Authorities issuing Show Cause Notices demanding Service Tax due to difference between Service Tax Returns and Income Tax Returns

by | Jan 14, 2021 | Outlook

CBIC is targeting taxpayers due to difference in value of output service declared in Service Tax Returns (‘Form ST-3’) vis-à-vis income depicted in Income Tax Returns / TDS Certificates (‘ITR / Form-26AS’).

In this context, Service Tax authorities have recently issued thousands of Show Cause Notices (‘SCNs’) to taxpayers on account of such variance (https://www.moneylife.in/article/central-gst-dept-issuing-illegal-show-cause-notices-for-fy2015-alleges-ca-association-report/62592.html). The authorities have blanketly compared values in Form ST-3 and ITR / Form-26AS without going into details or applying any logical reasoning, adopted highest value and issued SCNs demanding Service Tax on differential amount. An illustrative table used for computing Service Tax is reproduced as under:

(In Rs)

Financial Year

Return to which highest value pertains ITR / Form-26AS

Value of services provided as appearing in Form ST-3 returns

Difference of value between ITR / Form-26AS and ST-3 returns

Service Tax on differential amount

(1)

(2)

(3)

(4) = (2) – (3)

(5)

2015-16

100

40

60

14.5 percent of 60 = 8.7

NITYA Comments:

The authorities have haphazardly issued SCNs in December 2020 just to meet timeline of extended period of limitation of 5 years. The taxpayers were not even given even sufficient time to furnish details including reasons for variance, thus violating principles of natural justice. The authorities did not follow mandatory requirement of pre-consultation notice where Service Tax demand exceeded Rs.50 Lakhs.

Surprisingly, the authorities have blindly invoked extended period of limitation alleging fraud, suppression etc. and seeks to impose interest and penalty on taxpayers. Since information used by authorities was available with Government itself, invocation of extended period of limitation is untenable. 

The difference between Form ST-3 and ITR / Form-26AS can arise of several counts such as: 

  • ITR / Form-26AS has PAN India figures whereas Form ST-3 are registration wise;
  • Output services may be exempted under various exemption notifications and thus, may not be disclosed in Form ST-3;
  • Abatement and reverse charge provisions under Service Tax law may alter Service Tax liability;
  • Time of supply under Income Tax and Service Tax laws may differ etc. 

Courts and Tribunals on multiple instances, held that difference in figures in Form ST-3 returns vis-à-vis ITR / Form-26AS cannot be basis for raising Service Tax demand unless relevant facts are examined in detail. 

Taxpayers who have received such SCNs, have no option but to contest the same with all factual and legal arguments. Taxpayers must take all grounds in reply to SCN including challenging validity of SCN itself for reasons mentioned above.

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