APRIL 7, 2008

By V Sridhar, CBEC Member (Central Excise)

I AM very happy to be here to participate in this post budget seminar; nice to see many happy eager and smiling faces.  As Mr. Vijay Kumar mentioned, I had quiet a long stint in the Tax Research Unit. During 1984-89, I was Director (TRU) and handled five budgets. Later I also worked with Prof. Chellaiah Committee on Tax Reforms. I can’t help, but reflect on the sea changes that have come over in the last fifteen years or so.  Those were the days when we used to issue a notification a day; just like an apple a day keeps the doctor away, we used to believe a notification a day, keeps you healthy. I remember in the year 1986, when the new Tariff and Modvat were introduced, we issued more than 500 Notifications in 365 days, more than a notification a day. There was the thinking that through fiscal measures, a whole lot of socio-economic objectives could be achieved. We have come a long way from that. 

The year that went by 2007-08, I would say, was a landmark year in one particular sense in that the share of the Direct Taxes for the first time crossed the share of Indirect Taxes. I think this is a very important threshold.  And this year’s budget estimate too shows projections for tax collections of about 53% of Central Revenue for Direct Taxes and for Indirect Taxes it is 47% and that is the way that all the countries have moved. As the economy progresses, as the development environment enriches as income growth increases, the direct taxes take precedence over indirect taxes. Because indirect taxes, by their very nature are regressive.  If I buy a match box, whether the rich man buys or a poor man buys, they pay the same duty.  There is no progression in tax. While direct taxes by their very nature are progressive; higher the income, higher the tax.

I took over as Member, Central Excise a couple of days back and I have been seeing some of the post-budget memorandum that have landed up on my table.  I find that by and large there are no serious misgivings in the budget proposals. There have been some representations from the Customs side drawing particular emphasis to the inverted duty structure. In fact, this is a topic which comes up again and again. It is said that we should have a progressive rate, with the duty on raw materials at the lowest, intermediaries somewhere between, and the finished goods at the maximum. It is easier said than done, as when you get down to the brass tacks, the finished goods in one industry are the raw material for another industry. We have the free trade agreements with various countries, where the agreements refer to the finished product, so we have binding rates for the finished products.  It is not always possible to bring down the raw material rates, still lower. These problems wherever they could be addressed, I think the Board is keen to address those problems, if specific issues are brought to our notice, we will try to address them to the extent possible we will try to see that the inverted duty structure does not prevail. I have seen some references on Rule 6 cenvat credit rules, 2004 being amended where a manufacturer makes both exempted and dutiable finished products. I have some other representations on some other specific provisions on the general philosophy that when the cenvat rate has been reduced from 16% to 14%, shouldn’t  the  corresponding reduction be made in the duty amount payable of 10% to 8% under this Rule 6. Similarly specific rates of duty should also have been reduced. That is another demand from the trade. There are some representations on specific industries, cigarette industry is terribly upset as the duty on filter cigarettes and non-filter cigarettes both brought on par, which has resulted in the non filter cigarette rates going up significantly. In fact, they say virtually the non-filter cigarette may cease to exist with this tax structure. And there have been some representations on paper and paper products, some people have asked for simplified procedure for refund of special additional duty of customs (SAD).  They said the procedure where the imports are by the trading community the procedures are rather convoluted and takes a long time to get the refund. There should be some kind of simplification of procedure done there.

Seminars of this kind I have always believed, are very useful; number one, some of the feelings you can get off your chest as you say that would give you a feel good factor, particularly if you are upset with the tax proposals. That is on the lighter side.  We always value the suggestions from the trade. We do commit mistakes as I have said… I have done five budgets, and we handled so many things in a compressed time frame of one and half to two months, there are issues of time and secrecy, you can’t consult too many people.  We do err and I don’t hesitate to admit, to err is human and we have committed mistakes. And when the mistakes are pointed out by the forum of Taxindiaonline or from you, we are only grateful to you for bringing the mistakes to our notice so that remedial steps can be taken and the heartening feature is that quite often we do get feedback from trade or excise law times or taxindiaonline, even pointed out anomalies which should be set right to increase our revenue. It is not always a plea for more concession, or more reduction of duties, but we have failed to take care of some thing or failed to address an issue they were brought to our notice and we have taken quick remedial action. So in that sense suggestions are always welcome and we are grateful to you for whatever suggestions you have. In fact I was talking about changes from 1986 to now. An other change I have noticed is the antagonistic feeling (if I may be permitted to use words - strong language ), which perhaps prevailed between the trade and decision making authority, not only revenue – commerce or any other department, which is now slowly coming down, with a sort of Public Private Participation (PPP). Some kind of PPP is evolving even in taxation and fiscal regime. I think it is a very healthy development.

