Indirect tax: Need to align law with administration
An examination of the tax reforms by the government over the past decade which comprise fundamental tax reforms like introduction of Value-Added Tax (VAT) and alignment of the Central Value Added Tax (CENVAT) and Service tax regimes, indicates that the focus of the government has been to move towards a tax regime that is simple and economical.
In fact, India has steadily streamlined its indirect tax regime over the past thirty years. The law has increasingly become simpler and easier to interpret and administer over the years. Many commentators focus on aspects of the law which are still unclear or adverse in some way to industry. While this focus is definitely warranted, there is a huge gap between the law that exists on paper and the manner in which it is implemented. This article is therefore about the need to align the administration and governance to the law.
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What are the types of gaps between practice and the law on paper? Is too much being made of this? Well, here are just a couple of the more commonplace examples.
The first example is the refund of input service taxes to the exporter of services. While the intent of law has always been to free export of services from domestic taxes, it has always been a challenge to implement this. The way this is administered is as if the Government’s philosophy is to deny this refund to exporters or make them sweat over this.
There are many reasons for delays and rejection of refunds and these refunds being issued 3-4 years later, after the exporter has gone into appeal all the way to the Tribunal. The reasons include the requirement to establish a nexus between the input services, in relation to which the service taxes are paid, and the services exported. The other challenges surround the documentation requirements, starting from proof of actual exports, agreements with service recipient, the input service invoices and CA certificates pertaining to input services/exports. The authorities have sought to reject refund claims not just on legal grounds but also on procedural grounds, independent of a number of Tribunal decisions allowing such benefits that were denied on account of procedural lapses.
Another area where there has been complete disregard of the policy initiative taken by the government is the inaction on the Circular No.828/05/2006-CX dated 20th April, 2006, which laid down the scheme of granting ad hoc interim refunds, say 80 percent of the amount due, based on the refund claims furnished by the exporters, within 15 days thereof, subject to a final settlement within a short time frame (45 days) from the date of filing such claims. Though the circular has been in place since 2006, the field formations have hardly granted any refunds following the scheme prescribed in the circular.
However, the key issue, to us is one of philosophy. The law says service exporters should be refunded their input taxes. The practice on the ground says that they should not be given a refund.
Another area where the business community faces challenge is the payment of taxes in the last quarter of the financial year.
The challenge is two-fold: 1) there is a requirement to pay advance tax in March. 2) two there are “requests" made to factories for deferring the utilization of input credits during February/March while remitting the taxes and duties payable for such months. The requests are guided by the requirements to meet revenue targets of the tax authorities for the year but pose challenges for businesses in terms of strain on their working capital. From the perspective of the tax authorities as well, these have a twin impact in terms of creating inflated revenues for the current period and inflationary revenue targets for the subsequent period. There is clearly nothing in the law that provides the authorities with the power to require a factory to pay excise duty on the gross value of production, and not take CENVAT credit. It’s just that this is what happens every year.
In addition to the above, the businesses continuously face challenges in relation to routine processes like registrations, filing of returns, procurement of statutory forms, other statutory certifications, audits and assessments.
The extent of challenges of businesses can be understood from the fact that just to obtain a tax registration, the applicant entities have to furnish a ton of information and documents, which for a body corporate, start from the NOCs from the landlords of the premises to be registered to the authentication of registration documents by “all" directors of the company even if all such directors of the body corporate are foreign residents located in different parts of the world.
In summary, though the law and the policy is being formulated to support a system of self assessment based tax administration, at the ground level, such policy is either not implemented in the true spirit or is bypassed by the field formations to meet the short term objectives of their revenue targets.
Thus, for an efficient implementation of progressive tax policy, it is essential not just to develop the framework for a sound tax administration but also to monitor the working of the tax administration machinery.
In the next article in this series, we will discuss some initiatives that could help align the administration and governance to the law.
The Author is Leader Indirect Tax Practice,PwC India HYPERLINK "mailto:email@example.com"firstname.lastname@example.org Supported by Monika Arora and Kishore Kumar