Streamlining Central Excise Procedures for Efficiency and Accountability

1. Plucking Feathers Without Hissing Procedural Improvements in Indirect Taxes 401/408, Nirmal Towers, Dwarakapuri Colony, Punjagutta, Hyderabad – 500 082 Tel: 91 40 2335 0778 / 23350 790; Fax: 91 40 23350783; email: info@voteindia.org; url:www.voteindia.org

2. “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. Jean Baptiste Colbert ca. 1665

4. Genesis The Central Vigilance Commission (CVC) and Central Board of Excise and Customs (CBEC) are interested in introducing reforms in the functioning of the Central Excise department. Towards this end they have invited suggestions from Lok Satta to facilitate procedural reforms

5. Recommendations – Criteria Revenue neutral / revenue enhancing Simple and transparent procedures Build trust between department and industry Better service to assesses Encourage voluntary compliance Ensure accountability Minimize litigation Improve efficiency Enhance departmental image

6. What is Central Excise Tax Central Excise Tax is a duty on manufacture or production of goods. Manufacture means converting an article into a different article bearing a different name, use and characteristic Duty for the manufactured goods is assessed and paid on self removal procedure (SRP). No manufactured goods can be removed without payment of duty

7. Structure – Current Chief Commissioner Commissioner Division (4-5 Ranges) Preventive – Anti-evasion – Audit Range (25-30 units) Sector This is the structure at the state level

8. Structure – Current RACE - Revenue Audit Central Excise - state unit under (CAG) All India Level Organisations DGCEI – Director General of Central Excise Intelligence DRI – Director General of Revenue Intelligence Narcotics Agencies Directorate General of Audit NACEN

9. Structure – Recommendations Commissionarate, Preventive, Anti-Evasion, and Audit departments to be merged. Staff to be redeployed – Commissionerate Reduce range jurisdiction ( in terms of units) and increase accountability What would this result in*? Elimination of overlap of duties Increase accountability Improve efficiency Entrepreneur spared of multiple visits by authorities * The points referred to here are discussed in greater detail in the ensuing slides

10. Role of Range Reduction in jurisdiction - greater accountability Range to provide assistance and counselling to the assessee and to be made more responsible and accountable Range to encourage and assist in voluntary tax compliance Range Suptd. to be held accountable for malpraxis of industry The range superintendent should carry out audit with particular emphasis on classifications and valuation of goods Frequency of audit: SSI Units: Once in 3 years Large Units: Once in a year Integration of functions in the changed scenario

11. Procedures – Current Monthly returns have to be filed in person at the dept Officials make informal visits to the factories Stakeholders not clear about classification of goods Amendments made at different times causing confusion

12. Objectives of Procedural Recommendations Interface with industry should be to a minimum Online transactions to increase Making sure that all rules / amendments are self contained to eliminate ambiguity

13. SpecificProcedural Recommendations

14. Procedure - Registration Current Status Small-scale units with a turnover of less than 1 crore are exempt from registration Acceptance or rejection of application should be done within 1 day. After 1 day the application is deemed to have been accepted

15. Procedure - Registration Recommendations Rejection of any application should be in writing for preset reasons and should be given within 1 day In case of deemed registration, numbers are to be given within 7 days from the date of application Any classification changes to have prospective effect – not retrospective

16. Inspections Current Practice Multiple visits/ inspections by personnel of various agencies Assessee is not allowed to have the services of support staff during inspections Problems This is impacting the work schedule of the units There is a duplication of work by agencies Perception of harassment – statements taken under duress

17. Inspections Recommendations Right to enter the factory premises with permission of Commissioner of Central Excise, not applicable to intelligence agencies under the jurisdiction of Delhi The right to enter the premises shall be available only in following cases: during audit or for carrying out the audit related function when any documented information is received against the manufacturer or importer / exporter when any vehicle with goods is caught on the way without appropriate Central Excise Invoice All other random checks / inspections to be discontinued All officials visiting a unit should enter in the register name and designation purpose of the visit present their identity cards

18. Inspections Recommendations Assessee to be allowed to have his officials/advisors during inspection Officers taking statements under duress should be punished Officials to be trained in inspections – for instance, input-output ratios, capacities, electricity charges can be investigated