In fact, in the context of rupee appreciation, a series of articles have appeared over the past few months in the various economic journals – the Pink dailies as we call them. One phrase is often used as the impossible trinity; you can’t have simultaneously the trinity of low rate of interest, lower inflation and lack of capital controls. If you allow free flow of dollars, rupee will appreciate. If you buy dollars to prevent appreciation of rupee, the money supply increases. If the money supply increases, inflation increases. To curb inflation if you increase the interest rates the growth comes down, so it is an impossible trinity. So there is no way all the three can simultaneously exist. But I hope we don’t have that kind of impossible trinity of the trade, taxindiaonline and department. We make a possible trinity.

On the service tax side, I find that there have been some apprehensions raised about the tax on the Unit linked Insurance Plans. I read the representations saying that it was rather unfair when compared to Mutual Fund Industry, where only Asset Management companies are taxed, here probably the scope is more wide and it should be addressed by the Government.

There have been some apprehensions on the Classification of composite services. As you know, we started when I was in Chellaiah Committee, that for the first time we recommended the taxation on services. I think we made a modest beginning in 3 services, Telephone Service, Non-Life Insurance and Stock Broking introduced during 1994.  And every year we keep on adding, perhaps, we have reached a tally of 106 now. What has happened is when new services are being  brought to the tax fold, some of the earlier entries also seems to suggest that service could perhaps be classified under more than one entry; some kind of overlapping of entries do exist. In every budget we try to address this and I think my colleague Gautam Bhattacharya is more competent to talk upon it in the  subsequent sessions. I thought I will touch only the broad macro issues in my talk. It is one of the advantages of getting promotion and going to senior levels; micro issues can be left to junior officers, probably because I don’t know the answers.  Nice way of getting out of a situation.

But I have always been a micro-man also; I would definitely like to address micro issues. Any question that you raise, if I am not able to answer now by me or my colleagues, rest assured that we take it back with us and within a frame of about 10 to 14 days  we send some replies.  

Another important issue, I thought to address, perhaps I am digressing from the topic assigned, but its not often one gets to talk to a lot of distinguished people gathered under one roof at one particular time. I am also in-charge of Computerization project of the Department. We have a modern and ambitious computerization project.  The basic idea is to have a centralised system of 35 Customs EDI Stations from Customs side. Each station has its own server and so on. The architecture we are thinking of is a centralised data centre for the entire country’s computer hard-ware located under one building, catering to Customs, Excise & Service Tax with a wide area network with quality, connectivity. It will also have a disaster recovery centre as in the case of all data centres. If some thing happens to the main centre … like putting all eggs in one basket.  If something happens by way of a natural disaster, an earthquake, an act of God, the disaster recovery centre takes over, which is a mirror image of the primary data centre. 

We are also going to introduce a project for automation of Central Excise & Service Tax with the acronym ACES. We have done some user acceptance tests, Software is ready, and unfortunately the hardware is taking time. We have our processes to go through. It is a Rs. 600 Crore project. So getting the approvals all that take its own time, the tendering processes and all. We expect first batch of servers to be delivered some time in the month of June. Our primary data centre will be located at Delhi, the Disaster recovery at Chennai, with the Business Continuity Centre also which is a sort of hub which takes the data and communicates, for a short while the data will reside with the Business Continuity Centre also.    

E- filing of documents.  Although we keep telling all our assessees to do e-filing, I would be the first to admit that our systems are not adequate, and connectivity problems are there, system hangs.  I hope these things will be a thing of the past with the wide area network in place. We have country wide network of fibre optics connecting about 600 odd common buildings. All Customs Houses, all Central Excise Commissionerates, all Central Excise Divisions, will be covered by the Wide Area Network. Ranges will have dial-up function. So I again would be first to admit that there may be teething problems as there are bound to be. I crave your indulgence   and greater co-operation, please bear with us if there are some hick-ups, but please make it a success. Please get into the regime of more and more e-filing of documents. Raising the queries through the electronic mode will again reduce the interface with the Department and the Public which is one of the avowed objectives of the Mission-mode of the Government of India not only in the Centre, but also in the States.  This is going to be, I am clear, a very exciting year, a lot of hard work ahead of us to make the system work and I request the co-operation from every one of you.

(The Speech was delivered by Mr Sridhar at a Seminar organised by TIOL at Hyderabad on April 4, 2008)