REPORT ON CURRENT STATE REPO ASSESSMENT (AS ISPROCESS SSE SSM AS OCE DOCUMENTATION) OCUM NTA

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TABLE OF CONTENTS 1. 2. EXECUTIVE SUMMARY ........................................................................................................ 8 INTRODUCTION .................................................................................................................. .10 2.1. NATIONAL E-GOVERNANCE ACTION PLAN (NEGP) ...................................................................... 10 2.1.1. 2.1.2. 2.1.3. Key observations made by DIT and DAR&PG while endorsing the NeGP ............................ 10 Major activities proposed under the NeGP .......................................................................... 10 Framework for e-Governance under NeGP ......................................................................... 14 2.2. COMMERCIAL TAXES MISSION MODE PROGRAM (CT-MMP) ...................................................... 15 2.2.1. 2.2.2. 2.2.3. 2.2.4. Background to CT-MMP ..................................................................................................... 15 Vision of CT-MMP.............................................................................................................. 16 Overall game plan of CT-MMP ........................................................................................... 19 Key outcomes of CT-MMP .................................................................................................. 20 2.3. VALUE ADDED TAX (VAT) .......................................................................................................... 21 2.3.1. 2.3.2. 2.3.3. 2.3.4. 2.3.5. 3. 4. What is VAT?...................................................................................................................... 21 History of VAT .................................................................................................................... 22 History of VAT in India ....................................................................................................... 22 Self assessment and VAT ..................................................................................................... 23 Operational tasks within VAT.............................................................................................. 24

METHODOLOGY FOR CURRENT STATE ASSESSMENT .............................................. 27 SELECTION OF PROCESSES UNDER CT-MMP FOR BPR ............................................. 31 4.1. REGISTRATION OF DEALERS UNDER VAT ..................................................................................... 32 4.2. VAT RETURNS PROCESSING AND TAX COLLECTION ...................................................................... 34 4.3. PROCESSING OF VAT REFUNDS .................................................................................................... 35

4.4. TAX ACCOUNTING ...................................................................................................................... 37 4.5. INTER-STATE TRADE ................................................................................................................... 38 5. CURRENT STATE ASSESSMENT OF THE FOUR STATES ............................................. 41 5.1. PROCESS ARCHITECTURE ............................................................................................................ 41 5.1.1. 5.1.2. 5.1.3. 5.1.4. 5.1.5. Registration of dealers under VAT....................................................................................... 42 Processing of VAT returns and tax collection ...................................................................... 57 Processing of VAT refunds .................................................................................................. 67 Tax accounting ................................................................................................................... 73 Inter-state trade .................................................................................................................. 76

5.2. TECHNOLOGY ARCHITECTURE ..................................................................................................... 84 5.3. PEOPLE ARCHITECTURE .............................................................................................................. 90 5.3.1. 5.3.2. 5.3.3. Delhi Organizational structure............................................................................................ 93 Andhra Pradesh Organizational structure ........................................................................... 95 West Bengal Organizational structure ................................................................................. 97 Page 2 of 118

5.3.4. 5.3.5.

Gujarat Organizational structure ........................................................................................ 99 Key observations on the As-Is organizational structure.................................................. 100

5.4. TAXPAYER SERVICES ................................................................................................................ 102 5.5. FEEDBACK FROM VAT DEALERS INTERACTED WITH ACROSS FOUR STATES .................................. 107 6. STAKEHOLDERS CONSULTED IN THE FOUR STATES .............................................. 109

6.1. DELHI CTD OFFICIALS CONSULTED............................................................................................ 109 6.2. ANDHRA PRADESH CTD OFFICIALS CONSULTED ......................................................................... 110 6.2.1. Dealers interacted with in AP............................................................................................ 111 6.3. WEST BENGAL CTD OFFICIALS CONSULTED ............................................................................... 112 6.3.1. Dealers interacted with in West Bengal ............................................................................. 113 6.4. GUJARAT CTD OFFICIALS CONSULTED ....................................................................................... 114 6.4.1. 7. Dealers interacted with in Gujarat .................................................................................... 115

GLOSSARY OF TERMS ...................................................................................................... 116

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REFERENCE DOCUMENTS FOR INTERNAL USE

1: 2: 3: 4: 5: 6:

Delhi VAT Act, rules and schedules Delhi VAT Forms Delhi Checklist for returns scrutiny Delhi Organization structure Delhi Note on the computerization in the CTD Delhi SLA between Government of Delhi and Comat Technologies for data entry services

7:

Delhi Circular that had been circulated for reorganization and relocation of selective units under VAT regime

8: 9: 10 : 11 : 12 : 13 : 14 : 15 : 16 :

Delhi Select statistics related to Commercial Tax Administration AP VAT Act, rules and schedules AP VAT Forms AP VAT leaflets which have been prepared as ready reckoner on VAT AP Select statistics related to Commercial Tax Administration WB - VAT Act, rules and schedules WB VAT Forms WB Administrative report 2004-05 WB SLA between the office of commissioner, CT, WB and CMC Ltd. for data entry of endorsed waybills and transit declarations at 3 checkposts

17 :

WB- SLA between office of commissioner, CT, WB and Webel Technologies for hardware maintenance

18 : 19 : 20 : 21 : 22 :

WB Note on computerization in CCT WB Publication of Trade Circulars Gujarat VAT Act, rules and schedules Gujarat VAT Forms Gujarat Administrative organization at the division level

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23 : 24 : 25 : 26 : 27 :

Gujarat Proposed organizational structure to be adopted under VAT Gujarat MIS report on Input tax credit mismatch Gujarat Note on the checkpost activity Gujarat Select statistics related to Commercial tax Administration International case studies on successful implementation of Cross matching of invoices

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LIST OF FIGURES FIG 1: MAJOR ACTIVITIES PROPOSED UNDER NEGP AND BUDGET ALLOCATION .................................................. 13 FIG 2: OVERALL FRAMEWORK FOR E-GOVERNANCE .......................................................................................... 14 FIG 3: THE TRIPLE E OF COMMERCIAL TAX ADMINISTRATION SYSTEM ............................................................. 16 FIG 4: THE SEVEN DIMENSIONS OF EGOVERNANCE........................................................................................... 17 FIG 5: OVERALL GAME PLAN FOR CT-MMP ..................................................................................................... 19 FIG 6: METHODOLOGY ADOPTED FOR CURRENT STATE ASSESSMENT UNDER CT-MMP ..................................... 28 FIG 7: TAX ACCOUNTING SYSTEM.................................................................................................................... 37 FIG 8: FORMAT OF TAXPAYER IDENTIFICATION NUMBER (TIN) IN WEST BENGAL ............................................. 53 FIG 9: FORMAT OF TAXPAYER IDENTIFICATION NUMBER (TIN) IN GUJARAT...................................................... 54 FIG 10: ORGANIZATIONAL STRUCTURE OF AN OPERATIONS UNIT IN THE DELHI CTD ......................................... 93 FIG 11: ORGANIZATIONAL STRUCTURE OF THE DELHI COMMERCIAL TAX CTD.................................................. 94 FIG 12: ORGANIZATIONAL STRUCTURE OF THE AP CTD AT THE HEADQUARTERS ............................................... 95 FIG 14: ORGANIZATIONAL STRUCTURE OF THE WB CTD .................................................................................. 97 FIG 15: ORGANIZATIONAL STRUCTURE OF THE GUJARAT COMMERCIAL TAX CTD ............................................. 99

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LIST OF TABLES TABLE 1: LIST OF MISSION MODE PROJECTS UNDER NEGP ................................................................................ 12 TABLE 2: BASIS FOR IDENTIFICATION OF STATES FOR STUDY UNDER CT-MMP .................................................. 29 TABLE 3: LIST OF PROCESSES UNDER COMMERCIAL TAX ADMINISTRATION ....................................................... 31 TABLE 4: SNAPSHOT OF STATISTICS RELATED TO VAT REGISTRATION IN FOUR STATES ...................................... 32 TABLE 5: SNAPSHOT OF STATISTICS RELATED TO VAT RETURNS IN FOUR STATES .............................................. 34 TABLE 6: SNAPSHOT OF STATISTICS RELATED TO VAT REFUNDS IN FOUR STATES.............................................. 36 TABLE 7: SNAPSHOT OF STATISTICS RELATED TO INTER-STATE TRADE IN FOUR STATES ..................................... 38 TABLE 8: COMPARISON OF PROCESS OF VAT REGISTRATION ACROSS THE FOUR STATES ..................................... 52 TABLE 9: COMPARISON OF F VAT RETURNS PROCESSING AND TAX COLLECTION ACROSS THE FOUR STATES ........ 65 TABLE 10: COMPARISON OF PROCESS OF VAT REFUNDS ACROSS THE FOUR STATES ........................................... 70 TABLE 11: COMPARISON OF TAX ACCOUNTING ACROSS THE FOUR STATES ......................................................... 75 TABLE 12: COMPARISON OF PROCESS OF MONITORING INTER-STATE TRADE ACROSS THE FOUR STATES ............... 79 TABLE 13: COMPARISON OF EFFECTIVENESS OF VARIOUS CONTROLS RELATED TO INTERSTATE TRADE............... 81 TABLE 14: COMPARISON OF TECHNOLOGY ARCHITECTURE ACROSS THE FOUR STATES ........................................ 88 TABLE 15: COMPARISON OF ORGANIZATIONAL STRUCTURE ACROSS THE FOUR STATES ....................................... 92 TABLE 16: COMPARISON OF TAXPAYER SERVICES OFFERED BY THE CTDS ACROSS THE FOUR STATES ............... 106 TABLE 17: FEEDBACK FROM DEALERS ACROSS THE FOUR STATES .................................................................... 108

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1.

