A K Bhattacharya: Troubled route

RAISINA HILL

Paying service tax has been a major ordeal for train travellers.

If you have been one of those who travelled by a Shatabdi or a Rajdhani train last week and your ticket was purchased before May 8, you would have got some idea of why the Indian tax collection system still has a long way to go to make itself friendly and easy for the tax-payer as well as the collector. The inconvenience caused to the Railway staff and the railway passengers may not have been huge. And the extra money that such passengers had to shell out as a result of a new tax was, perhaps, small. But the way the entire issue was handled has some lessons for those at the helm of our tax administration system.

The genesis of this problem was the finance ministry's decision to levy service tax on catering services offered by the Indian Railways. The Budget for 2006-07, which had proposed such a levy, was passed by Parliament long ago, but the notification giving effect to the new tax was issued only in the first week of May. Thus, travellers on all tickets purchased before the notification came into effect had to pay Rs 10-15 more to the Indian Railways. And what's the best way to collect this levy? Catch hold of the unwary passengers and ask them to cough up that extra money even before they could settle down in their seats.

It would be instructive to know how the airlines handled this problem since the service tax was levied on their business class travellers. One is yet to hear of any complaint on this score from air passengers. But the way Indian Railways handled the issue left several harried passengers and even more harassed ticket examiners on board. One ticket examiner complained that the entire journey time on the Shatabdi route (about six hours) was spent on issuing receipts to passengers for the service tax that he collected. Many passengers were upset and got into arguments over why the tax should not have been collected at the time of purchasing the tickets.

To this argument, the Indian Railways' answer is that it had no clue about the date when the new tax would be enforced. The revenue department in the finance ministry decided to issue the notification one fine morning and out went the orders to all those providers of services that came under the tax net. The Indian Railways, like all other service providers, had no choice but to levy the tax from that day itself. The only option was that the Railways take the tax hit on itself until such time the additional burden of the tax was incorporated in the basic fare structure and it could be collected at the time of selling the tickets. But the Railways top management chose not to absorb the tax burden and instead inconvenienced thousands of its passengers.

Why couldn't the tax authorities issue advance notices to the new categories of service providers to be brought under the tax net and inform them that the new tax would be levied from a specified date? This was possible as the Budget this year was passed in the last week of March. This would have also greatly reduced the number of passengers inconvenienced by the sudden levy of the new tax. The old mindset of issuing notifications in the evening to give effect to a change in the tax rate or the levy of a new tax from the following morning may be valid for taxes such as customs duty. But that mindset has to change at least for the administration of the service tax regime. There is also no fear of any major revenue leakage if advance notice is issued indicating the date from when a new service tax is to be enforced.

The problem is that the revenue department fails to show the same alacrity when it comes to refunding excess collection of taxes. A couple of years ago, the government withdrew the inland air travel tax. Passengers who had paid the inland travel tax while purchasing the air ticket were entitled to a refund of the tax if they made their travel after the tax was withdrawn. A colleague found how difficult it was to get the refund. The airline in question sought all kinds of proof to establish that the passenger had paid the tax and undertook the travel on a certain date after the tax was withdrawn.

What was the need for the airline to seek such proof? It became clear later that the tax department was insisting on the proof from the passenger and was not satisfied with the airline's own record of the passenger's travel on a certain date. Eventually, the colleague got no refund. This was a couple of years ago. The Shatabdi incident last week shows not much has changed.