FAQ On Penalty: In General & Service Tax in Particular

CA Lalit Munoyat

1) Why Governments Need Your Taxes (Basic Economic Arguments)?

Taxes are a major source of revenue for any country to fund the government expenditure and welfare of the society. In fact, they have been called the building block of civilization . In due course of time taxes started being levied on income, wealth ,sale of goods , provision of services etc. mainly to pay for increasingly more expensive defense efforts and for a modern welfare state. The emphasis is shifting progressively to voluntary compliance of tax laws.

The Apex Court in the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax & Others, – [1985] 60 STC 1 formulated the basic concepts of taxation as under:-

(a) The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy,

(b) The second is a clear indication of the person on whom the levy is imposed, and who is obliged to pay the tax,

(c) The third is the rate at which the tax is imposed, and

(d) The fourth is the measure or value to which the rate will be applied for computing the tax liability.

If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.

2) How the taxes are enforced ?

For levying a new tax a new law is required .It is generally perceived that the enactment of any law brings about two units in the society-

(a) The law-abiders and

(b) The law-breakers.

The levy of tax will be an exercise in futility, if the same is not backed by strong deterrence against tax evaders so that they do not go with impunity. There are three modes built in the fiscal legislation for encouraging tax compliance:

(a) Charge of Interest,

(b) imposition of penalty

(c) launching of prosecution against tax delinquents

While charging of interest is compensatory on character, the imposition of penalty and institution of prosecution proceedings act as strong deterrents against potential tax delinquents. The purpose of penal provisions in any statute are to transform or change these law-breakers to the group of abiders by levying penalty.

3) What is a Penalty for violations of tax provisions?

(a) A penalty is nothing but a sanction called against a person for a violation of the rules of law. It is the main disciplinary sanction available to the government to penalise those members of the society who commit deliberate infringements. In different legal systems the forms of penalty may be different but it may be observed that all arise out of some action or omission. Civil Penalty is designed to compensate the other party, who was damaged or injured in some way and it is exclusively monetary.

(b) Mens rea” is another important issue of penalty. It literally means a guilty mind while committing the offence. A person should be punished for deliberate defiance of law, rather than something which didn’t do intentionally or something which happened accidently etc. Mens rea is nothing but intention to commit the prohibited act. Taxation offences are statutory offences, and hence mens rea is not required. Supreme Court, High Courts and Tribunals have consistently held that mens rea is not an essential ingredient for imposing a penalty unless statute specifically prescribes so. The only thing which is required to be established is “deliberate act or omission prohibited by law”.

4) What are the penal provisions for various contraventions of the Service Tax Law?

5) Is there any provision to waive the penalty under Service Tax law?

Yes. Section 80 provides that no?Penalty under section 76, 77 or section 78 shall be imposable on the assessee for any failure referred to in the said provisions if the assessee proves that there was REASONABLE CAUSE for the said failure. Reasonable cause has not been defined in the Act or rules. But dictionary meanings, explanations, arguments and judgement of various courts of law has narrowed down the gamut of reasonable cause. Reasonable cause means, to believe that a person has committed an offense when evidence or information which appears reliable discloses facts or circumstances which are collectively of such weight and persuasiveness as to convince a person of ordinary intelligence, judgment and experience that it is reasonably likely that such offense was committed and that such person committed it.

The Burden of Proof is on the Taxpayer to Establish Reasonable Cause for waiver of penalty.

The following instances generally do not constitute instances of Reasonable Cause:-

(a) Taxpayer’s Responsibility to File Return and/or to Respond to Notice and Demand or Request for Information. This responsibility can’t be delegated to his staff. No Reasonable Cause

(b) A taxpayer’s reliance on a tax advisor : to file the return by the due date, to respond on the taxpayer’s behalf to a notice and demand and/or to reply to a request for information by the department is not reasonable cause.

(c) Difficulty in Obtaining Information or Documents Needed to File the Return, Respond to the Notice and Demand, Or Respond to the Request for Information. The fact that tax information is lost, lacking, inaccurate, or difficult to obtain is insufficient to meet the taxpayer’s burden of establishing reasonable cause. No Reasonable Cause

(d) Illness/Personal Difficulties of the Taxpayer/Work Pressures A taxpayer’s inability to file a return and/or respond to a notice and demand or request for information in a timely fashion because of the press of business affairs or work pressures is not reasonable cause: No Reasonable Cause

(e) Complexity of the tax law which leads to a delay in computing tax liability, and therefore a delay in filing the return and/or responding to a notice and demand or request for information, is not reasonable cause. No Reasonable Cause

(f) Taxpayer has the Burden to Show that the Notice and Demand or Request for Information was not mailed to the taxpayer’s Last Known Address. This may be treated as reasonable cause.

