Sunday, December 30, 2007
Politically the year was dominated by 123 agreement
Economically Sensex went through the roof
Culturally even Tamil TV channels joined the reality bandwagon
Sportingly India won 20-20
Electorally mud-slinging touched new highs
Geographically God (Ram Sethu) was served with eviction orders
Socially amidst SEZs, suicides and starvation continued
Let 2008 give the poor and the needy their economic and social dues and the rich the strength to bear it and will to concede - Best wishes for a great year 2008.
Saturday, December 29, 2007
The Sunday siesta got disturbed when my friend dropped in and fired a salvo – “What’s common between me, Anil Ambani and Shah Rukh Khan?”
I almost blurted ‘age’ but that would have been a little rude so I tried “olive oil…?”
“Hell! We are in the same tax slab – income tax”, he retorted. I responded with a polite laugh and that fuelled him into “Yes, it’s a cruel joke. Anyone who earns above Rs. 2.5 lakhs per annum pays 30%. I just got a pay hike of 7K p.m. and a month’s pay as bonus – that means I pay around Rs.35000 – the entire bonus as tax. Imagine even a small time businessman gets away – so much depreciation, incidental expenses. My boss is saving 30% on my salary – it is an expense.”
He would have gone all till I could see 30% everywhere so I interrupted – “But you have insurance, housing loan, children’s education expenses – I pay only around 6K in tax. Surely……”
“For you lady folks it’s a big advantage. Anyway, you have Ashok’s salary too. I’m the sole earning member.”
All this outburst pushed me into taking a closer look at income tax. This is usually reserved for eleventh hour in February or March when we try to frantically pull up our socks and try to save something to ward off the taxman. Come June-July we try to play the pompous upright honest tax-payer, left of course, with hardly any alternative. “Thin chance to avoid (read evade) in salary”, my husband had remarked once, dryly.
I gathered from my friend, some tips in planning (this annual exercise is more complicated than Five-Year Plans) and preparing (mentally at least) to part with our hard-earned money.
· Familiarise yourself a little with your tax rules – you don’t need God to help you there. Just check out some good websites/books.
· Start as early as Nov-December (earlier the better even if it is at the cost of some domestic peace) to work out actual liability. It gives time to save something and invest in tax saving instruments like bonds or deposits, if necessary.
· It’s true that in order to save Rs. 1000 on tax paid you have to invest 1000 x 100 / (your slab %), which is locked up for 5 years if deposited in banks or at least for 3 to 5 years in most Unit Linked Insurance Policies (ULIPs). If you are looking for security plus savings, the traditional insurance policy may be attractive.
· If your office/employer regularly torments by deducting tax (TDS) monthly you may not feel the pinch. Else better start keeping a sum apart every month so that you need not lament at the 12th hour.
· In respect of income from house property where house is let out interest on loan is deductible without any limit. In case of self occupied property it is limited to Rs.30000/-. But if the property was acquired or constructed with capital borrowed on or after the 1.04.1999 and the acquisition or construction was completed within three years from the end of the financial year in which capital was borrowed the limit is Rs 150000/-. “Of course if you have two or more houses, you can choose any one them, the most favourable to you to be self-occupied”, my friend counselled. “ This is hardly beneficial to me, I’m squeezing the maximum for my EMI my flat”.
My friend spoke at length about the Fringe Benefit Tax or the FBT - some of it was beyond me, but I gathered that you need to look at the structure of your salary and also whether your employer is deducting FBT correctly. Further, FBT is a presumptive tax and actual expenses or reimbursement in respect of the list of expenses which attract FBT, is immaterial. The liability to pay the same is on the employer. Reimbursement of medical expenses upto Rs 15000/- per annum is not taxable in most cases and also does not attract FBT. Children education allowance upto Rs.100/- per month and children hostel expenditure upto Rs.300/- per month is not taxable. Statutory payments like Group Personal Accident, Workman Compensation Insurance, payment to approved gratuity fund or provident fund are also out of FBT. So you need to watch out for expenses like telephone expenses borne by the employer, use of club facilities, gifts given by employer, scholarships given to children (of employee), entertainment expenses, hotel boarding and lodging. You can see the complete list under the relevant section in Chapter XIIH of Income Tax Act.
