The government has no legal support to insist that people pay up service tax, even though it is due. This was good enough reason for finance minister P Chidambaram to be hassled about service tax trends through most of FY14. This is because, unlike other taxes, say excise and customs, the indirect tax department has faced a string of court censures whenever it has tried to make people pay up their dues quickly.
The entire problem has a lot to do with the lack of trained tax personnel to fill up the customs and excise settlement tribunal, and the inadequate number of such tribunals. As a result, there is a pendency of a massive 1.2 lakh-and-growing cases in the Customs, Excise and Service Tax Appellate Tribunal (CESTAT). Almost all of these cases have a common origin. Every time the indirect tax department moves in against a business to pay up service tax, it hits a wall. There is a Supreme Court order from 2005, in a case known as the Kumar Cotton case, that says no tax money can be extracted through use of state power (in terrorem).
The numbers are not chicken feed. Service tax is the fastest growing one among the five major central taxes. The others are personal income tax, corporation tax, excise and customs duty. As per the budget data in FY14, service tax is expected to grow by almost 36%. This is far higher than the 19% rate at which the overall tax revenue is expected to grow in FY14.
The court order effectively said that if anyone served with a service tax demand felt it was unjustified, she had the right to move the CESTAT for a stay.
The fun starts thereafter. The CESTAT is supposed to hear and dispose off these appeals soon. Only when it cannot do so, should it give a stay on the demand, but the matter is to be heard within 180 days. However, remember the number of cases pending we mentioned earlier There is not even a ghost of a chance the 180-day period will work. So, the tribunals routinely give a stay that extends across years.
The Supreme Court ruled in this case that stays beyond the 180-day period will be held to be in order if there is a genuine reason for them. A delay because of a backlog is surely a very valid reason. The sub-section which was introduced in terrorem cannot be construed as punishing the assesses for matters which may be completely beyond their control. Occasionally by reason of other administrative exigencies for which the assesses cannot be held liable, the stay applications are not disposed within the time specified. The department has no chance to counter this argument.
So, when a tax demand is raised, those affected immediately move the CESTAT, quoting the order. Typically, those who take this route are those whose dues are large. The system, therefore, has created a perverse incentive to reward the big fish with the legal alley to slip through.
Since there is a shortage of tribunals as well as of officers to act as judges, the pendency rarely goes down. The service tax arrears mount.
But what if the government were to try and demand that some or all of the tax has to be paid even if kept in an escrow purse for the stay to work The government has tried this approach twice, in the last fiscal and this one. In other words, it has tried to get around the Supreme Court observation that state power should not be used to extract taxes without giving the citizen a democratic right to make her position heard.
In January 2013, the Central Board of Excise and Customs (CBEC) issued a circular asking the department officers to raise service tax demand. It was also included in Budget 2013. The section read in case the appeal is not so disposed of within the total period of three hundred and sixty-five days from the date of order referred to in the first proviso, the stay order shall, on the expiry of the said period, stand vacated.
This meant even in case when there is no fault of the assessed, the demand would hold.
This worked for a time till someone went to court. In nine orders from different high courts, the departments circular was shot down. But there was a leeway as the circular was not a general one and so the court orders, too, were applicable only to specific cases which came up before it. So, again, the big fish have benefited.
In October last year, the CBEC again revived the circular, around the same time when it launched the VCES. There is no general Budget planned till the middle of this year. It will be interesting to see if the government plans to issue an update in the Vote on Account, meanwhile.
More than any other central tax, service tax is levied on a large segment of the population who may not even be income tax assesses. But the legal advantage of the current set-up that helps the richer to slip by where others are tracked is an unhappy phenomena for a fiscally-progressive regime.