CAG Rips Apart VCES
THE CAG in is latest report to Parliament on the Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES), was highly critical of the Scheme, its launch, executions and post mortem.
It would appear as if the CAG wanted every declarant to be guillotined before a declaration was accepted. CAG forgets the fact that the declarations were voluntary and had they not come forward to file the declarations and pay some tax, the Department would not have got a single rupee from any of those declarants. The fact that 7750 crores could be collected from the scheme without a hassle should itself be hailed as a tax achievement. At least we could get enough money to finance the Audit to lambast the collection of some excess revenue.
The highlights from the CAG's report:
The Performance Audit on Service Tax Voluntary Compliance Encouragement Scheme, 2013 (VCES) was conducted in 35 selected Commissionerates to study whether the Scheme achieved its intended goals through seeking assurance regarding mechanism devised by the department for its implementation, addressing of the systemic failures that necessitated the VCES and monitoring of post-VCES compliance by the declarants.
The key aims of the scheme viz. encouraging non-filers or stop filers to file returns and tax base broadening were not achieved as only 66,072 existing as well as new registrants declared tax dues amounting to Rs. 7,750 crore under VCES as against 10,00,000 non/stop filers when the Scheme was announced and only around 22 per cent of the declarations filed related to new registrations. The Performance Audit revealed deficiencies in the design and enabling provisions of the Scheme, non-compliance to provisions prescribed in various stages and inadequacies in tax administration as detailed below:
a. The Scheme envisaged grant of immunity for truthful declaration of service tax dues. No basic documents in support of tax liability declared were prescribed and verification of correctness of declaration was restricted only to mere check of arithmetic accuracy. Even basic facts apparent on the face of the declaration were not verified.
b. Clarifications given by Board regarding pending demand notice, inquiry, audit or investigation, which would make the declarant ineligible for the scheme, were contradictory to the provisions and the intention of the scheme. This resulted in extension of unintended benefit amounting to Rs. 129.84 crore in 332 cases.
c. Deficient design of VCES application form and non-prescription of proper database by Board deprived department the benefit of having valuable data for post-Scheme analysis and monitoring.
d. The safeguards prescribed in Cenvat Credit Rules, 2004, to avail Cenvat (input) credit were not given due consideration while making payments under VCES admissible for availing Cenvat credit in future.
e. In 444 cases in 20 Commissionerates, involving tax dues of Rs. 85.97crore, we found deficiencies in verification of eligibility criteria.
f. We noticed in 169 cases, involving tax dues of Rs. 20.96 crore, that though the declarants had not paid the declared tax dues as per due dates prescribed, the declarations were not made ineligible for the scheme.
g. Audit attempted to examine truthfulness of declarations made by cross-verification of declared tax dues in two Commissionerates with details available with other authorities (viz. Income Tax Department, Commercial Taxes Department and Registrar of Companies) and found short declaration of tax dues to the extent of Rs. 4.35 crore in eight cases.
h. One time amnesty Scheme like VCES can be a real one time solution for the problem it sought to redress only if the tax systems are strengthened and follow up mechanism is made stringent. In 15 Commissionerates where data was made available to audit, we observed that only 62 per cent of the returns due for filing were actually filed post-VCES and no action was taken by the department against non-filers.
i. The department did not initiate any action to recover the balance of the declared tax dues or to levy applicable interest and penalty in respect of 78 rejected cases involving an amount of Rs. 23.02 crore.
j. The scheme was introduced with undue haste as the department responded with 'lack of time' to several audit observations.
Summary of Recommendations
Part-1 Recommendations to be considered while framing any amnesty Schemes in future
1. The use of IT platforms, integrated with the existing automated systems, for self declarations as well as scrutiny and follow up by the department for such Schemes may be considered.
2. Defining checklists for verifying the truthfulness of declaration filed by the declarants.
3. Identification of challans related to such schemes must be ensured by use of IT Platforms.
4. Provisions/clarification issued should not dilute the safeguards prescribed in the existing provisions as well as the express intention of the Scheme.
Part-2 Recommendations for corrective action Post VCES
5. Cenvat credit should be allowed in respect of only those service tax payments under this Scheme for which documents prescribed in rule 9 of Cenvat Credit Rules, 2004 are available.
6. The amnesty Scheme should be followed by an extensive drive to bring evaders to tax net through departmental investigation and vigilance wings, so as to send a strong message to the defaulters who did not come clean despite the Scheme, to have effective deterrent effect and also to boost morale of regular tax payers.
7. A rigorous follow-up procedure through monitoring of filing of returns and scrutiny of such returns should be ensured to facilitate success as well as impact assessment of the Scheme.
The CAG was equally critical of the Kar Vivad Samadhan Scheme of 1998, the embers of which are still smoldering in the Tribunals and Courts! The CAG then observed, Kar Vivad Samadhan Scheme failed to either declog the system or realise a significant amount of 'reasonable Government dues'. However, it did provide an escape route for select debtors of the Government whose liability was in little or no dispute (vivad). The scheme did not provide any safeguards against such abuse of the scheme. The response from actual cases of dispute was rather poor and they continued to clog the system. Its overall impact on revenue was, therefore, negative.
Maybe next time they launch an amnesty scheme, it should be clearly mentioned in the statute that CAG will not have the power to audit the scheme.