Sukumar Mukhopadhyay: What is indirect tax reform?

We understand what is reform in a very vague sense that what is good is reform. What is good is again not quite definable. So if we want people to define reform, they will be only saying that reform is doing good. Reform is one of those vague concepts such as truth, courage, good, bad, discipline and others which are understood but are not amenable to definition. They are all conditional in the sense that they depend on time, age and circumstances. People now would shudder to support slavery but at a different age even Aristotle supported it though in theory. Two opposite things can be true under opposite circumstances. Similarly, reform is also a concept which is relative to various factors. It is not an absolute concept. 

Another usual definition is that it means to put or change into an improved form or condition; to amend or improve by change of color or removal of faults or abuses beneficial change, more specifically, reversion to a pure original state, to repair, restore or to correct. Even this definition is faulty because it is in terms of improvement which needs to be defined.

Before I go to define it myself let me tell an actual story of how I faced the problem of defining reform.

When I was Member Budget in the CBEC, I received a Parliament question which was like this: (a) What is reform?

(b)        Is the government doing bhajan and kirtan in the name of reform?

The reference to bhajan and kirtan is because this was after the demolition of Babri Masjid.  When some people assembled near the Masjid, they said that they had no intention of doing any harm to the Masjid but they were only doing bhajan and kirtan. That is how this became a phrase which denoted certain actions which were meant to hide the real intention. 

            The imputation in this question (b) was that the Government of making a song and dance of reforms but doing nothing.

 The answer to the question (a) that was presented to me by the office was that reform is not defined in the Customs and Excise Acts.  The answer to the question (b) was given as, “In view of the reply to (a) above, the question does not arise”.    After seeing this proposed reply I had a hearty laugh.  After that I drafted the reply myself which is as follows:

Definition of Reform – Reform is action towards what is contemporaneously thought as better. 

The answer to question (b) I gave was that the Government was not doing Bhajan and Kirtan in the name of reform but doing some real reform.  Then I enumerated the measures that have been taken towards reduction in the rates of duty, compressing down the spread of the rates of duty, dismantling the control on the economy, removing quantitative restrictions on imports and many other such measures. 

            In retrospect I would say that this definition of reform which I gave on the spur of the moment is still the best that I could even write now after a lot of thinking.  The most important component in the definition of reform is the word ‘contemporaneous’.  It is the contemporaneous thinking that something as better is what constitutes reform.  With a passage of time the concept changes so much that they may be diametrically opposite.  Just saying that reform is taking action towards what is better is not correct.  For what is better is itself the issue.   Everybody thinks that his prescription of the policy is better.  Therefore, the critical element of the concept is that what is contemporaneously, that is, at a particular point of time, considered as better. 

            This needs to be explained with reference to so many examples.  In Russia after the Revolution in 1917 the Bolsheviks, that is the hard core communists thought that public possession of property i.e. abolition of private property, collectivization of land, reduction in the wage rates of intellectuals workers and labourers to remove inequality of income and similar other measures were the best policy.  The opposite view shared by the Mensheviks was ridiculed as reformism.  The Bolsheviks were called revolutionaries and the Mensheviks were called reformists.  Reform was a bad word at that time.

            Coming to India,so far as the tax structure of indirect tax is concerned, earlier to 1991, it was characterized by very high rates, multiplicity of rates, numerous exemptions and narrow tax base.  In many cases the tax rate of customs on the raw materials was more than the rate on the finished goods which made manufacture in our country unprofitable.   Procedural rigidity was also too much.  The work in the tax offices was fully manual and so labour intensive and inefficient. 

In Customs the reforms that took place was the following:  The tax rates were reduced.  The highest rate of 300% has been reduced to 180%.  The average rate has been reduced from 70-80% to 20% approximately.  Most of the industrial goods now attract a rate of duty of 10% which earlier used to be in the range of nearly 60%.    The number of exemptions has been reduced drastically.  Computerization has been done to cover all Custom Houses.  Physical examination of all goods imported has now been replaced by a percentage check based on the assessment of risk involved.  Green channel facility has been extended to nearly 50% of the goods.  There is a provision for on line payment of drawback on export which has been a highly pro-export measure.

In Central Excise, the reforms have been on the following lines: There has been a reduction in the tax rate as well as in the number of rates.  16% duty is now the mode which means that most of the items are classifiable at this rate.  Exemptions have been substantially reduced.  The classification code has been aligned with the Customs Classification code which in turn is based on harmonized system.  This helps a lot in easily ascertaining the countervailing duty.   A system of accepting maximum retail price (MRP) for valuation after giving suitable abatement has been introduced for a large number of items. Another improvement is the introduction of transaction value in Central Excise.  This has made litigation in Central Excise valuation far less frequent than earlier.  Self assessment has also been introduced which means that all returns relating to manufacture or rendering service and taxes paid submitted by the tax payers are not subject to checking by the offices.  Only a percentage is checked.  Classification list, price list and statutory records have been abolished which has been possible due to computerization in the Department which is now capable of retrieving information from the computerized data maintained by the corporate houses.  The Modvat (Cenvat) system which was introduced in 1986 has now been made broader by extending over all most all commodities.  It has been extended even to capital goods also (1994-95 Budget).

Conclusion is that reform is a continuing process and more and newer measures will have to be added depending on the experience. It is what contemporaneously people think it as good.