduction:
There are amendments galore in the recently announced budget more so in the indirect taxes field. One of the major thrusts of this budget are the changes brought about in the penal provisions. It would not be an exaggeration to say that the penal provisions have been completed overhauled. This article has made a humble attempt to study the changes in brief and also to do a comparative study of the changes brought about in section 73 of the Finance Act, 1994 (ST) and its counterpart section 11A of the Central Excise Act, 1944. (CEA)

Service tax :
Section 73 of the Finance Act has section 73 (3) read with 73 (4) which provides that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him unless the reason for short on non-payment tax was due to fraud, collusion, wilful mis-statement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

In cases where fraud or collusion etc is involved the benefit of section 73 (3) was and is not available but in such case another Section 73(1A) gave the benefit of paying 25% of the tax as penalty if the tax + interest + 25% penalty were paid within 30 days of the issuance of SCN. Now this section 73 (1A) is deleted.

Now a new section 73 (4A) has been introduced which is as under:

‘(4A) Notwithstanding anything contained in sub-sections (3) and (4), where during the course of any audit, investigation or verification, it is found that any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, but the true and complete details of transactions are available in the specified records, the person chargeable to service tax or to whom erroneous refund has been made, may pay the service tax in full or in part, as he may accept to be the amount of tax chargeable or erroneously refunded along with interest payable thereon under section 75 and penalty equal to one per cent of such tax for each month, for the period during which the default continues, up to a maximum of twenty five per cent. of the tax amount, before service of notice on him and inform the Central Excise Officer of such payment in writing, who, on receipt of such information, shall not serve any notice under sub-section (1) in respect of the amount so paid and proceedings in respect of the said amount of service tax shall be deemed to have been concluded:
Provided that the Central Excise Officer may determine the amount of service tax, if any, due from such person, which in his opinion remains to be paid by such person and shall proceed to recover such amount in the manner specified in sub-section (1).
Explanation.—For the purposes of this sub-section and section 78, “specified records” means records including computerised data as are required to be maintained by an assessee in accordance with any law for the time being in force or where there is no such requirement, the invoices recorded by the assessee in the books of account shall be considered as the specified records.’;

From the above text it can deduced that in cases where the department during an audit, investigation or verification discovers a short or non-payment of tax then the assessee will automatically and mandatorily become liable to pay penalty @ 1% of tax per month subject to a maximum of 25% of tax. So now there are 2 clear lines of action which are as under:

1. If an assessee himself goes to the department and pays the tax and interest – no penalty will be leviable on him.
2. If the department comes calling and finds out the tax – in that case bear minimum penalty would be 1% of tax subject to a maximum of 25% given that the assessee pays the tax, interest as well as this penalty before issuance of penalty.


Central Excise :
Erstwhile section 11A (2B) of the CEA which is a counter part of section 73 (3) and (4) of the Finance Act, also provided that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him or issue an SCN unless the reason for short on non-payment of tax was due to fraud, collusion, wilful misstatement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

This provision is still retained in the new section 11A (1 – b) read with sub section (2) but the provision of erstwhile subsection (2B) – Explanation 1 (wherein the benefit to cases of fraud etc was not to be extended) are deleted which means that in cases where an assessee himself comes and pays tax and interest even in cases of fraud, collusion etc the benefit of non levy of penalty will have to be accorded – strange but true. Comments on this are solicited.
Further a new sub-section (5), (6) and (7) are introduced which practically say that in cases where short payment of tax is discovered by the department during the process of audit, verification or investigation then the assessee can pay the tax, interest and penalty @ 1% of tax per month subject to a maximum of 25% of the tax and the department will not issue any SCN to him.

The above benefit or one can say relief is not to be granted in case where the short payment is due to fraud, suppression, willful misstatement etc.


The above provision can be summed up as under:

1. If an assessee himself approaches the department and pays the tax and interest and suppression etc is not alleged.

Service Tax
No penalty is to be levied and no SCN can or should be issued

Excise
No penalty is to be levied and no SCN can or should be issued

2. If an assessee himself approaches the department and pays the tax and interest BUT IT IS A CLEAR CASE OF SUPPRESSION

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
No penalty is to be levied and no SCN can or should be issued

3. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is not alleged

Service tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

4. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is alleged

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee does not have the benefit of payment of penalty at 1% subject to a maximum of 25% and hence the department will have to issue an SCN to levy the penalty.

Conclusion:

The above analysis brings out the stark difference in the approach of the government in dealing with similar situations in service tax vis-à-vis excise. Till recently the approach and execution thereof was similar but now defaulters howsoever minor in case of service tax will be dealt with a bit more firmly and more penal consequences have been thrust upon them in contrast to Excise.

Nitesh Jain
Chartered Accountant
www.niteshjain.co.in
Email: nitesh@niteshjain.co.in
+919824182629