Executive Summary

National e-Governance Plan (NeGP) was conceptualized jointly by Department of Information Technology (DIT) with Department of Administrative Reforms & Public Grievances (DAR&PG) to lay the foundation and provide the impetus for long-term growth of e-Governance within the country. . The Commercial TaxesMission Mode Project (CT-MMP) has been initiated under the NeGP, spearheaded by the Department of Revenue (DoR), Ministry of Finance, Government of India. DoR has partnered with National institute for Smart Government (NISG) and Ernst & Young to play the role of strategic advisor in designing the MMP for introduction of e-Governance in area of Commercial Taxes in the States and Union Territories of India. This would include Conceptualization, Architecting and Defining the Mission Mode Program with respect to understanding the services to be provided to the citizens, designing of the architectures (functional, process, people, technology and resources) and design of a comprehensive and integrated Commercial Taxes MMP Model / Models. In order to study the complexities and ground realities associated with tax administration, four representative states of India, viz. Delhi, West Bengal, Andhra Pradesh and Gujarat were identified for study as well as for conducting discussions with stakeholders. After detailed study of various administrative procedures under Commercial Taxes, five core VAT administration processes were prioritized for re-design and infusion of various technology enabled solutions viz Registration of dealers under VAT, Processing of VAT returns and tax collection, Processing VAT refunds, Tax accounting and Inter-state trade. The current report is a detailed note on the findings of As-Is study of these five processes, the technology architecture and the organizational architecture across the four representative states. The study reveals significant variation across states both at the process concept/design level and implementation level. For each of the five processes, the parameter across which they vary and the impact it has on tax administration has been discussed in detail. Based on our study, feedback from dealers and understanding of the international leading practices, the following key areas have been identified to be considered during the re-design phase under CT-MMP: VAT Registration: Security deposit, Tin format, SIC code, pre-verification Versus postverification, time to grant registration and the steps involved therein Processing of VAT Returns and tax collection: Simplification of returns form with an objective to utilize the information captured for further processing ( scrutiny/ analysis), uniformity in period for filing of returns Processing of VAT Refunds: Stringent timelines for processing of refunds, cross matching of invoices Tax accounting: Simplification of reconciliation of tax payment Inter-state trade: Effectiveness of controls like checkposts, waybills, statutory forms in prevention of frauds related to inter-state trade

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Study of the technology reveals that the states differ significantly in the level of usage of technology as an enabler in increasing the effectiveness of service delivery to taxpayers. Based on the as-is study and the international leading practices following are some of the key e-Governance initiatives that have been identified for further discussion: Online registration Online filing of returns e-Payment of tax Electronic exchange of data between the CTD and banks, treasuries Electronic clearance of refunds Online tax profile for dealers Dematerialization of statutory forms

The study of organizational structures across the four states reveals that the structure is primarily geographic in nature and this causes problems like lack of specialization and focus, lack of economies of scale, possibility of collusion between dealer and officials etc. It is evident that there is a need for the CTDs to move toward a functional organizational structure. There is significant scope for improvement in Commercial Tax administration. It is desirable that the CTDs consider the possibility of incorporating international leading practices in their system, streamline and standardize the processes leading to Efficient, Effective and Equitable commercial tax administration system.

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2.

Introduction

2.1.National e-Governance Action Plan (NeGP) NeGP was conceptualized jointly by Department of Information Technology (DIT) with Department of Administrative Reforms & Public Grievances (DAR&PG) to lay the foundation and provide the impetus for long-term growth of e-Governance within the country. The Government of India has approved the National eGovernance Action Plan for implementation during the year 2003-2007. The plan seeks to create the right governance mechanisms, set up the core infrastructure and policies and implement Mission Mode Projects at the centre and state to create a citizen-centric and a business-centric environment for governance.

2.1.1. Key observations made by DIT and DAR&PG while endorsing the NeGP The ultimate goal of e-Governance is to make the delivery of government services and information to the citizens efficient, speedy and transparent using electronic means. For effective implementation of eGovernance, DIT and DAR&PG felt the necessity to incorporate the following key observations while endorsing the NeGP: Adequate weightage to be given for quality and speed of implementation in procurement procedures for IT services Incorporation of suitable system of incentivization of states to encourage adoption of eGovernance initiatives proposed under NeGP Trend of delivery of services to citizens through common service centers to be encouraged and promoted Services to be outsourced to competent entities if opportunity exists Full potential for private sector investment to be exploited Connectivity to be extended up to block level through NICNET/ SWANs

2.1.2. Major activities proposed under the NeGP The following is a list of major activities proposed under the NeGP: Development of Core Policies : This would involve development of overall vision, mission, strategy and approach for e-Governance; Policies relating to funding, human resources, integrated services, process reengineering etc Development of Core Projects / Mission mode projects : The following is the list of parameters based on which certain areas/ departments of the Government have been prioritized and Mission mode projects have been identified under those areas as a part of the NeGP : o o o Impact in terms of number of people likely to be affected by project Impact in terms of likely improvement of the quality of service Impact on the economy or economic environment in the country Page 10 of 118

o o o

Impact in terms of the likely cost-benefit of investments in the project Readiness and willingness of ministry/ CTD to position a National Mission Project Feasibility of implementing the project from a financial, administrative and political perspective within a reasonable time frame

The table presented below lists the Mission Mode projects identified under NeGP for implementation at the national level (Central government projects), state level (state government projects) and as integrated services.

S. No.

Mission Mode project

Line ministries/ CTDs responsible

Mission mode projects under Central government 1 2 3 4 5 6 7 8 Income Tax Passport Visa & Immigration Project DCA21 Insurance National Citizen Database Central Excise Pensions Banking Ministry of Finance/Central Board of Direct Tax Ministry of External Affairs/Ministry of Home Affairs Department of Company Affairs Department Of Banking Ministry of Home Affairs/Registrar General of India (RGI ) Department of Revenue/Central Board of Excise & Custom Department Of Pensions & Pensioners welfare & CTD Of Expenditure Department of Banking Mission mode projects under State government 9 10 11 12 13 14 15 16 17 18 Land Records Road Transport Property Registration Agriculture Treasuries Municipalities Gram Panchayats Commercial Taxes Police (UTs initially) Employment Exchange * Ministry of Rural Development Ministry of Road Transport & Highway Department of Land Resources Department of Agriculture & Cooperation Ministry of Finance Ministry of Urban development and Poverty Alleviation Ministry of Panchayati Raj Ministry of Finance Ministry of Home affairs Ministry of Labor Page 11 of 118

Mission mode projects under Integrated services category 19 20 EDI (E-Commerce ) E-Biz Common Service Centres India Portal EG Gateway E-Courts* E-Procurement* Ministry of Commerce and Industry Department of Industrial Policy & Promotion / CTD of Information Technology Department of Information Technology Department of Information Technology and CTD of Administrative Reforms and Public Grievances Department of Information Technology Ministry of Justice/ Ministry of Home Affairs Ministry of Commerce and Supply