19. Current practice All units are subject to frequent audit of various agencies – Internal Audit, AG’s Audit, special audit and jurisdictional authorities Absence of coordination between the field officials and CAG Problems Substantial manpower of units is being geared to answer queries Show cause notices being issued by multiple departments Audit

20. Recommendations As all the documents are available with the Range office, the routine audit may be conducted in the Range Office giving a date, similar to the practice followed by ST & IT Depts., for assessment To prescribe simplified proforma for maintaining records. This would prevent the assesse from being accused of suppressing information Field officials should be present whenever CAG visits units. The final report of CAG should be prepared only after consultation with the concerned Commissioner Audit only to raise objections For audit of any other activity or verification of any documents requiring a visit must be done with the prior approval of the Commissioner Audit

21. Adjudication Current practice • Documents submitted during investigation are being withheld for long periods • The assessees are being made to personally come and handover the documents • The show cause notices are being issued much after the detection of ‘alleged’ irregularity • Investigating officers responsible for show cause notices are not present during the hearings • Assessees do not receive any acknowledgement of any communication • There are delays in adjudication • Coercive tactics are being used to recover sums during the pendency of stay petition • The stay given during appeals is valid only for a period of 180 days and if the appeal is not decided within those 180 days, the stay stands vacated

22. Adjudication Current practice • There is undue delay in the payment of refund amounts. • Pre-deposit amounts are too high and cause a blockage of funds • The order-in-original in most of the cases lacks in the following areas:- • It does not consider various judgments which have been referred in reply to show cause notice or during personal hearings • The documents which are relied upon in the show cause notice are not submitted to the assessee. Cross examination is not permitted • The charge of suppression is not elaborated • The role played by the individual person in levying personal penalty is not stated • The final appellate authority, CESTAT, is too distant for many units

23. Adjudication Recommendations • Documents submitted during investigation to be returned immediately • Certified copies may be retained if documents are required for departmental proceedings • The assessee should not be made to personally come and handover the documents in the excise office. They maybe faxed or couriered • The show cause notice must be issued within 30 /60 days of the detection of ‘alleged’ irregularity • Further adjudication should be completed within 6 months of the Show Cause Notice • Investigating officer responsible for Show Cause Notice should be present during hearings • Declarations, intimations, applications, returns and all communications from the assessees should be acknowledged within 7 days of their receipt Continued……

24. Adjudication • Refund amounts must be paid within 30 working days of receiving a valid claim and for any delay interest to be paid and the concerned officer should be held responsible and penalized • Pre-deposit provisions to be simplified or dispensed with • Instead of cash, bank guarantees and other securities can be used • If there is to be a pre-deposit, Appellate Commissioners’ discretion to be curtailed and amount cannot be more than 15-25%. (In case of delay in adjudication the pre-deposit amount should be given back) • It would be best to fix time period for disposal of appeal • In issues of pure technical nature – revenue neutral/classification stay can be issued by the adjudicating officer Continued……

25. The Section 35-C(2A) needs to be amended by giving the CESTAT a time limit of 180 days to decide the appeal and the stay should be valid till the appeal is decided Quasi judicial bodies should be strengthened by using staff available due to restructuring Two commissioners may be made as first appellate authority instead of single Commissioner Appeals working at present Instead of the presence in only four regions, CESTAT should be in every state Special officers should be trained for adjudication, and they should not be responsible for revenue targets ( may be the practice of having targets should be dispensed with) Continued…… Adjudication

26. Current practice No classification to determine the severity of penalties to be levied Officials having too much discretionary powers in imposing penalties Extended law of limitation is now 5 years Goods are being seized as penalty Power to arrest is available to officials Problems Even procedural mistakes incur heavy penalties Seizure of goods is resulting in host of problems The fear of arrest is resulting in assessee not contesting even on legitimate grounds Penalties

27. Recommendations For procedural and technical lapses not causing loss in revenue – there should beno penalty nor punitive action In case of difference in duty on account of interpretation, classification etc, no penalty should be levied, only duty to be collected with interest No penalties without full enquiry In levying penalties – discretionary powers to be curtailed and following to be done 1st offence – duty 2nd offence – duty + 25% 3rd offence – duty + 50% Regular offender – duty + 100% Continued…… Penalties

