GST in April 2016 – Our Concerns (Part II)

By Tirthankara

Over the next one year the terms GST Council, GST Network, common law etc. will become more and more familiar to us, and the main challenge posed before us shall be to cope with and cope early with the new terms, new approach and new standards. We have come a long way since the days of Tobacco Excise and Physical Control. But, this time it is going to be very different. Not only we have to recognize and conceptualize the tax setup afresh, we have to harmonize our entire exercises with State VATs. Whether it is explicitly required or not, as a big brother, the senior/ more professional partner in the matter of indirect taxes and specially in the matter of Services, we will be bound to make way and guide.

To succeed there will be a fresh need to reorganize the field formations post GST.

Present Status.

For any indirect tax administration, the centre activity has always been tax assessment or assessing how much to pay to the government and how? Naturally, the methods of assessment employed in the country have been factored by many reasons and developments, but the resultant evolution has always maintained a symmetry of purpose:

1.         Physical Assessment (Physical Control):   Even in pre-independence era, the central indirect taxes in India meant Excise and Customs. In a copybook style, Excise was imposed on the production of a few selected sumptuous items which were assessed at the time of clearance at the factory gate and duty was collected. The job of assessment and collection of duty was given to the Inspectors holding ‘Sector Offices’.

Being sumptuous, the items attracted a high rate of duty. And in 1944 i.e. at the time of introducing Central Excise Act, only 16 items were covered under excise. Those were listed in a Tariff Schedule and mentioned as Tariff Items (TI). As the number of items continued to increase, soon the schedule was overloaded and after TI 67, TI 68 was inserted to accommodate ‘all other items’. Though number of items increased, the concept of the duty remained same and attracted high rates. A committee was formed under S. Bhootalingam, former Finance Secretary of the country who submitted a ‘Report on Rationalization and Simplification of the Tax Structure, 1968’. Following the report, ‘Physical Control’ was withdrawn from most of the items on 31 May 1968.

Today, Cigarette is the only item produced, assessed and cleared under physical control, under supervision of Inspectors. 

2.         Return Assessment under Self Removal Procedure (Production Based Control and Return Based Control):         Commonly called PBC and RBC under Self Removal Procedure (SRP), success of this method largely depends on officers control over the documents maintained by the taxpayer, including Stocks, Production and Dispatch and as such needed sufficient workforce to regular physical verifications of stock. The taxpayers used to submit periodical returns to the Range Officers (Superintendents), who gave assessment certificate at the end of the return.

Since opening up of the economy in 1991, the work volume was rapidly increasing. When in response to Raja Chelliah Committee (1991) report, Service Tax was introduced in 1994 this got further aggravated. Soon, the controls were started loosening up with abolition of Classification List (TI numbered classification was meanwhile replaced by a Tariff Act and Schedule based on ‘Harmonized nomenclatures in 1986), Price Lists and Gate Pass. Ultimately, RBC and PBC were withdrawn with effect from 01 October 1996. In 2001 the old rules of 1944 was rescinded.

3.         Risk Based Scrutiny under Self Assessment Procedure (SAP):  Under the new method employed since 01/10/1996 and developed over the years, taxpayers assess their taxes and make payments accordingly. The scrutiny job hence been distributed over two stages,

(i)         In the preliminary stage Scrutiny of Returns is done to check that information is complete, prima facie, valid and internally consistent. Thus it is to ensure that tariff quotation of duty rate is correct and duty calculated and paid in cash or credit accordingly is accurate. This preliminary scrutiny is also to check that such assessment is consistent with existing orders on a particular commodity or the individual registrant including order of provisional assessment. This stage of scrutiny is done by the Range Superintendents (since introduction of automated systems (ACES) this is done in the system itself).

(ii)        In the second stage Scrutiny of Assessment or the detailed scrutiny is done for those returns where abnormalities are noticed in course of comparison of trends of payment of duty, production, clearances, value or in credit utilization etc. (mini risk parameters). In the original scheme of things under ACES, system itself was supposed to select the returns and list was to be generated in descending order of risk. The Joint/ Additional Commissioners are given the responsibility to select returns for detailed scrutiny. For the purpose local risk factors are also to be taken into consideration.

