Amendments to Section 91 of the service tax provisions mandate that in case where service tax is collected but not paid in excess of Rs 50 lakh, it will constitute a criminal offence which is cognisable (and presumably non-bailable till orders of bail are obtained from the Magistrate). This provision is a reflection of a similar customs provision introduced in last year’s Finance Bill. While this is non obstente provision we must not lose sight of the fact that in view of the Supreme Court, in revenue and fiscal matters of interpretation there should be no arrests.
The greatest impact of these provisions is likely to be felt in cases where an assessee recovers service tax but omits to pay it to the service tax department. An indirect and unintentional impact of this provision is that it is likely to impact such contracts where the consideration of services is recovered on an inclusive of tax basis. This is the typical format which is followed in large EPC contracts with public sector undertakings. It will be critical to appropriately draft the language of the tax clauses in such contracts to protect against any exposure under this new provision. Since the consideration is tested to be inclusive of taxes it may well be contented in a contentious case that the tax impact has been recovered but not paid.
This provision which impacts “life and liberty” issues needs to be very carefully implemented. The lurking danger of such a provision is that it may be misused when there are revenue shortfalls and tax officers are under pressure to meet revenue targets.
While hard measures are required to deal with wilful tax offenders, provisions such as these have a potential for misuse which can only be addressed by ensuring strong discipline in administering such provisions only in gross cases of wilful evasion or non-compliance.