My father-in-law had a question for him regarding gifts and capital gains arising out of sale of land. Much to my chagrin, our ignorance came in full view, for we contended that since my father-in-law was a senior citizen and he was not even a pensioner he could get away by transferring some amount to my mother-in-law’s account or take refuge in Section 80C [Total taxable gains worked out to Rs 3.1 lakhs]. Apparently Long Term Capital Gains are taxed separately at a flat rate of 20% irrespective of other taxable income. In respect of individuals (including the nebulous entity of HUF), where total taxable income as reduced by Long term capital gain (that is without adding LTCG) is below basic exemption limit, the shortfall can be used to reduce the taxable Long Term Capital Gains and only balance is subject to the flat rate of 20%. The only two ways to save on tax on LTCG in this case would be to either invest in bonds of National Highways Authority of India or Rural Electrification Corporation Limited. Another option is to deposit in Capital Gains Account in notified banks and invest in residential property within 3 years from the date of transfer.
The sermon went on thus - If he were to transfer the amount to his wife, say to a bank account or some investments, income arising from such transfers would be clubbed with his income. Section 64 (1)(iv) essentially provides for clubbing of income of spouse unless it is attributable to some technical or professional qualification. He cited an interesting case of R. Dalmia v. CIT  133 ITR 169 (Delhi) wherein the High Court had held a wife could make savings out of household expenses received from the husband and the income arising from investment of such savings would be separate property and should not be clubbed.
Though tax law usually does not provide anything which can be music to our ears, my friend managed to cull out one. Gifts received from certain specified relatives as per Section 56(2)(v) will not be considered as income and taxed in the hands of the recipient. The limit of Rs.50000 in aggregate does not operate in this case and it is only for non-relatives. If this amount exceeds by even one rupee, the entire amount becomes taxable when it comes to non-relatives. As recipient is liable in case of gifts, better be cautious of who is giving and how much he is gifting. Of course, gifts in kind are out of purview.
Going back to my friend’s contention of being in the same boat as high profile millionaires, I felt he was slightly off the mark because income above Rs.10 lakhs carries a 10% surcharge on tax. But yet, he has a point given the fact that disposable income in the hands of the individual presents a picture in contrast to his tax slab. A gentleman with income of say Rs. 3 lakhs will have Rs 2.5 lakhs after taxes (assuming there are no savings) while another with 4 times his income will have Rs. 8.8 lakhs after tax and as we go higher the effective rate of tax increases by less than 0.25%. That doesn’t seem to be a really progressive tax. While relief to working women and senior citizens is welcome, we do need some rationalization in the limits. In recent years there has been just minimal tinkering with the basic exemption, the upper limit of Rs 2.5 lakhs has not been changed. Thus those with income upto say Rs 5 lakh will get hardly any relief. As always the too poor and very rich are insulated from these changes. It is the middle bracket which is taxed more. We need to look for tax structure which will be fairer and really progressive in terms of the assessee’s capacity to bear. After all income tax is a direct tax and more specifically it is the salaried class that lives from one payday to the other, which records maximum compliance.
By G. Gokul Kishore
The voices uttering the word 'VAT' are gaining strength as days pass and it has taken roughly thirty years to deliberate on the subject on such a scale since introduction of a Value Added Tax in Brazil in 1966. Though by way of 'proforma credit' and other such schemes, some form of reform was attempted, the acronym came with a bang in 1986, when a modified version, in that it was confined to excise duties levied and administered by the Union Government, was introduced and within excise, it was restricted to input tax credits. The concept of a single commodity levy encompassing both the administrative units viz., the Union and the States is fraught with multifarious and multitudinous effects and counter-effects which have been analysed by tax administrators and experts of Public Finance. The objective of this article is to throw light on the problems in implementing a complete VAT and the possible options to make the process workable.
