Mar 06, 2013 07:47 PM IST | Source: CNBC-TV18

Budget 2013: Finance Minister to lash whip at service tax defaulters

Budget 2013 offers amnesty to people who have defaulted on indirect tax payments over the last five years.

For those wanting proof that the Finance Minister is serious about increasing tax revenues to meet his fiscal deficit targets, here it is. Budget 2013 offers amnesty to people who have defaulted on indirect tax payments over the last five years. At the same time, the Budget opens the door to criminal prosecution of future service tax defaulters. CNBC-TV18's Ashmit Kumar reports that the possibilty of criminal prosecution has caused some concern.

Finance Minister P Chidambaram has decided on the carrot & stick approach to increase tax revenues. First, the FM has offered the carrot by saying, "We will provide amnesty for people who have defaulted on indirect tax for last last five years."

Then, the FM revealed the stick, which was not in the Budget speech, but only in the fineprint. The scope of criminal prosecution has been extended from defaulters of excise and customs duty, to those who default on service tax as well. And this has raised some eyebrows.

Nishith Desai, founder, Nishith Desai & Associates says, "We are increasingly seeing that civil law is transforming into criminal law. Punishment disproportionate to crimes is not the best way to deter tax evasion."

So just how does Chidambaram propose to amend the law? Section 89 is to be amended to prescribe imprisonment from 6 months, to 7 years. A new section 90 categorises such offences as cognizable and non-bailable.

And a new section 91 gives officers of the rank of Superintendent of central excise or higher, the power to arrest defaulters, in-line with the code of criminal procedure.

Rohan Shah, managing partner, Economic Laws Practice, believes, "The government has negated the SC rulings with these provisions. They have brought more acts within the scope of criminal prosecution provisions."

Another cause for concern seems to be the low threshold of this law. The proposal says such action can be taken in cases where the default exceeds Rs 50 lakh. Experts say this may be too low and is infact, detached from commercial reality. They also say there should have been more criteria for classifying a case as fit for criminal prosecution.

Sudhir Kapadia, national tax leader, Ernst & Young, "The law in itself is not so much of a problem but rather the implementation that has us worried."

The biggest worry, by far, is that this law could be misused, and that may lead to a fall in investor confidence.

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