21

22 23 24 25

* Additional mission mode projects proposed Table 1: List of Mission mode projects under NeGP Development of Core Infrastructure: This involves development in areas like National eGovernment intranet, State wide intranets, National and state level data centers, security infrastructure. Development of Integrated Services Projects: This involves taking up initiatives related to the development of one stop national level and state level government portals, e-Business, e- Procurement. Development of Support Infrastructure: Support Infrastructure would cater to areas such as Service delivery infrastructure at State, District, Block and Village levels including Wireless infrastructure for last mile connectivity, e-Post, design, development and deployment of low cost technology solutions, Integrated Service Delivery Front ends. Human Resource Development/Training: This would comprise Training for e-Governance policy makers, Chief Information Officers, Project specific training, General IT Skills and Competencies, Special training programmes for specialists, Security, use of local language solutions, Advanced courses architecture, language technologies , Equipping National / State Institutions of Public Administration for EGovernance Training etc. Technical Assistance: The technical assistance under this Scheme may include Support for undertaking survey of needs and expectations, Benchmarking of interventions, Feasibility studies, Planning and design of various projects, Capacity building of institutions which would be involved in the implementation and monitoring of the projects . Awareness & Assessment: Some of the key initiatives under this activity are as follows : o o o Undertaking e-Readiness assessment of various States/ Departments Setting up of Virtual e-Governance Forums Assessment of e-Projects Page 12 of 118

o o o o o o Governance

Study of best practices for e-Governance Development of e-Governance National Resource Database Newsletters on e-Governance, workshops/ seminars/ Conferences, Setting up e-Governance forum for NGOs, Private Sector, Academicians Setting up of Training Institutions Create awareness through different media like films. such Board, as National Institute Electronic for Smart Council/ National Information Services National

Design and development of Organizational Structures

Government (NISG) , State Electronic Governance Councils/ State Information Services Board , Electronic Government Standards Institution, National Informatics Center (NIC). Research and development : Research and Development would need to be taken up in areas such as Architecture , Standards , Integration Strategies ,Language technologies , Electronic payment systems , Security and other areas related to E-Governance Figure 1 depicts the percentage allocation of the total budget proposed for NeGP to major activities identified under NeGP (listed above).

Core Policies 1% Inte grate d se r vices 2 % HRD and Tr aining 4 % Suppor t and Infr as tructure 5 % Cor e Infr astructure 10 %

Te chnical ass is tance 1 %

Or ganizational s tr uctues 1 %

Rese ar ch and De ve lopm e nt 1 % Aw ar e ness and Asses s m e nt 2 %

Core pr oje cts 73 %

Core projects HRD and Training Technical ass is tance

Core Infras tructure Integrated s ervices Organizational s tructues

Support and Infras tructure Core Policies Res earch and Developm ent

Awarenes s and Ass es s m ent Source: Website of Department of Information Technology Fig 1: Major activities proposed under NeGP and budget allocation

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2.1.3. Framework for e-Governance under NeGP Under NeGP, a framework/ overall architecture has been developed for the effective implementation of eGovernance initiatives. As depicted in Figure 2 below, the e-Governance framework includes the following main components Back-end: The e-Governance framework envisions the integration between databases of the different government agencies, service providers and state governments. An e-India portal would function as an interface between the back end, middle ware, GoI portals and the state government portals. Middleware: The Middleware comprises of communication and security infrastructure, gateways, central data banks and integrated services facilitating integration of inter-departmental services. Front-end delivery channels: The e-Governance envisions multiple delivery channels to citizens and businesses in form of home PCs, mobile phones, kiosks, integrated citizen service centers etc to increase the effectiveness of service delivery.

Middleware GOI Agencies GOI Portals Communication Infrastructure Central Data Banks Gateways Security Infrastructure Service Providers e-India Portal Front-end interface Integrated services enabled Citizen Portal State Portals State Agencies E-biz

Mobile

Citizens

Home PCs

Integrated CSC Kiosks

Businesses

DTV

Fig 2: Overall framework for e-Governance

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2.2. Commercial Taxes Mission Mode Program (CT-MMP) 2.2.1. Background to CT-MMP Commercial Taxes form the most important revenue base for the States and Union Territories in India, often accounting for 60% - 70% of the total internal resources generated. The Commercial Taxes departments are entrusted with the administration and enforcement of Tax Legislations as might be applicable. As the CT department mainly interfaces with businesses, its functioning can directly affect the attractiveness of the state as a business destination. Currently most States and Union Territories are aligning their processes with the new Value Added Tax (VAT) System adopted since 01-04-2005. A study of the Commercial Taxes administration across the states and union territories reveals significant variations both at the level of conceptualization/ design of processes and at the implementation level. One of the primary reasons for this variation being that VAT is a state subject and each state has developed its own act, rules and procedures for implementation of VAT. In many of the states, the previous sales tax act is still being administered. States are facing issues relating to the complete transition to VAT. The need for a Mission Mode Program (MMP) under Commercial Taxes was felt to establish a certain degree of standardization across states with respect to Commercial Tax administration and to come up with streamlined citizen-centric, service-oriented processes. The CT- MMP has been initiated under the National e-Governance Plan spearheaded by the Department of Revenue (DoR), Ministry of Finance, Government of India. DoR has partnered with National institute for Smart Government (NISG) to play the role of strategic advisor in designing the MMP. They are responsible for formulation and design of a MMP for introduction of e-Governance in area of Commercial Taxes in the States and Union Territories of India. This would include Conceptualization, Architecting and Defining the Mission Mode Program with respect to understanding the services to be provided to the citizens, designing of the architectures (function, process, people, technology and resources) and design of a comprehensive and integrated Commercial Taxes MMP. From the CT-MMP would emerge a comprehensive and integrated model for Commercial Taxes administration that can be adopted by all states by making suitable customizations specific to their state laws. The following are the key objectives of CT-MMP: Alignment with the NeGP goals of service orientation, centralized planning and de-centralized implementation. Design of e-Governance strategy and roadmap for Commercial Taxes (CT) Creation of a national mission-mode program for approval by Government of India Creation of a national infrastructure for o o o Facilitating inter-state trade Uniformity and standards in Commercial Tax administration Enabling free exchange of information Page 15 of 118

Transformation of key processes related to CT leading to improved service delivery Building capacities among all the stakeholders to enable people delivering the services to perform better Ensure balanced pace of implementation across all the states Exploit true revenue potential Use technology to alter the way services are delivered

2.2.2. Vision of CT-MMP The vision of the CT-MMP is to Create a modern state tax administration that is Efficient, Effective and Equitable and which is conducive to investment, economic growth and free flow of goods and services within the common market of India. An Efficient Commercial Tax administration would mean lower costs of administration for the department and lower costs of compliance for the taxpayer. It would minimize the negative impacts on investment and economic growth. It would also help to improve and regulate inter-state trade by bringing about uniformity in administrative procedures across states. An Effective Commercial Tax administration system would help improve revenue yield,

maximization of voluntary compliance and reduced revenue leakages, greater control over fraud and collusion and reduction in disputes with taxpayers and timely resolution of objections and appeals An Equitable Commercial Tax administration system would bring about greater transparency in tax administration, uniformity/consistency in application of tax to taxpayers in similar circumstances

Effective

Efficient

Equitable Fig 3: The Triple E of Commercial Tax Administration System

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The CT-MMP is designed to address each of the seven pillars of e-Governance as outlined below.

Program Management

Procurement Management

Expectation Management

Knowledge Management

Technology Management

Process reform Management Resource Management

Fig 4: The seven dimensions of e-Governance Knowledge management Knowledge sharing across states is critical so that states can learn from each others experience, best practices can be quickly replicated, mistakes and cost escalations are prevented. Simultaneously such a large scale change initiative requires rapid learning by functionaries at various levels across states for effective implementation. The CT-MMP would help in this regard as the model framework for Commercial Tax administration would incorporate the leading international practices as well as the learnings from visits to the four states identified for study Delhi, Andhra Pradesh, West Bengal and Gujarat. Program management Program management requires systems which help monitor and evaluate resources and progress of work across multiple areas of the mission mode program. Therefore much emphasis has been placed under the CT-MMP on the monitoring and evaluation framework to be used by the Department of Revenue and the states for assessing the progress of the mission mode program. Expectation management Under the CT MMP emphasis has been placed on understanding of the services that Commercial Tax departments wish to offer, the expectation of the various stakeholders and the service standards that citizens expect. Process reform management Process reforms require sensitization to various issues and also taking cognizance of the constraints that impact the reforms. Therefore, under the CT MMP a Page 17 of 118

participatory approach has been adopted to determine the reform initiatives required and what impact each reform would have on the tax organization and its performance. Resource management CT MMP has been designed to identify possibilities for public private partnerships and alternative channels for mobilizing new resources and improving utilization of existing resources. Technology management The pace with which technology landscape is changing necessitates redefinition of standards for technology procurement by the CTDs; ensure investment protection and optimal deployment of IT resources. In view of this in-depth analysis of various technology enabled options has been carried out. Procurement Management Migration to a new enterprise architecture based on a service delivery orientation would necessitate procurement of various kinds of resources. Therefore frameworks for procurement including sample RFPs, SLA frameworks and templates for public private partnerships are being developed as part of the CT MMP.

