Tax reforms are an integral part of any fiscal reform process. The objectives of such reforms are to establish a tax system which is simple, economic and certain. The structure of excise duty, which emerged in the early 1980s could not be described in these terms. The reasons were; multiple rates, numerous exemptions, complex administration procedures.
Amidst this backdrop, reform in the field of excise began in the mid 1980s. Excise duty reforms focused on relieving tax cascading, rationalisation of duty rates, and simplification of rules and procedures.
As a result, over time, the rates converged to a single rate for most products. All other issues mentioned above also were dealt with through various amendments in the law.
Most of the requirement for prior approvals has been done away with and replaced by self declarations. Most of the statutory records are abolished and considerable reliance is now placed on the system of accounting followed by the assessee. Financial records and audit procedures have gained tremendous importance to ensure compliance with the law.
Despite all these efforts, considerable emphasis continues to be placed on physical controls over the manufacturing process, movement and storage of excisable goods. The point of this article is that modern financial audit processes which are far more effective and the emphasis on physical controls should be done away with for the organised sector.
Typical examples of physical controls relied on by excise officers are the process of factory registration and warehousing approvals. While processing factory registration requests, the excise officer is required to verify the address of the factory. However this is usually carried out in the form of an inspection of the layout of factory, the entry and exit doors and similar physical concepts. The concept of centralised registration is still not available to all taxpayers under central excise. We are still concerned with location of factory. For example two factories of one company, separated by a road or merely by one more vacant plant would be likely to have separate registrations.
This made sense in the 1960s – in the economy and the mindset of that era. There were fewer factories then and correspondingly a larger number of excise officers. IT systems did not exist. Therefore, if an officer was not physically present to prevent leakage of excise duty, there was no fallback.
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This is radically different from the economy that exists today. Today’s economy has sophisticated IT systems which have a large number of checks and balances. In today’s information-rich environment, large scale evasion of excise duty is close to impossible in the organised sector.
In fact, the service tax authorities have been forced to rely exclusively on financial records, since the nature of services precludes having an inspector at the gate ensuring that appropriate tax is paid on every invoice to clients. If the service tax authorities are able to rely on financial records to ensure or check on compliance with service tax obligations, why is it that excise authorities are still operating in the era of inspecting and approving a factory layout?
Similar are the tools that Income tax department uses to conclude assessments. They rely on audited records, PAN based information on financial transactions executed by assessee made available by their own IT tools, cross checking of TDS transactions with reported income sources, etc. An income tax officer does not have to visit to an assessee’s office to gather information.
In central excise itself, the facility of centralised registration and common return has been made available to Large Tax payers units (LTUs), but the majority of taxpayers do not fulfil the eligibility criteria prescribed for LTUs.
While the policy makers found it feasible to do away with physical control measures under Service tax and Income tax this should equally stand good under central excise. This would take away a major practical irritant which is currently faced by manufacturers. It’s not only a one-time issue of getting a new factory registered. It’s also that they have difficulties if they want to have some processes carried out by a group company in the same factory. It’s also that it’s virtually impossible to get a registration to store goods in a warehouse that is not within the same campus as the factory.
Therefore, we are not suggesting that the excise authorities should be as sophisticated in their approach as the VAT authorities in the EU. We are simply suggesting that they adopt the same approach as their counterparts in the income-tax and service tax departments. Once this is achieved, we will then have to write a similar article aimed at the state VAT authorities!
(Supported by Tajinder Singh)
The Author is leader (indirect tax practice), PwC India
Email: pwctls.nd@in.pwc.com