One of the latest proposals for restructuring tax administration relates to the establishment of large taxpayer unit. This was announced in Budget 2005-06, but it has not yet found favour with large taxpayers in the four major cities, namely, Mumbai, Kolkata, Delhi and Chennai. However, in Bangalore, there has been a better response, where the first LTU will be operative from October 1.
The proposal is to set up one single office in a city, say, Mumbai, where all assessees of income tax, corporate tax, service tax and central excise duty will be dealt with on a single-window facilitation system.
Custom duty is out of its purview. Companies will be able to file their returns for all the taxes at one LTU. Even if there are 10 factories at different places, so long as the head office or registered office is in Mumbai, they can join the LTU in Mumbai. There are three conditions for eligibility. First, is that they file their income tax return in Mumbai.
The second is that in the previous financial year, they paid at least Rs 5 crore of excise duty or service tax in cash or advance income tax of Rs 10 crore. The third is that the different factories or units under one company pay the tax only under one PAN. It has to be a single PAN-based identity. The head of one LTU will be a chief commissioner of either income tax or excise department. There will be one nodal officer known as "client executive" for each taxpayer.
Returns can be filed electronically from outlying units to the client executive. This system has already been in vogue in several developed countries such as the US, UK, New Zealand, Holland and Australia, and also in some developing countries such as Pakistan, Sri Lanka, Bangladesh and Nepal. This scheme is optional both for joining as well as for exiting it.
The major benefits from LTU as claimed by the government are examined below. I have also analysed the real worth of these claims:
- This being a single-window facilitation, only one client executive will deal with all the different taxes.
Companies feel that this facility is more superficial than real. The "client executive" will either be from direct taxes or indirect taxes. He will not be competent enough to deal with income tax, service tax and excise all by himself, but will merely act as a public relation officer. If adjudication is to be done after issuing a show-cause memo, an appeal has to be decided, obviously there will be several officers of different departments and he can at best be a coordinator.
- The erstwhile system of jurisdictional officers supervising factories or units will no longer be there. This claim cannot also be taken on the face value. Certain procedures under central excise rules requiring physical control and verification of premises or documents, particularly relating to Cenvat, will have to be carried out by the local office, though with the permission of LTU. The dual control will continue.
- Procedural simplification for LTUs in respect of central excise has been offered in terms of allowing transfer of inputs without payment of duty and Cenvat credit from one factory to another. This is a genuine facility but can be availed of by only a few companies because the factories usually produce different things and the inputs are not the same. Already, this facility is available after paying duty for the inputs and taking credit in the next factory where they are transferred. It is only a book adjustment which they can get rid of now. It is not a financial gain as such. Inter-factory transfer of Cenvat credit also arises in rare cases.
There are several concerns, which are being expressed by industrial and commercial houses:
- The main concern is that there is likely to be an increase in the transaction cost. At present, the outlying units are independent entities under an independent head of office. Once the tax administration comes to the corporate office, it will have to handle the tax problems itself, which will involve maintaining another set of data for each factory. It is going to be duplication to a large extent, if not for all the documents maintained in a factory. If there is adjudication in Mumbai, the officers of a factory from Coimbatore will have to come all the way to Mumbai to attend the adjudication. All these mean extra transaction cost.
- The corporate office is usually not enthusiastic about taking over the tax administration work from independent units because it will be its headache in case there is a problem.
- The companies also feel that just because there is one single window, it does not mean that complicated issues because of unclear laws, complicated circulars and innumerable exemptions will be solved or that the usual harassment that they face due to Inspector Raj will be over.
It is understood that in Bangalore nearly 40 companies have opted for LTU. The next LTU will be in Chennai. In Bangalore, those who have opted for it are mostly IT companies, such as Infosys, for whom it is a matter of combining between income tax and service tax but not excise duty. It is much more easy to combine direct taxes and service tax because both are based on examination of documents than to combine excise also, which is based on manufacture and, therefore, is subject to physical verification, particularly regarding sending of inputs from one factory to another, reversal of Cenvat credit and sealing of wagons.
The intention of the government is good and the experiment with LTU is worth trying but there are some genuine concerns about its success. The best part of the experiment is that one can exit out of it. Chief financial officers in corporate head offices are not enthusiastic about LTU, as it will mean much greater responsibility for them.
The writer is former member, Central Board of Excise & Customs.
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