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2.2.3. Overall game plan of CT-MMP

Fig 5: Overall game plan for CT-MMP Subsequent to the design of MMP by DoR, a three-pronged strategy has been demarcated for roll out of the mission mode program. After approval of the MMP by Government of India, a monitoring and evaluation mechanism would be set up to oversee the establishment of core infrastructure for the MMP at national level. It would also monitor utilization of the technical and financial assistance rendered to the states as part of the MMP. In parallel, the MMP model would be shared with states for customization and implementation of the design. Industry and trade form a key stakeholder group and it would be important that they be aligned to the change initiatives planned under CT MMP and also participate in the capacity building exercise.

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2.2.4. Key outcomes of CT-MMP The following are the proposed key outcomes of CT-MMP: Roadmap for implementing the Commercial Taxes MMP with emphasis on vision, mission, service prioritization, program management and governance structure & mechanisms, stake holder expectations, risks and risk management guidelines, critical success factors International / National Best Practices along with their applicability and usability context in the CTMMP best practices for program management, governance, processes for management of Commercial Tax functions, technology architecture, service delivery, service delivery standards, channels for service delivery Portfolio of services to be targeted under the CT-MMP with description, breadth, depth, prioritization, service levels required to be achieved to meet stake holder expectations Reengineered Processes - process descriptions, process metrics, expected impacts of these processes on stake holders and on internal efficiencies, challenges in implementing them, governance structure for implementation, how the implementation plan has to be tied with IT infrastructure / applications Integrated o o o o o and comprehensive Commercial Taxes MMP Model/multiple models for

implementation, consisting of Functional Architecture - developing requirements of the functionality of the solution Process Architecture - defining the scope of BPR in selected core areas along with the BPR itself in those areas Technology Architecture - Technical solution, Information Security and Disaster Management Plan People Architecture - Capacity Building & Change Management Plan Resource Architecture - Business Model Options, including PPP models

Monitoring & Evaluation structure within the Ministry of Finance for Commercial Taxes MMP

The project seeks to bring significant improvements in area of Commercial Tax administration to increase the effectiveness of service delivery to citizens.

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2.3. Value added tax (VAT) 2.3.1. What is VAT? VAT is a multi-point Sales Tax system where the tax is levied as a proportion of value added (i.e. sales minus purchases).VAT is a consumption tax charged at every step of the value chain i.e. at each transaction in the production distribution system unlike previous Sales Tax systems concept of taxation at first/ last point. VAT helps to overcome certain problems and complexities associated with the Sales Tax structure. In the sales tax structure, there were problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. Under VAT system, this problem is tackled by allowing dealers to claim a set-off on the input tax paid as well as the tax paid on previous purchases. Under the Sales Tax structure, there is also a multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these taxes will be abolished. In addition, Central sales tax is also going to be phased out. The overall tax burden of a taxpayer will be rationalized, and prices in general will fall. VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. This will improve tax compliance and also augment revenue growth. To summarize, the introduction of VAT will result in the following key benefits: Prevention of double taxation with cascading effects by provision to dealers for claiming a set-off on input tax paid and tax paid on previous purchases Abolition of multiple taxes like turnover tax, surcharge, additional surcharge Rationalization of overall burden of taxpayer General fall in prices of goods over a period of time after stabilization of VAT system Shift from system of inspection of dealers by the CTD to system of self assessment by dealers Increase in transparency of taxation system Increased tax compliance and revenue growth

VAT will therefore help common people, traders, industrialists and also the Government. It is the right step in direction of a more efficient, effective and equitable taxation system.

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2.3.2. History of VAT Value Added Tax was first introduced in France in 1954 but initially it was not a complete system of VAT, since it applied only to transactions entered into by manufacturers and wholesalers. Later it was supplemented by a separate tax on services. A full-fledged VAT was initiated first in Brazil in mid 1960s, then in European countries in 1970s and subsequently introduced in about 130 countries, including several federal countries. VAT was extended to activities such as energy and construction during 1954 to 1963. In January 1968, reforms were initiated for generalizing VAT to all industrial, agricultural and commercial activities. It was extended to all transactions formerly subject to the local tax and to the tax on services, which were then abolished. Development of VAT in other countries has been gradual. Most of the countries had not adopted VAT till sixties. VAT has come to occupy an important place in the fiscal storage over the years in nearly all industrialized countries. This has led to many countries to adopt VAT as their major form of consumption tax. Thus, the augmentation of interest in VAT has been the most remarkable event in the evolution of commodity taxes in the present century. Over 120 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it. 2.3.3. History of VAT in India In India, there has been a VAT system in respect of Central excise duties, introduced by the Government of India for approximately last ten years. The first preliminary discussion on State-level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. In this meeting, the basic issues on VAT were discussed and this was followed up by periodic interactions of State Finance Ministers. Thereafter, in a significant meeting of all Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister, three important decisions were taken. Before the introduction of State-level VAT, the unhealthy sales tax rate war among the States would have to end and sales tax rates would need to be harmonized by implementing uniform floor rates of sales tax for different categories of commodities with effect from January 1, 2000. In the interest of harmonization of incidence of sales tax, the sales-tax-related industrial incentive schemes would also have to be discontinued with effect from January 1, 2000. On the basis of achievement of the first two objectives, steps would be taken by the States for introduction of State-level VAT after adequate preparation. For implementing these decisions, an Empowered Committee of State Finance Ministers was set- up. The Empowered Committee meets regularly, attended by the State Finance Ministers, and also by the Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior officials of the four Revenue CTD of the Ministry of Finance, Government of India. Through Page 22 of 118

repeated discussions and collective efforts in the Empowered Committee, it was possible within a period of about a year and a half to achieve nearly 98 per cent success in the first two objectives on harmonization of sales tax structure through implementation of uniform floor rates of sales tax and discontinuation of sales-taxrelated incentive schemes. As a part of regular monitoring, whenever any deviation is reported from the uniform floor rates of sales tax, or from decision on incentives, the Empowered Committee takes up the matter with the concerned State and also the Government of India for necessary rectification. Steps have been initiated by the EC for systematic preparation for the introduction of State-level VAT. In order to avoid competition among the states, attempts have been made from the beginning to harmonize the VAT design in the states keeping also in view the distinctive features of each state and the need for federal flexibility. Along with these measures at ensuring convergence on the basic issues on VAT, steps have also been taken for necessary training, computerization and interaction with trade and industry, particularly at the State levels. The Chief Ministers of all the states in an important meeting on State-level VAT convened by the Prime Minister on October 18, 2002, when Shri Jaswant Singh, the then Union Finance Minister was present, stated their intention of introducing VAT from April 1, 2003. Most of the states have joined VAT and implementation began on April 1, 2005 thus starting an era of the most significant tax-reform in indirect taxation. India is currently at a crucial stage in the introduction of a modern VAT. Some States have made excellent progress towards implementation, while others are at an early stage. Government of India wishes to see the development of a uniform set of VAT architecture and standards across all States regardless of their current stage of development.

2.3.4. Self assessment and VAT Modern tax administrations operate on the principle of self-assessment and the VAT proposed for India is ideally suited to that approach. In addition, India is already committed to formally adopting self- assessment across all revenues and therefore has a good basic experience in this approach. Self-assessment requires more than simply permitting the taxpayer to make the tax calculations and pay the amount calculated without notification from the tax administration. The concept is based on the understanding that a taxpayer is, because of the information known only to them, best placed to assess their tax liabilities and that the tax authorities efforts are best directed to identifying those taxpayers most likely to understate their tax liabilities, and focusing their scarce resources on the greatest areas of risk. Thus, the taxpayer effectively takes on responsibility for carrying out the assessment function otherwise carried out by the tax office. The following are some of the key responsibilities of taxpayers: Considering the facts relating to their own financial affairs Interpreting and applying the law to those facts Determining the amount of tax owing Page 23 of 118

Making that determination with an appropriate degree of finality Filing their return on time Paying the tax owing by the due date

This means that the tax administration pays little or no attention to the returns or affairs of the vast majority of taxpayers, other than to carry out automated checks for arithmetic accuracy and to ascertain that registered filers have in fact filed in a timely manner and paid the amounts they themselves have assessed. The declarations of most taxpayers are simply accepted. The modern tax management therefore relies heavily upon risk-assessment tools to determine which taxpayers' matters must be examined very closely, not merely at the audit level, but at all stages of the tax process, from registration to collection. In order for such a self-assessment system to be effective, the apparent freedom granted to taxpayers must be backed up with a supportive legislative framework and a comprehensive and integrated set of administrative processes, the main elements of which are: Simple and concise law Minimal discretion in hands of tax administrators Record-keeping rules appropriate to the nature and size of taxpayers business financial affairs Comprehensive and accessible taxpayer services A well-targeted audit system, leading to accurate reassessments with minimal disputes An effective and speedy disputes resolution service An appropriate and fairly applied penalty regime Well-designed processes to manage the recording of the receipt of returns and payments Identification of non-registrants, stop-filers and non-paying taxpayers Effective IT support across all functions

International experience has shown that this extensive reliance on self-assessment is the basic strategy that permits tax agencies to achieve high rates of voluntary compliance with ratios of 500 to 1000 or more taxpayers per tax official.