VAT literally means 'Value Added Tax' i.e. a tax on the value added. Addition of value means the incremental intrinsic monetary value of a commodity which is scientific, objective and quantifiable. While multi-level taxation of a particular goods is economically undesirable in that it would cause an upward spiralling of the prices over and above the true and real worth of an article, yet the indispensability of a regressive tax like excise with its equal incidence forces injection of some progressiveness in such a levy. The result is the taxation of value additions at every stage till the goods reach the ultimate consumer. VAT provides the much needed veil of progressiveness to commodity taxes as in a developing economy like India, the ideal predominance of direct taxes over indirect taxes is a distant dream.
There are three stages in the process of VAT. First stage involves making the federal commodity tax as 'value-added'. The second stage relates to co-existence of a state level VAT alongwith the Central VAT. The final stage is the integration of the value added levies administered at both the federal and local levels into one single tax. The Union Excise has been termed as Central VAT (CENVAT) which is a rebatable levy for the taxable industrial consumer extending to almost all the commodities irrespective of the differentiation 'inputs' and 'capital goods' with the 'difference', till its obliteration recently, costing crores of rupees in litigation for the assessees and locking up revenue for the exchequer. While at the federal level the tax at the manufacturing stage, the Union Excises have been converted into a 'VAT', the Frankenstein of conversion of sales taxes of States into VAT and their integration with the Central VAT has made the entire process a non-starter. The various problems associated with the introduction of a total VAT regime in India logically take us to the second stage in the process i.e. dual VAT as advocated by economists and the Tax Reforms Committee. It is the realistic and workable formula in the Indian context since taxing the same base by various tiers of administration is unavoidable. The narrow tax base of both direct and indirect taxes, though considerable efforts have been taken to widen the same in both of them by bringing a host of services in the net of the latter, is an indicator of limitations in the commodity taxes reforms.
As Dr G.K. Pillai notes in his book 'Value Added Tax', the various studies of incidence of such reformed commodity tax reveal that regressivity of indirect taxes is reduced to a great extent only when essential commodities are not taxed and in countries where such a system could not be introduced, the progressivity has been very marginal. For a country like India where, even according to official statistics, more than a quarter of the population survive below poverty line and where the established social security measures such as Public Distribution System and fertilizer subsidies are being done away with, exemption of a few essential goods from the purview of commodity taxes should be seriously considered. The revenue foregone by such a measure would be offset by VAT, as experiences with such steps point out.
The Central Sales Tax, collected and appropriated by the exporting states in the case of inter-state trade, may have to be rebated by the importing state. This revenue has to be reimbursed by the Centre taking into account the recommendations of the Finance Commission and also the increasing revenue accruing to the Union Government from the service sector tax-base which has widened significantly in recent times. In this connection the idea of leaving the service sector for the states may operate against the interests of under-developed states where the tertiary sector has not picked up on a cognizable scale. The suggestion of abolition of CST altogether would be opposed tooth and nail by the taxing states which invariably belong to the developed class. The importing state would suffer from 'double- jeopardy' (in the literal sense) if it were to provide abatement for the levy in that while on the one hand the tax revenue from finished goods is reduced, these under-developed states which are more of consumers would be left with very little space for value-addition and consequently tax revenue gets deflated.
If the rough ride of passing through to a system of uniform sales tax among all the states which is the starting point is any indicator, the authorities concerned will encounter stiff resistance given also the pressures of neo-liberal processes of liberalisation and privatisation on the near-bankrupt states. The pauperised states could ill afford to think of tinkering with the single largest contributor to their coffers. The constitutional pre-eminence of the two levies, excise and sales taxes and their role in the finances and hence that of the governance in a loose federal setup like India only leads one to safely conclude that VAT in toto, is utopian.
Introduction of a total VAT regime when many centrifugal forces are at work in a heterogeneous federal polity can only spell greater danger to India as a nation-state. The developed states with wider tax base and better administrative resources to ensure compliance would significantly gain at the cost of the lesser developed states and the disparity in the growth rates would widen. The effectiveness of the role of the Centre in the wake of emergence of coalition governments in such a scenario is doubtful, to say the least.
