Retention of service tax
This query is : Resolved
25 July 2014
In no of co. During government audit I have found that they are retaining service tax for services they availed & reimbursing the same when party submit proof of payment supposed if party not paying service tax then what is our liability ? For how much time we should keep that money in retention ? Can we book as it as profit after three years ?
21 July 2025
Your question relates to retention of service tax deducted from vendors and not remitted until vendors furnish proof of payment. This is a common practice seen during audits, but it has important legal implications.
🔍 Key Issues:
Service Tax Liability:
Service tax is a liability of the service provider, not the service recipient.
However, if the recipient deducts the service tax from the bill and retains it, they may be held liable if:
The vendor fails to deposit the tax.
The department considers the recipient as having collected service tax on behalf of the government.
Retention of Service Tax:
Retaining the tax without depositing it with the government is not legally sound.
It does not absolve the service recipient of liability under audit.
The right way would be to pay the full bill including service tax to the vendor and let the tax department follow up on non-payment by the vendor.
Alternatively, if retention is agreed contractually and disclosed properly, the amount should be deposited by the recipient on behalf of the vendor if the vendor fails to do so.
Can It Be Booked as Profit After 3 Years? ❌
No, you cannot book the retained amount as income/profit.
That amount is a statutory due to the government.
Booking it as profit may lead to:
Tax demands with interest and penalties
Allegation of misappropriation of government dues
✅ Suggested Action:
If the service provider fails to furnish proof, you should:
Deposit the retained service tax to the government under the respective vendor’s GSTIN/registration number (if applicable), or
Seek legal closure via indemnity clauses or documentation.
For legacy service tax (pre-GST) cases:
Evaluate whether the tax was supposed to be deposited under reverse charge (if applicable).
Consider disclosing the amount in your statutory audit notes to avoid future implications.
⚠️ Summary:
You are not legally allowed to keep retained service tax as profit.
The amount must be treated as statutory liability.
Deposit it if vendor fails, or obtain clear proof/documentation of vendor’s payment.
🔍 Key Issues:
Service Tax Liability:
Service tax is a liability of the service provider, not the service recipient.
However, if the recipient deducts the service tax from the bill and retains it, they may be held liable if:
The vendor fails to deposit the tax.
The department considers the recipient as having collected service tax on behalf of the government.
Retention of Service Tax:
Retaining the tax without depositing it with the government is not legally sound.
It does not absolve the service recipient of liability under audit.
The right way would be to pay the full bill including service tax to the vendor and let the tax department follow up on non-payment by the vendor.
Alternatively, if retention is agreed contractually and disclosed properly, the amount should be deposited by the recipient on behalf of the vendor if the vendor fails to do so.
Can It Be Booked as Profit After 3 Years? ❌
No, you cannot book the retained amount as income/profit.
That amount is a statutory due to the government.
Booking it as profit may lead to:
Tax demands with interest and penalties
Allegation of misappropriation of government dues
✅ Suggested Action:
If the service provider fails to furnish proof, you should:
Deposit the retained service tax to the government under the respective vendor’s GSTIN/registration number (if applicable), or
Seek legal closure via indemnity clauses or documentation.
For legacy service tax (pre-GST) cases:
Evaluate whether the tax was supposed to be deposited under reverse charge (if applicable).
Consider disclosing the amount in your statutory audit notes to avoid future implications.
⚠️ Summary:
You are not legally allowed to keep retained service tax as profit.
The amount must be treated as statutory liability.
Deposit it if vendor fails, or obtain clear proof/documentation of vendor’s payment.
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