NOVEMBER 04, 2014

By Suresh Nair

TAX policy reforms in India, till date,could at best be construed as a bits and pieces affair without a structured and holistic approach.

The constitution of the Tax Administrative Reforms Committee (TARC) under the erudite Chairmanship of Dr. Parthasarathi Shome acknowledges the need for a definitive thrust towards an all encompassing tax administrative reform in India.

The TARC has been mandated to review the application of tax policies and tax laws in the context of global best practices and recommend measures for reforms required in tax administration to enhance its effectiveness and efficiency.

The first report submitted by the TARC to the Hon'ble Finance Minister on 30May 2014 discussed key areas such as lack of customer ( tax paying community) focus, structure and governance, HRD of tax administration,dispute management, key internal processes, Information and Communication Technology et al.

The second report of TARC which was submitted on 26 September 2014, emphasized on "capacity building in Customs administration" and "strengthening of database and inter-agency information sharing".

One pertinent observation by the TARC in its second report is the emphasis on capacity building in the Customs to handle valuation issues with respect to imported goods in case of related party transactions and the need for a paradigm shift from the present Special Valuation Branch (SVB) based approach.

The report has aptly captured the perennial concerns in the present SVB process i.e.;

++ "Gate keeper" approach and the traditional control mechanisms.

++ Huge pendency in SVB cases and quality of decisions.

++ Requirement of extra duty deposit (EDD).

++ Increase of EDD from 1% to 5% at slightest delay on the part of the importers in providing documents/details.

++ Resistance of Customs to discontinue the EDD on furnishing of required documents/details.

The Committee has opined that the EDD appears to serve little purpose and that the CBEC should seriously consider dispensing this levy. Further, the Committee has recommended that related party transactions be handled through the post-clearance audit mechanism to be in sync with the principle of self-assessment in letter and spirit.

Further the need to strengthen the Directorate of Valuation (nodal agency to control the SVB process) to play a more active role in such audits and to build expertise in this field- a la Centre of Excellence in valuation by staffing it adequately and building strong expertise has also been highlighted.

The report has highlighted the need for actively providing detailed guidance on the valuation regime including documentation requirements to importers through lucid and clear publications. This would help to ensure that the importers are better prepared to address related party valuation issues in collaboration with Customs. In this regard, the report also has referred to the best practices globally in the area of Customs valuation. There is a suggestion that CBEC should consider publishing user friendly guidance notes on key issues of valuation as done regularly by Australian Customs and Border Protection Service as well as other Customs formations.

The website of Mumbai Customs pegs the pendency of SVB files at around 1000 (as of October 2013). It would a reasonable guesstimate that the said pendency would only have increased since the last year. Also similar challenges are faced across all the SVB formations(pan India)in the relevant Customs Commissionerate.

Given the inordinately high pendency of SVB cases in Mumbai Customs, the Commissioner of Customs (Imports) and his team handling SVB cases have taken proactive initiatives to hold two meetings with the industry and other stake holders over past few months to address the issue. The views put forth by the participants and SVB officers in the said meeting to balance the need for speedy disposal of SVB cases while safeguarding Revenue interest would hopefully find resonance with the Commissionerate and implementable action should be forthcoming in the near future.

It is an admitted fact that the pendency at SVB cell needs to be addressed quickly as the impact of 1% or 5% EDD on imports is substantive for the importers. It is also relevant to ensure specialised training on Customs valuation (more so in case of related party transactions) - this should be with the focus of imbibing the global best practices in Customs Valuation in case of related parties.

It may also be relevant to explore possibility of a concerted strategy for convergence of Transfer Pricing and Customs Valuation. While this could appear challenging as on date, such a move could trigger reduction of compliance cost for the Trade and also the enforcement cost for the Revenue Administration. One approach could be to have an Advance Pricing Mechanism (APA) as in the case of Direct Taxes eg. Korea Customs law allows for Advance Customs Valuation Agreement (ACVA).

Hopefully, the 2nd TARC report would ensure the much needed push and focus on the immediate necessity of capacity building in Customs. If the recommendations in the report especially with respect to reforms in the SVB process are implemented quickly, then it would be a welcome step in resolving the impasse caused to the trade on account of pending SVB assessments and ease the pain for MNC's having related party imports.

Also hopefully, the Finance Ministry would take immediate steps on the recommendations of the TARC report and work towards addressing/resolving the genuine concerns of the importer fraternity.

Having said the above, stake holders who interact with the Department on a regular basis would appreciate the need for a responsive tax administration that does not perceive the Trade solely from a revenue augmentation perspective.

Customs should play its role as a facilitator of legitimate trade more coherently to allow businesses to concentrate on their key activities triggering thereby improvement in productivity and profitability. The mind set, approach and agenda of the Revenue Department should be to adopt and implement a trust-based approach with the taxpayers and promote voluntary compliance especially when the clarion call of the day is "Make in India".

Before parting :- The Committee headed by Dr.Par thasarathi Shome and ably supported by Mr Y.G. Parande and team have done a commendable job.The 1 st and 2 nd TARC reports can be perused on the TARC web-page on the Finance Ministry website and is definitely worth a read. The TARC has now embarked on the third report, due by the end of November 2014.

The terms of reference of the 3rd TARC report are:

a. To review the existing mechanism and recommend capacity building measures for preparing impact assessment statements on taxpayers compliance cost of new policy and administrative measures of the tax Departments.

b. Toreviewthe existing mechanism and recommend measures for deepening and widening of tax base and taxpayer base.

c. To review the existing mechanism and recommend a system to enforce better tax compliance - by size, segment and nature of taxes and taxpayers, that should cover methods to encourage voluntary tax compliance.

(The author is Partner with Indirect tax practise of EY, Mumbai - supported by Jayakrishna Naidu from EY.)