MAY 11, 2016

By P R Chandrasekharan,  Member (Cestat) (Retd.)

IN Budget 2016, one of the proposals relating to indirect tax was the imposition of central excise duty on gold jewellery. Subsequently, there have been wide protests against the levy by the jewellery manufacturers all over India, who shut their shops for a few days. The hon'ble Finance Minister has, on more than one occasion, made it clear that the levy will not be withdrawn. Nevertheless, the protest has continued. Vide Circular No. 1021/9/2016-CX dated 21 March, 2016, the Department of Revenue constituted a sub-committee of the High Level Committee chaired by Dr. Ashok Lahiri, former Chief Economic Adviser, to interact with Trade and Industry on Tax Laws which will consist of representatives from the trade, one legal expert, an officer from the Ministry of Commerce & Industry and high level officials from the central excise department to be nominated by CBEC (‘Board' in short).

2. Recently the constitution of the sub-committee and its terms of reference were notified under Circular No. 1025/13/2016-CX dated 22 April 2016. As per paragraph 3 of the said circular “terms of reference of the Sub-Committee will include the issues related to compliance procedure for the excise duty, including records to be maintained, operating procedures and any other issues that may be relevant”. The question that arises is whether the constitution of a special committee is really necessary and what are its implications?

3. The ‘problem areas' mentioned in the terms of reference are /ought to be the domain of CBEC in terms of its experience and expertise. The Board has successfully dealt with these issues in respect of a large number of commodities and services since 1944 without any assistance from external agencies. The Central Excise Rules, 2002 provide for the compliance and operating procedures in respect of excise levy for all goods. Rules 4, 6, 8, 9, 11 and 12 of the said Rules prescribe the time and manner/method of payment of duty, assessment, registration, maintenance of records, issue of invoices, filing of tax returns and so on. Further in respect of jewellery manufactured on job-work basis, a separate procedure has been laid down in Rule 12AA. Therefore, one really wonders at the necessity for constituting a separate committee under the chairmanship of an economist, to go into matters relating to tax administration. If protest by the jewellery manufacturers is the reason, that does not make much sense, for in the past also there has been widespread protests when excise duty was imposed for the first time on various commodities – to cite a few examples, the marble industry across the country went into protest for almost two months when excise levy was imposed on it in the mid-eighties; the ready-made garment industry resorted to nation-wide strike in 2000 when excise levy was sought to be imposed on it and so on. On all such occasions, the Board officials and the local tax administrators met the protesting industry associations and accommodated all their reasonable demands and ensured compliance to the levy. I was very closely associated with these issues and hence the reference. It was not found necessary to constitute any high-powered committee to resolve the matter. Has the CBEC lost its competence in tax administration or has the political leadership lost confidence in it? In the present case, if the Board had taken the initiative and discussed the problems with the jewellery manufacturers, they could have easily found a way out on the various contentious issues and resolved the matter. The failure on the part of the Board in this regard has led to a situation where they have been reduced to the status of a spectator rather than that of a player.

4. The real reason behind the jewellers' protest is not the excise levy. State Governments are already levying VAT on them. In any case, the incidence of excise duty does not fall on the manufacturers but on the ultimate consumers. It is the source of the raw material, gold, which is at the heart of the problem. India does not produce any gold worth mentioning and it has to be imported. Because of the high rate of customs duty (which is currently about 10% adv.) and the insatiable demand for gold, there is rampant smuggling, as it is hugely profitable. All over the world, high valued items, such as precious metals, are taxed at lower rates as otherwise there will be a tendency towards tax evasion. An import dutyrate which is more than 4% in ad valorem terms encourages only smuggling. The huge seizures of the yellow metal, made at the air-ports day-in and day-out, bear testimony to this fact. The argument given for keeping a high duty on gold is that it is necessary to control the current account deficit. This argument lacks logic because if the gold is coming into the country, whether licitly or illicitly, foreign exchange has to flow out for its payment. This happens either through the hawala route or the forex, which ought to have come into the country, does not come and is used to make payments abroad for the supply of gold. It is an open secret that most of the smuggled gold lands into the hands of jewellery manufacturers who cannot account for the same. The insistence on mentioning of PAN for purchase of gold jewellery above a certain amount has only little or no impact as the Indian economy is still cash transaction-oriented. Therefore, the jewellery industry cannot account for all its production and sales transactions. Unless the import of gold is made licit by keeping the import duty at reasonable rates, the malady will persist. This is the real reason behind the protest. The Government knows this only too well; however, it apparently lacks the will to tackle it in the right way.

5. Another instance where the Board has been completely sidelined is in the context of GST. There is no representation of the Board anywhere in the Empowered Committee dealing with the GST matters. The Board has no say, whatsoever, in formulating the policies relating to GST which it is expected to implement . Only a few commissioner level officers have been inducted for drafting the legislation concerning Central GST. Neither the Chairman nor the members of the Board knows first-hand the developments relating to GST and their knowledge is second-hand through their junior officers who participate in the meetings of the empowered committee/sub-committee. The Board has neither any administrative nor financial autonomy and it remains a mere attached office of the Department of Revenue, ruled by the Revenue Secretary who is invariably from the IAS.

6. It is high time that the CBEC stands united and assert itself for its legitimate place in indirect tax administration. For thisto happen, you need members, who are technically competent and have the requisite administrative ability and leadership quality. They should be given a tenure of at least two years so that they can make meaningful contribution to tax administration. There is a telling commentary on the present method of selection of Board Members and their competence (or the lack of it) in Chapter 1 of the First Report of TARC. Some of the major shortcomings pointed out in the report are - routine selection of members based on seniority, assignment of tasks with little or no relation to experience or expertise, making policy with little policy experience, risk aversion leading to low productivity or low motivation to provide guidance or clarity, rude and arbitrary behavior with no accountability and so on. Unless urgent corrective action is taken to remedy this situation, the Boardwill not be able to command any respect from the political leadership and will be left with no meaningful role to play.

(The author was an officer of the Indian Customs and Central Excise Service for more than 3 decades and retired as Member (Technical), CESTAT, WZB, Mumbai. )