Show Cause Notices fail even to identify service, service provider and service recipient
IN its Third Report, the Tax Administration Reform Commission (TARC) has noted with concern:
In practice, in a large number of cases, penal provisions are being applied to what are essentially tax disputes. This is true of both the departments, and is particularly true in the case of service tax. Investigations are conducted and show-cause notices are issued by service tax field authorities and the DGCEI alleging deliberate violation of legal provisions where the provisions lend themselves to different interpretations and there is no evidence of intentional tax evasion. Normally, the severe penal provisions, where a mandatory penalty equal to the amount of tax involved can be imposed, are meant to be invoked only where there is intention to evade tax with mis-declaration, wilful suppression of fact, or collusion, and the tax demand can extend to five years instead of the normal one year. In practice, when any new information is accessed by the authorities, which according to them indicates a violation, it is taken as wilful suppression of fact with intent to evade payment of duty and notices invoking severe penalties and the extended period of demand are issued even though there is no evidence to show deliberate concealment of information or to indicate mala fide intent. Some of the notices on the service tax side also reflect a superficial or misconceived understanding of the nature of business practices in the service industry and fail even to identify the service, the service provider and the service recipient.
The complicated legal provisions in tax law give rise to confusion and varying interpretations. Whether it is the interchange fee involved in complex banking transactions, the definition of canteen, the applicability of reverse charge mechanism, or a host of others, the lack of clarity in law has led to different interpretations by the authorities and the taxpayer but the latter has been saddled with notices invoking the deterrent penalty and extended demand period meant for the deliberate tax evader. These sadly get locked up in litigation.
The judiciary, including the Supreme Court, has consistently commented adversely on this tendency. But the practice has not changed. With the adjudicating authorities invariably confirming the demand and imposing penalties, the matter enters the stream of litigation.
A large number of disputes are generated because taxpayers feel compelled to contest the imposition of penalties as well as unjustified invocation of the extended period of limitation, rather than voluntarily comply within the framework of law. The Departments' success rate in litigation is woefully low.
Such a situation leads to loss of credibility for the Departments. The enforcement wings should not be frittering away their resources on cases that can best be left to the compliance verification function and resolved through normal dispute management mechanisms. They should be focusing more on in depth investigations of fraud and such investigations should be of such quality as to ensure that the cases are capable of being successfully prosecuted.
The extremely short-term focus, excessive reliance on factors like indiscriminate seizures of documents and goods for reporting performance and the absence of quality evaluation have led to a drastic decline in the quality of investigations with long-term consequences for compliance management and effective deterrence. The administration needs to prize quality over quantity if deterrence is to play an effective role in its management of compliance. Therefore, far more attention needs to be paid to selecting the right cases and investigating them with thoroughness and competence.