2.3.5. Operational tasks within VAT Decisions relating to policy and legislation, other state specific issues will have an impact on the way the tax is to be administered. However, international experience is that the main operational requirements of a modern VAT administration are: A registration program that facilitates registration for the vast majority of potential taxpayers while establishing proper controls for those registrants that are judged to have a high risk of fraudulent activities A comprehensive taxpayer services strategy and a strong taxpayer CTD to complement and support the service initiatives that have been included in the modernization program Page 24 of 118

Extensive use of technology including an aggressive and systematic campaign to promote electronic filing An audit program that relies on field audit presence and extensive reliance on risk assessment An arrears collection program that tailors the type and sequencing of enforcement actions to the degree of revenue risk posed by each arrears case

Following is a brief description of the key operational tasks under VAT administration: Registration: It has been an international experience that under VAT system a more dynamic approach to new taxpayer registration is required than under an income tax system. This flows from a number of features of the VAT, for example: o o o The pace with which arrears can accumulate if businesses are not registered immediately they commence The requirement for taxpayers to issue valid invoices to their customers from the day of commencement The compliance risks associated with false registration.

Hence the key requirements of the registration system are: o o On commencement of the VAT to ensure that all existing businesses with turnover above the threshold are registered automatically To ensure that new businesses operating above the threshold are identified quickly by the VAT office the most effective administrations have put in place systems to ensure automatic registration where a new business is registered with an organization such as the companies office, business registration department etc. o Identify potential false registrations which are likely to be a precursor to attempted VAT fraud The registration process will generally include functions such as: o o o o Issuance and collection of registration forms The automated allocation of a taxpayer identification number Issue of a VAT registration certificate Issue of initial blank return and will also trigger a taxpayer service advisory contact.

Managing return filing can be seen as being an extension of the registration system in that any registered taxpayer failing to file a return by the due date will be followed up promptly with an automated reminder notice and the automatic imposition of appropriate penalties. Electronic filing: As far as possible, VAT taxpayers should be required to file their returns electronically. Countries with established VAT systems are moving taxpayers to electronic filing as quickly as they can, but countries currently considering the introduction of the tax are considering making electronic filing mandatory. Comprehensive strategies would be required to encourage taxpayers to file electronically such as accelerating the issuance of refunds, extending the filing Page 25 of 118

dates (possibly), free-use of filing software, on-line help facility, and mailing out promotional materials. Taxpayer services: In a functional structure, there will be little conceptual difference between the taxpayer services activity for the VAT and that required for other taxes. In the implementation phases it is most likely that a structured advisory service will be required so that taxpayers can receive intensive education in the new tax. On an ongoing basis VAT taxpayers might require a higher level of assistance because of the increased filing frequency, but this might be counterbalanced by the greater simplicity of the VAT when compared to income taxes. Modern technology is being used in many countries to minimize the level of direct contact between taxpayers and tax officers. Following are some of the key benefits ensued from the use of technology in rendering services to taxpayers: o o Reducing the level of face to face contact between taxpayer and CTD officials. Centralized service provision can increase the consistency of advice given to taxpayers Taxpayer audit: As with direct taxes, VAT can be evaded and a strong and effective audit program is therefore crucial to increase the risks for taxpayers of being detected, to identify discrepancies and to provide sanctions against those who do not comply. The most common methods of VAT evasion are broadly similar to those of traditional sales taxes and direct taxes including o o o o Non-registration of businesses Underreporting of gross receipts Abuse of multiple rates Failing to account for tax paid by customers

However, the credit mechanism and zero rating offer additional opportunities, and VAT-specific fraud will include o o o Use of fake invoices Classifying domestic sales as exports to benefit from zero rating Claim of VAT credits for ineligible purchases

Despite the apparent similarities, VAT and direct tax audit practices need to differ reflecting the differing nature and risks of the two taxes. A VAT liability generally arises monthly or quarterly and can be a significant liability even for a moderately sized business. Discrepancies can therefore grow rapidly over a year if defaults are not identified and addressed quickly. As a result, VAT audit activity must include short period-based checks during the year as well as some more comprehensive multi period, multi tax audits. By contrast, direct tax audit cannot take place until annual returns have been filed. Different cycles are therefore appropriate for VAT and direct taxes. Page 26 of 118

In addition, a VAT inevitably gives rise to a significant number of refund claims. Verification checks need to be made which balance the need to protect the revenue with the justified requirements of honest taxpayers to receive their refunds quickly. Specific risk based audit needs flow from this requirement, and generally require special treatment of established and trustworthy exporters. Payments and arrears collection: Fundamentally, there is no difference between the payment and debt collection activities for income taxes and the VAT. In both cases, the emphasis needs to be on making it as easy as possible for taxpayers to pay (using a range of methods including direct debiting, internet banking/payment etc) eliminating the need for the tax office to handle cash, and the speedy follow up of those who pay late. Because of the speed with which VAT debts can arise, it is necessary to commence debt follow up action even more quickly than might be traditional for income tax debt, but the collection measures themselves are essentially the same as for Income Tax.

3.

Methodology for Current state assessment

Figure 6 represents the methodology for Current State Assessment under CT-MMP Page 27 of 118

Identification of four states for study

Prioritization of processes for reengineering

Information Gathering Exercise

Research on International leading practices

Stakeholder Consultation

Consolidation & Analysis of info - rmation gathered

CURRENT STATE ASSESSMENT

Fig 6: Methodology adopted for Current State Assessment under CTMMP Phase 1: Identification of the four states for study Under CT-MMP, for conducting a dipstick study to understand the primary features of commercial tax administration in the country, it was decided to identify four states as representative states among the 28 states and 7 union territories in India. Some of the key parameters used for the selection of states are as follows: Status of development of tax administration in the state Complexity of economy and size of business activity in the state Trading and transaction patterns in the state Willingness and commitment to change on the part of the state Geographical representation and accessibility for study of the state VAT implementation and participation in TINXSYS (Tax Information Exchange System) by the state Level of computerization in the state States with relatively strong linkages to the rest of the economy

The following four states were identified based on the above listed parameters. State Gujarat Relevant Consideration West Bengal Andhra Pradesh Nascent state of VAT Implementation Open to reforms Large State Traditional (Evolving) tax administration Mix of manufacturing and trading activities

Advanced tax administration

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State Delhi

Relevant Consideration Ease of Implementation Test of concept Political commitment for improving administration Compact Diversity of trade transactions

Table 2: Basis for identification of states for study under CT-MMP Phase 2: Prioritization of processes for reengineering under CT-MMP The next phase was the prioritization of those processes, the reengineering of which would have the maximum impact on the commercial tax administration and result in an Effective, Efficient and Equitable system. Section 4 includes the complete list of processes, the parameters used for prioritization and the final list of prioritized processes for study and reengineering under CT-MMP. The following five processes were selected: Registration of dealers under VAT Processing of VAT returns and tax collection Processing of VAT refunds Tax accounting Inter-state trade

Phase 3: Information gathering exercise As a part of the Information gathering exercise, an attempt was made to gather the following documents for the four states from websites and other public domains: VAT act, rules and schedules VAT forms Organizational structures Statistics related to VAT Information about the state and CTD

Phase 4: Research on international leading practices As a part of Phase 4, research was conducted to study some of the leading international commercial tax administrations, particularly with respect to the five prioritized processes. This secondary research along with consultation with international experts was used to prepare the paper on international leading practices.

