MARCH 02, 2015

By Suhrid Bhatnagar, Superintendent, Central Excise

IN the Budget 2015-16 penal measures provided in the Finance Act, 1994 have been rationalized. While the effects must take place for the notices issued on or after the date on which the Finance Bill receives the assent of the President, a new section 78B has been inserted to give transition provisions to transport the earlier issued show cause notices to the new penal measure regime.Also, the noticee's favourite section 80 is proposed to be omitted.

The present situation, the one proposed in the Finance Bill and its implications are as under:

(A) SECTION 76 (Clause 111 of the Finance Bill, 2015)

(1)   PRESENT SECTION 76:

(i) Since 10.05.2008, sections 76 and 78 have been mutually exclusive. Therefore, presently section 76provides the penalties for failure to pay service tax up to the quantum 'not less than one hundred rupees for every day during which such failure continued or at the rate of one per cent of such tax, per month whichever is higher' for the cases where penalty has not been imposed under section 78.

(ii) Provision for modification of penalty in cases of redetermination of appellate forums or courts was not expressly provided but taken as implied earlier (such provisions were there in section 78!).

(2) FEATURES OF PROPOSED SECTION 76:

(i) With the assent of the President, the section 76 shall provide penalties for failure to pay service tax, only for the cases which do not involve reasons for which penalty under section 78 is leviable. This specification comes in lieu of the last proviso to section 78 which provides (with effect from 10.05.2008) that if penalty is payable under section 78, the provisions of section 76 shall not apply.

(ii) The penalty that can be imposed shall not exceed ten per cent of the amount of service tax determined.

(iii) In the cases where such service tax and interest is paid within a period of thirty days of the-

a. date of service of notice, no penalty shall be payable.

b. receipt of the order of the Central Excise Officer determining the amount of service tax under sub-section (2) of section 73, the penalty payable shall be twenty-five per cent. of the penalty imposed in that order, only if such reduced penalty is also paid within such period.

(iv) Provision for modification of penalty in cases of redetermination of appellate forums or courts shall now be expressly provided under subsection (2).

(3) IMPLICATION OF SUBSTITUTION BY NEW SECTION 76:

(i) The noticee can save on penalty under section 76 if he admits the liability within thirty days of the receipt of the show cause notice.

(ii) Penalty which earlier was up to 50% of the tax payable shall now be very low or on lower side upto an extent of meager 2.5% of the tax or in any case not more than 10% of the tax

(iii) Express provision for modification in penalty due to re-determination of tax by appellate forums or courts shall reduce litigation agitated by the Department.

(B) SECTION 77

No change.

(C) SECTION 78 (Clause 112 of the Finance Bill, 2015)

(1) PRESENT SECTION 78:

(i) Section 78 provides 'mandatory' penalty for the cases involving reason of fraud or collusion or willfulmis-statement or suppression of facts or contravention of any of the provisions of Finance Act, 1994 or rules made there under with the intent to evade payment of service tax, where the notices have been served under the proviso to sub-section (1) of section 73.

(ii) It differentiated between the cases where transaction are recorded or not recorded in the specified records.

(iii) For the cases where transaction are not recorded in the specified records, penalty was equal to the amount of service tax determined. Further, no option for reduced penalty was available.

(iv) For the cases where transaction are recorded in the specified records, penalty was fifty per cent of the amount of service tax determined. Further, option for penalty reduced to twenty five per cent of the tax was also available, if tax, interest and penalty were paid within 30 days from the date of receipt of order.

(v) The above period was 90 days for the noticees whose value of taxable service was up to sixty lac rupees during the impugned period.

(vi) The last proviso provides for mutual exclusivity of section 78 and section 76. That is if penalty is payable under section 78, the provisions of section 76 shall not apply.

(vii) Provision for modification of penalty in cases of redetermination of appellate forums or courts was expressly provided.

(viii) The explanation provided for adjustment of any amount paid by the noticee before receipt of order.

(2) FEATURES OF PROPOSED SECTION 78:

(i) As earlier section 78 shall provide 'mandatory' penalty for the cases involving reasons given at (i) in the preceding sub-head 'Present Section 78' .

(ii) In the cases where such service tax and interest is paid within a period of thirty days of the-

a. date of service of notice, the penalty payable shall be fifteen per cent of the service tax demanded , only if such reduced penalty is also paid within such period.

b. receipt of the order of the Central Excise Officer determining the amount of service tax under sub-section (2) of section 73, the penalty payable shall be twenty-five per cent of the penalty imposed in that order, only if such reduced penalty is also paid within such period.

(iii) Provision for modification of penalty in cases of redetermination of appellate forums or courts is expressly provided under subsection (2).

(iv) The explanation providing for adjustment of any amount paid by the noticee before receipt of order has gone missing.

(3) IMPLICATION OF SUBSTITUTION OF NEW SECTION 78:

(i) The reasons for imposition of penalty are not diluted by the fact of recording of transactions in the specified records.

(ii) Penalty which earlier was up to 100% of the tax payable shall now be very low or on lower side upto an extent of 15% of the tax or in any case not more than 25% of the tax, if the noticee complies within the specified period

(iii) The absence of explanation providing for adjustment of any amount paid by the noticee before receipt of order is missing and this may create confusion. A clarification is urgently required.

(D) INSERTION OF SECTION 78B: PROPOSED SECTIONS 76 AND 78 TO APPLY TO SCNs ISSUED BEFORE THE DATE OF ASSENT OF PRESIDENT AS WELL (Clause 113 of the Finance Bill, 2015)

The newly inserted section 78B provides for transition application of proposed sections 76 and 78, which implies that the sections 76 and 78, as proposed by the Bill, shall be applicable even for the show cause notices issued before the date of assent of the President which have not been adjudicated. In layman terms, the section 78B transports the show cause notices issued before enactment of the Bill to the period after the enactment so as to apply newly substituted sections 76 and 78. These transitional provisions shall be available under sub-section (1)of section 78Bfor the cases where no show cause notice has been served under sub-section (1) of section 73 or under the proviso thereto, or where so served, no order has been passed under sub-section (2) of section 73. Also for the cases falling under present sub-section (4A) of section 73, such transitional provisions are similarly available under sub-section (2) of section 78Band in such cases the penalty leviable shall not exceed fifty per cent of the service tax.

(E) LAMENT ON OMITTED SECTION 80; BUT WAS THERE ANY FURTHER NEED? (Clause 114 of the Finance Bill, 2015)

Section 80 of the Finance Act, 1994 is proposed to be omitted vide clause 114 of the Finance Bill, 2015 on the date the Bill receives assent of the President.The said section 80 has had its more than two decade old journey.

The premise of section 80 was 'reasonable cause for failure'. The cause cannot be measured to be reasonable, it only depends upon the adjudicating authority's perception. Therefore, this always left with adjudicating authorities in dilemma either way, whether they intended to extend the benefit of section 80 or not.

So, while it hurts many that section 80 is gone, actually there remained no need for those discretionary provisions it provided after the welcome rationalization of penalties in sections 76 and 78.

(The views expressed are strictly personal.)