The idea of transferring almost all the excises to the states, with the Union retaining only a few commodities and then providing for a legal frame-work to ensure horizontal distribution is, prima facie, not necessary as buoyancy in revenue collection would neither get improved significantly nor is it workable. The experiences of the intransigence exhibited and the spectacle of the Centre being a mute witness to sharing of river waters in spite of awards of legally constituted tribunals would definitely point to replication of such a performance by the states. The consequences of choking of finances by cash rich states to the under-privileged states would be disastrous for the country as such.
After extension of VAT to the state-level which may be a calibrated exercise by restricting it to whole-sale stage, price effect should be studied which may provide valuable conclusions in the direction for further reforms. For this purpose, the valuation machinery should be geared up. Incidence of such Value Added Tax should be analysed as non-economic aspects of reforms are as important as economic ones. The dwindling state social security further reduces the tools of control available with the administration to counter the onslaughts of market forces and the time is more suitable to retain taxation as one. Taxation as a tool of re-distribution to ensure the betterment of the impoverished masses gains currency under such circumstances. Conservative it may sound, yet the paradoxes of the New Economic Policy like withdrawal of the State from business activities reserving the right to interfere through regulatory mechanism which may extend to takeover in 'public interest', do not obviate the welfare obligations of the State.
Transparency and right to information being the modern day hymns of the public bureaucracy, sufficient publicity should be given before implementation is contemplated and the proposals need to be discussed with all the interest groups such as chambers of commerce, traders forum, consumer action groups and others. In this direction it is to be welcomed that to take on board all the states without any differentiation, the date for introduction of VAT in states has been put off till 1.4.2003. Preparatory time is very crucial and even if it means travelling beyond the scheduled time, it is sine qua non for the reforms to succeed. With all the necessary information being made available, the apprehensions and inhibitions of the states would give way to realistic approach tempered with rationality.
An area that needs crying attention is reforming the sales tax administration of the states which vary in every aspect. Variation may be explained as necessitated by circumstances peculiar to that particular state. But that does not condone the effects of an archaic regime contributing, in part, to the skewed development pattern obtaining in the country. While competition among the players may be beneficial for the economy, yet the same among states is neither politically nor economically desirable. Hence the state governments should whole-heartedly agree over comprehensive reforms of their sales taxes aimed at achieving uniformity, certainty and equity. Making those levies vatable would require enforcement of document-oriented business practices which is feasible only upto a certain point. With misplaced enthusiasm, trying to capture all and sundry to include even the remote retailer would make the levy meaningless given the literacy level and collection and compliance costs.
Full-fledged VAT in states is not practicable in the near future. Integration of state VAT with central VAT would further require, inter alia, coordinating machinery with efficiency of highest order for matching of sale and purchase invoices, detection of evasion and ensuring better compliance. With the governments at both the levels unable to rein in their expenditure and with augmentation of resources through rate revision ceasing to be an option, any reform measure with multiple, arduous and often non-feasible factors in full play is bound to be jinxed. As discussed, a middle-path in this context, a dual VAT, is the more practicable proposition as the Central VAT is already in place and reforming the states' sales tax to make it vatable should lead to an improved system
By G Gokul Kishore
''AS a measure of facilitation, I propose to follow international practice and establish LTUs. To begin with, these units will be set up in major cities. I would like to invite large taxpayers, whether of corporate tax or income tax or excise duties or service tax, to participate in the programme and avail of the single window service." (Budget Speech by Hon’ble Finance Minister). The past decade and a half has been witness to injection of heavy doses of reforms into the Indian Tax system, both direct and indirect at national as well as state levels. While the Chelliah Committee Report formed the basis of reforms in the 1990s, the Advisory Group on Tax Planning and Tax Administration (AGTPTA) for the 10th Plan and Kelkar Task Force sustained the reform process in first decade of this millennium. The implementation of VAT in majority of states from 1st April 2005 based on the roadmap worked out by the Empowered Committee of State Finance