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November 11, 2002
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Should CAG visits be stopped?

Subhomoy Bhattacharjee

It was a small point in Vijay Kelkar's consultation paper on indirect tax reform that would have been easy to overlook. But its implications could be far more serious than any of the other much-discussed proposals.

This was a suggestion that audit teams from the office of the Comptroller and Auditor General stop making visits to companies. Indeed, it was the exultant industry associations that described this as the most important recommendation of the report in post-release press conferences.

What is the implication of this recommendation? In the past, the CAG has been one of the strongest and most influential critics of the chronic slippages in the revenue system.

Over the years, it has been the CAG's trenchant comments on the misuse of various export promotion sops that have contributed to the general realisation that these schemes needed to be wound up.

By suggesting that the department suspend field visits, the task force is inadvertently encouraging revenue slippages that result from poor monitoring.

Take the case of tax breaks for exports. In their consultation paper, the task force led by Kelkar, advisor to the finance minister, has also suggested winding up all such schemes except advance licence and duty drawback.

This selectiveness is the problem. In the latest audit report on indirect taxes the CAG says between the four fiscal years 1997-98 to 2000-2001, the Centre has foregone an average annual customs revenue of Rs 17,118 crore (Rs 171.18 billion) as a result of various export promotion schemes - including advance licence, duty entitlement passbook scheme, export promotion credit guarantee scheme, export promotion zone, export oriented units and duty drawback schemes. In the same period the Centre collected an average of Rs 45,000 crore (Rs 450 billion) annually.

"The duty foregone under export promotion schemes has gone up from 33 per cent of customs duty receipts in 1997-98 to 46 per cent in 2000-01," the CAG report says.

The CAG report adds that the basic objective of foregoing duty on imports made under the export promotion schemes was to enhance foreign exchange earnings. But it points out that audit enquiries revealed that while duty exemptions were based on export commitments, the monitoring mechanism in the customs houses and the offices of the directorate general of foreign trade did not enable them to ensure that the full amount of forex due was realised.

To what extent does the CAG depend on field visits to develop its database? In truth, visits are fairly rare. For instance, the same report mentions 20 companies from whom the Centre would earn Rs 1,063 crore (Rs 10.63 billion) in forex. But this fact is based on records culled from within the department.

It is on the excise side that CAG teams visit units more often. The obvious question here is: how open are they to misusing their position and harassing companies?

Departmental officials admit that there is scope but it is limited given the restricted mandate of the audit and the fact that these visits occur once in a couple of years. They point out that the harassment is far less of an irritant than the visits of excise and sales tax teams while the spin-off for the government is far greater.

Why are visits for excise audits more frequent than those for custom audits? Under the current excise rules, companies have to file only a comprehensive return called RG-23 with the revenue department. But the registers and records that make up that return are kept by the company, in accordance with the initial declaration that the unit files with the tax department.

When assessing the tax paid, the CAG teams need to visit units if they think those records need further inspection. According to internal orders of the department, audit parties are not supposed to visit units with an annual turnover of less than Rs 5 crore (Rs 50 million). If that lower limit needs to be breached, the auditor general has to give written permission.

CAG officials said with the shift in the excise policy toward assessees, which will increase as the country moves towards value added tax next year, the areas for evasion were growing. In that context there has to be a fallback measure to ensure that there is accountability.

For instance, to quote from the report, 38 assessees in the sugar sector derived an "unintended benefit" of Rs 31.35 crore (Rs 313 million) taking advantage of the absence of provisions on how to treat credit for duty paid on inputs and those on final products.

Now, intentions may not be malafide - these may be genuine mistakes that the revenue department makes in, say, the rush to meet budget targets. But it would be impossible for the CAG to okay such numbers without establishing both sides of the story. And for that, inspection of records at the factory level is essential.

The new set-up recommended by the Kelkar panel is largely based on trust. For instance, it has suggested that most of the tax records should lie within the factory premises. It has suggested that self-declaration by exporters should be the acceptable basis for revenue assessment and collection.

Moreover, the panel has also asked for a universal green channel for inward shipment of goods. That makes it even more important to look beyond the records of the department to ensure that the trust has not been misplaced by some companies.

In recent years CAG test checks in direct tax have shown that the government has been owed revenue even from charitable institutions, cooperatives and non banking finance companies.

Certainly, industry's keenness to push this aspect of the Kelkar panel's recommendations is at odds with growing demands for greater transparency.

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