Column: VCES: confession and absolution

Written by Rajeev Dimri | Updated: Sep 6 2013, 10:44am hrs
The concepts of confession and absolution are rooted in human history and religionit is hardly a surprise that they would permeate into the legal realm as well. After all, amnesty schemes in tax laws are nothing but an extension of the aforesaid concepts. India has experimented with tax amnesty schemes in the past with mixed results. In the past, the government brought VDIS scheme under income tax and the Kar Vivad Samadhan Scheme for indirect taxes. The newly introduced Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES) embodies the concepts of confession and absolution specifically in the context of service tax by providing for amnesty vis vis specified scenarios of transgression of service tax laws.

The eligibility for VCES is restricted to service providers who have not paid service tax or filed service tax returns for the period October 2007 to December 2012. In order to avail the benefit of VCES, the taxpayer would be required to pay the due tax which, if accepted by the tax authorities, will lead to an immunity from the levy of interest, penalty and any other proceedings under Chapter V of the Finance Act, 1994 (hereafter, the Act).

VCES is not an open-ended scheme available to all taxpayers. The benefit of VCES cannot be availed if a show-cause notice or adjudication order has been passed before March 1, 2013, vis vis the service tax default. Similarly, where an enquiry or an investigation has been initiated in relation to the service tax due in question by way of search of premises, issuance of summons or requisitioning of accounts, documents and other evidence in relation to such enquiry or investigation before March 1, 2013, VCES cannot be availed.

Despite the apparent benefits, till recently, the response to VCES has been lukewarm. This can probably be attributed to the lack of clarity prevailing till recently pertaining to the ambit of the restrictions on the availing of VCES. Like whether a party, against whom an inquiry, investigation or audit has been initiated after March 1, 2013, can avail VCES or when can an enquiry/investigation be said to have been initiated or when an assessee has been audited and audit para issued on a specific issue, whether VCES can be availed for a issue that the audit para doesnt cover, etc. There were doubts on important aspects, the most crucial of which is whether the service tax amount paid under VCES would be eligible as CENVAT credit in the hands of the taxpayer. Fortunately, in a step that demonstrates the seriousness of the government to ensure the success of this amnesty scheme, most of these doubts have now been adequately clarified vide CBEC circulars dated May 13, 2013, and August 8, 2013.

Given how quickly service tax has grown in complexity and reach in India in the last decade especially with the introduction of the new negative-list-based comprehensive service tax regime, VCES can prove to be a handy tax controversy management tool for the taxpayers. Some issues have proved to be extremely litigious under service tax, like export of services, liability of service tax on a reverse-charge basis for an Indian recipient receiving services from a provider located outside India, classification issues arising under the pre-July 2012 service tax regime arising out of introduction of new taxable service categories, service tax on reimbursement of expenses, etc. The taxpayers can avail VCES to regularise their tax positions pertaining to the above issues without incurring interest and penalty implications (as well as prosecution against employees) and thereby obviate a lot of indirect tax litigation.

The success of VCES, like any other well-intentioned piece of legislation, would depend on the actual ground-level implementation. Many taxpayers are apprehensive that applying for VCES for one particular default may lead to service tax authorities undertaking scrutiny to dig out other defaults (actual or imagined)the actual implementation experience, if largely positive, would go a long way in mitigating such apprehensions and ensure the success of VCES. One only wishes that an amnesty scheme in the realm of a tax as dynamic as service tax had wider reachinexplicably, the option of VCES has not been extended to scenarios where a show-cause notice has been issued. Even more inexplicable is the restriction on the availing of VCES where audit has commenced or investigations are in progress. One can envision several scenarios where an honest taxpayer would become aware of a possible service tax default only pursuant to an audit/investigation only.

The idea of a tax amnesty scheme is in sync with the modern tax administration concept of self-assessment by taxpayers coupled with vigilance against tax evasion by tax authoritiesin fact, tax amnesty schemes like VCES act as bridges between the two by offering bona fide taxpayers an option to rectify honest mistakes without paying a heavy price for the same.

In conclusion, while the window of service tax amnesty under VCES could have been opened wider, in its current form too, it may prove to be an optimum tax controversy management option for the trade at large.

The author is partner and leader (indirect tax) at BMR Advisors.

Views are personal. With inputs from Sudipta Bhattacharjee, associate director