Thursday, 10 December 2015

Penalties under Service Tax Law

Finance Act 2015 has drastically amended the penalty provisions under the Finance Act 1994 (Service Tax law) in order to ensure nondiscriminatory form of penalties. Earlier penalties u/s 76 (for short payment of S/Tax) and u/s 78(Suppression of facts) used to be at Rs 100/- per day or 1% per month whichever is higher. This lead to the number of litigation upon the calculation of penalty. Finance Act 2015 has amended the same and the new provisions have been laid down. Summary chart of the new provisions is as follows:

Old Provisions
New Provisions w.e.f 14.05.2015

u/s 76 (No Fraud)
u/s 78 (Fraud)
100 Rs per day or 1 % per month from the date of default.
Nondiscretionary Minimum Penalty of 10% of Service Tax Liability.
Nondiscretionary Minimum Penalty of 100% of Service Tax Liability.
Maximum ceiling
50% of the tax liability
No maximum ceiling, implied 10%.
No maximum ceiling.
Waiver of Penalty
No Waiver – Penalty could be dropped on grounds of reasonable cause u/s 80.
Complete waiver if service tax + Interest is paid within 30 days of date of service of notice.
Waiver of 85%, if Service Tax + Interest + 15% Penalty is deposited within 30 days of service of notice.
Relaxation in Penalty after the order.
No relaxation
75% penalty is waived if Service Tax + Interest is paid within 30 days of the order.
75% penalty is waived Service Tax + Interest + 25% Penalty is paid within 30 days of the order.

It should be noticed that section 80 which provided for waiver of penalty under reasonable causes was first introduced in Finance Act 2012 and the same has been withdrawn by Finance Act 2015 with the introduction of new provisions u/s 76 && 78 of Finance Act 1994.
It is well established fact under Service Tax Law that penalty cannot be levied without the issue of Show Cause Notice(SCN) to the assessee. Since the Finance Act 2015 has been enforced from 14.05.2015, there are three different scenarios possible under which the penalty provisions can be enforced, the details of which are as follows:
Applicable Provisions
SCN issued after 14.05.2015
New Sections 76 & 78 shall apply
SCN issued before 14.05.2015 but order passed after 14.05.2015
New Sections 76 & 78 shall apply as per the transitory provisions of Section 78B introduced by Finance Act 2015
Order in original issued before 14.05.2015
Old Sections 76 & 78 shall apply subject to reasonable cause u/s 80.

CA Keshav Garg

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