Service tax has become a major source of revenue to the government. Service tax being complicated on many issues and interpretation often lead to litigation. Government has also expanded the service tax department considerably to stop and find out tax evasion. Knowingly or unknowingly, if one remains fail to comply with the service tax provisions, then there are penalties provisions. The main provision of penalty is covered under Section 76 & 78 of the Finance Act, 1994. These sections have been amended by Finance Bill, 2015 to rationalize the penalty. The amended provisions are compiled by me in following paragraph.
Penalties under section 76 of the Finance Act, 1994:
This section is used to levy penalty when service tax has been:
- not levied; or
- not paid; or
- short levied; or
- short paid; or
- erroneously refunded.
without any intention of evading payment of service tax due to any reason except the following reasons (hereinafter referred as service tax evasion with malafide intention):
- fraud; or
- collusion; or
- willful mis-statement; or
- suppression of facts; or
- contravention of any provisions or rules.
Therefore, if the service tax is evaded without any malafide intention then section 76 is applicable. The burden of proof is on the assessee that service tax is evaded without any malafide intention on his part. The penalty provision under section 76 is as follows:
SITUATION 1 :
SCN (Show Cause Notice) is issued and service tax is PAID along with due interest within 30 days of service of SCN:
No Penalty is levied and proceedings deemed to be concluded. It is very favorable to the assessee as no penalty need to be paid. A genuine taxpayer will be benefited from this.
SITUATION 2 :
SCN as well as order have been issued and service tax along with due interest is NOT PAID within 30 days receipt of order:
Penalty Quantum : Maximum penalty is 10% of the service tax evaded. Therefore assessee has to pay maximum penalty of 10% of service tax evaded. It is to be noted here that section 76 provide only upper limit of penalty. Therefore, penalty amount can be less than 10%.
Example : If service tax evaded along with interest comes to Rs. 10,00,000/- and the same is not paid within 30 days of receipt of order then maximum penalty will be Rs. 1,00,000/-, i.e., 10% of 10,00,000/-. However, penalty amount can be less than Rs. 1,00,000/- since no minimum penalty is prescribed by Section 76.
SITUATION 3 :
SCN as well as order have been issued and service tax along with due interest and reduced penalty is PAID within 30 days receipt of order:
Penalty Quantum : Maximum penalty is 25% of the penalty as prescribed in the order. Since maximum penalty u/s 76 is 10%, therefore assessee need to pay maximum penalty of 2.5% of service tax evaded. It is also very beneficial to the assessee.
Example : If service tax evaded along with interest comes to Rs. 10,00,000/- and the same is paid along with reduced penalty within 30 days of receipt of order then maximum penalty will be Rs. 25,000/-, i.e., {(25% of 1,00,00) (10% of 10,00,000/-)}. However, penalty amount can be less than Rs. 25,000/- since no minimum penalty is prescribed by Section 76.
SITUATION 4 :
Where demand of service tax is increased or decreased by any appellate authority:
Benefit of reduced penalty, i.e., only 25% of penalty amount, will be available to the assessee if the tax along with due interest and reduced penalty is paid within 30 days from the date of order of appellate authority.
It is to be noted that in situation 3 the period is within 30 days of receipt of order while in situation 4 the period is date of order. It might be technical error in law as assessee receives order generally after many days from the date of order and as per current law if assessee receives order after 30 days from the date of order then he cannot take benefit of reduced penalty. It will be prejudicial to the assessee.
Penalties under section 78 of the Finance Act, 1994:
This section is used to levy penalty when service tax has been:
- not levied; or
- not paid; or
- short levied; or
- short paid; or
- erroneously refunded.
with the intention of evading payment of service tax due to following reasons (hereinafter referred as service tax evasion with malafide intention):
- fraud; or
- collusion; or
- willful mis-statement; or
- suppression of facts; or
- contravention of any provisions or rules.
Therefore, if the service tax is evaded with any malafide intention then section 78 is applicable. But if assessee proves that there is no any malafide intention then section 76 is applicable.
SITUATION 1 :
SCN (Show Cause Notice) is issued and service tax is PAID along with due interest and reduced penalty within 30 days of service of SCN:
Penalty Quantum : 15% of service tax amount evaded is levied and proceedings deemed to be concluded. It is favorable to the assessee as very lower penalty need to be paid.
SITUATION 2 :
SCN as well as order have been and service tax along with due interest is NOT PAID within 30 days receipt of order:
Penalty Quantum : Penalty is 100% of the service tax evaded. It is to be noted here that unlike section 76, this section neither prescribe upper limit nor lower limit but exact 100% penalty of service tax evaded. It is the most dangerous situation to the assessee as penalty in no way can be less than 100%. It is further to be noted that government has omitted Section 80 of the Finance Act, 1994 w.e.f. 14.05.2015. Therefore, now assessee cannot in any way escape from 100% penalty even if he proves that there was reasonable cause for default or failure.
Example : If service tax evaded along with interest comes to Rs. 10,00,000/- and the same is not paid within 30 days of receipt of order then penalty will be Rs. 10,00,000/-, i.e., 100% of 10,00,000/-. It cannot be minimized or maximized in any way.