(g) Ultimate Determination by the department that there is no Tax Liability or the same has been met by credits or payments does not excuse the failure to file a return in response to a notice and demand: No Reasonable Cause

(h) The failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not “reasonable cause” for a late filing .

(i) Lack of necessary information to prepare the tax return.

(j) General overwork, stress, or health problems of either you or your tax return preparer.

(k) Ignorance of the law (extraordinarily complex tax concepts excluded)

(l) Financial hardship.

(m) Constitutional, religious, etc., objections. Philosophical arguments such as “the tax laws are unconstitutional” are consistently rejected as reasonable cause

6) What are the basic ingredience for penalty u/s 78 for evasion of service tax ?

Section 78 of the Finance Act, 1994 provides for levy of penalty for two specific default or offences, with the intent to evade the payment of Service tax: i.e.

(a) Suppression or concealment of value of taxable service.

(b) Furnishing inaccurate particulars of value of taxable service.

This penalty is rather a harsh penalty and equally harsher to enforce the same. The department has to establish that there is a positive act on the part of the defendant deliberately to avoid tax. The department must prove beyond a reasonable doubt that the the defendant willfully , voluntarily and intentionally violated a legal duty known to him with an intent to evade payment of tax.

The key word in the above is “willful.” This means that the acts of the accused were intentional and/or deliberate. However many a times penalty can be imposed on a preponderance of evidence and the department may not be required to meet the stringent condition beyond a reasonable doubt. The willfulness requirement is closely related to the affirmative act requirement because evidence of affirmative acts is often used to show willfulness. Thus, an act to evade tax must be a commission rather than an omission. Some of the omissions are:

(a) Filing false returns;

(b) Keeping two sets of books;

(c) Making false entries or alterations;

(d) Making false invoices or documents;

(e) Destroying books or records;

(f) Concealing assets or covering up sources of income;

(g) Handling one’s affairs to avoid making records usually kept for transactions; and

(h) Conduct where the likely effect would be to mislead or conceal.

7) Penalty is for what : Tax Avoidance or Tax Evasion ?

Tax avoidance is the legal utilization of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law.

By contrast tax evasion is the general term for efforts to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). An evasion of tax may be classified as under:

(a) Evasion proper;

(b) Attempted evasion;

(c) Acts done with intent to evade;

(d) Default in performance of a statutory duty with intent to evade.

All of the above offences are sometimes called `evasion’. But only offence (d) necessarily entails a breach of a specific statutory or regulatory term. Thus one may say:

8.) How should the Penalty be enforced ?

The penalty must be enforced only through principles of natural justice. These principles may be summarised as under (abstract obtained from the Lecture delivered by Justice T.S.Sivagnanam)

a) No man shall be Judge in his own cause:

Justice should not only be done but should manifestly and undoubtedly be seem to be done.

b) Both sides shall be heard, or audi alteram partem

It denotes that no one should be condemned unheard. This principle could be broadly classified as under.

i. Party to an action is prima facie entitled to be heard in his presence

ii. He is entitled to dispute his opponent’s case, cross examine his opponents witnesses and entitled to call his own witnesses and give his own evidence before Court.

iii. He is entitled to know the reasons for the decision rendered by a Court l.

iv. Person against whom an order to his prejudice may be passed should be informed of the charges against him.

v. Such person should be given an opportunity of submitting his explanation which also include the right to no the oral and documentary evidence which are to be used against him.

vi. Witnesses who are to give evidence against him be examined in his persons with right to cross examine them.

vii. To lead his own evidence both oral and documentary, in his defense.

viii. The parties to a proceedings must have due notice of when the Court / Tribunal will proceed

ix. The Court must act honestly and impartially and not under the dictation of other persons to whom authority is not given by Law.

Disclaimer: This article is meant for general purpose knowledge only . Refer to actual legal provisions before acting on the basis of this article.

Compiled by:

CA LALIT MUNOYAT

B.Com.(Hons.), CS, FCA, DISA

munoyat@gmail.com

98201 93508

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