(iii)       Under this system, it is mandatory for the divisional Assistant/ Deputy Commissioners to conduct six-monthly scrutiny of returns of assessees paying yearly revenue between Rs. 1 Crore to Rs. 5 Crore in cash.

(iv)      Similarly, the Joint/ Additional Commissioners are required to conduct six-monthly scrutiny of returns of assessees paying yearly revenue of more than Rs. 5 Crore in cash.

(v)       In cases where scrutiny does not bring in satisfactory result references are to be made to the departmental Audit (now Commissionerates) with details.

It thus comes clear that over the years, the indirect tax assessment in the country has developed or evolved itself to cope with the changing/ liberalizing requirements of the time where returns have been simplified, interactions have been decreased and taxpayers have to disclose lesser details.

In the process apparently it has moved towards a risk based officer oriented system.   

The Breach Within.

However, certain gaps always remained in the logical build-up of the assessment/ scrutiny system in Central Excise/ Service Tax. 

(i)           Assistant/ Deputy Commissioners or Joint/ Additional Commissioners are supposed to conduct scrutiny, but in legal terms or to the understanding of the taxpayers they do not appear as scrutiny officers. Till date Superintendent is the only proper officer to scrutinize returns.

(ii)         Assessment/ Scrutiny Officers are often not allowed to process refunds or settle demands. Assistant/ Deputy Commissioners remain the sole refund sanctioning authority, and (adjudicating) powers to settle demands are distributed among Superintendent, Assistant/ Deputy Commissioner, Joint/ Additional Commissioner and Commissioner on the basis of amount and nature.

Thus the officer scrutinizing the returns, in most cases, is not entitled to allow refund or to settle demands.

Comparison with Assessment System in Direct Taxes.

This is not the case in the Income Tax Department. For direct taxes the assessing officer is empowered to settle/ finalize the returns by allowing refunds or settling dues. To allow this, the assessment powers in Income Tax Department are distributed upto Joint/ Additional Commissioner level.

In an Income Tax Commissionerate, generally there are 4 (four) Ranges (akin to the Divisions in Central Excise) headed by a Joint/ Additional Commissioner. But in most of the typical metro Commissionerates one of the range (Special Range) is employed as an assessing unit where Joint/ Additional Commissioners work as assessing officers. Within a Range, there are 2 (two) Circles headed by Assistant/ Deputy Commissioners, and 4 (four) Wards headed by Income Tax Officers (ITOs). Special Ranges, Circles and Wards, all work as assessing units where returns are distributed based on income levels. Inspectors of Income Tax and Tax Assistants are posted to assist in the assessing work.   

This structure has been helpful not only towards a more secure risk based assessment system, but also developed a technical orientation in the department. This apart by employing a Commissionerate ratio of 1: 4: 7: 13 among Commissioner: JC/ ADC: AC/DC: ITO, it is continued to be the reason behind a normal promotion prospect for the officers in the Income Tax Department.   

Future with GST.

It is an eventuality, a foregone conclusion, that post GST the tax returns will be more taxpayer friendly, simpler and shall contain lesser details. Thus effective assessment of such documents will pose challenge to the tax officers in terms of not only technology (it is well expected that GSTN will improve on the shortcomings of ACES) but also in terms of resource base.

On both these counts and irrespective of GST, the TARC (Tax Administration Reforms Commission) in their first report (page 141) has made specific recommendation for introducing Income Tax like structure of field formations in Central Excise and Service Tax.

It should be of highest priority for the Central Excise and Service Tax Department to reorganize and restructure accordingly towards building an effective administration that can meet the challenges put forth by the biggest tax reform initiative in the country and to attain great heights with introduction of GST on 01 April 2016.

GST in April 2016 – Our Concerns (Part I)

By Tirthankara

On 28 February 2015, in course of his 2^nd Budget Speech, the Hon’ble Union Finance Minister declared that on and from 01 April 2016 GST (Goods and Services Tax) will be rolled out in the country. Since the Central Excise & Service Tax offices are expecting to have a major role in such dramatic developments, the buzz in the corridors of these offices is growing since and curious eye-brows are raised seeking replies to a ‘How?’ The queries are left unattended or replied back with a matching dance of eye-brows.    