SITUATION 3 :
SCN as well as order have been issued and service tax along with due interest and reduced penalty is PAID within 30 days receipt of order:
Penalty Quantum: 25% of the service tax evaded as determined by the adjudicating authority in the order. It is also beneficial to the assessee as assessee can save compulsory penalty equivalent to 75%.
Example : If service tax evaded along with interest comes to Rs. 10,00,000/- and the same is paid along with reduced penalty within 30 days of receipt of order then penalty will be Rs. 2,50,000/-, i.e., (25% of 10,00,00/-).
SITUATION 4 :
Where demand of service tax is increased or decreased by any appellate authority:
Benefit of reduced penalty, i.e., only 25% of service tax amount, will be available to the assessee if the tax along with due interest and reduced penalty is paid within 30 days from the date of order of appellate authority.
It is to be noted that in situation 3 the period is within 30 days of receipt of order while in situation 4 the period is date of order. It might be technical error in law as assessee receives order generally after many days from the date of order and as per current law if assessee receives order after 30 days from the date of order then he cannot take benefit of reduced penalty. It will be prejudicial to the assessee.
Summary : Comparison of Section 76 & 78:
| Basis of difference | Section 76 | Section 78 |
| Time period to issue SCN from the relevant date | 18 months | 5 years |
| Malafide intention, i.e., fraud etc. | Must not be present | Must be present |
| Penalty when Service tax is paid along with interest and reduced penalty within 30 days of service of SCN | No Penalty | 15% of service tax |
| Penalty when Service tax is paid along with interest and reduced penalty within 30 days of service of order | 25% of penalty as mentioned in order | 25% of service tax |
| Penalty when Service tax is not paid along with interest within 30 days of service of order | Maximum 10% penalty of service tax evaded | 100% penalty of service tax evaded |
| Benefit of reduced penalty if demand of service tax is modified by appellate authority | Available if service tax is paid along with interest and reduced penalty within 30 days from the date of order of appellate authority | Available if service tax is paid along with interest and reduced penalty within 30 days from the date of appellate authority |
| Benefit of section 80 if reasonable cause is shown by assessee for default or failure | Not available as section 80 is omitted w.e.f. 14.05.2015 | Not available as section 80 is omitted w.e.f. 14.05.2015 |
One shall strictly comply with the service tax provisions as penalty is very harsh. It is almost difficult to prove that there was no malafide intention as in most of the cases department invokes section 78 and assessee need to pay 100% penalty in such cases. It is to be noted that benefit of Section 80 is not further available as Government has omitted this section w.e.f. 14.05.2015. Thus even if there is reasonable cause for failure or default assessee need to pay the penalty. There is no discretion of tax authorities to waive or minimize penalty and penalty is mandatory in nature.
CA Vineet Rathi Proprietor of M/s Vineet Rathi & Associates
Treasurer – Ghaziabad Branch of CIRC of ICAI
Visiting Faculty of ICAI
ACA, DISA (ICAI), LL.B., M.Com
A-370, New Panchwati Colony, Ghaziabad, U.P. – 201001
Mobile : 9717724704
E.Mail : cavineetrathi@gmail.com
As per Section 76, if Service tax and interest thereon are paid before issue of SCN, then no penal action can be taken. But, the Article is silent as to whether penalty @ 15% has to be paid in case of Section 78 if Service tax and interest are paid before issue of SCN. Kindly clarify.
Very good expalanation Sir.
To the best of my knowledge, the burden to prove the intention of the person in the case of suppression etc with intention to evade the payment of tax for which penalty is to be imposed under section 78 of the Act, lies on the alleger, i.e. the department.
We are not under GST Act. it is an members association Under trade union ACt 1960. Service Tax Commissioner sent order to us.
We paid amount to lawyers for their retainer ship..
tell me how to give answer service tax department. It is an writer association.
what will be date of SCN the date of receipt of notice or the date mentioned in the notice
Dear sir,
U/s 78 of Finance Act,1994 reduced penalty @ 15% on Service Tax is available.
Here my doubt is, Service Tax means before taking Cenvat Credit or after taking Cenvat Credit ?
Regards.
Kiran Kumar V
In case of Fraud assessee if the Service tax is enhanced from say Rs.10 Lacs to Rs14 Lacs. What will the amount of penalty payable if payment made within 30 days of appellate order.
Thank you so much for clear explanation of Penal provisions.Sir kindly let me know whether penalty is charged 10% or 100% as the case may be, is merely on the amount of Service tax or service tax including interest?
suppose X got manpower supply contract from state govt.They use to deduct service tax from the bills of service provider. Is it mandatory to file service tax returns regularily. Let me know in detail with case laws if any
I have raised full payment invoice and have raised Service tax to my client.
Now the project is cancelled. However my client has paid me service tax while paying payment.
Kindly suggest while returning the amount to my client do I need to deduct service tax amount?
I have received advance on 16th Nov. do i have to pay Swatchh brarat cess:
Warm regards,
Well explained writing. Thanks.
Thank you sir
Example : If service tax evaded along with interest comes to Rs. 10,00,000/- and the same is not paid within 30 days of receipt of order then penalty will be Rs. 10,00,000/-, i.e., 100% of 10,00,000/-. It cannot be minimized or maximized in any way. So , penalty has to be paid on interest also?. Nice article.
A really Nice & Informative article.
Keep it up.
A well detailed article.