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Phase 5: Stakeholder Consultation This phase involved the following key steps: Visit to the four states identified o o o o Delhi West Bengal Gujarat : July 24 to July 27 , 2006 : August 28 to August 30, 2006 : August 31 to September 2 , 2006 Andhra Pradesh: August 22 to August 24 ,2006

Detailed discussions regarding the five prioritized processes with the concerned CTD officials Interaction with dealers to obtain their feedback with respect to the five prioritized processes Collection of relevant documents and statistics

Phase 6: Consolidation and analysis of the information gathered The final phase involved the consolidation and analysis of information gathered to understand the system of commercial tax administration in the four states and coming up with the current state assessment. The interaction with dealers provided significant insight into the drawbacks of the current system particularly with respect to the lack of citizen centricity and service orientation in process design. Also the research on leading practices helped benchmark the processes in the four states with international benchmarks and identify the existing gaps.

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4.

Selection of processes under CT-MMP for BPR

The table below lists all the processes of a Commercial Tax administration grouped into core processes and support processes. Core processes Registration Return processing and tax payment Refunds processing Audits Tax accounting Taxpayer services Inter-state transactions Enforcement Mobile squads, Checkposts Debt collection/Recovery Support processes Personnel Development/Human Resources Administration Training Legal Policy Internal Audit Accounts Public Relations Information Technology

Table 3: List of processes under Commercial Tax Administration The potential processes for re-engineering were identified by collecting requisite data from the states identified for study and analyzing the impact of each process on effectiveness of service delivery through a mix of qualitative and quantitative parameters. Following are some of the indicative parameters used for measurement of impact: Extent of citizen interaction: According to NeGP, e-Governance is defined as giving taxpayers the choice of when and where they wish to access government information and services. NeGP emphasizes the importance of citizen centricity in the design of any initiative. Hence this is an important parameter for prioritization of processes. Increase in revenue collection: The ultimate objective of any tax administration is increased revenue collection. Hence this is an important parameter for prioritization of processes. Reduction in service delivery time: Since primarily citizen centricity is the underlying theme in design of any process under CT-MMP, taxpayer convenience becomes critical to an efficient and effective Commercial Tax administration system. Taxpayer convenience can in turn lead to increase compliance and increased revenue generation. Reduction in service delivery time has a direct impact on taxpayer convenience and hence is an important parameter in determining the effectiveness of service delivery. Possible reduction in paperwork: The rapid pace at which technology landscape is undergoing change makes it imperative that significant amount of work should be computerized by undertaking technology initiatives and minimize paperwork to extent possible. This would provide better maintenance, storage, access control and security of the data.

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Scope for standardization: There is significant amount of variation across the states in the processes both at the concept/ design level and the implementation level. It is necessary to bring about a certain degree of standardization in processes. From the taxpayers point of view, this would be helpful especially to those taxpayers who have their operations spread across multiple states. From the CTDs point of view, this would help in integration with other state CTDs for sharing of data relevant to Commercial Tax administration.

Scope for adoption of leading international practices: The objective of CT-MMP is to come up with a model framework for Commercial Tax administration incorporating some of the international leading practices. Hence we identify the processes where there is significant deviation from the international benchmarks and prioritize them for study under CT-MMP.

Possibility of revenue leakage: This is one of the primary areas of concern from the CTDs point of view. Hence it is necessary to prioritize those processes where there is potential for fraud leading to revenue leakage,

Following is a detailed discussion on how various processes were prioritized for re-engineering under CT-MMP. 4.1.Registration of dealers under VAT The table presented below is a snapshot of statistics related to VAT registration process across the four states. Parameters Number of dealers registered under VAT Number of times a dealer needs to visit the CTD to get the Registration Certificate issued Minimum of 2 visits Minimum of 1 visit Minimum of 2 visits Minimum of 3 visits Delhi 1,91,943 Andhra Pradesh 1,45,809 West Bengal 1,74,533 Gujarat 3,45,580

Average revenue generated per dealer per year (in INR) Average number of pages in the registration file of a single dealer (including supportings and annexures) Average wait time for a dealer to get the Registration Certificate ( in calendar days)

3,44,894

6,78,216

3,09,693

1,71,127

15 pages

10 pages

20 pages

20 pages

15 days

24 hours

7 days

30 days

Table 4: Snapshot of statistics related to VAT registration in four states Page 32 of 118

In conjunction with the statistics presented above, the following observations may be made with respect to the VAT registration process Extent of citizen interaction: Even though registration is a one time activity, it is the first customer touch point for new dealers and for existing dealers with good compliance history, there is an implicit expectation of an easier process. The registration process involves significant depth of interaction with dealer and therefore, it is essential that the process of registration be citizen friendly. The number of interactions of the taxpayer with the CTD to obtain Registration certificate varies across states. From taxpayer convenience point of view, ideally the number of visits required should be 1 or less and efforts should be made to achieve this. Registration as a process has an impact on both revenue generation and revenue protection. o o Revenue generation: The process of registration has a direct impact on revenue generated as higher the number of registered dealers, higher is the revenue generated Revenue protection: Registration is one of the processes where it is possible to control revenue leakage of the CTD by keeping the system free of bogus dealers who register to issue tax invoices but do not file returns The process of registration is primarily manual across states and this results in significant amount of paper work. This has a direct impact on issues related to storage space and security of the information stored. Hence registration process is an ideal candidate for reduction in paper work by process reengineering and using technology as an enabler. The service delivery time in a registration process is an important parameter since this is a citizen facing process and so it is necessary to minimize the turnaround time and make the process simple, fast and hassle free for the citizen. Scope for standardization: There is lack of standardization across states with respect to multiple parameters like TIN format, security deposit, pre-verification versus post verification, threshold for registration, types of registration, methods of collection and processing registration forms. There is a necessity to bring about a certain degree of standardization in the process across states so that dealers having operations in multiple states find it convenient to comply with the requirements. Scope for adoption of international leading practices: Some of the international benchmarks with respect to registration are as follows o o o o After initial implementation, all TIN to be issued within three (3) working days of the receipt of registration application TIN should be issued immediately for large business taxpayers provided all relevant documentation is provided with the application Ratio of active (operating regularly) to total registered taxpayers > 90% Ratio of taxpayers with more than one TIN to total registered taxpayers < 5%

In conjunction with the data pertaining to registration presented earlier, it can be seen that there is significant deviation from the international benchmarks with sufficient room for improvement.

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4.2. VAT Returns processing and tax collection The table presented below is a snapshot of statistics related to VAT returns and tax collection process across the four states. Parameters Number of VAT returns filed in financial year 2005-06 Number of times a dealer needs to visit the CTD in a year for filing of VAT returns Dependent on periodicity of filing of returns Monthly 12 Quarterly 4 Annual - 1 VAT tax collection for year 2005-06 (in INR crores) Average number of pages in the VAT returns filed by a single dealer (including supportings and annexures) 3 3 10 7 pages form + list of purchase and sales invoices and stock information Total Average =50 pages 6,620 9,889 5,405 5,913 12 times in a year for each dealer 4 System not yet stabilized Delhi 5,07,114 Andhra Pradesh 14,59,799 West Bengal 7,68,345 Gujarat 11,53,384

Table 5: Snapshot of statistics related to VAT returns in four states Based on the above statistics we can make the following observations with respect to VAT returns process Extent of citizen interaction: Return filing is a recurring periodic activity that a taxpayer must undertake and is the origin point for many other taxpayer related activities. The number of interactions of taxpayer with the CTD for filing of returns can be as high as 12 times in a year. Efforts should be made to minimize the number of visits of the taxpayer to the CTD by enabling electronic filing of returns. The process is primarily manual in the country across states resulting in a significant amount of paper work. This brings up issues related to storage space and security of the information stored. There is strong need for reduction in paper work by process reengineering and using technology as an enabler. Page 34 of 118

Scope for standardization: There is lack of standardization across states with respect to a multiple parameters like complexity of returns form design, periodicity of filing of returns and payment of tax, methods of collection and processing returns forms. This increases the compliance cost for dealers having operations across multiple states.

Average turnaround time for returns processing: The turnaround time for returns processing is a sum total of the time required for the following activities. The figures indicated are an average of the figures across the four states. o o o Forms collection ( 3- 5 mins) Data entry : 1 hour ( For Gujarat, the detailed entry can take upto 2-3 days depending on the length of annexures ) Scrutiny: The time required for scrutiny depends on whether it is performed manually / electronically. Only if performed manually it requires on an average a few hours time else the time required is insignificant. o Payment processing and reconciliation: This activity can be described as the bottleneck in the process. The time required varies across states. It also depends on whether the information is received from banks and treasuries in hard copy or electronically.

