In cases where the taxpayer has collected service tax of Rs 50 lakh or more and not deposited it for over six months, there can be arrest without a warrant.

One of the key aspects discussed extensively after Budget 2013 is the newly introduced ‘Power to Arrest’ under service tax regulations. Reaction from industry was on expected lines, suggesting that a civil regulation such as taxation did not warrant an ‘arrest’ provision, as pecuniary disincentives are sufficiently weaved into the framework.

First of all, it is important to understand the changes and the questions they raise.

To begin with, prosecution provisions were reintroduced in service tax in 2011 as additional deterrents for serious offences. The arrest provision is a superimposition, where evasion exceeds Rs 50 lakh in matters liable for prosecution.

As such, prosecution applies if the taxpayer maintains false books, or takes credit on false invoices, or knowingly gives false information to Revenue authorities, or collects tax but does not deposit it with the exchequer for six months. These are clearly cases with intent of fraud or wilful violation of regulations. Prosecution can also be initiated when there is failure to supply information required by an officer, or evasion of service tax. These are much wider than the earlier examples and there could be cases where there is no intent or plan to defraud Revenue, and it is mere failure to act on time.

For example, what is “knowingly evades payment of tax” can be subjective. While there was an uproar when these prosecution provisions were introduced, given that fraud should be proven under CrPC, or Criminal Procedure Code, it was felt that the criminal investigation process should clearly demonstrate the lack of intent to falsify or deceive, and, therefore, genuine taxpayers may not be impacted.

With the ‘power to arrest’, the equation would change, perhaps substantially. Now, even in cases where the Tax Commissioner sees a deliberate attempt by the taxpayer to evade taxes, he/she can issue arrest orders, creating a serious threat for an otherwise bona fide case. This, clearly, could be a cause for concern, as arrest can be made at the beginning of the proceeding itself, and the investigation would follow later.

There is clearly a need for a detailed guideline for testing cases before arrest warrants are issued. Otherwise, hypothetically a mere delay in submission of requested information beyond what the Commissioner (or his subordinate) considers reasonable can trigger arrest — which is completely unwarranted and excessive.

In cases where the taxpayer has collected tax of Rs 50 lakh or more and not deposited it for over six months, there can be arrest without a warrant. It is difficult to understand the need for such provisions. Revenue may need such powers under Customs, in cases such as smuggling, where offenders need to be brought to book immediately. Typically, a service provider in all probability would have established an office and would otherwise be traceable. Also, do service tax authorities have the infrastructure to take custody of offenders? Handing over to police may be too rough for alleged economic offenders, even before the charge is proved.

For businesses, it is important to prepare for this proposed change. Persons impacted would be directors, managers and officers in charge. Companies should regularly generate reports tracking critical information such as taxes collected but not deposited. Similarly, summons or requests for information should be attended to promptly. Where delay is anticipated, taxpayers should adequately engage with the Revenue and document the reasons. Periodic reviews may be needed to identify aggressive tax positions, and processes may be required to disclose the positions to Revenue. Internal controls should be strengthened and processes automated to reduce unintended failures.

Clearly, the ‘power to arrest’ could have significant ramifications. It is interesting to note that in 1998, prosecution provisions were removed from the statute as service tax was a new law then. Will the same benefit be extended once again, given that the negative list was only recently introduced (in 2012)? It remains to be seen whether the existence of such provisions will result in better tax compliance. It is hoped that this power is not used by Revenue to coerce taxpayers to admit tax liabilities in order to avoid arrest. It is important for taxpayers to prepare for this new ‘normal’.

Tax Partner, Ernst & Young

(This article was published on April 7, 2013)
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