Plucking Feathers Without Hissing Procedural Improvements in Indirect Taxes

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“The art of taxation consists in so plucking the goose as

to obtain the largest possible amount of feathers with

the smallest possible amount of hissing”.

Jean Baptiste Colbert

ca. 1665

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Genesis

The Central Vigilance Commission (CVC) and Central

Board of Excise and Customs (CBEC) are interested in

introducing reforms in the functioning of the Central

Excise department. Towards this end they have invited

suggestions from Lok Satta to facilitate procedural

reforms

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Recommendations – Criteria

Revenue neutral / revenue enhancing

Simple and transparent procedures

Build trust between department and industry

Better service to assesses

Encourage voluntary compliance

Ensure accountability

Minimize litigation

Improve efficiency

Enhance departmental image

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What is Central Excise Tax

Central Excise Tax is a duty on manufacture or production of

goods. Manufacture means converting an article into a different

article bearing a different name, use and characteristic

Duty for the manufactured goods is assessed and paid on self

removal procedure (SRP). No manufactured goods can be

removed without payment of duty

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Structure – Current

Chief Commissioner

Commissioner

Division (4-5 Ranges) Preventive – Anti-evasion – Audit

Range (25-30 units)

Sector

This is the structure at the state level

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Structure – Current

RACE - Revenue Audit Central Excise - state unit under

(CAG)

All India Level Organisations

DGCEI – Director General of Central Excise Intelligence

DRI – Director General of Revenue Intelligence

Narcotics Agencies

Directorate General of Audit

NACEN

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Structure – Recommendations

Commissionarate, Preventive, Anti-Evasion, and Audit departments to be merged.

Staff to be redeployed – Commissionerate Reduce range jurisdiction ( in terms of units) and increase

accountability

What would this result in*?– Elimination of overlap of duties – Increase accountability – Improve efficiency – Entrepreneur spared of multiple visits by authorities

* The points referred to here are discussed in greater detail in the ensuing slides

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Role of Range Reduction in jurisdiction - greater accountability Range to provide assistance and counselling to the assessee

and to be made more responsible and accountable Range to encourage and assist in voluntary tax compliance Range Suptd. to be held accountable for malpraxis of industry The range superintendent should carry out audit with particular

emphasis on classifications and valuation of goods Frequency of audit:

– SSI Units: Once in 3 years

– Large Units: Once in a year Integration of functions in the changed scenario

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Procedures – Current

Monthly returns have to be filed in person at the dept

Officials make informal visits to the factories

Stakeholders not clear about classification of goods

Amendments made at different times causing confusion

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Objectives of Procedural Recommendations

Interface with industry should be to a minimum

Online transactions to increase

Making sure that all rules / amendments are self contained

to eliminate ambiguity

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Specific

Procedural Recommendations

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Procedure - Registration

Current Status

Small-scale units with a turnover of less than 1 crore are exempt from registration

Acceptance or rejection of application should be done within 1 day. After 1 day the application is deemed to have been accepted

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Procedure - Registration

Recommendations

Rejection of any application should be in writing for preset

reasons and should be given within 1 day

In case of deemed registration, numbers are to be given

within 7 days from the date of application

Any classification changes to have prospective effect – not

retrospective

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Inspections

Current Practice

Multiple visits/ inspections by personnel of various agencies

Assessee is not allowed to have the services of support

staff during inspections

Problems

This is impacting the work schedule of the units

There is a duplication of work by agencies

Perception of harassment – statements taken under duress

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Inspections Recommendations Right to enter the factory premises with permission of

Commissioner of Central Excise, not applicable to intelligence agencies under the jurisdiction of Delhi

The right to enter the premises shall be available only in following cases: – during audit or for carrying out the audit related function– when any documented information is received against

the manufacturer or importer / exporter – when any vehicle with goods is caught on the way

without appropriate Central Excise Invoice All other random checks / inspections to be discontinued All officials visiting a unit should enter in the register

– name and designation – purpose of the visit– present their identity cards

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Inspections

Recommendations

Assessee to be allowed to have his officials/advisors during

inspection

Officers taking statements under duress should be

punished

Officials to be trained in inspections – for instance, input-

output ratios, capacities, electricity charges can be

investigated

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Current practice

All units are subject to frequent audit of various agencies –

Internal Audit, AG’s Audit, special audit and jurisdictional

authorities

Absence of coordination between the field officials and CAG

Problems

Substantial manpower of units is being geared to answer

queries

Show cause notices being issued by multiple departments

Audit

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Recommendations As all the documents are available with the Range office, the

routine audit may be conducted in the Range Office giving a date, similar to the practice followed by ST & IT Depts., for assessment