Ministers was the moment of glory for Indian Taxation as the commodity taxes were infused with the much-needed progressivity since reduction in regressivity of indirect taxes has been a constant endeavor of tax economists. Measures like e-filing of returns and Help Centres have dominated the attention of everyone, but the announcement of the FM on establishment of separate offices to cater to Large Taxpayers and constitution and submission of Project Report by the Action Group (CBEC & CBDT) on such Large Taxpayer Units (LTUs) remains elusive from media glare. This article is an attempt to throw some light on the LTUs as proposed by the Action Group and to fine-tune the proposed set-up and its processes. What is an LTU? As the nomenclature itself provides the etymological connotation that they are units or offices exclusively for catering to the tax needs of large assessees, the next logical step is to provide the criterion to define the term ‘large’. As per the Project Report of the Action Group, corporate assessees paying excise revenue of Rs 1 crore or more are the ‘Large Taxpayers’. The much-touted adjective for these units is ‘self-contained’ and the objective is to provide a single window in respect of all tax matters, whether direct or indirect. The concept of LTU has its genesis in the discussions of IMF which recommended the same for reforming tax administration in countries facing revenue crisis. In Canada, entities with gross annual revenue of $ 15 million or more are classified as LTUs. In Poland, certain type of businesses like banks, insurance and foreign ventures are categorized as Large Taxpayers. Gross income, tax due and tax paid are some of the criteria adopted in some countries to define and Large Taxpayers. Functions of LTUs LTUs are tax offices which will provide facilities for scrutiny and assessment of returns, recovery of short-levied or short paid taxes, adjudication of disputes and an appellate authority. They will provide tax advisory services. As per the proposed scheme, Corporte Tax, Central Excise and Service Tax will be dealt with by LTUs and Customs is excluded for the reason that assessment takes place on real time at the port of importation. These units are intended to collate and integrate information contained in returns filed by major assessees under various tax statutes. Trade facilitation is the primary function from the point of view of the assessees and for the taxman, LTU will assist in checking evasion by enabling access to variety of information as contained in returns and accounts and guarantee better compliance. Excise duty is levied at the stage of manufacture and other levies such as sales tax, corporation tax, etc., only follow. Non-reporting/Under-reporting of the value of the manufactured goods results in excise evasion further leading to evasion of sales tax to the extent of that portion of value which is depressed and consequently ending up with payment of lower corporate tax and the net income tax. It obviously flows that excise evasion has a cumulative and cascading effect on almost all the types of other levies. By focusing on a particular segment of excise assessees, leakages in revenue are anticipated to be plugged. While the preceding paragraph would point to LTUs being a necessity for the taxman, the tax-payer angle also needs to be highlighted. The role of such big business in creation of wealth, foreign trade, overseas investments, R&D and the like demand some special treatment in the form of better service delivery, client education, extensive consultations and mediation in dispute resolution. LTUs are designed to perform these functions. Administrative set-up The proposed LTU will be set up in 12 cities selected on the basis of the concentration of major assessees. Phase 1 will commence with the establishment of LTU in four metros and considering the number of major assessees in Mumbai and Delhi, two LTUs will be set up in these two cities. There will be a Member (LTU) in both CBEC and CBDT and every LTU headed by a Chief Commissioner either from Income Tax or from Central Excise will report to the said Member. One or more Executive Commissioners and an Appellate Commissioner from both I.T. and Excise form the next rung and Additional and Deputy Commissioner to be assisted by ITOs/Superintendents and Inspectors form the last middle tier in the hierarchy. The supporting ministerial staff along with Group D will form the last layer. The only factor that differentiates an LTU from a regular IT or Excise office is that at the Commissioner’s level, there will be functional specialization and each of them will be responsible for a specific sector (Industrial vertical, as the Group puts it) viz., textiles, pharma, oil, automobiles or I.T. A common tax portal will be launched which will integrate the data bases of all the tax departments. Economic Rationale: The rationale for going for exclusive tax offices for a category of assessees is the basic principle of economics i.e. majority is contributed by minority and minority enjoys the majority. In statistical parlance, 5493 assessees pay more than one crore by way of excise and their contribution to the total excise revenue is more than 70%. To put it more precisely, around 5% of the assessees