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Credible tax administration to boost investor confidence
February, 14th 2013

Budgetary proposals focus more on rate structure with less attention on tax administration, though "it is now well-recognised that tax administration is tax policy".

Undoubtedly, significant improvement and modernisation has come in the working of tax departments. Returns are filed electronically, and departmental websites boast of excellent and efficient service to the taxpayers.

The text of tax laws and procedures is available at the click of a mouse albeit in not-so-updated form. However, what seems to be worrisome is the significant lack of dynamism, enthusiasm and the spirit of efficient implementation of tax laws.

To say that it has become an obsession to introduce changes in the name of reforms would be cynical. Yet, it is true that while out-of-the-box thinking is needed to bring fundamental changes, what holds the key to buoyancy and sustainable revenue collection is effective and efficient implementation of the system.

A tax system might be excellent, but it can be flawed by maladies of implementation. And history can be a good teacher to draw on some inferences for introspection and corrective action.

Consider this. In 2001, the government amended the relevant sections of the Central Excise Act and Customs Act to urge upon the adjudicating officers to decide the duty liability disputes within six months from the date of notice issued to the noticee. In the case of evasion of duty on account of fraud or collusion, any wilful mis-statement or suppression of facts or deliberate contravention of law, the time limit of one year was prescribed.

In respect of both the time limits, the expression "where it is possible to do so" was perhaps consciously used to take care of outliers and exceptions. Otherwise, the message given was loud and clear: effort must be made to decide the cases within the time limit of six months or one year.

What the industry now complains is that the objective of speedy disposal that was intended has been given a go-by and passing of orders is awfully delayed even after all the formalities, including hearing, are over. The industry is so much perturbed by the delays that it now wants the proceedings to lapse if orders are not passed within some fixed period of time.

Take another striking legal provision. It mandates that if duty is short-paid by reason of fraud, collusion, any wilful mis-statement or suppression of facts or deliberate contravention of law with intent to evade duty, then the department can recover such duties or tax for a period of five years; in the normal course, the period of recovery is only one year.

Similar provision applies to evasion of service tax. There is an additional provision that in the event of such evasion being upheld, the evader would be liable to pay penalty of an equal amount. And, not to forget, the interest that the evader has to pay in addition to duty and penalty. The cumulative effect of these provisions is harsh enough to warn the tax evaders and that is the purpose.

But how has it been implemented at the ground level? Many feel that the officers resort to invoking the extended period of five years even when ordinary interpretational issues of law are involved and there is no intention to evade the duty or tax.

It is also widely believed that once a notice invoking extended period of limitation is issued, the adjudication officer feels compelled to confirm the demands, even though not sustainable on the face of it. The result is that it adds to the number of appeals to the tribunal or higher fora. The fact that the success rate of the departmental cases is meagre adds credence to the unholy misuse of these legal provisions, without adding to government revenues, which ought to be the objective of initiation of recovery proceedings.

The tax administrators need to hold a chintanshivir to make an honest assessment of ground reality and dwell upon the causes of falling credibility. While the goods and services tax (GST) would change the entire complexion of the indirect tax structure, the need to change the work culture in tax administration cannot await GST. In fact, it is a prelude to the GST.

It is time the Budget announces concrete measures to introduce a new culture, treating the taxpayers as 'clients', as Parthasarthi Shome, adviser to the finance minister, would like to advise and usher in an era of a truly 'non-adversarial' tax administration. The 'hostile relationship' must come to an end.

 
 
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