Large Taxpayer Units - A bird's eye view
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.