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 Following the report, ‘Physical Control’ was withdrawn from most of the items on 31 May 1968.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.