Tax policy developments in India are creating significant differences in degree of influence among various sections of tax administrators. The policies are empowering income tax officials with more authority while diminishing the clout exercised by excise and customs officials. This reflects a divergence in the degree of control that can henceforth be exercised by direct and indirect tax administrators.
The General Anti-Avoidance Rules (GAAR) should become effective in India from April 1, 2017. The GAAR will give considerable additional authority to income tax officers for scrutinising old assessment cases. The foundation for such authority has been provided in the latest Union Budget presented on February 1, 2017. Paragraph 2.32 of Annex III of Part-B of the Budget authorises ‘the Joint Director, Deputy Director or the Assistant Director of Income-tax to call for information for the purpose of any enquiry without seeking approval of the higher authority’. This nearly sweeping power is combined with the authority granted to assessment officers to ‘provisionally attach a property for a period of six months in order to protect the interest of revenue’ (Paragraph 2.31). The implementation of the GAAR along with much greater authority granted to income tax officers by the Budget is in line with powers already vested with income tax officers after demonetisation for tough scrutiny of deposits above certain threshold levels. Subsequently, with almost 20 lakh people asked to explain the sources of their funds, there is little doubt over the whip that the income tax officers have begun cracking afresh.
Greater empowerment of income-tax officers would increase their bureaucratic weight and influence. Income tax administrators, as it is, are feared by individuals and businesses because of their coercive powers. These powers would increase manifold in the days to come. While this does not mean that the greater powers would be necessarily exerted in a malevolent fashion, the overarching concern over harassment and rent-seeking by income-tax officers is too old and common a perception to go away.
More authority to federal income tax officials is being granted at a time when similar authority is likely to diminish for their excise and customs counterparts. The impending GST is most likely to produce this erosion. By emphasising dual control between Centre and states, the GST framework would do away the control of central excise officers from a large number of enterprises with turnover of upto R1.5 crore. These enterprises and other assesses would now be under the jurisdictional control of various state government assessors. It is hardly surprising therefore that the central excise and customs officers have vehemently protested the decision of the GST Council to implement dual control by marking the Martyr’s Day on January 30. Indeed, this is probably the first example of an organised show of disapproval by the bureaucracy on economic policies of the current government.
The government’s emphasis on shifting towards a more progressive tax structure and improving the direct tax to GDP ratio would inevitably result in greater empowerment of income tax administrators for mobilising more revenue. Such empowerment, while certainly not meant to accrue at the expense of empowerment of excise and customs administrators, is noticeable by its impact on altering the balance of influence between two segments arms of the country’s revenue administration. From the point of view of preservation of control exercised by India’s tax bureaucracy, the development is inimical to the long-term prospects of excise and customs officials. The latter would have assumed themselves as the fulcrum of the upcoming GST architecture. Going by international experience, they wouldn’t have been wrong in presuming so. Across the world, GST or VAT is collected by the federal governments and distributed to states or provinces according to their consumption indices. Pursuing a similar arrangement in India would have preserved the jurisdictional control and functional importance of central excise and customs officers. But dual control in GST management has dashed such hopes.
Dual control makes India’s GST unique. Apart from creating challenges over the effectiveness of such control at least in the initial stages, dual control is going to impact bureaucracy. What has probably not been thought through is the additional authority that would now be vested with state excise officers managing GST. Most states hardly have enough excise officers with adequate expertise in managing GST particularly complicated functions like refund of credit. On top of that, the sudden discovery of ‘new’ powers by these officers might result in misuse of such powers. At the federal level, misuse of authority has relatively greater probability of being checked due to more vigilance exercised by the central government. Similar vigil cannot be expected from all states. The result could be the growth of new groups of empowered local excise officers keen on exploiting their authority.
The current situation reflects three key developments in India’s tax administration. Greater power for income tax officers; lesser power for central excise and customs officers; and the rise of state excise officers with greater powers. The inter-play of the three outcomes can radically alter India’s tax administration scenario in the years to come.
The author is senior research fellow and research lead (trade and economic policy) in the Institute of South Asian Studies in the National University of Singapore.
Views are personal