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Is tech-driven compliance lending fizz to taxes?
November, 17th 2007
Most indirect tax statutes are amenable to being embedded in automated processes, though the manual element can never be eliminated completely.

The thrust of the indirect tax administration appears to be on enforcing greater compliance in Central Excise and service tax through intrusive audits and use of information technology.

Mr Manasvi Srivastava, Vice-President Operations in BMR Managed Services.

How do you reconcile these numbers: Economic engine growing at 10 per cent and direct tax kitty swelling at 40 per cent? Clearly the result of increased compliance, says Mr Manasvi Srivastava , Vice-President Operations in BMR Managed Services, New Delhi.

Since the growth numbers of taxes are so out of sync with growth in economy and the extra collection is indicative of increased compliance, the question of estimating the residual non-compliance assumes importance, he adds, in the course of a recent e-mail interaction with Business Line.

While the Finance Minister and revenue officials have expressed concern at the low growth in Central Excise revenue, the conclusions arising out of the galloping rate of growth in direct taxes as well as service tax should not escape our study.

So, it may be a worthwhile exercise to explore the fizz that taxes get, beyond what can be a logical fallout of economic growth.

Excerpts from the interview:

What are the numbers that we have about tax collections?

Direct tax collections in the current fiscal have grown by 40 per cent over the corresponding period in the previous year. Now considering economic growth of 10 per cent for the non-agricultural sector (despite the slowdown for September the numbers still hold for cumulative growth) added to the inflation rate of 3-4 per cent one arrives at 13-14 per cent as a normal increase in tax revenue.

This implies that the 40 per cent growth in direct tax revenue has arisen out of increased compliance.

And indirect taxes?

The Central Governments indirect tax collections have shown an increase of 14.6 per cent till September this year. The indirect tax revenues consist of Customs duties, Central Excise, and service tax.

Of these, Central Excise collections have grown at 7.2 per cent for the month of September 2007 over the corresponding period in the previous fiscal, while the cumulative growth figure for April-September is 6.5 per cent over the previous year. Service tax has grown by 37 per cent for the first six months of this fiscal, over the previous year.

Now that we are talking of better compliance, do we know how extensive non-compliance is?

Non-compliance with taxes in a country can never be measured accurately since those who evade taxes do not provide figures of how much tax they evade.

It would be unrealistic to assume that everyone who was non-compliant has become compliant this year and hence the increase in revenue.

It is widely known that that the success rate of tax audits by the government in detecting undisclosed liability is higher in service tax than in Central Excise. Such a trend is expected to persist in the near future.

Are we working on improving compliance?

Going by recent utterances of revenue officials, the thrust of the indirect tax administration appears to be on enforcing greater compliance in Central Excise and service tax through intrusive audits and use of information technology.

Thus e-governance, besides being a facilitator, would also be used as the strong arm of the regulator to catch tax offenders.

There would always be some individuals and organisations who would deliberately and wilfully evade taxes, whatever be the tax regime. Such evasion can be contained only asymptotically and never brought down to zero.

What can be tackled easier, however, is the unintentional evasion

Unintentional evasion?

This arises out of complexity in a tax system or a lack of awareness about the nuances of taxation. From the point of view of taxpayers, unintentional non-compliance is a greater risk for genuine businesses since it can generate unpleasant financial surprises.

An organisation serious about corporate governance would lay great store by eliminating unintentional non-compliance.

But how?

It is here that the role of putting in place systems that embed tax compliance within finance and accounts processes becomes important. While the Finance Minister and the revenue department feel that technology will get the evaders, the use of technology can also be made at the taxpayers end to subserve the objective of compliance.

Most indirect tax statutes are amenable to being embedded in automated processes, though the manual element can never be eliminated completely.

Arent businesses having the right systems in place already?

While most multinational corporations operating in India have aligned their processes to the US Sarbanes-Oxley Act compliance, the picture is rather bleak when it comes to compliance with Indian taxes.


Most large businesses have deployed some form of an enterprise resource planning (ERP) system which, while catering to accounting from the point of view of receipt and expense accounting, inventory management and even HR, does not do enough to ensure tax compliance.

We have technology gaps, therefore?

Yes. From a systems and technology standpoint, either present day ERPs should be augmented with capacity to handle domestic taxes or companies should deploy overlay solutions over and above their ERPs to fulfil this requirement.

It is here that use of IT can enable better compliance dovetailing into the overall objectives of e-governance.

You are talking of a different sync between government and business

Thats right. As India evolves from a developing economy to a developed one, there are systemic changes that will need to be effected in both public governance as well as corporate governance.

While there is some activity on both fronts, much needs to be accomplished.

On the one hand, the Central and State governments are making efforts to improve the regulatory environment through e-governance.

And, on the other, businesses are putting in place systems for streamlining their processes and ensuring accuracy of financial reporting. The two trends need to converge so that the ends of both government as well as businesses are met.

More specifically?

If we consider the touch-points of businesses with government across sectors of the economy, the Ministry of Company Affairs and Ministry of Finance assume relevance. Within the Finance Ministry , the two revenue boards, namely, the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT), act as major facilitators as well as regulators of businesses.

Of the foregoing, compliance with the taxes administered by the CBEC, namely, Customs, Central Excise and service tax, being transaction-based, take up greater time and effort of taxpayers.

Can you describe the e-governance scene in India?

E-governance is happening as a result of certain key ministries/departments taking the initiative and launching ambitious e-governance schemes. There has also been some effort at nationwide and pan-ministry co-ordination, in the form of National E-Governance Plan (NEGP), but in effect the ministries/departments have been plodding through on their own, managing projects, pursuing financial approvals, and so on.

There have been quite a few successes though. There are 27 mission mode projects identified by the Ministry of Information Technology and some of theses have been quite successful.

Such as?

Clear success examples are the e-governance programmes of the Ministry of Company Affairs and the Income-Tax Department. These have delivered concrete benefits.

As a result of MCA-21 (the electronic governance project of the Ministry of Company Affairs) the time line for incorporation of a company has come down to five days from the earlier average of fifteen days, while the timeline for a change in name of the business entity has come down from fifteen to three days.

In income-tax, there is a host of automated systems in place, including computer-aided selection for scrutiny (CASS), online tax accounting system (OLTAS) and electronic filing.

Are there clear signs of success in the tax office too, as in MCA?

While some aspects of online tax accounting may take time to stabilise, the success of the automation project can be gauged from the fact that for the assessment year 2007-08, nearly 11 lakh e-returns have been filed till due date, which is an increase of 273 per cent over the previous year.

It is also remarkable that the revenue figures of income-tax collections for the entire country for the period ending October 31 are available are available to the public by November 5.

Another mission mode project for Central Excise and service tax, now in the final stages of roll out, aims at automating all kinds of filings and submissions to the Department concerned, apart from putting in place an automated workflow for departmental officials.

Bio: Mr Srivastava, a B.Tech from IIT Kanpur, supervises solution development and compliance operations in BMR Managed Services. Earlier he was an officer of the Indian Revenue Service (Customs & Central Excise), 1992 batch, and worked for 14 years in enforcement, intelligence and systems wings of the Department. At the time of his resignation from government service he was working on the Prime Ministers mission mode project for automation of Central Excise and Service Tax. He has also worked on collaboration projects with Canada Customs and Revenue Agency and has been Co-Chair of a regional conference of World Customs Organisation (WCO).


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