GROSS DOMESTIC PRODUCT.( FOR OFFICERS POSTED IN AUDIT COMMISSIONERATES)

In the theory of economics GDP or Gross Domestic Product
representing the value of the total goods and services produced
within a country has been accepted as an internationally standardized
indicator of economic health of its subjects.
From the governance point of view, it is desirable that the tax
planning should be in such a way that the gross national revenue
would commensurate with this common economic indicator. With this
objective, almost all the contemporary regimes have been in a path
of adopting systems to raise revenue from goods as well as from
services in a balanced manner.
Our nation is currently in a labyrinthed course of transforming
itself into a developed country. While keeping pace with
development, macro-economic concepts like GST are voluntarily
incepting into our system of governance. Recognizing the role of
industries in nation-building our Governments maintains a legacy of
dedicated care towards them.
This time also it is committed to pursue a simplified systemadaptation
methodology for GST; leaving no room of confusion for
the valued contributors of revenue.
The glittering fact is that, if we may sincerely collect only
3.18% of the estimated ` 100 Trillion of our national GDP, it shall
fairly cover the whole budgetary estimation of Excise & S. Tax
revenue for the FY 2012-13. Hence, by this way we may able to
relieve the massive burden of 12.36 % of indirect taxation on goods
and services consumed by our countrymen.
THE CHALLENGES:
Goods are characterized as a tangible object in contrast to
services which are intangible in nature. This is the first challenge
everyone may encounter while dealing with those subjects.
In real sense the problem is more psychologically guided than
rationally, which may be suitably handled by putting a little
professional approach towards it. In the following pages we shall try
to analyze the scope and extents of the present process of
transformation in our tax regime and try to draw maximum possible
beneficial inferences out of it.
The problems of clubbing such heterogeneous phenomenon
have already been overcome when Cenvat Credit Rules, 2004
successfully assimilated the elements of credit on goods and services
under one umbrella. That was perhaps the most difficult part of the
assimilation process where there was maximum possibility of systemfailure.
Now, as our first experimentation in this direction sustained
the test of time, we are now confident to frame the rest of our
policies in the same pace. We should remember that the policy
matters we are going to lay-down at this very moment shall have far
reaching impact on our national economy and for a long period we
may not get a chance to bring any substantial change to it. Hence,
we should try our level best for a maximum possible visualization of
the subject matter and to simulate all possibilities before its real
implementation.
SCOPE OF THE CODE:
Under this caption we shall try to analyze the possible extent of
our study and the prospective results thereof. It shall help us to set a
goal which would guide our efforts towards achieving the ends. It is
worthy to reiterate here that our scope of study is not limited to the
aspects like improving the cenvat credit system only by allowing
credit on both services and goods. But the scope is much wider, with
an ultimate objective that, it shall improve our economic efficiency in
two fronts viz. by contributing to the core competency of the
industries and by increasing revenue potential for the exchequer.
The thumb rule for achieving it is to widen the tax base, reduce
the tax rate and side by side to enhance the operational efficiency of
the implementing authority.
Floating numerous subsidiaries and allies by the companies and
circumventing the government dues through them has become a
contemporary worldwide phenomenon. The industries are engaging
management as well as accounting professionals to shape their
missions. To curb its ill affects, the tax legislation ought to be
oriented properly. Side by side we should keep in mind that, if the
tax law shall be implemented in a non professional way, it shall
completely neutralize the legislative efforts.
As the legislation itself defines the procedure of its
implementation and the role of the executive authorities, our present
efforts should encompass all these relevant issues as to how to frame
the ‘tax-structure’ as well as the ‘operational-structure’ of its
enforcement agency.
METHODOLOGY:
We can not afford the risks of adopting a trial and error method
on such a vital national issue hence, we should not hesitate to borrow
some of the time tested elements from international best practices.
Secondly, we should not think of a whole new set of rules replacing
the prevalent one but should safely brought some harmonized
changes into it for averting the take off risks.
PRESUMPTIONS:
It is presumed from the taxation point of view that, the method
of costing and valuation of goods and services are not fundamentally
different from each other but having visible similarities. We are
familiar in costing of ‘goods’ for which we need to take the cost of
the tangible input materials along with the cost of some intangible
and financial cost factors like:
• direct and indirect labor cost
• notional interest for production cycle lead time
• cost of intellectual properties etc.
As such, costing an intangible commercial phenomenon like
‘services’ is not fundamentally different from the method of costing of
the goods. As such, we presume that we shall not face any difficulty
in tax administration if both the entities shall be guided by a single
set of legislation.
The second presumption we rely upon is that ‘goods’ and
‘services’ both are equally recognizable ‘cost factors’ as well as
‘commercial outputs’ for all business concerns. As such, commercially
speaking, both the factors are firmly integrated to each other.
