INTEREST PROVISION IN SERVICE TAX

[Dr. Sanjiv Agarwal]

Interest on Delayed Payment of Service Tax (Section 75)

According to Section 75, of the Finance Act, 1994, "Every person, liable to pay the tax in accordance with the provisions of Section 68, or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed shall pay simple interest at such rate not below ten per cent and not exceeding thirty six per cent per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette for the period by which such crediting of the tax or any part thereof is delayed".

Section 75 is a charging provision which provides for charging of interest at the prescribed rate for the failure on the part of the assessee to pay to the credit of the Central Government in the prescribed or stipulated period. This interest will be on the amount of Service Tax due. The rate of interest has been as under:

W.e.f. 16-10-1998	24 per cent p.a.
W.e.f. 16-7-2001	1.5 per cent per month
W.e.f. 16-8-2002	15 per cent p.a.
W.e.f. 10-9-2004	13 per cent p.a.
W.e.f. 1-4-2011	18 per cent p.a. (15 per cent for specified assessees)
W.e.f. 1.10.2014	18 / 24 / 30 percent p.a.

It should be noted that section 75 stipulates interest only on delayed payment of service tax. As such, no interest can be levied on the delayed payment of any amount other than service tax under any section of Finance Act, 1994. Section 75 does not authorize the Department to charge interest on delayed payment of education cess. In JK Synthetics v. CTO 1994 (5) TMI 233 - SUPREME COURT, it was held that any provision made in a statute for charging or levying interest on delayed payment of tax must be considered as substantive law and not an adjectival law and interest was not payable on the additional sales tax from the date on which the returns were filed but interest had to be paid only from the date subsequent to determination of sales tax. In India Carbon Ltd. v. State of Assam 1997 (7) TMI 566 - SUPREME COURT OF INDIA, it was held that interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf. Interest is also not payable if the delay is cause because of the Government procedure of transferring from one account head to other account head. [BSNL v. CCE (2006) 6 STJ 128 (CESTAT, Bangalore); Chennai Telephones v. CCE, Chennai (2005) 1 STJ 86 (CESTAT, Bangalore)]

Revised Rate of Interest w.e.f. 1.10.2014

Vide Notification No 12/2014-ST dated 11.7.2014, rate of interest to be charged on delayed payment of service tax has been enhanced w.e.f. 1.10.2014, based on period of delay. Thus, longer the delay period, higher would be the rate of interest payable. Accordingly, the rate of interest shall be as under:

S.No.	Period of delay	Rate of Simple Interest Per Annum
1	Up to six months	18 percent
2	More than six months and up to one year	18 percent for the first six months of delay; 24 percent for delay beyond six months
3	More than one year	18 percent for the first six months of delay; 24 percent for period beyond six months up to one year; 30 percent for any delay beyond one year

To illustrate, suppose, there is a delay of 15 months in payment of service tax of ₹ 1 lakh by the assessee. The impact of rate change would be as under:

If paid prior to 1.10.2014
Interest @ 18% p.a for 15 months	Rs.  22500
If paid after 1.10.2014
(say due on 1 August 2013 and paid on 1 November 2014)
Period upto 30.9.2014 (14 months @ 18 % p.a.)	₹ 21000
1 month @ 30% p.a.(as delay is > 1 year)	Rs.  2500
Total Interest	₹ 23500

The impact of interest would be much more if payment is delayed after October, 2014.

It may be noted that :

1. 3 percent interest rate concession allowed u/s 75 shall continue to be allowed to specified small service providers
2. This rate structure will not be applicable to VCES cases as interest @ 18% p.a. is payable under the scheme which ends on 31 December, 2014
3. The rate of interest is simple interest per annum
4. New interest rate will be operational only on or after 1 October, 2014. Upto 1.10.2014, rate of interest @ 18% p.a. will continue to apply.

End Note

The proposed new interest rate regime is going to be very tough de-motivating the assessee to indulge into any sort of delay in making the payment, even if they have genuine case on merits to withhold the payment.