Developing countries like India face several challenges in managing their tax collections, particularly due to the lack of sophisticated and comprehensive IT systems in the economy. A IT systems-driven economy tends to produce reliable data in real time, through which informed tax collection decision can be taken. The previous article in this column had discussed briefly the challenges faced by the business community right from obtaining registrations, to complying with the tax compliances such as tax payment, refund claims etc due to the huge gap between the law that exists on paper and the manner in which it is implemented. This article will discuss in detail the priority areas for further action to achieve good tax governance.
Measures to achieve good tax governance can be implemented in several ways in the field of taxation. One of the key areas is the raising of tax demands for reasons that are not very well supported by the provisions of the law. The net result of these tax demands is that there is litigation which goes on for several years for any given issue, ultimately resulting in a refund of the taxes collected. The government could easily create a body, which has the mandate to examine issues which result in demands, which are ultimately overturned. Such a body could make recommendations to the CBEC, which could issue circulars which are both interpretative and directional in nature. Such circulars are currently issued on various issues. Clearly, issuing circulars would not by itself solve the problem.
We would suggest that the circulars should be backed by a requirement to obtain an approval for any fresh demands on any tax payer on the issue covered by the circular. The approval could be required from the chief commissioner of the jurisdiction (for example), who could be required to record reasons why the interpretation covered in the circular is not applicable in the specific facts of the case where the demand is issued. To anyone who might suspect that this measure would have the effect of disempowering the tax authorities, we would provide this example.
We have several refunds of service tax due to service exporters that are currently denied on various pretexts. The overall picture on this is one where the government pays out the refund typically after a lapse of two years, with interest, after the exporter has obtained relief by appealing up to the level of the tribunal. Effectively, the government is borrowing money from the service exporter and paying that money with interest two years later. From a macro-economic perspective, that is not in the interest of the government.
Similarly, on service exports (again, this is only one of many examples), all pending litigation can be examined by high level screening committee constituted to evaluate the merits of the pending disputes and cases that are similar to those already adjudicated in favour of the taxpayer may be dropped.
Ironically, the revenue authorities are (by and large) not assessed on their individual performance by the volume of tax demands that they raise. Therefore, it is not only that in the interest of government or industry that frivolous tax demands be minimised. It is also not in the interest of the individual tax officer who raises the demand.
Similarly, unlawful measures, if adopted by the field formations should be appropriately dealt with by way of disciplinary action on the relevant tax officer. One of the examples given in the previous article is the common practice of not allowing factories to take CENVAT credit for inputs in the last one-two months of the year. This is something that should simply be stamped out, by concerted administrative action. This is something that cannot happen too soon, as far as industry is concerned.
There should also be minimum intervention between the tax authorities and the tax payers, on routine issues. Most states have automated the periodical compliances such as electronic filing of VAT returns, e-payments, electronic generation of movement documents, etc. While there has been a considerable amount of progress, this trend needs to be accelerated, with a sense of urgency.
The key point is this. We have a reasonably good set of laws on paper. However, there is a massive gap between the rights of the taxpayer on paper and those that are actually available on the ground.
It does not seem reasonable that this gap be ignored any longer. Nor does it seem logical to simply assume that the issues of faulty implementation of the law will go away by itself.
The government therefore has to take concrete steps to correct the many egregious examples of the law saying one thing and the administration’s actions saying something completely different.
The tax laws have been created by the Parliament and state legislatures, not by industry. These laws are, for the most part, balanced and fair. It’s time that industry starts to find that the implementation of the law is similar in its orientation.
The author is Leader Indirect Tax Practice, PwC India email@example.com , Supported by Monika Arora and Kishore Kumar