There is a significant scope for improvement in average time required for returns processing. One of the key areas that need to be looked at is the time required for data entry. In states collecting invoice level purchase and sales details from every dealer registered under VAT, the time required may be as high as 3 days for a single return. Such data entry activities are a significant drain on the administrations resources and divert the managements attention from more important issues. It also increases expenditure levels without any visible impact on efficiency or effectiveness of the administration. 4.3. Processing of VAT refunds The table presented below is a snapshot of statistics related to VAT refunds process across the four states. Parameters Citizen base the refunds process caters to Number of refunds made in year financial 2005-06 Total refunds amount in year 2005-06 (in INR crores) 121.33 35.5 9.5 262.67 12,726 88 20 7,691 Delhi 1,91,943 Andhra Pradesh 1,45,809 West Bengal 1,74,533 Gujarat 3,45,580

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Parameters Average wait time for dealer for refunds process ( in calendar days)

Delhi 30 days

Andhra Pradesh 45 days for exporter, 90 days for others

West Bengal NA *

Gujarat NA *

* NA Not applicable. The system of VAT refunds is under development. Input tax credit due is carried forward and settlement is made at year end. Table 6: Snapshot of statistics related to VAT refunds in four states Based on the above statistics we can make the following observations with respect to VAT refunds process Extent of citizen interaction: Refund processing is a critical activity especially for exporters and dealers who incur heavy capital expenditures. In many cases taxpayers need to prove validity of refund claims. Given that a large population of dealers would belong to this category and would require frequent refunds the extent of citizen interaction for refund processing is very high. The turnaround time for refunds process is an important parameter because a slow refund process implies stagnation of the working capital of a large segment of dealers. This can significantly hamper the economy and countries across the world have stringent timelines for refund clearance. There is significant variant found across the four states with respect to the turn around time. Scope for standardization: There is lack of standardization across the four states with respect to a number of parameters like time taken to grant refunds, approval process, and modes for granting refunds. By developing a model framework for all states, it would be possible to bring about a certain degree of standardization in the process across states. Scope for adoption of leading international practices: Internationally as well, experience with VAT implementation in many countries shows that refund of credits to taxpayers has been the Achilles heel of the VAT. For an efficient VAT functioning, VAT refunds should be paid promptly following receipt by the tax authority of a VAT return giving rise to an excess credit. That is the practice of most developed countries, where refunds are generally paid within four weeks of a refund claim being made.

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4.4. Tax Accounting Tax accounting is the critical process in any tax administration system. The process deals with the accounting of all cash inflows and outflows of the CTD and thus has direct revenue implications. The process is primarily complicated as it involves multiple entities both internal and external. The Department needs to receive information from these entities at different points in time and reconcile the information to maintain an up-todate snapshot of every dealer profile and to be able to answer the two ultimate questions: How much does the dealer owe to the Department? How much does the Department owe to the dealer?

External

Internal 3 1 4

External

Banks designated by CTD

Deale r

2 Commercial Tax Departme nt 10 9 8 7 5

6 Treasur y

Circle Office 1 2 3 4 5 Information about tax paid VAT Refunds issued

Audit

Enforcement

Other Acts

6 7 8 9 10

Information about payment realized Information for adjustments related to other acts Information on interests and penalties due Information about assessments issued Carry forward information of dealers

Information on refunds for electronic clearance Summary scroll for payments received and challan scroll VAT Refunds issued to dealers

Fig 7: Tax Accounting System

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The process of tax accounting is primarily manual across states and this results in significant amount of paper work. Also if the process is manual, there will be a considerable lag before the information gets reflected in the dealers account. Hence tax accounting process is an ideal candidate for using technology as an enabler to make process streamlined and efficient.

Scope for adoption of international leading practices: All leading tax administrations provide an online access to the dealers account/ ledger maintained by the Department. Since designing of citizen centric processes is the underlying theme of CT-MMP, Tax accounting becomes one of the candidate processes for reengineering. This initiative will also help to increase the transparency in the system and this in turn will lead to reduction in number of disputes and effort needed for dispute resolution.

4.5. Inter-state Trade The table presented below is a snapshot of statistics of processes related to inter state trade across the four states. Parameters Number of dealers registered under CST act Number of CST returns filed in the financial year 2005-06 Amount of CST collected in year 2005-06 (in INR crores) Number of times a dealer needs to visit the CTD with inter-state trade The dealer has to visit the CTD four times a year for filing CST returns. For the application and issuance of statutory forms need based The dealer has to visit the CTD four times a year for filing CST returns. For the application and issuance of waybills/ statutory forms need based The dealer has to visit the CTD four times a year for filing CST returns. For the application and issuance of waybills/ statutory forms need based The dealer has to visit the CTD four times a year for filing CST returns. For the application and issuance of statutory forms need based NA * 1,037 713.97 2,002 4,91,656 3,79,079 2,32,508 5,01,389 Delhi 1,862 Andhra Pradesh 76,734 West Bengal 1,00,831 Gujarat 2,04,399

* Data not available Table 7: Snapshot of statistics related to Inter-state trade in four states Page 38 of 118

In conjunction with the statistics presented above, the following observations may be made with respect to the VAT registration process Extent of citizen interaction: The number of interactions of each taxpayer with the CTD is a minimum of four times as the CST returns are to be filed quarterly. The dealer also has to visit the CTD for obtaining statutory forms and waybills on need basis. From taxpayer convenience point of view, it is necessary to minimize the number of interactions. Inter-state trade is one of the areas where there is significant scope for fraud prevention and control revenue leakage. Some of the possible frauds related to statutory forms are as follows o o o Faked/ forged statutory forms Misutillization of statutory forms Misrepresentation of information content in forms (Understating of purchases in the form submitted to the CTD of the purchasing dealer and overstating of the same in the copy submitted to the CTD of the selling dealer ) The processes related to inter-state trade are primarily manual across states. o The process of application and issuance of waybills and statutory forms is manual. This results in significant amount of paper work for the department and the dealer. Based on the teams interaction with dealers, it is estimated that a large inter-state dealer on an average manages around two thousand waybills in a year. o o The existence of manual statutory forms gives scope for related frauds. The process of monitoring inter-state transactions is primarily manual which means real time sharing of information related to statutory forms across states is not possible and therefore monitoring of inter-state transactions cannot be effective. Scope for standardization: There is lack of standardization across states with respect to parameters like process of application and issuance of waybills and statutory forms. There is a necessity to bring about a certain degree of standardization in the process across states so that dealers having operations in multiple states find it convenient to comply with the requirements.

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Conclusion: As is evident from the above analysis, the selection of processes for study under CT- MMP has been done in alignment with the NeGP goal of citizen centricity and service orientation. As a result of the analysis the following five processes been selected for study and re-design under the CT- MMP: Registration of dealers under VAT VAT Return processing and tax collection VAT Refund processing Tax accounting and Inter-state trade processes

The approach for selection of processes is oriented towards creation of a national infrastructure that would bring about uniformity in taxpayer services across India and facilitate inter-state trade. It is widely recognized that a streamlined registration process, automated return processing, electronic clearance of refunds and extensive use of internet technologies for tax payment processing and accounting are the hallmarks of any leading VAT administration. Given the intensity of citizen interaction in the five processes identified above it is expected that transformation of these key processes would lead to improved service delivery and help in exploitation of the true revenue potential of commercial activity in the various states. These processes lend significant scope for infusion of technology for faster processing and for easier information flow.

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5.

Current State Assessment of the four states

This section focuses on the current state assessment of the processes, technology architecture and organizational structure in the four states identified for study, viz. Delhi, Andhra Pradesh, West Bengal and Gujarat. This analysis is based on discussions of the NISG and Ernst & Young team with the officials in the four CTDs (Commercial Tax CTD) and a study of the existing documentation made available to the team by the respective CTDs. The current state assessment concludes with the following sections: A section detailing the taxpayer services offered by the CTD A section on dealer feedback based on our interaction with dealers in each state.

This analysis is not a commentary on the existing setup in the various states and is only intended to identify areas for the following purposes: Standardization of processes Aveneues for significant process improvement New services for taxpayers e-Governance initiatives to be targeted under CT-MMP

5.1. Process Architecture The current state assessment of processes in the four states was focused on the following five processes prioritized as detailed earlier: Registration of dealers under VAT Filing of VAT returns and tax collection Processing of VAT refunds Tax accounting Inter-state trade

The study reveals significant variation across states both at the process concept level and implementation level. The lack of standardization in processes across states creates problems for dealers operating across states. For the CTD, this limits the possibility of integration and sharing of data related to tax administration between states.

