Dr. Sanjiv Agarwal

Finance Act, 2013 has inserted new penal provisions in Service Tax which make certain defaults or offences as cognizable and certain others non-cognizable and bailable. The offences are punishable with monetary fine as well as imprisonment which may be extended upto a period of seven years. An arrest could be made under Code of Criminal Procedure.

Any offence resulting in failure to deposit Service Tax to the credit of Central Government where amount exceeds Rs. 50 lakh within six months of due date is a cognizable offence which may result in an improvement upto seven years. In case of defaults such as willful tax evasion, wrong availment or utilization of credit, falsification of books of accounts or false supply of information to the Department, the offences are considered as non-cognizable and bailable and bail can be granted.

While in a bailable offence, granting of bail is done in normal course whereas in case of non-bailable offence, an arrest can be effected, even for the purpose of investigation implying that offenders detention is discretionary. The offences where detention may not be warranted are bailable offences.

The new changes in Service Tax law also provide for power to arrest. Commissioner of Central Excise is empowered to authorize any officer of Central Excise not below the rank of Superintendent of Central Excise, to arrest a person for specified offences, particularly non-payment of collected service tax.

While the punitive arrest powers may be considered as regressive leading to harassment of service providers, it would result in two things – one good, i.e. increase compliances and two bad, may increase litigation. The key to effective implementation would lie in distinguishing between willful and genuine defaults. The lacuna here is that arrest could be made at the beginning of the proceedings itself, the investigation may follow.

All said and done, stringent law is required and at the same time some people will still be non-compliant. The law is for such people only. In order to mitigate the arrest, some of the possible measures to avoid arrest are suo moto compliance, getting conducted an independent due diligence exercise by some professional, promptly attending to notices and summons issued by the Department, ensuring timely and full payment of Service Tax and not to use taxes for working capital requirements and strengthening internal process and controls to avoid unintended failures.

While one should take aggressive tax positions with utmost care keeping the risk management principles in mine, it is also desirable to get in touch with the Department, if delay / default is expected.

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February 2024