OBJECTIVES:
• To formulate a simple and integrated system of taxation that
shall be affective to both goods and services;
• The prospective set of law should leave less scope for
interpretation;
• Smooth transaction to the new tax regime;
• Eradicating the fundamental as well as the operational defects
in the existing indirect taxation system;
• Widening the tax preview;
• Defining goods and services in a better way to remove the
confusions in the existing system; (the definition may be a little
lengthy but desired to have wider connotation to reduce confusion, it
should not be like- prescribing a negative list and remain silence over its
horizon)
• Avoid the scope of double taxation as well as tax evasion;
• Tightening the compliance parameters; (eg. Compulsory filing of
annual statements of accounts by all business concerns irrespective of
their tax payment status. Since all of them including the individuals are
filing balance sheet and profit and loss accounts with the IT department
they may file the same returns to excise department as well without any
extra effort)
• Flexibility of verification of business operation system by
implementing authorities.
• Widening the parent legislation i.e. the GST Act by
incorporating the Cenvat Credit and Valuation rules into it,
leaving the procedural aspects which may be guided by the
subordinate legislations.
(A cardinal principle of drafting a statute is that a perfect piece of legislation
should leave no room for interpretation. But, in a movement to simplify the
law we should not sacrifice its quality and scope. We should accept that the
domain is not meant for a layman but for one who is legally-literate.
Although complexity is not desirable yet we may not afford to sacrifice
quality in favor of simplicity. Such a law may not safeguard justice in our
society.)
EXEMPLARY DEFINITIONS:
i. “Taxable Supplies” one single definition may be awarded to
goods and services that are generated and supplied in the
course of a commercial activity which are subject to GST (it
including zero-rated supplies).
ii. “Supply” means the sale, transfer, barter, exchange, license,
rental, lease, gift, and disposition of a goods, property or a
service.
iii. “Zero-rated supplies” means some supplies of goods,
property and services which for the time being chargeable to
GST at a rate of 0%. But subject to all legal compliances as
for the taxable supplies.
iv. “Exempt supplies” means supplies of property and services
which are exempt from the GST and GST is not chargeable
on those supplies.
v. “Goods” includes capital assets of all kinds used directly in
the process of generating supplies.
vi. “Credit” means the deduction of GST allowed on supplies
which were produced by utilizing input Supplies that suffered
GST at an earlier stage;
N.B. : The definition clauses may be build up during the course of
construction of the Code by incorporating meanings of all specified
connotes come across.
SOME IMPORTANT TECHNICAL ASPECTS:
I. Basic Structure: Some of the basic features of the present
Central Excise Act should be continued with the new law.
a) The title of the statute may be changed to ‘Goods and
Service Tax Act 2013’
b) The statutory preamble, extend, and definition clauses
shall remain at its own place.
c) The basic structural frame of the tax law which
metamorphosed over the ages to reach at the present
form should be honored.
II. Negative List: For levy and smooth collection of duty there
should be a universal definition (as far as possible) to the
‘subject of taxation’ viz. goods and services.
a) It should cover all goods and services in whatever form
they come into existence.
b) The category of service providers should be defined.
We already have such distinctive expressions about
business categories in our S.Tax law for charging GTA to
specific types of business organizations.
In a similar way we may define a negative list of
organizations which may be kept out of the tax purview
(e.g. domestic services of a person to his own family,
service of a cost centre within a company to the same
company generating taxable Supplies, services of
personnel to their own office or department etc.)
Care should be taken to define the services for which
the directors ‘as individuals’ are taking huge commission
from their companies. Since a company is a separate legal
person, the director’s contributions of skill to the company
which make them eligible for getting such commissions
should be recognized as a taxable service provided for
business considerations.
We have already discussed that companies
circumvent duty by opening numerous allies, branches
and subsidiaries. Their modus operandi is diversified,
which roots from their pre-formation stage and extends
upto sales of their outputs through the allies. The allies
are not recognizable to naked eyes because all of them
are not having characteristics of a business organization.
Relevant Examples:
i. How the companies providing commercial services to
their allies by keeping the authorities in dark:
The large companies purchase all the shares of
their allied companies through pseudo investment
proposals. They are separate business entities, but we
close our eyes to recognize the elements of financial
service of commercial nature in such transactions.
Immediately after floating the company in this way,
they extend corporate guarantee of a huge sum in favor
of the allied company and raise loan from the public
sector financial organizations.
They sale or lease out huge booties to their allies to
build up their equity base and to siphon huge worth out
of the company. In one of such instances under our nose
a company has leased out 400 acres of land to its
subsidiary by fixing a rent of one thousand rupees per
annum. Followed by this step the parent company
extended corporate guarantee of 700 crore rupees in
favor of the subsidiary to enable them to get a capital
goods loan of an equal value from the government. In
this way the parent company which is a separate legal
entity fairly veiled the commercial services which are
taxable under law.
