Column: A tax disservice

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SummaryThe big fish slip through the service tax net, thanks to the current legal set-up. Minnows are trapped

One of the most high-octane publicity drives by the government in the recent years—that of making service tax assesses pay up—ended last week. According to the revenue department estimates, it has raised about R5,500 crore. It was great publicity made even better by the fact that during the entire campaign of the Voluntary Compliance Encouragement Scheme (VCES), the government was able to hide that it carried no stick to scare those who chose to sit out.

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

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