It is though not much difficult to appreciate the silence. The only official communiqué available to the departmental officers is a GST status report posted on the CBEC site (www.cbec.gov.in) just two months back (dated 01/01/2015). (To be more truthful this status report is an upgrade version of an earlier report posted in March last year.)

This report is not a mere statement on the GST developments, while concluding it brings forth the role of CBEC in the scheme. It states:

“8.           The CBEC is expected to play an important role in the drafting of GST law and procedures, particularly the CGST and IGST law, which will be exclusive domain of the Centre. This apart, the CBEC would need to prepare, in advance, for meeting the implementation challenges, which are quite formidable. The number of taxpayers is likely to go up significantly. The existing IT infrastructure of CBEC would need to be suitably scaled up to handle such large volumes. Based on the legal provisions and procedure for GST, the content of work-flow software such as ACES (Automated Central Excise & Service Tax) would require review. Augmentation in human resources would be necessary to handle such large number of taxpayers scattered across the length and breadth of the country. Capacity building, particularly in the field of Accountancy and Information Technology, for the departmental officers have to be taken up in a big way.”    

This small paragraph, in fact gives some specific points which CBEC (i) is expected to do, (ii) would need to prepare, (iii) would need to scale up, or points which (iv) would require review, (v) would be necessary, and (vi) have to be taken up. These points are:

1.      Drafting of CGST & IGST laws,

2.      Meeting formidable implementation challenges,

3.      Updating IT infrastructure due to increased number of taxpayers,

4.      Reviewing content of workflow software (ACES),

5.      Augmenting human resources, and

6.      Capacity building of officers in the fields of Accountancy and Information Technology.           

The above content thus depicts that the apex body for central indirect taxes itself is yet to get a clear sense of things happening/ will happen, and we don’t need to walk far to find the reason behind the prevailing confusion on GST in the department. Moreover, the status report apparently being silent on some major issues further fuels apprehensions.

First, the report is totally silent about a major GST institution viz. GSTN, a private limited company set-up by the government in 2013 as a special purpose vehicle (SPV), primarily to provide IT infrastructure and services to the Central and State Governments, tax payers and other stakeholders for implementation of the Goods and Services Tax (GST).

It appears from the reports available, that the government intends GST administration to have simpler control mechanism. While the mainframe will be administered by the GST Council (GSTC, a body similar to present Empowered Committee), IT infrastructure will be taken care of by the GSTN. The CBEC, as things stand today may only play a supporting role. That be so, the future of CBEC and its employees will remain much dependant on the work of these bodies, and shall have to abide to the decisions taken there.

Second, despite references to Empowered Committee, it does not reflect some major developments/ decisions taken there even when such reports are available in the public domain. Specific reference may be drawn to a long standing expectation (reflected in the status report also) that number of taxpayers/ assessees for CBEC would swell from the present 25-26 lakhs (manufacturers, dealers and service providers) to above 60 lakhs under the GST regime.

Yes, under present conditions and projected threshold of Rs. 10 lakhs (turnover), GST will have a sufficiently large tax base and the number of taxpayers would still be above 60 lakhs. But, and this is a very big ‘but’, as per reports published in leading national newspapers, and we quote from Economic Times:

“As per their recommendation, GST would not be imposed on businesses with an annual turnover of less than Rs.10 lakh. Currently, the threshold for Value Added Tax (VAT) is Rs.10 lakh in most states.

On the vexed issue of dual control of traders by both the union as well as state governments, the states recommended that they be given legal powers to collect tax from businesses with an annual turnover of up to Rs. 1.5 crore. Those with below the turnover threshold of Rs. 1.5 crore would pay their taxes to states, which would subsequently pass on to the Centre its share.”

(Report: 21 October 2014)

If this demand of the states is accepted and if report from some independent researchers, which indicate status quo in administrative control of ‘traders’ and ‘service providers’ by the centre and the state does not come true for turnovers upto Rs. 1.5 Crore, all taxpayers whose annual turnover would fall between Rs. 10 lakhs to Rs. 1.5 crores will be within administrative and legal control of the states. If that be so, the majority (more than 90%) of service tax assessees will go out of CBEC control and the total assessee/ assessable returns number will reduce drastically to be around 5-6 lakhs and instead of augmentation, retrenchment will be looming large for CBEC.