To prescribe simplified proforma for maintaining records. This would prevent the assesse from being accused of suppressing information

Field officials should be present whenever CAG visits units. The final report of CAG should be prepared only after consultation with the concerned Commissioner

Audit only to raise objections For audit of any other activity or verification of any documents

requiring a visit must be done with the prior approval of the Commissioner

Audit

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Adjudication Current practice Documents submitted during investigation are being withheld for

long periods The assessees are being made to personally come and handover

the documents The show cause notices are being issued much after the detection

of ‘alleged’ irregularity Investigating officers responsible for show cause notices are not

present during the hearings Assessees do not receive any acknowledgement of any

communication There are delays in adjudication Coercive tactics are being used to recover sums during the

pendency of stay petition The stay given during appeals is valid only for a period of 180

days and if the appeal is not decided within those 180 days, the stay stands vacated

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Adjudication Current practice There is undue delay in the payment of refund amounts. Pre-deposit amounts are too high and cause a blockage of funds The order-in-original in most of the cases lacks in the following

areas:-– It does not consider various judgments which have been

referred in reply to show cause notice or during personal hearings

– The documents which are relied upon in the show cause notice are not submitted to the assessee. Cross examination is not permitted

– The charge of suppression is not elaborated– The role played by the individual person in levying personal

penalty is not stated The final appellate authority, CESTAT, is too distant for many

units

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Adjudication Recommendations Documents submitted during investigation to be returned

immediately Certified copies may be retained if documents are required for

departmental proceedings The assessee should not be made to personally come and handover

the documents in the excise office. They maybe faxed or couriered The show cause notice must be issued within 30 /60 days of the

detection of ‘alleged’ irregularity Further adjudication should be completed within 6 months of the

Show Cause Notice Investigating officer responsible for Show Cause Notice should be

present during hearings Declarations, intimations, applications, returns and all

communications from the assessees should be acknowledged within 7 days of their receipt Continued……

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Adjudication Refund amounts must be paid within 30 working days of

receiving a valid claim and for any delay interest to be paid and the concerned officer should be held responsible and penalized

Pre-deposit provisions to be simplified or dispensed with Instead of cash, bank guarantees and other securities can be

used If there is to be a pre-deposit, Appellate Commissioners’

discretion to be curtailed and amount cannot be more than 15-25%. (In case of delay in adjudication the pre-deposit amount should be given back)

It would be best to fix time period for disposal of appeal In issues of pure technical nature – revenue

neutral/classification stay can be issued by the adjudicating officer Continued……

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Adjudication The Section 35-C(2A) needs to be amended by giving the

CESTAT a time limit of 180 days to decide the appeal and the stay should be valid till the appeal is decided

Quasi judicial bodies should be strengthened by using staff available due to restructuring

Two commissioners may be made as first appellate authority instead of single Commissioner Appeals working at present

Instead of the presence in only four regions, CESTAT should be in every state

Special officers should be trained for adjudication, and they should not be responsible for revenue targets ( may be the practice of having targets should be dispensed with)

Continued……

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Penalties Current practice No classification to determine the severity of penalties to be

levied Officials having too much discretionary powers in imposing

penalties Extended law of limitation is now 5 years Goods are being seized as penalty Power to arrest is available to officials

Problems Even procedural mistakes incur heavy penalties Seizure of goods is resulting in host of problems The fear of arrest is resulting in assessee not contesting even

on legitimate grounds

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Penalties Recommendations For procedural and technical lapses not causing loss in revenue

– there should be no penalty nor punitive action In case of difference in duty on account of interpretation,

classification etc, no penalty should be levied, only duty to be

collected with interest No penalties without full enquiry In levying penalties – discretionary powers to be curtailed and

following to be done

– 1st offence – duty 2nd offence – duty + 25%

– 3rd offence – duty + 50% Regular offender – duty + 100%Continued……

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Penalties

Instead of seizure of goods, authorities can take surety / bank

guarantees / bonds and release goods

Authorities should have no power to arrest Defaults to be divided into two categories and accordingly dealt

with:

– clandestine removal where no records have been maintained.

