Thursday, December 27, 2007

PAPER ON LTU

Posted by Secretary General on 3:53 PM with No comments
THE FORMATION OF LARGE TAX PAYER UNITS
AND IT’S LIKELY IMPACT ON REVENUE

(Presented at the All India Conference of COC of Revenue Fedns/ Assns at Chennai on 6.10.07 by R. Manimohan, Secretary General,
All India Central Excise Inspectors’ Association)

Introduction.

It is the simplest issue which requires reiteration most often. One such fundamental issue is that the essence of all economic activity is to be happy at home. But we see that all so called economic developments are at the cost of the fabric of the economy, social and family structures and even against the health of individuals employed for the activities.

The other simple point is that no traffic signal serves its purpose in the Indian context without a police man around. This theory regarding traffic management holds good in respect of traffic of money and goods as well.

Conception of LTU

The very Finance Minister who recognized this principle and introduced the concept of 100% mandatory penalty in Central Excise in 1997, to put the fear of God in the minds of the assessees tempted to evade, goaded by the liberalization, has now made a turn around in envisaging a ‘soft’ body called Large Tax Payer Units (LTU) taking a cue from economies like Pakistan, Bangaladesh, Nepal and Sri Lanka.

The scheme is to bring under a single window all big assessees who pay Central Excise, Service Tax, Income Tax and Corporate Tax and that for all their transactions through out India. On paper it is stated that there will be no audit controls for the units coming under the scheme and selective audit based on ‘risk assessment’ is to be conducted in consultation with the tax payers themselves. Jurisdictional Officers will not have controls except under specific instructions for specific purposes from the LTUs and the units under the scheme will be free to move their inputs, semi-finished goods, capital goods and finished goods between their units any where in India without payment of any duty.

Questions on the concept.

LTU is an ad-hoc measure intended to be implemented through executive orders for short-term gains sacrificing the long-term gains of not only revenue productivity but also economic growth of the country.
In the words of Dr. Parthasarathi Shome, “…it would be the responsibility of the tax administration to fully apply the tax law without issuing executive orders to create simplistic administrative constructs that may facilitate its operations in the short run but would tend to divert the tax system from its principles of efficiency and equity. These principles must remain the tax system’s central premise if long run economic growth and, in turn, robust revenue productivity, are not to be hampered.” (IMF; STI Lecture – ‘Tax Administration and the Small Taxpayer: Concepts, Concerns and Corrections’)

The concept of LTU has been recommended for developing countries ‘as a potential Trojan horse for reform in tax administrations that have become seriously dysfunctional or, worse, completely captured by corrupt administrators.’ (McCarten (2004); South Asia Region, World Bank, p.2).

The serious question begging an answer from the Finance Minister and his bureaucracy is whether the above condition for introduction of this scheme in the Indian economy is accepted.

The stated and the practice.

One of the stated objectives of the scheme is to bring down the compliance cost. At the outset it would sound ridiculous to state that the large business houses suffer due to a high compliance cost and are to be provided relief even as their counter parts in the medium and small scale sector are not provided with the same sort of relief. Moreover, automation launched in the tax sector is understood to have already sufficiently reduced their ‘Compliance Costs’ as found by Dr. Sridharan in his paper “ What It Costs to Operate the Indian Customs and Central Excise Duties?” (1998) published in Management and Accounting Research (July-September 1998).

Another serious question requiring an answer before getting into the scheme is that when all India growth in respect of Central Excise and Service Tax revenue in the past three years is not buoyant, as compared to the buoyancy in industrial growth, why such new sops are added by the Government?

Strangely when the scheme paper claims that it was introduced after consultations with the trade, in the field we know that a lot of pressure is exerted to bring units into the LTU. Such a laisez-faire approach should have been enough to lure any sane assessee. Still there is a great effort undertaken to bring them into the scheme. So what could be the fear of the trade?


Janus face

The single window concept brings under the control of a small organization, around 80% of the large business houses answering to IT, Corporate Tax, Central Excise and Service Tax separately now. A small ill-manned organization like LTU, with the risk of its head being brought from outside market without any accountability to the Parliament or enactments of the Parliament can very rightly be expected to become a blood hound organization with sky high powers to make or break a business house itself. The enormous powers of discretion that would be available when all acts of direct and indirect taxes are put together, focused at a single point and the power to draw executive strength at will, for operation at a single stroke through out India, are fundamental threats for a transparent and equitable tax administration.
The only group of large business houses who can dare this trouble are those multinationals from abroad who would have the facility of dealing with only a single office in the entire country and who cannot be cowed down by the clout of the organization in what ever form they may be. But the larger question comes then: is the reduction in ‘Compliance Cost’ aimed at benefiting these tycoons and does not the economy face the risk of becoming a prey to the cartels of these huge business houses, which then can dictate the very policy of revenue?
If on the other hand, the Government is really intending to enforce such a free-trade zone within the economy, it requires to be kept in mind that the lack of preventive and audit controls due to lack of proximity to the location and premises of the assessees would hamper conducting risk analysis on the basis of intelligence gathered locally and would seriously affect revenue augmentation. Further, due to differences in the state government policies on the manufacturing sector, and the existing exemption regime, the proposed policy of remote control will have to counter several obstructions, but for which revenue is at stake.

At any rate provision for special facilities for the large business houses in comparison to the medium and small scale sector would prove to be the death knell for the local industries. Only to replay the East India Company episode and prove that history repeats.

Conclusion.

Thus, whether the LTU could become a blood hound body suiting the needs of the political masters or whether it will cater to the requirements of the rich and mighty at the cost of the small and medium scale tax payers, it is the economic sovereignty and security of the nation that is at stake.

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