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CA Pradeep Jain, CA Preeti Parihar, CA Neetu Sukhwani


Beware if you are the one illicitly holding the government revenue!!! Government is all set to severely punish the people contravening the provisions of Finance Act, particularly, when one collect the service tax and fails to deposit the same to government exchequer. Where the amount involved in such offence exceeds Rs. 50 lacs, the offence has been made as cognizable and non-bailable and imprisonment in such cases may extend to 7 years. Besides this vital amendment, separate provision has been prescribed for imposition of personal penalty on directors of the company. Amongst harsher penal provisions, one relaxation is given by reducing the quantum of penalty in case of failure to take service tax registration. This article broadly covers the amendments in penal provisions pertaining to service tax.


  • Background:-

Before introduction of the section 78A as proposed in the Finance Bill, 2013, there was no specific provision of penalty on the director when a company committed any contraventions of the Act. Thus, it was a common pleading made by the director/manager/secretary that when penalty has been imposed on the company, penalty should not be imposed on the director under residuary clause specifying general penalty. It was contended that the law makers does not intend to impose the penalty on the director for the same contravention as that of company and due to this there is no specific provision for the same. Now, the introduction of section 78A has left no room for the assessees to plead this contention.

  • Provision inserted:-

This section has listed out specific contraventions committed by the company wherein penalty can be imposed on the directors. The contravention mentioned in the section has been detailed as follows:

a. evasion of service tax; or

b. issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of this Chapter; or

c. availment and utilisation of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of this Chapter; or

d. failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due,

It has been stated in this section that if any of the above contraventions have been committed by the company then any director, manager, secretary or other officer of such company, who at the time of such contravention was in charge of, and was responsible to, the company for the conduct of business of such company and was knowingly concerned with such contravention, shall be liable to a penalty which may extend to one lakh rupees.

  • Implications:-

This provision has taken a strict approach so as to impose personal penalty on the officers of the company that are involved in the specified contraventions. This provision will bring them within the ambit of the specific penal consequences as company being principally managed by them, they ought to be more vigilant and act in a legal manner. Moreover, this section specifies the contraventions in a very broad manner so as to be able to include almost every contravention committed by the company with respect to evasion of service tax even when only four clauses have been specified regarding the kind of contraventions. By this provision, the directors, managers, secretary and other officers of the company are required to be careful so as to be able to prove that they were not knowingly and intentionally involved in the contravention committed by the company.

Moreover, on analysing the position before introduction of this section, it can be very well concluded that the scenario before and after the proposed section continues to remain the same as there have been a number of judicial pronouncements before introduction of this section wherein it has been held by the appellate authorities that penalty should not be imposed separately on the directors where his active involvement in the duty evasion could not be proved with sufficient and appropriate evidence. One of the decisions given by the Hon’ble Uttarakhand High Court in the case of Commr. of C.Ex.,Meerut-I vs Vision Mattel Aids Pvt. Ltd. [2011 (264) E.L.T. 323 (Uttarakhand)] is worth mentioning wherein it was held as follows:

“Penalty on Director of company – Personal penalty – In absence of evidence to prove his involvement in evasion of duty by company, he could not be held liable to penalty under Rule 209A of erstwhile Central Excise Rules, 1944 – Rule 26 of Central Excise Rules, 2002. [para 5]”

Therefore, the situation, more or less remains the same and even after the introduction of this specific section of penalty on directors, penalty cannot be imposed on them if they are not found to be knowingly and intentionally involved in the listed contraventions committed by the company.