The harm the parent company which is a listed
company caused to its numerous investors is immense,
who lost their legitimate benefit through appreciation of
the EPS (earning per share). This event never comes to
the vision of the government or the public who have
financial stake with the company.
This type of manipulations in accounts may
be averted to a greater extent by suitably defining
the business operations in the prospective GST Act.
c) Similarly in compound levy system when we charge duty
on cold rolling mills, companies take a plea that some of
their mills are cold rollers and others are hot rollers
because they fed pre-heated metals into it. Hence, simply
prescribing of a negative list may not effectively eradicate
such classification problems.
THE PROPOSITION TO PRESCRIBE A NEGATIVE LIST AND
LEAVING OTHER THINGS ON FAT MAY INVITE DISASTROUS
CONSEQUENCES IN THE ABOVE CONTEXT. ALTHOUGH IT SOUNDS
NOBLE FOR A LAYMAN FROM THE SURFACE BUT SHALL WIDEN THE
SCOPE TO HIDE TAXABLE GOODS OR SERVICES IN A COLORFUL
WAY.
III. Valuation: For valuation purposes, we should find a mean
path between yesteryears’ Price List approval method and
the contemporary method of transaction value.
a) Hiding the proper value of goods has always been an easy
way adopted by the companies to:
i. reduce the excise and vat tax burden
ii. showing lesser net income which is chargeable to
Income Tax
iii. diverting benefits in favor of the personal
account of the directors, promoters and
management by selling goods to some benami
customers floated by themselves
iv. ultimately, siphoning the net profit of the
company which is meant for dividend,
distributable to the shareholders.
Once they successfully clear goods at lesser price,
every other thing automatically follows through their own
plan. This practice is widely prevalent among biggest of
the big companies. The theory of our transaction value
stands for their rescue.
To prove such a business malpractice we are pursuing
the policy of ‘burden of proof’ which lies on the shoulder
of the department. This policy is basing upon the theory of
“seeing is believing” means if you frame a charge you
should prove that it occurred. Show that there is a flow
of fund from the buyer to the seller.
The theory of “seeing is believing” has become obsolete
even for scientific subjects like physics and chemistry so
this is the high time for amputation of the misnomer from
tax and business laws. The burden of proof here should
not be a static one but should be allowed to oscillate
between the two parties.
Before searching for a solution, we should first
understand the existence of such malpractices by applying
a deductive method from the symptomatic evidences they
leave. For example if we go to a paper company and ask
them to give us one ton of bond paper which they are
selling at 65 rupees a kilo, they shall not accept our
proposal showing various reasons why they have assigned
sole authority to a particular buyer. When the market
price of the said product is 200 rupees a kilo we may
comprehend that neither the buyer nor the price is
independent but still we accept the value as transaction
value.
b) The valuation rules on depot selling are also equally
ineffective on the above context. It is not difficult to
understand that the prevalent price at the depot on the
day of clearance may never be representative to its
independent market value.
The list above is not exhaustive……
While thinking of a solution to the above, we should take the
following notable points into consideration:
i. we may not think of approving pricelist at an age of
transparency and mutual belief between the trade
and sovereign;
ii. we should honor the business acumen of companies
that they may sometimes need to sell their products
even below the marginal cost.
iii. the department do not have the expertise to
arbitrage over the price decisions of the companies.
So, what is the easy and feasible way out ?
Obviously, the panacea lies with devising a method of effective
compliance from the part of the assessee and framing a mechanism
of technical verification from the departmental side. Straightly
speaking, if the state governments have successfully adopted the ewaybill
method through which the traders are generating it while
sitting at their home, why we may not apply the same method to the
invoicing system of the organized business concerns.
Each invoice yields some revenue to the exchequer so money
shall not be a constraint for its adaptation.
a) Every business concern shall be a registrant to the
system and each invoice shall be cenvatable.
b) Everyone intends to purchase goods from a registered
manufacturer or service provider for further commercial
purposes should also be a registrant.
c) Small retail business concerns may be chargeable to NIL rate of
duty but compliance to the system should be made compulsory
baring a lower threshold.
EXEMPTIONS
Turnover based exemption should not be allowed. If allowed at
least filing of returns and maintaining of records should be made
compulsory beyond a meager threshold. They may be charged a very
small percentage of their turnover as tax. If the companies are not
having time or expertise they may take help of the professionals like
advocates. By this way more employment opportunity shall be
opened and side by side the average compliance cost shall be
reduced.
BRIEF CONCLUSION:
By this way we may able to draw a symmetric relationship
between the GDP and our national economic progress. We may
reduce the tax rate which shall otherwise lead to control the price
rise.