Hard truths about service tax

Until leakages are plugged, what you pay may not reach the government

s-krishnan

S Krishnan | August 12, 2015



Service tax is a tax levied on providers of certain service transactions (excluding specified exempted categories). Service providers pay the tax and recover it from customers. It is charged to individual service providers on cash basis, and to companies on accrual basis. This tax is payable only when the value of services provided in a financial year exceeds '10 lakh. As has been mentioned in certain quarters, one could hardly step out of the house without encountering a service on which tax is not leviable!

As the service tax rates have been increased from 12 percent to 14 percent from June 1, it will be interesting to note some hard facts about the assessment, collection and administration of service tax for the financial year 2013-14 as contained in the CAG’s report, laid on the table of the house on May 5. While earlier service tax attracted a surcharge of 3 percent, and actually worked out to 12.36 percent, the present increase comes with a sop of absorbing the surcharge in the new rate of 14 percent.

As many as 104 field offices of the central board of excise and customs (CBEC) function under the respective chief commissioners of 23 central excise and service tax zones. Seventy-seven of these offices (seven exclusive for service tax, 66 integrated central excise and service tax and four large taxpayer unit, LTU, offices) are involved in assessment, collection and administration of service tax across the country with a total staff strength of 68,793 as on March 31, 2014. Besides, the government constituted the office of the director general of service tax (DGST) as a subordinate office in 1997 to coordinate service tax related work.

According to the provisional figures, the service tax collection during 2013-14 was '1,54,780 crore. It was observed that actual collection fell short of the budget estimates by 14.08 percent. Further, while the collection against the arrears of '20,361 crore at the beginning of FY13 was '2,332 crore (11.4 percent), the collection against the arrears of '39,557 crore during FY14 was only '1,232 crore (3.12 percent), indicating that while the arrears had increased considerably the recovery rate had fallen drastically. It is, however, important to note that in almost all cases of arrears, the service tax would already have been collected by the service provider from the service receiver.

Details of revenue foregone for direct taxes and other indirect taxes such as central excise and customs are traditionally laid before parliament each year during the respective budget, commencing with the budget of 2006-07. However, the revenue foregone in respect of service tax is not available in the budget documents. This, as observed by the CAG, would imply that the department would not be in a position to do a gap analysis.

CBEC has prescribed detailed scrutiny to cover only certain selected service tax returns (2 percent), identified on the basis of risk parameters, developed from the information furnished in the returns submitted by the taxpayers. Hence, the total number of returns to be scrutinised in a whole year would be very low in respect of any range, as for example the total number of cases for scrutiny were only 44,045 across all ranges (2,272) as on March 31, 2014. It was observed that as against 44,045 returns marked for detailed scrutiny during FY 14, only 16,201 returns had been scrutinised, leaving a balance of 27,284 returns as of March 31, 2014. Of these, 12,974 returns were pending for periods between six months and one year, 5,174 between one and two years and 17,636 for over two years. The data of age-wise analysis of pendency furnished was also not found to be correct. It was also observed that 19,925 cases of adjudications involving revenue implication of over '31,000 crore were pending finalisation as on March 31, 2014. Of these 758 cases involving '1,062 crore were pending for more than two years. It also came to notice that despite automation and extensive use of ICT, cost of collection continued to show a rising trend.

Scrutiny of service returns through test check by audit revealed that

  • Out of 2,45,240 returns receivable during 2011-12 and 2012-13 only 1,39,349 (57 percent) returns were received in the selected chief commissioners’ offices.
     
  • 1,05,891 (43 percent) returns were not received at all. Identification of non-filers/stop-filers has also been listed as one of the purposes of preliminary scrutiny in para 1.2.1 of the manual for scrutiny of service tax returns, 2009. However, the department did not identify non-filers/stop-filers.
  • Out of 1,39,349 returns, 8,091 were filed belatedly in the audited units during 2011-12 and 2012-13. No action was, however, taken by the department in cases of delayed filing of return.
     
  • A test check of 865 returns received belatedly revealed that '31.65 lakh were due to the government as late fee.
  • Out of 1,39,349 returns received in 2011-12 and 2012-13, only 121 returns were scrutinised by the selected offices, which is less than 0.1 percent of the total returns received.
     
  • Non/short payment of service tax and interest of '41.03 crore in respect of 56 cases came to notice during a test check, out of which, in 19 cases a recovery of '1.07 crore was effected.


The above examples as also other findings by audit showed that CBEC’s expectation that with the introduction of online automated scrutiny of returns, efficiency would increase and manpower would be released for detailed scrutiny, which would become the core function of the ranges, could not be achieved. Thus, the actual situation in the field left much to be desired and showed that a lot more effort was needed before scrutiny of assessments could claim its place as the core function of the ranges. Further, during the course of audit, several instances of non-compliance with rules and regulations such as non-payment and short-payment of service tax, irregular availing of cenvat credit on ineligible invoices, non-levy of interest on delayed payment of service tax, service tax collected but not deposited into government account, short levy of service tax due to misclassification, short payment of service tax due to undervaluation, etc., amounting to several lakhs, were also noticed.

This summary of the CAG report reveals that one cannot but feel cheated when several crores of service tax collected from the public have not reached the coffers of government but are merrily lying with the service providers. While one can appreciate the need for the government to raise resources through taxes, we as citizens have a right to expect that the taxes paid by the public in good faith, as indirect taxes, do reach the government coffers and are not allowed to become a source of enrichment for unscrupulous private business entities.

In fact, when the service tax was first introduced, there was no constitutional backing for it and an amendment was needed to include it in the relevant list to legalise the levy. It is high time the government took strong measures to plug the huge leakage of revenue as pointed out or ensure some other secure system to raise resources. However, we are now facing a situation when not only the rate of service tax has been increased but also the move comes with an ever shrinking exempted category.

The findings about the pitfalls in the assessment, collection and administration of service tax should serve as a timely warning to the government ahead of the enactment and implementation of the goods and services tax (GST) bill. There are already intensive discussions on the pros and cons of GST, but regardless of its merits and demerits, unless a robust machinery is put in place to prevent such large-scale leakages, as in the case of service tax, it may not prove to be such a panacea for economic reform as it is touted to be. The public is entitled to know in clear, unambiguous and easily understandable language the full implication of the tax, in terms of who is authorised to collect such indirect tax, at what stage, at what rates and on what goods and services, as also the foolproof steps put in place for its assessment, collection, administration as well as its transparent accounting and utilisation by the centre and the states.

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