Subject Group on Administrative And Legal Simplifications

Report on
Implementable Action Plans in the area of
Administrative and Legal Simplifications.

The Task Force, given the time constraints, could not embark on an analysis of the existing provisions of the Income Tax Act. However, the Task Force did talk to professionals in the field of taxation and it was given to understand that there is a comprehensive bill drafted in 1997, which is pending for enactment before the parliament. The Task Force strongly urges the Government to take up the introduction of the said bill in order that the entire tax administration becomes simple and is capable of being further simplified depending on the experience of the industry.

As regards Sales Tax and Excise Duty, the Task Force had dialogue with various Chambers of Commerce as also the Chairman of Central Board of Excise and Customs. The Task Force gratefully acknowledges the time given to it and the views shared by the Chairman.

Excise Duty Anomalies

The Task Force expresses its concern at the reach of the excise department to the market place and to charge Excise Duty based on the Maximum Retail Price (MRP), which was also the basis on which Sales Tax was being collected by various State Governments. The Task Force felt that using the MRP as an index for charging Excise Duty was in fact equating Excise Duty with Sales Tax, whereas the original intention was to make the Excise Duty as a duty payable on manufacturing.

During the course of its dialouge with the Chairman CBEC, the Task Force was given to understand that adopting the maximum retail price as the index for charging Excise Duty was part of the overall attempt to move towards the VAT regime. It was also stated that the maximum retail price was not being treated as the excisable value, but as a means to work backwards to arrive at an excisable value, by deducting certain components like freight, trade discounts etc. In the opinion of the Task Force, such a procedure would require enormous paperwork and substantiation both by the industry and the department and it is therefore appropriate that Excise Duty is imposed on the basis of valuation determined at the manufacturing stage.

Inter-State Council

Clashes of revenue interest between two States are creating problems and unnecessary litigation for the assessee. This is common in the area of branch transfers, works contracts and lease transactions. The assessees would like to pay tax at the appropriate rate to the appropriate State. However, whenever the other state make a rival claim, the dispute is not really between the assessee and the tax collector but the dispute is between the two states. For resolving such inter-state disputes, the Task Force suggests that an inter-state council is setup at the earliest. In this context the observations of the Supreme Court in the case of Ashok Leyland (1997) 105 STC 152 may please be referred.

Value Added Tax

On a review of the existing structure of Excise Duty, the Task Force is of the view that the duty structure has no doubt undergone a broad banding, but there is tremendous scope for further simplifying the structure and rationalising the rates of duty by widening the classification and eventually moving towards the system of Value Added Taxes (VAT).

In the course of its dialouge with the Chairman, CBEC the Task Force was given to understand that there is move to broad-band the duty structure in both Central Excise and Customs. This was to some extent amplified by the Planning Commission which expressed the view that a uniform rate of duty covering the main items and all analogous items would eliminate a large number of disputes that arise in respect of classification and such disputes would get minimised and focused only on valuation.

In the view of the Task Force, such simplifications may not be possible in one stroke but may have to be done in stages. It therefore recommends that the duty structure be broad-banded to not more than 3 bands to start with and gradually uniformity be brought about which will help introduction of VAT at a much faster pace.

The Task Force is aware that a dialogue between the Centre and different States in the country is going on, to rationalise the Sales Tax structure to prevent rampant evasion and abuse of the Sales Tax provision. The Task Force is also given to understand that it is difficult to bring about a uniform structure of Sales Tax and eventually replace Sales Tax, Excise Duty and other duties and levies with VAT.

However the distinct recommendation which the Task Force would make is, that the Government must make a serious endeavour for creating a system of VAT. The Government should not address only Sales Tax, Octroi and Entry Tax but also take into account the Excise Duty which is now being levied at the manufacturing point. A single point tax in the nature of VAT would address all revenue considerations and it will also help the Government to integrate various departments, man power and the systems to efficiently administer the tax regime and also create a conducive system of revenue sharing with the respective State Governments.

The Task Force recognises the fact that each State has its own compulsions for augmenting revenue with the collection of Sales Tax. But the fact remains that disparity in the Sales Tax structure amongst different States leads to unhealthy trade practices and at times the low rate of Central Sales Tax is taken advantage of by giving the transaction a questionable status of inter-state sale. In the whole process, tax gets related to the turnover and value addition is ignored. In order that the revenue considerations of the State and the Centre are adequately addressed, it is necessary to create a structure which will help the Central Government to eventually merge Central Sales Tax, State Sales Tax, Excise Duty, Entry Tax, Octroi Duty where applicable and arrive at a rational basis for apportionment of revenue based upon the average tax collection of the State which can be taken on a rolling basis for three years.

