1. DDT 2097-3.5.13

What do you mean by initiation of an audit?

Does it mean mere writing of letter to an assessee informing that Audit would be conducted on such and such date? The answer should be a resounding NO. This is because this clause of audit has been separately mentioned at (b). So, if the department has issued a letter prior to 1st March, 2013 informing a person of an impending audit in the month of March, 2013, he should not be hit by this exclusion clause.

However, a reading of the sub-section (2) indicates that inspite of these exclusions if a person makes an application/declaration, such a declaration can be rejected by the designated authority after giving reasons therefor. The usage of the word ‘order' means the principles of natural justice have to be followed. So if the declarant is unhappy with this order can HE GO IN APPEAL AND IF SO TO WHICH AUTHORITY? THE PROVISIONS OF THE SCHEME ARE SILENT IN THIS REGARD AND NEED CLARITY. Assuming that the declaration is rejected can the evidence be used against the person? Suppose the designated authority wrongly allows an applicant to file a declaration under section 96 of the VCES though he is hit by the debarring clauses. Can this order be reviewed by the Commissioner or any authority?

19. In terms of section 106 (2)(b), if a declaration made by a person against whom an audit has been initiated and where such audit is pending, then the designated authority shall by an order and for reasons to be recorded in writing, reject such declaration. As the audit process may involve several stages, it may be indicated as to what event would constitute,-

(i) initiation of audit; and

(ii) culmination of audit.

Initiation of audit: For the purposes of VCES, the date of the visit of auditors to the unit of the taxpayer would be taken as the date of initiation of audit. A register is maintained of all visits for audit purposes.

Culmination of audit: The audit process may culminate in any of the following manner.-

(i) Closure of audit file if no discrepancy is found in audit;

(ii) Closure of audit para by the Monitoring Committee Meeting (MCM);

(iii) Approval of audit para by MCM and payment of amount involved therein by the party in terms of the provisions of the Finance Act, 1994;

(iv) Approval of audit para by MCM, and issuance of SCN, if party does not agree to the parasoraised.

The audit culminates at a point when the audit paras ;raised are settled in any manner as stated above.

The pendency of audit as on 1.3.2013 means an audit that has been initiated before 1.3.2013 but has not culminated as on 1.3.2013.

12. Whether declarant will be given an opportunity to be heard and explain his cases before the rejection of a declaration under section 106(2) by the designated authority?

Yes. In terms of section 106 (2) of the Finance Act, 2013, the designated authority shall, by an order, and for reasons to be recorded in writing, reject a declaration if any inquiry/investigation or audit was pending against the declarant as on the cut-off date, i.e., 1.3.2013. An order under this section shall be passed following the principles of natural justice.

To allay any apprehension of undue delays and uncertainty, it is clarified that the designated authority, if he has reasons to believe that the declaration is covered by section 106 (2), shall give a notice of intention to reject the declaration within 30 days of the date of filing of the declaration stating the reasons for the intention to reject the declaration. For declarations already filed, the said period of 30 days would apply from the date of this circular.

The declarant shall be given an opportunity to be heard before any order is passed by the designated authority.

13. What is the appeal mechanism against the order of the designated authority whereby he rejects the declaration under section 106 (2) of the Finance Act, 2013?

The Scheme does not have a statutory provision for filing of appeal against the order for rejection of declaration under section 106 (2) by the designated authority .

2. DDT 2100 - 8.5.13:

What happens if the amount is paid but the declaration is rejected?

14 . A declarant pays a certain amount under the Scheme and subsequently his declaration is rejected. Would the amount so paid by him be adjusted against his liability that may be determined by the department?

The amount so paid can be adjusted against the liability that is determined by the department.

3 and 4: DDT 2105-15.5.13 & 2106-16.5.13:

Rule 6(2) appears to be draconian. It says CENVAT credit shall not be utilised for payment of tax dues under the Scheme. It is settled law that even in cases of clandestine clearances, CENVAT Credit is allowed. It is not known what is the intention behind such condition, but it will surely take the ENCOURAGEMENT out of the scheme if there is really any. What about the receiver of the services? Can they take CENVAT Credit of service tax paid under VCES?

17. Whether the CENVAT credit is admissible on the inputs/input services used for provision of output service in respect of which declaration has been made under VCES for payment of any tax liability outside the VCES?

The VCES Rules 2013 prescribe that CENVAT credit cannot be utilized for payment of "tax dues" under the Scheme. Accordingly the "tax dues" under the Scheme shall be paid in cash.

The admissibility of CENVAT credit on any inputs and input services used for provision of output service in respect of which declaration has been made shall continue to be governed by the provisions of the Cenvat Credit Rules, 2004.

18.