28. Instead of seizure of goods, authorities can take surety / bank guarantees / bonds and release goods Authorities should have no power to arrest Defaults to be divided into two categories and accordingly dealt with: clandestine removal where no records have been maintained. Here a hefty penalty should be levied the question of interpretation like claiming exemption under notification, classification of the product etc., Here no penalties may be levied Fraudulent assessees should have deterrent punishment in the form of alienation of property Penalties

29. Current practice There are no clear lines of responsibility within departments Large number of unsustainable show cause notices are being issued Problems Errant personnel are going unpunished and there are no support structures for honest and hard working personnel Assessees feel that they do not have a say in the system Accountability

30. Recommendations: As the Range Superintendent/Inspectors are completely in the know of the functioning of the units, they should be held accountable for gross irregularities which have taken place overtime Show Cause Notices Review – Performance indicator How many sustained How many dropped How many of them were frivolous This data to be kept online in the public domain When a Show Cause Notice is dropped – full refund with interest at bank rate should be given to the assesse, and show cause notice issuing authority should be made accountable Accountability

31. Current practice As on date there are no mechanisms to examine the nature and validity of queries raised by officials Problem The asssesses are being harassed on trivial queries or sometimes by queries that defy logic Recommendation All queries raised by an official should be submitted in writing to higher authorities, for instance an Assistant Commissioner should vet all queries Along with Show Cause Notice review, a review of audit queries should also be done There should be tracking system on refunds – how many and in what time-frame have they been disbursed Continued… Accountability

32. The officials should be held accountable in case of arbitrary and unsustainable acts ex., raids and show cause notices Computerisation of all transactions Citizen’s Charter to be implemented by amending Customs Act 1962, Customs Excise Act 1962 Feedback on the functioning of the department from industry may be considered Accountability

33. Administration should attend to requirements of the assessees, eg., offering consultation with respect to stuffing of export goods, overtime works, etc, There should be a master circular of all amendments to rules made over a period of time Assesee’s monthly returns to be posted / e-mailed / faxed Assesse visits department only if consultation is needed Entire transactions to be computerized under EDI system of functioning with various related organizations such as Bank, DGFT, IT, Statistics, Custodians, Airlines, Liners If it is not possible for the Range to offer counselling, the SSI Associations as a group should engage someone to advise them on procedures, laws and rules etc., There should be institutional mechanisms to protect whistle blowers General Recommendations

34. Current Practice Currently, if an exporter exports any item, s/he has 2 options To export against bond and after exporting, get the entry duty reversed Export against payment of duty and after exporting claim the rebate or refund of excise duty paid The documentation for exports and factory stuffing procedures are now under the supervision of range superintendent Problems Exporting against bond requires resources/skilled staff to handle the detailed documentation which most small and medium sized companies cannot afford to have. Hence they export against payment of duty and claim rebate or refund Claiming and getting the refund is a long drawn out process involving lot of paper work Documentation and stuffing procedures resulting in undue delay and is an avenue for bribe collection Exports

35. Recommendations In the simplified procedure, anyhow the Final verification report is given by the concerned range The Department can allow the Exporter to take the credit for the amount of refund (after receiving confirmation letter from the port officer) and submit all export related documents along with the RT 12 return and documents are then verified/checked by the concerned officer The same process could be allowed if you import any item Continued…… Exports

36. Recommendations This way the exporter can utilize the credit immediately towards domestic sales and hence does not suffer on account of the long time taken for refunds in the current system In the event of any discrepancies, then for the purpose of re-examining the case, the concerned department can make their report and forward the case to their higher authorities if required Continued…… Exports

37. Current Practice For central excise, the self removal procedure allows the assessee to remove the goods without having to inform the range every time, which is not the case with exports The ARE, application to remove exports, requires submitting proof of export to the range officers ICEGATE operated only in some port collectorates Sample testing is delaying the procedure of logging in the export books Problem ARE is not only cumbersome and illogical, but becomes an avenue for bribe collection Sample testing is delaying the procedure of logging in the export books Customs

38. Recommendations For established industries and enterprises, The self removal procedure practiced for central excise may be applied for exports Exporter can maintain the credit and debit records for export duty The implementation of Indian Customs & Excise Gateway (ICEGATE) with digital signature and auto process may be undertaken at the earliest Export and Import entries should be online Strict time limits for sample testing failing which, to accept exporter test reports. Augmenting the staff in the laboratories should be done to cut down delays Customs

