FEBRUARY 24, 2016

By S Thirumalai

WHAT to suggest as changes in the indirect taxes becomes an increasingly difficult tax because every significant rule has been subject of change in the last decade or so. The worst affected have been the cenvat credit rules ever since inter- sectoral benefits for goods and services were extended. Courts have commented upon the complexity in the rules and the difficulties in interpretation. The cenvat credit rules require a thorough over haul and more importantly the artificial curbs on credit should go. If required there could be other revenue balancing exercises but ease of doing business can be ensured only by simplifying these rules. The revenue protection angle is paramount and the issues are also well identified. To name a few significant ones: the chain transactions without backing by way of actual supply of material or services; fake invoices; taking of credit that has no relation to the output service or the clearances of goods. All the checks and balances have to be within the realms of the self-policing system of assessment. Is such a system possible or will this be chimerical. World over the problem of cross checking of invoices and genuineness of transactions for input credit purposes has been an issue that has bogged revenue officials all the time. The answer to this lies not in further complicating the rules but in adding intelligence and algorithmic based data analysis so that the key issues mentioned above are identified and arrested. Here the 80/20 rule should come of use. Concentrate on the big assesses and require them to go through expert guided data mining exercises in lieu of artificial curbs to deal with suspected evasion. This could establish whether there is genuineness in the affairs to a large extent. But use of IT and the tools related to data mining must be brought in to aid anti evasion measures and at the same time relieve the rules of the onerous burden which they carry by way of outright ban on the eligibility for credit. Looking at the large exceptions instead of every case and concentration on industry norms/standardized rates could be also adopted to supplement the system wherever required instead of cluttering the rules with every conceivable situation.

The second major irritant is the "Damocles" sword of extended period of limitation and allegation of fraud and suppression with mandatory penalty equal to the duty or tax as the case may be. Related to this is the entire adjudication and appeal remedies based on an adversarial system by issue of show cause notices. Some estimates in major metros provide mind boggling proportions of the pendency which reckon that it may take as much as 28 years to dispose of the show cause notices given the current disposal rate. The problem has to be tackled with a multi-dimensional approach instead of a one fit solution for all. Public Sector and all Government agencies involved in indirect tax litigation should be outside the purview of the normal system and must go through compulsory mediation and negotiation based on well-defined norms. Advance Ruling should be available as in the case of VAT legislations across the country. With technology and connectivity there should be no difficulty in instantaneous transmission of information to keep the integrity of the system in place and avoid contradictory rulings. But time bound response should be a given for this to succeed. Instead of clogging the Tribunal with every sort of appeal there should be a committee of two commissioners who should dispose of appeals finally in all matters less than a certain limit and thereafter there should be a revisionary remedy with the jurisdictional High Court. The single member limits in the Tribunal should be enhanced substantially and the curb on matters relating to classification or valuation or rate of duty should be done away with. Appeals against the Tribunal should be before the High Court and not directly to the Supreme Court. It is by meaningfully slicing the problem and addressing this with various arterial ties that both the fund and flow of litigation in indirect tax could be addressed. More importantly there should be a conscious attempt to provide a departmental view even at the threshold to the assesse so that investment planning and business expansion could be built on tax assumptions that carry a fair degree of certainty.

Goods and Service tax will be an eventual reality at some time in the future and the ground work for acclimatizing trade and industry to the initial days of the new system which may not be all that painless is an absolute necessity. The Budget should put in place specific organizational mechanisms to institutionalise the processes that are required for the smooth functioning of the system when formally introduced. To take an example the interactions between the State VAT authorities and the Central excise authorities should be formalized and publicized so that there are interactions in the course of work across the hierarchies during this waiting period for GST. Similarly the familiarization with respect to Trade and Industry for the IT back bone functions such as GSTN should be put in place and wide ranging training and demo exercises across the country should be arranged for the stake holders. Lastly there should be a mass movement to popularize the key benefits of the GST system across the length and breadth of the country in local and regional languages besides English and Hindi as may be appropriate. These standardized presentations and interactions would be a preparatory process to dispel many assumed and unwanted apprehensions in trade and industry particularly the MSME sectors which are the spinal system of the industry and trade.

If the Union Budget resorts to the normal tweaking and fire-fighting exercises as in the past without some bold experimentation initiatives then this will also go down in history as a wasted attempt towards reform and ease of doing business.