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Restructuring customs and Central Excise departments

CICERO SAID that taxes are the sinews of the state. The Central Board of Direct Taxes and the Central Board of Excise and Customs are its revenue eyes. Governments require resources to discharge their multifarious obligations. The problem of arresting evasion and avoidance of taxes as well as growth of black money is as old as the rocks. The problem has assumed gigantic proportions and sophistication.

The oft quoted advice of Kautilya is that taxes should be collected as painlessly as the bee sucks the honey from the flower. The Kacchit Sarga of Valmiki's Ramayana contains a similar advice. The ideal of the state should be to so conduct its affairs without causing hassles or harassment in enforcing the law. The Constitution ordains likewise.

Perfection is a never ending quest. If through the process of restructuring the Central Board of Excise and Customs, additional resources could be raised, concurrently arresting evasion and avoidance, it is certainly a wholesome goal.

The Central Board of Revenue, a composite body till December 31, 1963, was dissected to form two boards, designated as the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). The former has exclusive domain over direct taxes levied by the Centre. Indirect taxes leviable by the Union are under the exclusive domain of the CBEC, apart from the foreign travel tax, and tax on services.

The character of the tax will determine which board has the jurisdiction. In the last fiscal, total revenue stood at Rs. 1.15 lakh crores as compared to about Rs. 40,000 crores a decade back. Still the problem remains, namely, curbing evasion and the growth of black money. Policy planners are at their wit's ends to secure a greater percentage of GDP as revenue through more rigid but nevertheless humane enforcement.

Through the restructuring, the appellate side is also being strengthened to take about 38,000 pending cases (The institution of an appellate tribunal as well as a tribunal for deciding classification disputes was the result of the recommendations of the Jha Commission in 1978). The problem of adjustment of surplus staff as a result of the introduction of the self removal procedure scheme with effect from April 1, 1968, replacing the earlier scheme of physical controls, was sorted out amicably. The present restructuring, likewise, contains no provision for a voluntary retirement scheme for surplus staff.The Customs Act is an old Act dating back to the East India Company times. The primacy of the Revenue services over others was recognised by Sir Eric Coates, the then Member of the Viceroy's Council in 1945, and by T. T. Krishnamachari in 1965. The Central Excise Act, a product of World War II, was enacted in 1944 confining itself in the main to three items. Its coverage has been extended over time. A residuary tariff entry 68 was introduced in 1975.

The Acts have provisions to encourage manufacture of export oriented goods with provisions for drawback of duty. The needs of the small scale industry as well as the tiny sector have also been taken care of. Matches and tobacco products were once the prime source of Central excise revenue. Now with advancement of technology, and globalisation these Acts have registered changes consistent with the sophistication needed to finetune them.

In addition, the CBEC is in charge of the Narcotics Department. India is a signatory to the Treaty on Psychotropic Substances. It is also a member of the U.N. Narcotic Commission. The establishment at Ghazipur has been able to patent codeine sulphate. The chief chemist under the Board assays and determines the nature of the excisable product. The Board also administers the additional duties of the Excise Act, replacing sales tax on three items of mass consumption - sugar, textiles and tobacco.

The Customs Department was manned at the apex level by officers of the Indian Customs Service. The Central Excise Service class I was created in 1955. Both the services were merged to form the Indian Customs and Central Excise Service in 1959. There is a training directorate in Delhi and regional training centres in States.

The Customs Department was studied in 1958. The Central Excise Department was studied by a committee under the late A. K. Chanda in 1963. The latter report recommended restructuring of the department as well as redrafting of the Central Excise Act. Amidst the administrative measures the cadre of principal appraiser was upgraded as Assistant Collector. The setting up of a coast guard organisation was another. The cadre of Deputy Superintendents in Central Excise was replaced by a cadre of superintendents. The post of Deputy Collector was created in the Central Excise Department.

The study team, under the chairmanship of a member of Parliament for identifying sensitive points and streamlining procedures, following the directions of the Santhanam Committee on corruption, made several recommendations, including posting of officers in select embassies, to arrest the problem of smuggling.

A recent address by the Chief Vigilance Commission also lists certain points: (i) 40 per cent of the gross product consists of black money. It fills the coffers of political parties and is the oxygen of corruption; (ii) vice versa corruption is the oxygen for black money; (iii) black money is the root cause of political, bureaucratic and business corruption; (iv) amendments are needed to the prevention of Money Laundering Bill to cover IT, Customs, Excise and Sales Taxand (v) amendments are needed to the customs and Central Excise Acts on the principle of zero discretion.

Jha panel's recommendations

A committee was set up in 1976 under the chairmanship of L. K. Jha, the then Governor of Jammu & Kashmir, a member of the Willy Brandt Commission, and administrator, to study the entire spectrum of indirect taxation. On the basis of its recommendation, the Central Excise Act was amended. There were several other recommendations, resulting in wider powers for States, through the 46th amendment of the Constitution as well as enlarging the ceiling for levy of profession tax. The modified VAT was a recommendation of this committee.

In order to avoid the cascading effects of multiple taxation both by the Centre and the States, the committee suggested that after detailed field studies, VAT should replace sales tax with suitable safeguards to the revenues of the States. The recent two-day seminar on July 11 and 12 in Bangalore has also recommended that the Centre should take the initiative in guiding all States towards adoption of value added tax, by firming up the ideal VAT model and negotiating the package with States. For this, the States must first rationalise the tax rates, remove exemptions, combine existing rates, and introduce self assessment before they switch over to the VAT scheme.

VAT has many advantages. It is transparent. It will help avoid the cascading effect of most indirect taxes making it attractive for both business and governments. But the State governments will have to do considerable preparatory work, if they are to realise the benefits of a VAT and contain any adverse consequences that could arise from the major shift from the existing regime.

The Centre's experience first with Modvat and more recently with Cenvat has shown that false claims and poor administration continue to make revenue buoyancy more a dream and less a reality. Indeed the widespread abuse of Modvat and Cenvat has been seen as a major reason for the limited growth of excise revenues in recent years.

While a number of States have decided to introduce VAT at the retail stage from April 2002, the challenge lies in introducing a universal system in which evasion will be difficult. For this to happen, computerisation is essential and businesses trading in commodities that attract VAT should be on the records of the tax administration.

It is only recently that a few State governments have decided to provide businesses with PAN. This is a welcome development.

It is considered that the restructuring of the customs and Central Excise department should serve as a model for the States as well and help in achieving the ultimate goal of (i) increasing the revenue base; (ii) moderate taxes consistent with the Centre's and States' needs including those of development; (iii) engendering mutual trust between the assessor and the assessee; (iv) larger revenue realisation; (v) increase in exports and arresting smuggling and evasion and (vi) a model for other nations to follow.

M.S. Sivramkrishna,

Former Member,

Central Board of Direct Taxes.

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