The Govt has decided to enforce a new tax regime — Goods and Service Tax — from April 1, 2010 without even utilising the expertise of Excise and Customs Dept
The countdown to Goods and Service Tax (GST) rollout having already begun and the major fiscal transition in the past five decades now just being less than seven months away, it is appropriate to carry out an assessment of the entire Act in order to avoid any unforeseen or unwarranted situation.
It is indeed worrisome that the government has decided to take the plunge from April 1, 2010 without so much as even a debate on the proposed legislation. This gives an impression that the government, in its over-enthusiasm, may have thrown reason and caution to the winds.
The apprehension looks real when we see that the task force and committees constituted for the purpose do not comprise any expert from the Excise and Customs despite the department being the most experienced in handling the Value Added Tax (VAT) and enforcement related thereto. This would only deprive the task force of the expertise in developing an effective enforcement mechanism. It looks that the government rather believes in evolving a tax system by first introducing it and then learning from experience to know its shortcomings. It has overlooked the fact that the expertise already available is sufficient to sound early warnings to make the system foolproof to a considerable extent.
The rollout is being dubbed as the biggest reform on indirect taxes, but it is woefully lacking in public debate unlike the Draft Tax Code, which is already in public domain even one and a half year before its proposed date of implementation.
Why is the government going about the task in such a discreet manner is anyone’s guess. It could be something to do with the resistance of some of the states.
Let us try to analyse as to where things can go wrong if not properly addressed before the take-off stage of the new tax regime. Whether it is the VAT system in the states or CENVAT in the central domain, one of the major areas of concern has been the floating bogus invoice, which is generated by unscrupulous elements at the drop of a hat.
Under the Central Excise alone, there have been a number of scams in places like Surat, Goa, Thane and Mandi Gobindgarh.
While the magnitude of the frauds that have come to light has been found to be to the tune of hundreds of crores, a number of frauds remain undetected by the Central Excise authorities due to lack of wherewithal and infrastructural support as also due to lack of cultivated intelligence and rampant corruption in certain cases.
Even when such detections were made by premier investigating agencies like Directorate General of Central Excise Intelligence (which normally gets more support from field formations than others), the average time to verify authenticity or otherwise of a CENVAT invoice has been 6-8 months and that too when in most cases intelligence info about invoices of input credits being fake is available.
Considering the same in the early stages in some of the Commissionerates, a sample check of only 1 per cent was prescribed which is also because of the tediousness and dwell time involved has been followed more in breach, leaving the field open for such frauds, especially by textile, metals and other SSI sectors.
The investigations conducted in some of the cases have threw up gory details – like often these units were opened in the names of facades, some of the EOUs were found to be managed by illiterate and vulnerable people who were given small sums by the fraudsters, who, in turn, were selling these invoices to willing takers on 15 per cent to 20 per cent of the face value without there being any accompanied goods.
In another case, a small scale industries (SSI) unit committed a fraud of more than Rs 8 crores. Its real owner purchased an iron mine, had a permanent five-star suite and was a frequent flier to Dubai -- all these when he did not even have a PAN card number.
Now, consider the likely scenario, post GST. In the Central Excise department which deals mostly with factories and bigger excise units, a backward verification is much more easier since it is all within the same department and involves the existence of the factories or otherwise and authenticity with the concerned range. Still, the process takes between 6 and 8 months, as the payment particulars are not linked with any computer system, whereby the data of, say, Chandigarh can be verified while sitting in Bangalore.
If an exercise of the enormity of the GST is to be rolled out, the way out for a country as vast as India, therefore, is to possess another supercomputer like that of NSDL which instantly captures all data relating to transactions of share market in up country or wherever and can indicate the same on any number of computer screens instantly and still has the capacity available to lend it to another Department like Income Tax and as such to rely on manual system of verifying invoices through stipulated backward checks.
The latter is likely to be a futile exercise, unless there is a high powered central agency in existence which can conduct such checks within a matter of days as state governments may not be easily amenable to furnishing such information if the same is sought by, say, a politically rival state.
Again, if, for instance, if the system founds that a few crores of invoices have been generated from a Naxal-infested remote area, then the minimum dwell time to verify it manually will be at least two to three years. By then, the fraud would assume gigantic proportion and the fraudster would escape to a tax haven, or in an enemy country or in the lap of the D-company. One should compare the cost of printing fake currency notes with the cost of printing fake invoices to see the potential damage that can be done. This problem of national security that may be involved, it is hoped, has been addressed by the members of task force on GST.
One should understand why the US has not implemented such a tax regime even when its population is one-third of ours.
No haste is, therefore, warranted in implementing GST unless we have a dependable data capturing system about payments in place.
Let not emotions of ushering in quick reforms alone hold the sway. A holistic view and preparedness before initiation is the need of the hour. The rollout should not become a case of ‘act in haste and repent later’.
Somesh Arora is Former
Commissioner of Customs & Excise & CCO, Amicus Rarus Consults