CAG objections on Service Tax
The CAG’s recent report to Parliament had some interesting snippets.
No scrutiny of returns:
The scrutiny of returns is the most important element of the enforcement strategy of tax administration. The overriding aim of such scrutiny/verification is to provide a creditable deterrence to willful suppression of actual assessable value as well as to realise correct Government revenues.
Are the returns required to be scrutinised?
Prior to 10 September 2004, Section 71 of the Finance Act, 1994, provided for verification of the correctness of the tax assessed by the assessee, on the basis of information contained in the returns filed by the assessee. But this Section has been omitted with effect from 10 September 2004. Afterwards, no departmental instructions for scrutiny of ST-3 returns have been issued. While superintendent of Central Excise need not verify the return after 10 September 2004, the DGST in his Performance Report for the year 2005-06 spoke of the need to streamline the scrutiny of the returns. There is, therefore, contradiction in the policy of the Board/Government and perception of the DGST on the issue of scrutiny/verification of returns.
The information furnished by 46 commissionerates, however, revealed that the commissionerates continued to check returns as before although the pendency of the returns remaining unchecked increased considerably after 10 September 2004.
++ Eight per cent of returns for the period up to 2003-04 were pending for verification.
++ Twenty five per cent of returns for the period 2004-05 were not checked after 10 September 2004.
++ Rs. 5.30 lakh was recovered as a result of scrutiny of 29,231 returns for the period from 2002-03 to 2004-05.
Not even a cursory look.
Some ST -3 returns duly verified/checked by department were scrutinised in audit. Cases of short payment of service tax on the basis of information contained in ST -3 returns which had escaped notice of department came to light indicating that even basic checks with reference to the rate of service tax and interest payable for delayed payment, etc. were not exercised.
Increase in tax rate not implemented:
++ Rate of service tax was revised upward from eight per cent to 10 per cent with effect from 10 September 2004. Education cess was also levied with effect from 10 September 2004 at the rate of 2 per cent on service tax payable. However, in 16 cases, assessees continued to calculate service tax at lower rate. This resulted in short payment of service tax to the tune of Rs.20.42lakh besides interest of Rs.2.98lakh. DDT had recently pointed out that a Commissionerate had a huge board outside its office that Service Tax rate is 10%. The Board is still there heckling the administration.
Audit’s Recommendation
++ Board may consider putting in place a mechanism for checking/verification of returns on regular basis. This checking may be reinforced by detailed scrutiny of selected cases on scientific representative sample basis after proper risk analysis.
And the Board’s response:
++ Responding to the recommendation, the Ministry stated (January 2007), that it was working on the issue and once ACES is implemented, the risk management system in service tax will be implemented along with the selection on scientific basis for detailed scrutiny.
Till then? It’s an open game.