JUNE 27, 2009

Budget Planners – Simplify tax administration and give a roadmap for GST implementation

By Santosh Hatwar

WE have entered FY 2009-10 and only nine months away from the proposed roll out of GST from April 1, 2010. In fact way back in September 2007, Mr. Ashim Dasgupta, Finance Minister of West Bengal and Chairman of the Empowered Group of Finance Ministers after conducting a study tour of countries which have implemented GST observed that India will formulate its own GST model and it will be introduced from April 1, 2010. Two years have lapsed and there is no sign of even the road map.

Recently the President while addressing the Joint Session of the Parliament unveiled the policy direction of UPA Government and stated that the road map for GST is being vigorously pursued. Even the Finance Minister while addressing a gathering of Chief Ministers and Finance Ministers of States during pre-budget consultation meeting urged them to focus on implementation of GST from April 1, 2010 and sort out pending issues expeditiously to facilitate smooth roll out of GST.

But we are yet to see or hear anything on the proposed roadmap and there is no inkling of even the contours of the proposed road map or how the existing infrastructure and personnel would be amalgamated to gear up for the GST roll out. Let us hope that the Finance Minister will throw some light on the progress made by the Empowered Group of Finance Ministers on GST and provide the roadmap for GST implementation and its proposed date of roll out (in case if it is not from April 1, 2010) in the coming Budget speech.

Specific suggestions which will help in simplification of indirect tax regime:

What is required in the current scenario of global economic turmoil is a simple and simplified tax regime with minimal complications for tax compliance. To achieve this, the Government should rationalize and simplify the tax structure, do away with all the exemptions and provide an efficient and assessee friendly tax administration with zero red tape.

Exemptions:

To fully implement the GST regime successfully, the Central Government should first do away with all the exemptions including exemption on value based clearances because customs, excise, service tax and VAT are all indirect tax levies and any exemption at any stage for any manufacturer or trader or service provider will act as stumbling blocks for continuity in tax credit (VAT) chain. These stumbling blocks only result in complications for allowing input tax credits and the result is there for all to see in form of unprecedented litigations in this arena. The other aspect that will do the indirect tax structure a lot of good is doing away with all additional levies, cesses, surcharges currently in force in Excise and Customs domain which only complicate matters further.

Tax Structure:

If small scale manufacturers, traders and service providers have to be benefited, the rate of duties/taxes applicable to them should be kept at the barest minimum, say 4% across the board levy of Customs, Excise, Service tax wherever applicable, without giving them any benefit of input tax credits. After fixing the duties/taxes for small scale service manufacturers/traders/service providers at 4%, the duty structure for other manufacturers should be in the range of 8% to 12% (8% being the minimum and 12% being the peak rate). Service tax levy should be reduced from the current 12% to 8%.

Further, all the duties and taxes paid on inputs/input services/capital goods with certain exceptions (like HSD, Motor spirit and goods exclusively used in offices) should be allowed as input credit which will minimize litigation in this field.

Exports:

Exporters of goods and services are currently incurring unwarranted hidden costs in the form of litigations due to lack of clarity on tax implications/exemptions for export of goods and services. Confusion prevails over the eligibility of refund of input taxes on goods and services utilized by exporters. Rules 5 and 6 of the CENVAT Credit Rules, 2004, Rules 4 and 5 of the Export of Services Rules, 2005 need to be revamped to provide for clear cut exemption from taxation of inputs/input services utilized for exports and refund of all input tax credits accumulated by exporters without any pre-conditions (a revamp in the definition of inputs/input services as suggested above will also minimize litigation in this area).

Similarly, goods and services provided to SEZs have to be exempted and provisions on the lines of Central Excise (Removal of goods at concessional rate of duty for the manufacture of excisable goods) Rules, 2001 minus Rule 2 thereof coupled with suitable modifications should be brought in place to cover clearance of goods and services provided to SEZs. The existing mechanism of claiming refund of taxes on input services utilized by SEZ developers and units outside the SEZ only is riddled with confusion and there is no guarantee that refund claims will be sanctioned given the bitter experiences of service providers who filed refund claims for accumulated credits under Rule 5 of CENVAT Credit Rules, 2004 and Notifications 11/2005-ST and 12/2005-ST.

Tax administration:

In spite of a plethora of assessee friendly statements emanating from the previous finance minister and top bureaucrats of the finance ministry/CBEC, the scenario at the ground level leaves a lot to be desired. Does anybody remember the Citizen's Charter? Where are the help centres? Did LTU bring in the desired change in the attitude of the officers towards large tax payers? Functioning of Audit and Intelligence wings and the attitude of the officers manning these wings has not changed. Auditors from customs, excise and service tax wings work like blood hounds and as for intelligence officials in these departments the less said the better. Administration of Refund wing in the Department is the worst of all. An assessee never knows when his claim will be sanctioned, if at all it is sanctioned he is not sure of getting the entire amount, even if he gets the entire amount, he never knows when a show cause notice will hit him stating that the claim is erroneous and would be recovered with interest. The bottom line, therefore, is attitude. For a 21 st century economy we have a tax administration with a 19 th century mindset (this applies to even the top echelons of tax administration – we are still reeling under the effects of ‘sahib' syndrome). Once this attitude changes, everything else will fall in place.

(The author is a noted Indirect Tax Expert)