Education

Merging direct, indirect taxes boards

T.C.A.RAMANUJAM | Updated on: Jul 05, 2011

The compartmentalisation of fiscal laws into direct and indirect taxes suffers from the ills of a fragmented approach to policy-making.

An interesting suggestion has been made for merging the Central Board of Direct Taxes and the Central Board of Excise and Customs. The suggestion cannot be ignored. It comes from not the Finance Minister, not the Home Minister, but the Law Minister. At first glance, the idea can be dismissed as not worth the attention it deserves. The two departments are different in cultures and operate in different statutory frame work of powers. It was a realisation of this distinction that led to the separation of the two Boards in 1963 and the creation of the CBDT under the Central Boards of Revenue Act, 1963.

Advantages

The World Custom Organization has published a Research paper strongly advocating the integration of the functions of Direct and Indirect Taxes and the formation of a Common Revenue Authority. The IMF and the World Bank have encouraged such thoughts on integration.

The argument proceeds on the basis that such integration will help better exchange of information between the two wings of the Revenue department and help avoid tax fraud and evasion. It will lead to better human resource management and there will be less corruption. It will promote revenue growth at a national level and lead to better tax compliance, saving in costs and time and there will be better services by the unified merged body. There will be a single window for all tax-related issues.

It is argued that the present system of tax-specific administration involves higher costs since support services are duplicated. Integration will help joint audit operation at regional and local levels. . The present international trend favours a more strategic administration built on customer needs.

The idea that a common Revenue Authority should be formed for both Direct and Indirect Taxes has gained momentum. Over 15 countries in Sub-Saharan Africa including Kenya, South Africa, Rwanda, Zambia, and Uganda have accepted this model. South American countries such as Argentina, Mexico, Peru, and Venezuela followed suit. In Europe, Ireland, Estonia and Latvia adopted the same model.

The British Example

True to its image as the intellectual capital of the world, London came up with the announcement of the merger of Inland Revenue and H.M Customs and Exercise in the Budget speech of the then Chancellor of the Exchequer, Gordon Brown on March 17, 2004. The Commissioner for Revenue and Customs Bill was introduced in September 2004 and received Royal ascent in April 2005. The Financial Times described the merger as the ‘mating the C&E terrier with the IR Retriever'. Under the new dispensation, treasury is responsible for Direction and Strategy of tax policy. HMRC is responsible for policy maintenance.

The Indian scenario

India is in the throes of a fiscal revolution. The Direct Taxes Code will replace the age old Income-Tax Act of 1961. The Goods and Services Tax will come into operation sooner than later. The target for all fiscal levies can be the same. Audit trails of transactions can be followed more easily by merger of all fiscal operations. There can be creative use of information technology to track VAT defaulters.

The present separation of these activities and compartmentalisation of fiscal laws into direct and indirect taxes suffers from the ills of a fragmented approach to policy making. If the idea gathers momentum, even real estate transactions and stamp duty evasion can be brought under the umbrella of the Goods and Services tax.

The Law Minister's idea has come not a day too soon. This is the opportune time. Parliament should definitely take up this suggestion.

(The author is a former Chief Commissioner of Income-Tax.)

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Published on June 25, 2011
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