39. Current A letter of undertaking (LUT) has to be executed at the end of every financial year The bill of entry is appraised before the clearance of goods even for 100% EOU & SEZ Units Problems Expect in a few ports, where computerization is being implemented in a phased manner, the bill of entry involves lot of paper work Customs

40. Recommendations The system of executing LUT after every financial year should be dispensed with. The validity of the LUT shall be as long as the validity of license The system of appraising the bill of entry before clearance of goods shall be done away for 100% EOU & SEZ Units The importer or the Custom House Agent (CHA) shall prepare the bill of entry in their computer which is linked to the computer of the customs department and pay the duty based on their own assessment Customs

41. Current practice The cash section shall sign the intimation for receipt of the duty, however examination of goods and clearance is resulting in delays Whenever there is provisional assessment, valuation is now taking more than necessary time and the exporter / importer has to deposit the duty amount Presently the import audit is being done online at the particular port at which the importer is registered Duty Drawback is resulting in delays Customs

42. Recommendations Based on self-assessment and payment of duty by the established industries and enterprises, the physical examination of the goods can be carried out by the shed appraiser and the goods shall be allowed to be cleared The order of special valuation branch must be passed within the stipulated period of 7 days from the date of submission of the questionnaire. In case the order is not passed within 7 days, then the collection of revenue deposit should be dispensed with Augmentation of staff required in the valuation branch to prevent delays Routine inspection of the trade samples from the exporters with ISO 9001:2000 & Export House and 100% EOU & SEZ Units certification may be exempt, as there is a lot of delay due to various procedures in getting clearance for the samples Similarly, online export audit should be implemented to minimize the documentation hassles faced by the exporter Customs

43. Recommendations Customs Should do away with verification of Duty Exemption Pass Book Scheme (DEPB) / DFRC, etc. Licenses issued by DGFT should be available at the click of a button. This is the main purpose of starting the Electronic Data Interface (EDI) System Duty drawback to be paid within 48 hours of the export of the goods in case of electronic declarations and 15 days in case of paper declarations Filing of ER-1 to be done without enclosing duty payment documents and the same can be verified during audit Customs

44. Current practice Service Tax should be paid by the 5th of the following month Taxes on services received during the month of March should be paid by the 31st March There are no rules to classify or segregate the services into dutiable and non-dutiable Invoice of taxable service within 14 days of completion of service Problems Large companies are finding it difficult to pay the service tax by the 5th of the every following month and by the 31st March Many assessees are ending up paying service tax even for non-dutiable services Service Tax

45. Recommendations The date of payment of service tax on 5th of the following month need to be reverted to 25th of the following month Service tax collections for the month of March should revert to the earlier deadline of 25th April 31st March should be the deadline for service tax collections from 1st March to 15th March, and April 25th should be the deadline for collections from 16th March to 31st March Clear classification of services into dutiable and non-dutiable should be done expeditiously Invoice of taxable service within 14 days of completion of service needs to be removed as it is not practically possible Service Tax Credit should be allowed immediately on receipt of service as it is practically difficult to track the payment of each invoice particularly where the payment is being made in installment Service Tax

46. It is obligatory on the consignees to pay service tax on the goods they receive and this is against the principles of Service Tax and this requires some changes Endorsement of the consignment note and invoice of the transporter may be allowed in favour of the consignee to enable him to take the credit Service Tax–Transport

47. The consignor may be allowed to act as input service distributor for the purpose of passing on the credit to the consignee. A clarification may be issued that transportation is an activity related to business of the consignor in the definition of the input service under Rule 2(1) of the Service Tax Rules It may be necessary for the consignees to get a declaration from the Goods Transport Agency on the invoice itself that he has not claimed the Cenvat Credit or benefit under notification no 12/2003. If this declaration is available and the Goods Transport Agency is showing the Service Tax amount on 25% of the freight charges, then only the consignor or consignee can pay the said amount of Service Tax Service Tax–Transport

48. Protection for whistle blowers Ensuring Confidentiality System of fair enquiry Commissioner Services to look into grievances, day to day services for assessees, importers and exporters Facilitating Transparency and Accountability

49. Increase in facilities like housing, transport, and payment of such perks should be linked to performance Uniform to be dispensed with except for customs and airport officers There is a necessity to institute feedback mechanisms to assess the functioning of all concerned agencies Strengthen Honest Officials