contribute about 70% of excise revenue and the balance 95% contribute 30% of revenue. For optimal utilization of resources, instead of a thin spread of the entire tax administration over a vast majority, a section of the bureaucracy will dedicatedly cater to the big business thereby significantly reducing both collection and compliance costs. LTUs – Certain Imperatives The concept of LTUs is to aid the taxman to look into big business with a magnifying glass and check evasion and fraud by better sharing of information. While establishing such units, the government should make it clear that it is only as a matter of priority that they are set up and the usual offices and other assessees, particularly, SSIs, should not be made to feel unwanted or neglected. The conventional offices are expected to provide all support for LTUs in respect of any information and audit and such a functional arrangement may give LTUs the big-brother attitude. The field formations and the trade to which they tend to, may feel demoralized and sidelined which is neither economically preferable nor socially desirable. Also, overemphasis on LTUs may tend to aggravate economic distortions in that choices of production and consumption may get altered thereby causing negative revenue impact, a danger pointed out by Shri Parthasarathi Shome in his Paper “Tax Administration & the Small Tax Payer: Concepts, Concerns and Corrections”. Medium and small scale assessees should be provided all the advantages available to LTUs and in this direction, LTUs should serve as pilot projects for conducting feasibility studies in respect of tax reform measures. Time and again, including by KTF, codification of accepted decisions of the judiciary has been stressed to avoid frivolous litigation and to stop exhuming settled issues. No action has been taken so far and when LTUs are in place, such codification may become sine qua non as otherwise, the purpose of trade facilitation will be reduced to a mockery and LTUs will end up as yet another set of government offices. Large discretion should be given to C.C.s in LTUs while deciding to appeal or not against orders not favourable to Revenue. All relevant amendments to the statute and the rules should be put on the website of the Boards for pointing out any lacunae and to minimize the fodder for litigation on interpretation owing to poor or faulty drafting. According to IMF Paper ‘Improving Large Taxpayers’ Compliance: A Review of Country Experience’ [ Katherine Baer, et al, 2002], LTUs have been effective where highly centralized organization is in place and they are least effective where greater decentralization has been allowed. This read with another suggestion of clear reporting lines between the LTUs and the Board point to the necessity for evolving major administrative arrangement which ultimately may replace the Revenue Boards. Possibilities of introducing real time audit i.e. auditing before returns are filed, should be explored as such as suggested in Canada by Canada Customs and Revenue Agency [CCRA: Working Group on Large Business – External Consultation Paper (2001)] as the inherent defect of audit of being a post-mortem job can be removed to an extent. Any organization, to achieve unity of purpose should have unity of command. In the proposed scheme of things, major assessees who will be under the LTUs will be under dual control i.e. one of the LTU and the other being the usual Ranges and Divisions. The reason cited for concurrent jurisdiction appears very facile. The Ranges and Divisions are expected to provide assistance in export clearance and physical scrutiny of records (if required). It is too well-known that majority of major assessees opt for self-sealing save for DEPB clearances where such units prefer to have Excise supervision rather than Customs in view of the lower ‘opportunity costs’ in Excise vis-à-vis Customs. Physical scrutiny of records are required only for raising demand for short payment or for audit purposes and hence once the LTUs are in place, the existing offices exercising ‘control’(just to satisfy the bruised ego of excise men) over such large units will, at one stroke, be rendered redundant. There will then be a reorganization of the ranges and divisions. In view of the impending obsolescence of such conventional excise offices where LTUs constitute the raison d’etre, a clear and unambiguous roadmap for reorganization of such offices should be in place before 1st January 2006. The Project Report is silent on sourcing of staff and their service conditions. It can be safely presumed that a section of the existing officers and staff will be re-designated as LTU staff or they will be on ‘deputation’ to such agency. The expansionist drama staged by the Revenue Boards during the last cadre-restructuring providing for 100% to 200% increase in Group A posts should not be re-enacted and all Group A posts should be diverted from the existing strength to LTUs. With the reduction of number of appeals, the posts of Commissioner (Appeals) can be restored to pre-restructuring number and the excess posts need to be diverted to LTUs. Though these excess posts are now camouflaged with the executive cloak, identification and diversion are not insurmountable tasks. Since