Do your Due Diligence before Sending Show Cause Notices on Service Tax Defaults: CBIC Tells Officers

Tax-related associations say the department has issued notices even to many businesses which are exempt from service tax for the year 2015-16. Experts say that not all differences in data between income tax and service tax amount to tax evasion.

The Central Board of Indirect Taxes and Customs (CBIC) has directed its offices to not send show-cause notices (SCNs) for service tax defaults, merely on the basis of discrepancies between income tax returns and service tax amount.

Various tax-related associations have complained to the Union finance ministry that SCNs were wrongly sent for the financial year 2015-16.

The GST department has also issued notices to many entities and professionals who are exempted from service tax, like doctors, they had complained.

The GST department can issue SCNs till December 31 for any service tax violation in 2015-16. The department can reopen the last five years’ cases.

Angad Sandhu, Partner, PSL Advocates & Solicitors, told: “Show cause notices for enquiry up to 5 years can only be issued in cases where service tax has not been paid due to fraud, collusion, wilful misstatement or suppression of facts, which was admittedly not the case in the SCNs being issued. The latest decision also provides a respite to the concerned parties from facing lengthy proceedings before the department.”

What does the latest CBIC Letter say?

In a letter to all principal chief commissioners and commissioners, the CBIC said that demand notices should not be issued, just because ITR-TDS and service tax amounts are different.

“A reconciliation statement has to be sought from the taxpayer on the difference and whether the service income earned by them for the corresponding period is attributable to any negative list services specified in Section 66D of the Finance Act,” it said.

“All chief commissioners and commissioners may sensitise the field formations to issue demand notices after due diligence and verification,” the letter said.

Saloni Roy, Senior Director, Deloitte India, told: “There can be multiple reasons for the differences between the taxable value of income tax and service tax. It is not necessary that every difference/anamoly in data between income tax and service tax is a case of tax evasion.”

“For example, certain activities may be exempt from service tax but income may be liable to tax. Hence, this could throw up a difference in comparison. Show- cause notices should not be automatically issued on the basis of such a difference.

The authorities should verify and ascertain from the taxpayer the reasons for the differences and ask for a reconciliation statement. Only if the statement shows gaps, should notices be issued. Sharing of information and data between the income tax and the GST authorities can help identify cases where there could have been tax evasion.

‘Doctors, Lawyers Exempted’

Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co, told: "Issuing SCNs if there is a difference between income tax and service tax is completely illogical as there are many businesses from which TDS is deducted but are not subject to service tax or GST. Doctors and lawyers are prime examples.”

“Many advocates have moved the high courts and the courts have quashed such notices. The Odisha High Court went a step further and directed the principal commissioner to issue appropriate instructions to field formations to not issue SCNs blindly to advocates," he said.

“It is major relief for entities which are exempted from service tax. The GST department has issued a large number of notices without verification of data,” industry sources said.