Here a hefty penalty should be levied

– the question of interpretation like claiming exemption under

notification, classification of the product etc., Here no penalties

may be levied Fraudulent assessees should have deterrent punishment in the

form of alienation of property

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Accountability

Current practice

There are no clear lines of responsibility within departments

Large number of unsustainable show cause notices are being

issued

Problems

Errant personnel are going unpunished and there are no support

structures for honest and hard working personnel

Assessees feel that they do not have a say in the system

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Accountability

Recommendations: As the Range Superintendent/Inspectors are completely in the know

of the functioning of the units, they should be held accountable for gross irregularities which have taken place overtime

Show Cause Notices Review – Performance indicator – How many sustained – How many dropped– How many of them were frivolous– This data to be kept online in the public domain

When a Show Cause Notice is dropped – full refund with interest at bank rate should be given to the assesse, and show cause notice issuing authority should be made accountable

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AccountabilityCurrent practice As on date there are no mechanisms to examine the nature and

validity of queries raised by officials

Problem The asssesses are being harassed on trivial queries or sometimes

by queries that defy logic

Recommendation All queries raised by an official should be submitted in writing to

higher authorities, for instance an Assistant Commissioner should vet all queries

Along with Show Cause Notice review, a review of audit queries should also be done

There should be tracking system on refunds – how many and in what time-frame have they been disbursed Continued…

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Accountability

The officials should be held accountable in case of arbitrary and

unsustainable acts ex., raids and show cause notices

Computerisation of all transactions

Citizen’s Charter to be implemented by amending Customs

Act 1962, Customs Excise Act 1962

Feedback on the functioning of the department from industry

may be considered

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General Recommendations Administration should attend to requirements of the

assessees, eg., offering consultation with respect to stuffing of export goods, overtime works, etc,

There should be a master circular of all amendments to rules made over a period of time

Assesee’s monthly returns to be posted / e-mailed / faxed Assesse visits department only if consultation is needed Entire transactions to be computerized under EDI system of

functioning with various related organizations such as Bank, DGFT, IT, Statistics, Custodians, Airlines, Liners

If it is not possible for the Range to offer counselling, the SSI Associations as a group should engage someone to advise them on procedures, laws and rules etc.,

There should be institutional mechanisms to protect whistle blowers

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ExportsCurrent Practice Currently, if an exporter exports any item, s/he has 2 options

– To export against bond and after exporting, get the entry duty reversed

– Export against payment of duty and after exporting claim the rebate or refund of excise duty paid

The documentation for exports and factory stuffing procedures are now under the supervision of range superintendent

Problems Exporting against bond requires resources/skilled staff to handle

the detailed documentation which most small and medium sized companies cannot afford to have. Hence they export against payment of duty and claim rebate or refund

Claiming and getting the refund is a long drawn out process involving lot of paper work

Documentation and stuffing procedures resulting in undue delay and is an avenue for bribe collection

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Exports

Recommendations

In the simplified procedure, anyhow the Final verification report is

given by the concerned range

The Department can allow the Exporter to take the credit for the

amount of refund (after receiving confirmation letter from the port

officer) and submit all export related documents along with the RT

12 return and documents are then verified/checked by the

concerned officer

The same process could be allowed if you import any item

Continued……

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Exports

Recommendations

This way the exporter can utilize the credit immediately towards

domestic sales and hence does not suffer on account of the

long time taken for refunds in the current system

In the event of any discrepancies, then for the purpose of re-

examining the case, the concerned department can make their

report and forward the case to their higher authorities if required

Continued……

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Customs

Current Practice For central excise, the self removal procedure allows the

assessee to remove the goods without having to inform the range every time, which is not the case with exports

The ARE, application to remove exports, requires submitting proof of export to the range officers

ICEGATE operated only in some port collectorates Sample testing is delaying the procedure of logging in the export

books Problem ARE is not only cumbersome and illogical, but becomes an

avenue for bribe collection Sample testing is delaying the procedure of logging in the export

books

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Customs

Recommendations For established industries and enterprises,

– The self removal procedure practiced for central excise may be applied for exports

– Exporter can maintain the credit and debit records for export duty

The implementation of Indian Customs & Excise Gateway (ICEGATE) with digital signature and auto process may be undertaken at the earliest

Export and Import entries should be online Strict time limits for sample testing failing which, to accept

exporter test reports. Augmenting the staff in the laboratories should be done to cut down delays

