Is Penalty under Section 76 of Finance Act, 1994 is less severe than Penalty under Section 78?
SECTION 76 and 78 are two important Sections of the Finance Act, 1994 dealing with penalty. Section 76, penalty shall not be less than two hundred rupees for every day during which failure to pay service tax continues or at the rate of two per cent. of such tax, per month, whichever is higher, starting with the first day after the due date till the date of actual payment of the outstanding amount of service tax (Provided that the total amount of the penalty payable in terms of this section shall not exceed the service tax payable).
As per Section 78 (applicable for cases of suppression etc) , person liable to pay service tax or erroneous refund, as determined under sub-section (2) of section 73, shall also be liable to pay a penalty, in addition to such service tax and interest thereon, if any, payable by him, which shall not be less than, but which shall not exceed twice, the amount of service tax so not levied or paid or short-levied or short-paid or erroneously refunded (Provided that where such service tax as determined under sub-section (2) of section 73, and the interest payable thereon under section 75, is paid within thirty days from the date of communication of order of the Central Excise Officer determining such service tax, the amount of penalty liable to be paid by such person under this section shall be twenty-five per cent. of the service tax so determined)
Normally in many orders of the appellate forums, in cases where the service tax is paid before the issue of SCN, a lenient view is taken and penalty under Section 78 is vacated and only penalty under Section 76 is sustained. But in cases where the Service tax is paid before the issue of SCN or within one month of the issue or Order-in-Original, it may so happen that the penalty under Section 78 would be less than the penalty under Section 76. This is due to the proviso to Sec 78 as per which the penalty stands reduced to 75% if the tax and interest are paid within 30 days of the Order-in-Original.
Let us see this illustration where the assessee short paid service tax of Rs 1,00,000/- in the month of April 2008:
Amount short paid for the month of April 2008 | 100000 |
Return filed on 25th Oct 2008 | |
SCN issued within one year on 24th Oct 2009 | |
Paid ST on 1 lakh on 25th Oct 2009 on issue of SCN | |
Now, | |
Penalty under Sec 76 | |
at 200 per day for 17 months (or) | 102000 |
at 2% a month 17 months | 34000 |
(Subject to maximum of Service Tax short paid) | 100000 |
Max penalty u/s 76 restricted to ST payable | 100000 |
Had it been under 78, it would have been only 25% (min-equal to ST of Rs 100000) OR | 25000 |
Assuming twice the tax is penalty( max) | 50000 |
Now, which one is less severe? 76 or 78 |
Incidentally, Section 78 has been amended with effect from 10.5.2008 to make the provisions of Section 78 not applicable in cases where penalty is imposed under Section 76. Hence section 78 and 76 are now mutually exclusive. So, may be now in cases where there is suppression etc, but Service Tax is paid before the issue of SCN the adjudicating authorities would in fact be helping the assessees in imposing penalty under Section 78 ( which stands reduced to 25%, a facility not available under Sec 76).
But the final question is why the facility of reduced penalty of 25% is not made applicable for penalty under Section 76? After all, cases falling under Section 78 are more serious in nature than those of falling under Section 76.