(a) Whether the tax dues amount paid under VCES would be eligible as CENVAT credit to the recipient of service under a supplementary invoice?

(b) Whether cenvat credit would be admissible to the person who pays tax dues under VCES as service recipient under reverse charge mechanism?

Rule 6(2) of the Service Tax Voluntary Compliance Encouragement Rules, 2013, prescribes that CENVAT credit cannot be utilized for payment of "tax dues" under the Scheme. Except this condition, all issues relating to admissibility of CENVAT credit are to be determined in terms of the provisions of the Cenvat Credit Rules.

As regards admissibility of CENVAT credit in situations covered under part (a) and (b), attention is invited to rule 9(1)(bb) and 9(1)(e) respectively of the Cenvat Credit Rules.

DDT Comment: Why can't they make it clear that the provisions of Rule 9(1)(bb) of the CENVAT Credit Rules, 2004 are not applicable to the amount paid under VCES? Don't they know that the field will apply this Rule to deny the credit? What is the use of evasive clarification?

Rule 9(1)(bb) stipulates denial of credit when additional amount is recoverable by reason of fraud, collusion, etc,.

5. DDT 2122- 7.6.13

"Section 111 of the FA, 2013 says that where the CCE has reasons to believe that the declaration made by the declarant under the Scheme was "substantially" false, he may in writing serve notice on the declarant in respect of such declaration requiring him to show-cause why he should not pay the tax dues not paid or short-paid. What is meant by "substantially false" would be an issue that would need the Courts (or for that matter Settlement Commission) to answer in the days to come.

15. Section 111 prescribes that where the Commissioner of Central Excise has reasons to believe that the declaration made by the declarant was ‘substantially false', he may serve a notice on the declarant in respect of such declaration. However, what constitutes a ‘substantially false' declaration has not been specified.

The Commissioner would, in the overall facts of the case, taking into account the reasons he has to believe, take a judicious view as to whether a declaration is ‘substantially false'. It is not feasible to define the term "substantially false" in precise terms. The proceeding under section 111 would be initiated in accordance with the principles of natural justice.

To illustrate, a declarant has declared his "tax dues" as Rs 25 lakh. However, Commissioner has specific information that declaration has been made only for part liability, and the actual "tax dues" are Rs 50 lakh. This declaration would fall in the category of "substantially false".

This example is only illustrative.

6. DDT 2123-10.6.13

VCES, 2013 and a recent Preventive case

I found that the definition of "tax dues" given in the Finance Act, 2013, as reproduced below does not debar me from making any declaration and payment even if it is a Preventive case.

4. Whether a party, against whom an inquiry, investigation or audit has been initiated after 1.3.2013 (the cut-off date) can make a declaration under the Scheme?

Yes. There is no bar from filing of declaration in such cases.

7. DDT 2127-14.6.13:

How many times can I apply under the VCES, 2013?

And, by the way, is there anything in the VCES, 2013 which requires me to declare all my Service Tax dues for the reference period in one go OR in other words can I file more than one declaration under the VCES, 2013 and come clean?"

10. Whether upon filing a declaration a declarant realizes that the declaration filed by him was incorrect by mistake? Can he file an amended declaration?

The declarant is expected to declare his tax dues correctly. In case the mistake is discovered suo-moto by the declarant himself, he may approach the designated authority, who, after taking into account the overall facts of the case may allow amendments to be made in the declaration, provided that the amended declaration is furnished by declarant before the cut-off date for filing of declaration, i.e., 31.12.2013.

8. DDT-2128-17.6.13

1) Whether the Scheme is applicable only where no ST has been paid? Will it be applicable to the cases wherein tax has been paid partially?

2) Another issue that arises is whether the Scheme will be applicable to the cases wherein ST has been paid in the past at relevant point of time. However, for certain reasons, ST-3 has not been filed till date. As you know, substantial amount of additional fees are required to be paid for late filing of ST-3. A question arises whether VCES can cover such cases? To put it differently, whether the Assessee can have the benefit of waiver of payment of fees for late filing of ST-3.

7. Whether a person, who has paid service tax for a particular period but failed to file return, can take the benefit of VCES Scheme so as to avoid payment of penalty for non-filing of return?

Under VCES a declaration can be made only in respect of "tax dues". A case where no tax is pending, but return has not been filed, does not come under the ambit of the Scheme. However, rule 7C of the Service Tax Rules provides for waiver of penalty in deserving cases where return has not been filed and, in such cases, the assessee may seek relief under rule 7C.

DDT Comment: Under Rule 7(c), the only case where there is possibility of reducing penalty is a Nil return - So, this is a useless clarification - When they are ready to forego interest and penalty, why can't they extend the benefit of waiver of late fee also?