Column: Lessons from the service tax amnesty scheme

Written by Pratik Jain | Updated: Jun 26 2014, 07:49am hrs
Every year when the Budget is round the corner, there are expectations from the industry that the government might come up with another amnesty scheme to encourage assessees to voluntarily come forward and discharge their tax dues. As a trade-off, there is typically a waiver of interest and penalty/prosecution.

On the face of it, these schemes appear to pose a win-win situation for the government and industry, though the genuine/non-controversial taxpayers may be left with a feeling of betrayal. With a whopping R3,00,000 crore pending in litigation with different tax authorities for adjudication/final orders and more than 1,00,000 ongoing cases, an amnesty scheme can be an effective measure to put an end to unwarranted litigation while adding quick moolah to the government coffers.

Take, for instance, the Voluntary Compliance Encouragement Scheme (VCES) introduced by the government under service tax law last year. With widespread ambiguity around the applicability of service tax, availability of Cenvat credit, etc, on various transactions, the VCES was meant to give respite to not only tax evaders but also to genuine taxpayers who would have not paid tax earlier under a bona fide belief that it was not applicable.

At the time of introduction, everyone expected the VCES to be a runaway success. Unfortunately, it faced several challenges in terms of restrictive approach of such schemes, administrative hurdles and a perceived risk of

harassment/increased scrutiny by the authorities. All these aspects cumulatively led to a much lower-than-expected participation by the industry.

The VCES was heavily publicised both in print and electronic media. However, it was marred with ambiguities around issues such as exact coverage of the scheme, eligibility criteria, discharging dues through credit, admissibility of applications in case of existing litigation, etc. In fact, the issue of eligibility under the scheme when a proceeding was initiated by the authorities was a major bone of contention. Also, the fact that the government did not allow use of credit to discharge tax dues under the scheme also proved to be a big dampener.

In fact, while on one hand, the scheme was being heavily publicised, there were news reports of authorities initiating recovery/property attachment proceedings (even arrests) even in cases where applications were made under the VCES. This obviously did not help as it made the industry raise concerns as to whether the scheme was implemented in the manner in which it was intended to. And to make matters worse, some of the clarifications issued with respect to the VCES were challenged in courts. For example, in one of the cases, the court did not agree with the clarification that order passed under the scheme is not appealable.

As regards the businesses who had opted for the VCES, the government later issued a clarification which seems to convey that the credit of tax paid under the scheme can be availed only after issuance of final certificate of payment of tax dues (issuance of which, as on date, is still pending in large number of cases in spite of the taxes being paid as early as in December 2013). This again led to a dispute as to how an issuance of certificate can be made a precondition for availment of credit when tax dues have already been paid (that too as a post facto development, i.e. post December 31, 2013, when the declarants had already paid tax).

If the government wants such schemes to be more successful, it needs to adopt a more liberal and accommodative approach to ensure maximum participation. Some of the key aspects that the government may consider are covering the entire gamut of indirect taxes under the scheme (including cases pending under litigation), payment of tax dues through credit, etc. Also, specific and unambiguous guidelines should be issued to ensure that there is no harassment/unnecessary scrutiny of the taxpayers post their declaration of dues under the scheme.

Further, the field staff needs to be adequately educated to ensure that the implementation achieves the desired results. This would lead to widening of tax base, enhanced collections and will also encourage voluntary compliance.

With all the controversy and debate around the justification for such schemes, it would be difficult to expect any new amnesty scheme in the near future. Perhaps it would be a good idea to have at least one more such scheme immediately before or after the GST transition to cover all indirect taxes. This would help all the stakeholders bury the past and start afresh.

Rajeev Dewan, manager, KPMG in India, contributed to this article

The author is partner, Tax, KPMG in India. Views are personal