Thus post GST we are having three sets of possibilities as far as taxpayer base for the department is concerned.

Possibility 1.  Turnover threshold for GST is fixed at Rs. 10 lakhs/ annum and centre gets responsibility to look after entire CGST and IGST collections. Expected tax base would be more than 60 lakhs. As things stand today, this is least possible among options.

Possibility 2.  Turnover threshold for GST is fixed at Rs. 10 lakhs/ annum. Centre continues to look after CGST, IGST and SGST collections for services upto annual turnover of Rs. 1.5 Crore, while states continue to look after SGST, CGST and IGST collections for traders falling within Rs. 10 lakhs – Rs. 1.5 Crore annual turnovers. Expected tax base increases marginally due to addition of big traders (those above Rs. 1.5 Crore turnovers). This seems most practical at the initial phase.

Possibility 3.  Turnover threshold for GST is fixed at Rs. 10 lakhs/ annum. States are given responsibility to look after SGST, CGST and IGST collections for all businesses falling within Rs. 10 lakhs – Rs. 1.5 Crore annual turnovers. Expected tax base reduces drastically. This does not seem practical especially in the initial phase, but if a decision is taken to have single interaction point for small taxpayers, it may prevail.          

In any of the above situation with introduction of single registration and single return under GST, the department would have to go through another reorganization exercise; the specific situation would only determine the magnitude.

Meanwhile opinions be formed on the direction of such reorganization. 

AICEIA Chennai Boycotts Central Excise Day - Superintendents' Assn Chennai offers support

Time to introspect

By R Manimohan

In our youth, when we joined Government Service in the Central Excise Department as an Inspector of Central Excise, we were told by the then IRS officer  that we were the SPINE of the Department.We were proud. Because, we had been taught earlier in our schools and colleges that it is the spine that differentiates between the vertebrates and the invertebrates; that it is the erect spine which differentiates the homo sapiens from the rest of the animal kingdom.We were proud because we were asked to don a ‘Uniform’.  We were proud because it looked like the uniform of the Police officers.
We were proud because our senior officials in the department told us that an Inspector of Central Excise was equivalent to a Circle Inspector of Police, in rank.We were proud because we were told that only this class of Executives, in the entire Country, were empowered to wear uniform, wield weapons, collect revenue and also conduct quasi-judicial functions – all at once.We were proud because we were told that we were Chartered Accountants, Lawyers, Police, (and yet beyond the encumbrance attached to the police), Chemists, Judges, Statisticians, Sleuths, and a variety of various other things all rolled into one.
We were proud that no other super hero of our times had donned so many roles in a single movie.We were so proud that we had entered the heaven of a service

.…….

As days went by, years passed on and decades had been spent, we now realize:

That the SPINE DOESNT GROW;That the Spine is the one which bears the entire brunt;That the spine which is a connecting link between the animal instinct and the supernatural within, had been reduced to an elastic supplement because:

Ø  the department is quasi not only in judicial things, but also in uniform, discipline, responsibility, execution and many other things;
Ø  the uniform imposed upon the frame of the executives was a myth;
Ø  the powers stated in the statute for these executives were at the mercy of unwritten codes;
Ø  there were no work norms;
Ø  nor was there any uniformity in administrative decisions between various zones within the department and
Ø  all the benefits of the office, infrastructure and career benefits are supposed to be the exclusive prerogatives of only the very ones whose burden we bear and whose bread and butter we make.
So now it is time for this SPINE, once proud and erect, but now tired to the bones and shattered in spirit, to recline and introspect – where we went wrong.

About this blog

This blog has been given shape following an initiative by Shri R Manimohan and Shri Arun Zachariah, along with several other individuals who are, or  have earlier been,  in the forefront of the organisational movement in the CBEC. Its day  to day operation shall be looked after by A Satish and Ajit Kumar K G.  These four persons thus constitute the present editorial team of this blog.