Not one to forgive easily?

Finance Minister P. Chidambaram introduced the Service Tax Voluntary Compliance Encouragement Scheme to entice more assessees to return to the tax fold, and generate a reasonable sum of tax revenue.

The scheme received paramount attention in the Budget speech. However, not so encouraging was the draft of the scheme containing several constraints and empowering the designated officer to reject the declarations of assessees.

Following the lukewarm response to the scheme, the Central Board of Excise and Customs (CBEC) issued two circulars to provide taxpayers the much-needed clarity on the scheme.

Service tax officers routinely issue summons or inquiry letters seeking information on business activities, without highlighting any issue or alleging non-payment or short payment of service tax on any specific transaction. Although the CBEC has clarified that a roving inquiry shall not be the basis for rejecting an application, the question of whether an inquiry is ‘roving’ or not is left to the designated officer’s discretion.

Further, the service tax authority, even in cases of roving enquiry, may require the company’s representative to be physically present to submit the information and/ or documents required. Thus, where summons are issued calling for documents or personal presence, can a person still be ruled out from the scheme?

There are contrasting views on this. According to one school of thought, any inquiry that does not emphasise on any particular issue should be considered roving and the assessee permitted to declare his/ her tax dues. However, another view holds that every summons is based on some information and, hence, the officer has the right to reject the application. The assessee is thus at the mercy of the tax officer to determine his/ her eligibility under the scheme, which may not persuade defaulters to opt for it.

Further, there are no specified timelines to complete the inquiry/ summons proceedings. Also, there is no communication from the tax authorities on closure of the inquiry/ summons, leading to taxpayers not opting for the scheme as they continue to believe the inquiry is pending against them.

In such cases, the amnesty scheme will fail to produce the intended outcome both for the Government and the assessees.

Greater clarity is needed to understand which notices qualify for rejection, and a time limit should be set for the pending inquiry or investigation. These measures can help persuade more taxpayers to participate in the scheme.

For example, if it is clarified that the scheme will be available to all assessees, and that the declaration would be rejected only when a summons or other letter issued highlights the defaulted area and the related tax dues, there will be more takers for it.

Further, industry is not unreasonable in expecting a defined timeframe to determine whether an inquiry is pending or not. A clarification addressing these key concerns will help dispel the ambiguity surrounding the scheme’s eligibility criteria.

The author is Partner – Indirect Tax, KPMG in India

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