The Task Force recognises that there are likely to be differences between the various states and the centre on this issue. The administration of the tax regime in the Indian federal polity is driven by constitutional provisions that place tax related subjects in both the Central, State and in certain areas Concurrent list as well. It would therefore become inevitable to examine the need for an amendment to the constitution to bring about a uniform VAT regime. This is no doubt a political process that would entail a nation wide debate.

As an interim measure and to demonstrate the commitment of the Central Government to introduce the VAT system, it is suggested that a beginning be made by constituting a high powered committee to examine implementation of VAT. This Task Force will be happy to be associated, in any manner which would help the committee.

The Task force, during its interviews came across various problem areas which different industries experienced and an illustrative list is annexed as Attachment V which may please be directed for consideration by the concerned department. The Task Force is also given to understand that industry associations have also made separate representations on various other problem areas, which may also be taken up for expeditious resolution, alongwith the items mentioned in the attachment.

As regards Customs Duty, the Indian industry has endured the fall-out of lowering of tariff barriers and certain problems still continue to plague different sectors of the industry. The Task Force understands that the All India Importers and Exporters Association has been taking up industry specific issues with the Government and given the time constraints, it has not been possible for the Task Force to embark upon a detailed enquiry on the specific issues that dog the industry in this regard.

Anti-dumping Duty

The Task Force during its dialogue with various associations and individuals found that there is unanimity in the view that the administration of Customs Duty, Safeguard Duty and Anti-dumping Duty should be undertaken by the Ministry of Finance in the Department of Revenue.

Presently the Anti-dumping Duty is being administered by the Commerce Ministry and it takes 12 to 18 months even to arrive at a finding that provisional Anti-dumping Duty is to be levied. This is too long a period and it will have the effect of rendering the domestic industry sick. This is a serious concern expressed by the industry and the Task Force therefore strongly recommends that levying anti-dumping duty as an emergent measure, should be in the realm of Department of Revenue, Ministry of Finance which is also the authority that determines levy of Safeguard Duty.

The Task Force strongly recommends that there should be a change in the regulations, by making it obligatory on the dumping company / country to disprove the charge of dumping. The Task Force was given to understand that this practice is currently followed in the United States. In India the person complaining of dumping is expected to prove that there is dumping. However, the industry does not have the wherewithal to conclusively establish the act of dumping. The Government is better equipped to deal with the situation and it should, on an updation made by industry with adequate substantiation, take immediate measures to check dumping as it would erode the domestic industry and eventually extinguish it, leading to loss of investment as also unemployment. The process of imposition of Anti-dumping Duty should be compressed and the Task Force feels that a period of three months should suffice for this.

The Task Force recognises that as a member of the WTO, India has to keep in step with the covenants to which it is a signatory. The various limits that are available under the WTO covenants are quite adequate to justify the protection that should be provided to the domestic industry which complains of dumping.

During the interview with the Commerce Ministry, the Task Force was given to understand that a comprehensive legislation dealing with the subjects of dumping, imposition of quantitative restrictions and other safeguards is being thought of. The Task Force also appreciated the views expressed by the Commerce Ministry that the ability of the dumping country to produce enormous documentation to disprove dumping should be matched by a corresponding effort on the part of the Indian industry to document and establish dumping. If the Indian industry failed to provide documentary substantiation, imposition of Anti-dumping Duty would become a questionable decision. The Task Force has received this suggestion well but would request the Commerce Ministry to provide the guidelines that would enable industry to compile the information required by the Government to establish dumping.

Green Channel for Excise and Customs Duty

The Task Force also recommends that both in the case of Excise and Customs Duty there should be a record based control for the organised sector.

In the case of exports there should be a Green Channel provided for clearance based on self certification and declaration. This will greatly reduce the procedural rigours and boost the confidence of the export sector. In order that there is no abuse of the Green Channel, the Task Force recommends, that a beginning be made with accredited trading houses, which will have the facility of the Green Channel and subsequently after the system is stabilised, industrial houses of good standing may be accorded the same facility, depending on the nature of the products and the volume of exports undertaken by such industrial houses.

During the dialouge with the Commerce Ministry the Task Force found that its thoughts on the issue matched with the thoughts that the Ministry had on the question of self-regulation. The Ministry was of the view that a beginning could be made with 5 industries where imports and exports could both be permitted without having to go through the rigours of the existing procedure and a system of random sample checking would adequately serve as a deterrent for any abuse.

It was heartening to note that the Commerce Ministry considers Indian industry to be by and large mature, responsible and accountable and as such the Ministry did not foresee serious revenue implications if export and import trade is allowed on a self regulatory basis. The Ministry shared the views of the Task Force that abuse of certain procedures by a few should not cause inconvenience and harassment to all. In the assessment of the Task Force with which the Ministry was in agreement, a beginning must be made by liberalising the process and encouraging self-regulation in certain identified industries where the revenue impact arising from such experiment would be insignificant and if the findings of such experiment were encouraging then it could be extended in gradual measures to other areas as well.