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Customs

Current

A letter of undertaking (LUT) has to be executed at the end of

every financial year

The bill of entry is appraised before the clearance of goods

even for 100% EOU & SEZ Units

Problems

Expect in a few ports, where computerization is being

implemented in a phased manner, the bill of entry involves lot of

paper work

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Customs

Recommendations

The system of executing LUT after every financial year should

be dispensed with. The validity of the LUT shall be as long as

the validity of license

The system of appraising the bill of entry before clearance of

goods shall be done away for 100% EOU & SEZ Units

The importer or the Custom House Agent (CHA) shall prepare

the bill of entry in their computer which is linked to the computer

of the customs department and pay the duty based on their own

assessment

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Customs

Current practice

The cash section shall sign the intimation for receipt of the duty,

however examination of goods and clearance is resulting in

delays

Whenever there is provisional assessment, valuation is now

taking more than necessary time and the exporter / importer

has to deposit the duty amount

Presently the import audit is being done online at the particular

port at which the importer is registered Duty Drawback is resulting in delays

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Customs Recommendations Based on self-assessment and payment of duty by the established

industries and enterprises, the physical examination of the goods can be carried out by the shed appraiser and the goods shall be allowed to be cleared

The order of special valuation branch must be passed within the stipulated period of 7 days from the date of submission of the questionnaire. In case the order is not passed within 7 days, then the collection of revenue deposit should be dispensed with

Augmentation of staff required in the valuation branch to prevent delays

Routine inspection of the trade samples from the exporters with ISO 9001:2000 & Export House and 100% EOU & SEZ Units certification may be exempt, as there is a lot of delay due to various procedures in getting clearance for the samples

Similarly, online export audit should be implemented to minimize the documentation hassles faced by the exporter

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Customs

Recommendations

Customs Should do away with verification of Duty Exemption

Pass Book Scheme (DEPB) / DFRC, etc. Licenses issued by

DGFT should be available at the click of a button. This is the

main purpose of starting the Electronic Data Interface (EDI)

System

Duty drawback to be paid within 48 hours of the export of the

goods in case of electronic declarations and 15 days in case of

paper declarations

Filing of ER-1 to be done without enclosing duty payment

documents and the same can be verified during audit

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Service Tax

Current practice• Service Tax should be paid by the 5th of the following month• Taxes on services received during the month of March should

be paid by the 31st March • There are no rules to classify or segregate the services into

dutiable and non-dutiable • Invoice of taxable service within 14 days of completion of

service

Problems• Large companies are finding it difficult to pay the service tax by

the 5th of the every following month and by the 31st March • Many assessees are ending up paying service tax even for

non-dutiable services

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Service TaxRecommendations• The date of payment of service tax on 5th of the following month

need to be reverted to 25th of the following month• Service tax collections for the month of March should revert to

the earlier deadline of 25th April • 31st March should be the deadline for service tax collections

from 1st March to 15th March, and April 25th should be the deadline for collections from 16th March to 31st March

• Clear classification of services into dutiable and non-dutiable should be done expeditiously

• Invoice of taxable service within 14 days of completion of service needs to be removed as it is not practically possible

• Service Tax Credit should be allowed immediately on receipt of service as it is practically difficult to track the payment of each invoice particularly where the payment is being made in installment

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Service Tax–Transport

• It is obligatory on the consignees to pay service tax on the

goods they receive and this is against the principles of Service

Tax and this requires some changes

• Endorsement of the consignment note and invoice of the

transporter may be allowed in favour of the consignee to enable

him to take the credit

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Service Tax–Transport

• The consignor may be allowed to act as input service distributor

for the purpose of passing on the credit to the consignee. A

clarification may be issued that transportation is an activity

related to business of the consignor in the definition of the input

service under Rule 2(1) of the Service Tax Rules

• It may be necessary for the consignees to get a declaration from

the Goods Transport Agency on the invoice itself that he has not

claimed the Cenvat Credit or benefit under notification no

12/2003. If this declaration is available and the Goods Transport

Agency is showing the Service Tax amount on 25% of the

freight charges, then only the consignor or consignee can pay

the said amount of Service Tax

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Facilitating Transparency and Accountability

Protection for whistle blowers

Ensuring Confidentiality

System of fair enquiry

Commissioner Services to look into grievances, day to day

services for assessees, importers and exporters

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Strengthen Honest Officials

Increase in facilities like housing, transport, and payment of

such perks should be linked to performance

Uniform to be dispensed with except for customs and airport

officers

There is a necessity to institute feedback mechanisms to

assess the functioning of all concerned agencies