Successful implementation of the goods and services tax hinges on the quality of tax administration reforms that the states can carry out. The CBEC’s experience can offer useful lessons to the states.
The Goods and Services Tax (GST) has been seen, and rightly so, as the most important reform in post-Independence India. The deliberations in numerous seminars and workshops organised on GST have tended to focus on the provisions contained in the Constitution Amendment Bill, its passing in the Rajya Sabha and the concomitant question of “GST when?”
In my view, while these are legitimate questions, the implementation of issues is equally important. This hinges on the quality of tax administration reforms that the states can carry out: the Central Board of Excise and Customs’ (CBEC) experience may offer useful lessons to the states while the CBEC itself can benefit from innovative administrative experiments of the states.
An ideal tax administration must have suitable arrangements where there is ownership and functional responsibility built around key business processes. These are: registration, payment of duty, submission of returns and refunds, audit, anti-evasion and dispute resolution. It would be necessary to prepare a standardised manual for return scrutiny, audit and anti-evasion. For this the Centre and the states would have to get together. Similarly, collaboration on a common training programme would also be vital, which could culminate in the preparation of a common training manual. To achieve efficiencies in these business processes there is need for strong “facilitation processes” like taxpayer services, performance measurement and training for capacity building.
A good tax system must have an effective compliance verification arrangement based on the principle of “trust, but verify”. This requires making a clear conceptual distinction between the three prongs of the compliance verification system, namely, return scrutiny, audit and anti-evasion. In many state commercial tax departments this distinction is often blurred. Let us look at each one of these prongs. Return scrutiny relates to evaluation of the correctness of the assessment made in a self-assessment scenario. What can be done fruitfully is to reconcile the information given in the returns furnished by the taxpayer with the details given to the income tax department in the ITR 4, 5 and 6 (as applicable). This scrutiny should be confined mainly to smaller units below an annual duty threshold limit of Rs 50 lakh. These units must be selected for verification on the basis of risk parameters which assess the quantum of rupee risk. There are well-established ways of doing this. Audit, on the other hand, looks at reconciling the information given in the return with that furnished in the financial records, besides evaluating the internal control system of the company. Such a compliance verification may be confined to larger units above an annual threshold duty payment level of Rs 1 crore. In this arrangement, the two prongs of the compliance verification system, i.e. return scrutiny and audit, would complement each other. Finally, anti-evasion would cover cases of suppression of fact and clandestine transactions. This prong of the compliance verification system would benefit from information sharing among CBEC, Central Board of Direct Taxes and the state VAT departments.
Therefore, an effective compliance verification system would require three important elements – a risk management system to select delinquent units for verification (return scrutiny and audit), information sharing between central and state tax departments, and creating skill sets among tax officers for scrutiny of financial records.
The states will have to draw up an action plan for administrative re-organisation of their commercial tax departments. The technology backup here will be provided by GST-N. Both the Centre and the states must create administrative structures to deal with legacy issues even as they move towards implementing the GST. Some of the contentious issues must be quickly resolved in the interregnum available before the implementation of the GST. This will help the tax administration to look ahead and focus attention on GST administration.
There is also an imminent need for creating an administrative structure for Centre-state interaction. An important and successful parallel was the creation of the Empowered Committee of State Finance Ministers in 2001 and its institutionalisation in 2004. The empowered committee was a unique Indian innovation which delivered the state VAT and is now poised to deliver the design of the GST. The time has come to create another set of institutions. There is a need to create a GST secretariat in each state to bring senior CBEC and state commercial tax officers together. These bodies can be registered under the Societies Act, its terms of engagement defined, provided with a dedicated secretariat and adequately funded to meet administrative requirements. These structures can help CBEC and state officers to resolve a number of GST-related implementation issues, besides forging the bonds of fiscal federalism. The states would require some handholding in the taxation of services within the GST as they have not handled this tax segment earlier. These structures could provide the medium of such handholding. Exchange of staff on deputation or on loan basis could also be an area of engagement. Finally, the sharing of risk information about units for better compliance verification may be the icing on the cake.
With consensus now being built on GST, there is the happy prospect of its early implementation. Therefore this is perhaps the appropriate time to discuss issues of tax administration in addition to tax policy. These are last-mile issues which can make or mar the successful implementation of the GST. Tax policy experts and consultancy organisations must therefore focus attention on laying goals and concomitant milestones for restructuring the commercial tax department in the states and the formations in CBEC. This is critical. As Seneca, the Roman philosopher, once said, “If you do not know to which port you are sailing, no wind is favourable.”
The author is retired member, Central Board of Excise and Customs.
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