Strong administration is key to GST success

With Finance Minister P Chidambaram reiterating in Budget 2007-08 the deadline for the introduction of a national Goods & Services Tax (GST), with effect from April 2010, there is renewed optimism that the most important piece of India's tax reform initiative, that is, the replacement of the multiplicity of indirect taxes with a single GST, is on course. The state VAT, which has already been successfully implemented, has laid the foundation for this last, and perhaps the most, important phase of indirect tax reform.

One of the key underpinnings of a successful GST is an efficient and robust tax administration. Given the importance of raising tax revenues and indeed, enhancing the overall tax to GDP ratio in aggregate terms, it is essential that an efficient and effective tax administration is in place. The quality of tax administration is thus both, a key economic indicator and a key economic driver.

In relation to service taxes as well, a modernised and fine-tuned tax administration is critical. By its very nature, the service tax is a complex one "" it is a tax on services which is inherently difficult to define and to tax. Services are inchoate and intangible and hence, the definitions relating to their provision as also to their receipt, are inherently complex. Also, services effortlessly cross borders, with the greater use of information technology and its various manifestations. Increasing cross-border trade in goods and services, and the manifold growth of e-commerce, pose major challenges in relation to appropriate definitions of services, for these to be taxed. It is imperative that there is a matching increase in the capacity of the service tax administration to monitor and tax increasingly complex transactions. Equally, a robust tax administration is required, so that the taxpayers respect the rule of law and discharge their liabilities to taxes fully and completely. Also, such an administration would act as a facilitator for greater tax compliance.

Broadly speaking, tax administration reform projects have sought to achieve certain common objectives, even though there are invariably country-specific considerations and variations that have characterised such projects. These common objectives have been i) improvement of the organisational capability of the tax administration; ii) strengthening of the legal and regulatory framework; iii) broadening of the existing tax base; iv) facilitation of voluntary compliance; v) capacity building to process and monitor vast data and information flows; vi) development of increasingly sophisticated risk analysis and risk management capabilities; vii) strengthening of audit and enforcement capabilities and, lastly, viii) reduction of corruption. This list is, of course, illustrative but highlights the multiplicity of objectives that are typically sought to be achieved through tax administration reform.

All of these objectives are equally relevant in relation to service tax administration. Historically, service taxes have been administered by the central excise officers. The reason perhaps, was that, this was the only relevant federal and central tax administration that could be entrusted with the task of administering service taxes till such time as a cadre of carefully selected and trained officers could be deployed to administer the tax. As a result, there have been numerous teething problems that had arisen in the early years of introduction of this tax. Indeed, for the first decade after the introduction of the tax in 1994, the quality of service tax administration left much to be desired. Officials who had historically been familiar with taxation of tangible goods were suddenly required to struggle with complex and, at times, conflicting definitions relating to taxable services. Matters were exacerbated by the rapid extension of the service tax to a myriad new services and also by the blurring of the distinction between work and services. Further, the lack of authoritative decisions of the tax tribunal and the courts, in relation to service taxes, was a major handicap in ensuring that a trained administration, well versed in service tax law, was in place. A combination of all these factors therefore, resulted in a very uneven administration of the service tax law in the first decade of its introduction.

Things have however materially changed in the past several years. Dedicated service tax commissionerates have been set up in all major cities. These have now been staffed by the relatively better-trained and better-performing excise officers and a distinct qualitative improvement in service tax administration has come about. Also, there appears to be a conscious attempt to look at global best practices in relation to the entire gamut of service tax, from the manner of its determination to its administration and collection. Parallely, a slew of decisions in relation to service tax has come about from the CESTAT, the apex indirect tax tribunal in the country.

Certain authoritative decisions of the Supreme Court, on the broad contours of the goods tax and the services tax respectively, have also helped matters.

While there are several problems that remain to be addressed in relation to service tax administration, it is nevertheless true to state that there is, currently, a far more responsive and aware set of tax officials who administer the tax.

The other major progression in service tax administration is related to the operation of the Large Taxpayer Unit (LTU) Scheme, which was introduced in October 2006 with the first such LTU becoming operational in Bangalore. In the words of the Finance Minister, the initiative was necessary so as to bring about administrative and attitudinal changes and also to facilitate the introduction of modern management principles in tax administration. More recently, the Finance Minister, in his Budget speech of February 2007, stated:

"A number of administrative goals have been set for 2007-08. These include expanding the coverage of Annual Information Returns, extending the Refund Banker System to more areas, extending the e-payment facility through more banks, making electronic filing of returns mandatory for more categories of assessees and creating new Large Tax Payer Units."

As can be seen, several of these initiatives will further one or more of the common objectives of tax administration reform projects, as described earlier in this article.

The introduction of e-payment of service taxes, which is mandatory for taxpayers with annual service tax payments in excess of Rs 50 lakh, the significant investment in an information technology backbone for both excise and service taxes, through the Automation Project in Central Excise and Service Tax (ACES) and the extension of the LTU Scheme to many more major cities will together majorly contribute to reforming and modernising service tax administration. If this is accompanied by the attitudinal and mindset changes in tax administration, as articulated by the Finance Minister, it could fundamentally transform service tax administration and the quality of the experience of service taxpayers in interfacing with the tax administration on a day-to-day basis.

The writer is leader, indirect practice, PricewaterhouseCoopers