the officers are going to be saddled with extra-responsibilities in that they are expected to be abreast with law and procedures to take the big bulls by their horns, pay and perks should be commensurate with such posts. Let the LTUs be the forerunners of ‘generation next’ government offices which attract the best of talents through lucid job description and lucrative compensation package. Learning from the past experiences, Cadre-Control functions should be clearly demarcated to the concerned zonal Chief Commissioner or to a Committee of Chief Commissioners (the new blue-eyed boy is the committee system). The problems of infighting among the Chief Commissioners after cadre restructuring and consequent tossing of officers should be kept in mind so that such avoidable things do not recur. When the Report conjures up an image of swanky private-sector like offices for LTUs, retention of the long discredited Control Room, protocol work and uniform for officers will present the units in a very bad light. The CBEC should come out with clear-cut decision that such colonial vestiges will not find a place in the LTUs. Let us hope that the LTUs become model government offices which will achieve the seemingly impossible i.e. keeping both the taxpayer and the taxman happy and smiling.
By Dr. G. Gokul Kishore & Mr. T.M. Kothandaraman
Crime-prevention through punitive action is sine qua non for the existence and sustenance of society and the human civilisation. In any society, more so in the modern era, the consequences of criminal acts determine the magnitude of correctional actions. With Politics leaving the centre-stage in Inter-national relations and economics occupying its place, economic crimes assume more significance as the latter increases in geometric proportion compared to the development of a monetised and complicated economic structures both in the canvass of nation-states and in the international horizon. The damage that is inflicted by economic crimes to a national economy and hence the society mandates the need to prevent them. The trial and punishment of such offences by the judicial system secures two ends i.e. the offender is reformed (reformative end) and the potential offenders are deterred from indulging in such activities (deterrence effect). Thus prosecution of an economic offender serves at both the individual and social levels.
Indirect taxes contribute the maximum ( 50 % of Gross Tax Receipts of Govt. of India during 1997-2001)(CMIE 2002) among all other tax revenues to the Central Exchequer and every leakage in such revenue has far-reaching implications. K.D.Gaur ( 1987) identifies, inter alia, (i) inadequate prosecution machinery (ii) lack of adequate legal advice on potential prosecution cases (iii) lenient judicial attitude towards tax evasion as causes of tax evasion. The Indirect tax laws, viz., the Customs Act, 1962 and the Central Excise Act, 1944 provide for prosecution and punishment by the Judiciary in addition to the financial penalties imposed by the department. With the advent of New Economic Policy in 1991, the overall climate in so far economic offences are concerned, has become more of ‘fine-only’ offences with the criminal intent/effect receding to the back-stage. The role of the Criminal Justice System has been under greater strain in such a scenario. This Paper, therefore, attempts to study the present-day statutory provisions pertaining to prosecution in respect of evasion of Customs and Union Excise duties as provided in the relevant statutes, the performance of the Indirect Tax Administration in bringing tax offenders to book and the Criminal Justice Response in this sphere. An evaluation of the prosecution performance is also made along with a discussion of relevant recommendations of various committees constituted by the Government of India. The extent of implementation of various reforms and consequential results in tackling such crimes also form part of the discussion.
By Dr Kishore and Sri Kothandaraman
Taxes are 'imposed' and this nature of tax substantiates the fact that Economics is not divorced from Physics in that tax evasion exemplifies Newton's Third Law of Motion. It is common knowledge that the tendency to evade a tax is as old as the tax itself. The nature, characteristics and consequences of such evasionary acts in monetised economy vastly differ, from a largely individual-oriented barter economy of the earlier era. The modern day evasion represents a direct, deliberate and informed attack of an individual or group on the State or the society at large. Tax crimes are part of economic crimes and are violations of fiscal laws of the land in the course of occupational activity by persons who are respectable and of high status in the eyes of the society. Edwin Sutherland, a noted Criminologist described these as "crimes committed by a person of respectability and high social status in the course of occupation. First proposed by Edelbery (1970) and later figuring in a legislation in USA, 'economic crimes' is defined as 'an illegal act or a series of illegal acts committed by non-physical means and by concealment or guile, to obtain money or property, and avoid the payment of loss of money or property, or to obtain business or personal advantages.'