This section has undergone vital change in Budget, 2013. It has been proposed that the offence where a person collects the service tax but not deposits the same to government exchequer, should be made cognizable and non-bailable. Imprisonment in such cases should also be extended to seven years. Besides this, certain more amendments have been made in the section 89 which are summarized in the following table:-

S. no. Offence u/s 89 Condition Imprisonment Imprisonment on second & subsequent defaults Cognizable or non- cognizable
1 Knowingly evades payment of Service tax Amount exceeds Rs. 50 lacs 3 years ** 3 years non- cognizable
2 Avails & utilizes credit of taxes without actual receipt of inputs/ services, whether partly or fully Amount exceeds Rs. 50 lacs 3 years ** 3 years non- cognizable
3 Maintains false books or fails to supply any information or supplies false information Amount exceeds Rs. 50 lacs 3 years ** 3 years non- cognizable
4 Collects any amount as service tax but fails to pay the same to government exchequer within 6 months of due date. Amount exceeds Rs. 50 lacs 7 years ** 7 years Cognizable
5 Any other offence 1 year 3 years non- cognizable

 ** Provided that in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the court, such imprisonment shall not be for a term of less than six months;

  • Procedure to be followed in case of suspicion:-

(i) If the Commissioner of Central Excise has reason to believe that any person has committed any of the offence listed in above table from serial no. 1 to 4, he may, by general or special order, authorise any officer of Central Excise, not below the rank of Superintendent of Central Excise, to arrest such person.

(ii) Where a person is arrested for any cognizable offence, he should be informed of the grounds of arrest. Also, he should be produced before a magistrate within twenty-four hours.

(iii) Where the arrest is for a non-cognizable and bailable offence, the power on bail or otherwise should be vested in Assistant/Deputy Commissioner. Further, he shall be subject to all the powers and provisions as given to incharge of police station under section 436 of the Code of Criminal Procedure, 1973.

(iv) The provisions related to arrest shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973.

On perusal of the above provisions, it is observed that Government has considered the offence of collecting the amount as service tax but not depositing the same to the government exchequer in specified cases as the most serious offence. This offence may attract imprisonment to the extent of seven years and further provision of imprisonment to the extent of seven years if the same offence is committed subsequently. Also this offence has been made cognizable and non bailable. It is worth mentioning here that before this provision, the offences under Central Excise, which are inherited to Service tax also, were non-cognizable and bailable by virtue of Supreme Court judgment in the case of Om Prakash vs. Union of India [2011 (272) E.L.T. 321 (S.C.)]. By inserting the above referred provisions, the government seeks to nullify the effect of larger bench judgment of Supreme court in this case wherein it was held that the offences under the Central Excise and Customs Act are non-cognizable and bailable.


On one hand, a strict approach has been taken by the law makers by making a provision to penalize the directors and other officers of the company for the default committed by the company and by amending section 89 but on the other hand, a lenient view has been taken with respect to the penalty under section 77(1)(a) imposed for failure to take registration. Earlier, the provision in respect to penalty under this section contained as follows:

Any person,- who is liable to pay service tax, or required to take registration, fails to take registration in accordance with the provisions of section 69 or rules made under this Chapter shall be liable to pay a penalty which may extend to [ten] thousand rupees or two hundred rupees for every day during which such failure continues, whichever is higher, starting with the first day after due date, till the date of actual compliance.

With the amendment of this section, now the penal provisions are proposed to be as follows:

Any person, who is liable to pay service tax or required to take registration, fails to take registration in accordance with the provisions of section 69 or rules made under this Chapter shall be liable to a penalty which may extend to ten thousand rupees.

Thus, it is observed that a ceiling limit has been imposed on the penalty that penalty under this clause cannot exceed ten thousand rupees as the law makers would also have realised that such a harsh penalty is not warranted in the event of failure to take registration as when there is failure to pay service tax, there are already strict penalties in force. This amendment is welcomed by all the assessees and is also appreciated.

While winding:-

There is only one relaxation that has been given in respect of penal provisions and that too for failure to take service tax registration. However, two severe provisions have been inserted in the offences and penal provisions, thus, ultimately, the Budget, 2013 has made the non-compliance of service tax law as harsher. So, be quick in paying the service tax as quickly you collect and be loyal even to the smallest provision of the service tax law. If not, penal provisions including the prison are ready to embrace you.

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June 2024