(BY DR. KISHORE AND DR SURESH BABU)
Rule- orientation, neutrality and anonymity are few of the hall-marks of bureaucracy. Such Weberian characteristics can be obtained in a complete manner only in ideal situations which, often, are far removed from reality. Absence of such factors lead to great deal of formalism and lack of independence in many spheres and this is more marked in Union Revenue Administration. Among the sources of revenue to the Government of India, Union Excise duties occupy a pride of place constituting the largest percentage averaging 35% of the gross tax revenue receipts from 1997-98 to 2001-02. The significance of the levy points to the urgency in addressing the problems in its administration. The Paper extrapolates Riggsian concepts to comprehend such problems in the sphere of adjudication. It begins with an introduction to functioning of quasi-judicial system in the Central Excise Administration and then proceeds to analyse the extent of prevalence of such factors followed by an attempt to understand the causes of their existence. A solution which is both administratively feasible and economically viable has been suggested for imparting greater independence in the adjudicatory proceedings. The Paper also considers the views of various Tax Reforms Committees constituted by the Union Government in so far as adjudication is concerned and evaluates the relevance of criticisms of Riggsian concept of Prismatic society to the identified problem and suggested solution.
Check out the pages of Inspectors' Assn.
Friday, December 28, 2007
Thursday, December 27, 2007
Budget 2003 and Excise Reforms
A budget always evokes knee-jerk reactions from all over and tax proposals occupy a 'pride of place' among the contents of any budget. While articulation of grievances tends to be the mainstay of such reactions, this article attempts to examine a wider range of issues including the budget vis-à-vis the Kelkar Report and a few other policy matters in the Excise realm.
Among the host of recommendations in the legislative and procedural spheres, only two on the statutory side, viz., deletion of reference to SWAM Act in Section 4A, and inclusion, in Section 4 A, of certain processes like labelling, repacking, etc., as manufacture in the case items subjected to MRP based levy, have been accepted. Procedural matters are more fortunate as more have been graced with acceptance. This list includes storage of CENVAT availed inputs outside the factory, abolition of forfeiture clause in Rule 8(4) of Central Excise (No.2) Rules, 2001, consigning budget day restrictions to dust bin, reckoning date of presentation of cheque as date of payment of duty and providing powers to condone procedural lapses in CENVAT cases.
Despite the absence of any study as to the evasionary implications of removal of goods without payment of duty and deferred payment, the trade has been blessed with monthly payment facility. Even in the case of Income Tax, the statute seeks advance payment of tax for certain categories. Corporate world is more trust worthy than the salaried class? Instead of addressing the liquidity problems through this measure, it might have been prudent to accept the Kelkar Task Force (KTF) suggestion of dispensing with pre-deposit in the case of appeals before Commissioner (Appeals). In fact, this suggestion is advantageous to the department also in as much as it obviates the necessity of elaborate process of passing an order for refund and review of such order, where appeal by the assessee is allowed.
Certain laudable suggestions of KTF have been given a go-by without any obvious reason. Divergence in interpretation was sought to be ended by advocating sparing and prospective use of power to define manufacture by the Board and this amendment to Section 2(f) has been given pre-mature death with status quo ante being restored through Finance Bill 2003. A very progressive idea of making value-addition at the processing (of manufactured goods) stage as the basis for the levy of excise replacing the age-old concept of manufacture should have been considered for acceptance. The first stage of making the levy value added has been made almost two decades ago with the introduction of MODVAT and with the Union Government having convinced majority of the States to introduce VAT from 1.4.2003, acceptance of this idea would have carried forward this process and also reduced the scope of evasion by sub-contracting and carrying processes outside the factory, as felt by KTF rightly.