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5.1.1. Registration of dealers under VAT The study of the VAT registration process in the four states has revealed that there are significant variations in the process across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below. The parameters have been grouped into two main categories viz parameters related to the design of VAT registration form and the parameters related to the actual process. S. No Parameters Delhi Andhra Pradesh Parameters related to VAT Registration Form 1 Number of pages in the main registration form 2 Number of Annexures to the registration form DVAT 04 is a 4 page form for registration under DVAT. Refer Annexure 2 Annexure I : Particulars of the persons having interest in business Annexure II : Details of additional places of business of the dealer Annexure III : Particulars of the authorized signatory VAT 201 is a 2 page form for registration under AP VAT. Refer Annexure 10 VAT100A : Details of additional places of business of the dealer VAT 100 B: Particulars of persons having interest in business. Form 1 is an 11 page form for registration under WB VAT. Refer Annexure 14 Form A: To be filled in by the Proprietor/Partners/Karta, as the case may be, of the business for Proprietorship/ partnership/HUF Business. Form B: To be filled in by the Managing Director/ Director/ Secretary of a Private Limited Company or a Public Limited Company or Trustee of a trust. Form 101 is a 4 page form for registration under Gujarat VAT. Refer Annexure 21 Form 101A: Details of additional places of business of the dealer within Gujarat. Form 101B : Details of additional places of business of the dealer outside Gujarat Form 101C : Form for specimen signature of the authorized signatory Form 101D : Particulars of persons having interest in business Form 101E: For additional Information on business. Page 42 of 118 West Bengal Gujarat

S. No 3

Parameters Supporting documents mandatorily to be submitted with the form by the dealer

Delhi Proof of incorporation of the applicant dealer Proof of identity of authorized signatory signing the Registration Application Form Proof of Security deposit submitted by the dealer

Andhra Pradesh Copy of Proof of Identity of the sole proprietor / managing partner / managing director/ responsible person for the business must be enclosed.

West Bengal None

Gujarat The dealer has to submit the following documents duly attested by a Sales Tax Practitioner whose name has been entered into the list as per rule 59 under Gujarat VAT rules Proof of place of business Proof of domicile Passport size photograph of the applicant The name, designation of and the specimen signature

person(s) authorized to sign cash memo, tax retail invoice, forms invoice, delivery or

challan, credit /debit note or any prescribed appended to any notification Parameters related to VAT registration process 4 TIN format Delhi issues an 11 digit TIN to every dealer registered under VAT. The first 2 digits represent AP issues an 11 digit TIN to every dealer registered under VAT. The first 2 digits represent Page 43 of 118 WB issues 11 digit TIN to every dealer registered under VAT. The first 2 digits represent Gujarat issues an 11 digit TIN to every dealer registered under VAT. The first 2 digits represent

S. No

Parameters

Delhi the state code. The remaining 9 digits are a running serial number.

Andhra Pradesh the state code. The remaining 9 digits are a running serial number.

West Bengal the state code. Of the remaining 9 digits, there are digits reserved to represent Area and district to which dealer belongs, Act under which the dealer is registered. th The 9 digit in the TIN is reserved for representation of the act under which dealer is registered. The values it can take and the acts signified are as follows: 0 VAT registration 1 CST registration 2 WBGST registration

Gujarat the state code. Of the remaining 9 digits, there are digits reserved to represent Area and district to which dealer belongs.

TIN allocation when dealers are registered under multiple acts viz VAT, CST, states previous Sales Tax act etc

A single TIN is issued to a dealer irrespective of the fact that he/ she/she may be registered under both VAT and CST.

A single TIN is issued to a dealer irrespective of the fact that he/she may be registered under both VAT and CST.

WB allocates separate TINs to dealer for registration under different acts. For example a dealer will have 3 TINs if he/ she is registered under WBGST, CST and VAT.

Gujarat allocates separate TINs to dealers for registration under CST and VAT. The TINs of all dealers registered under previous GST act have been migrated to current VAT system.

Page 44 of 118

S. No 6

Parameters Security deposit/ Referral requirement

Delhi Delhi prescribes a security deposit of INR1lakh for dealers to obtain registration under VAT. Security deposit required from a dealer can be reduced to INR 50,000 by the provision of all of the following documents. Last paid electricity bill in dealers name Last paid telephone bill in dealers name PAN number of the dealer Proof of ownership of principal place of business Proof of ownership of residential property A notarized photocopy of the passport of proprietor/ managing partner or managing director Security deposit may be provided in form of cash, bank

Andhra Pradesh For a dealer to register under VAT in AP there is no security deposit/ referral requirement

West Bengal WB does not prescribe a security deposit for dealers to obtain VAT registration under normal scenario. It maybe required for a dealer dealing with tax evasion prone items as defined by the CTD to submit security deposit to get registered under VAT.

Gujarat Gujarat prescribes a security deposit of INR 50,000 for dealers to obtain registration under VAT The amount of the security deposit required shall not exceed INR 10,000 in case the dealer provides any 3 of the following documents to the CTD Last paid electricity bill in dealers name Last paid telephone bill in dealers name PAN of dealer Proof of ownership of principal place of business/ residential property or any immovable property Notarized photocopy of the passport of proprietor/ partner/ director Certificate obtained from a local authority in respect of shop and establishment

Page 45 of 118

S. No

Parameters

Delhi guarantee, post office cash certificates, bonds/debentures, dealers' surety, or mortgage of immoveable property.

Andhra Pradesh

West Bengal

Gujarat Registration certificate obtained from Custom and Central Excise Authority: It is mandatory for all dealers to provide the referral of an already registered VAT dealer in Gujarat to get registered under VAT.

Time for granting registration (in calendar days)

When all the requirements for registration as prescribed by the Delhi VAT act have been satisfied by the dealer, registration is granted within 15 days.

When all the requirements for registration as prescribed by the AP VAT act have been satisfied by the dealer, registration is granted within 24 hrs.

When all the requirements for registration as prescribed by the WB VAT act have been satisfied by the dealer, registration is granted within 7 days.

When all the requirements for registration as prescribed by the Gujarat VAT act have been satisfied by the dealer, registration is granted within 30 days.

Threshold for registration

A dealer with a gross turnover exceeding INR 10 lakh is liable for registration under VAT.

A dealer with a taxable turnover exceeding INR 5 lakh is liable for registration under Turnover Tax scheme and exceeding INR 40 lakh is liable for registration under VAT.

A dealer with a gross turnover exceeding INR 5 lakh is liable for registration under VAT.

A dealer with a gross turnover exceeding INR 5 lakh is liable for registration under VAT.

Types of registration and criteria for

Mandatory

registration:

Mandatory registration: For dealers whose taxable turnover exceeds INR 5 lakh

Mandatory registration: For dealers whose gross turnover exceeds INR 5 lakh

Mandatory registration : For dealers whose gross turnover exceeds INR 5 lakh

For dealers whose gross turnover exceeds INR 10

Page 46 of 118

S. No

Parameters registration under various schemes lakh

Delhi

Andhra Pradesh

West Bengal

Gujarat

Voluntary registration: For dealers whose gross turnover is less than the threshold prescribed. Registration for casual dealers: Dealers who do not carry on business in Delhi on a regular basis, but make sales on an occasional basis fall under this category.

Voluntary registration: For dealers whose taxable turnover is less than the threshold prescribed.

Voluntary registration: For dealers whose gross turnover is less than the threshold prescribed. Registration for casual dealers: Dealers who do not carry on business in WB on a regular basis, but make sales on an occasional basis fall under this category.

Voluntary registration: For dealers whose gross turnover is less than the threshold prescribed. Registration for casual dealers: Dealers who do not carry on business in Gujarat on a regular basis, but make sales on an occasional basis fall under this category.

Registration for casual dealers: Dealers who do not carry on business in AP on a regular basis, but make sales on an occasional basis fall under this category.

Composition scheme: Dealers whose annual gross turnover does not exceed INR 50 lakh can opt to be registered under composition scheme).

Composition scheme: Dealers whose annual gross turnover does not exceed INR 50 lakh can opt to be registered under composition scheme).

Registration under Turnover Tax: Dealers with taxable turnover less than INR 40 lakh in previous 12 months or INR 10 lakh in previous 3 months are registered under this scheme (They can opt for registration under VAT)

Composition scheme: Dealers whose annual gross turnover does not exceed INR 50 lakh can opt to be registered under composition scheme).

Page 47 of 118

S. No 10

Parameters Is the Economic Activity code captured ?

Delhi No

Andhra Pradesh Yes. But this is different from the National Industry Classification published by the CSO.

West Bengal No

Gujarat No

11

Pre-verification Versus Post verification for issuance of registration

All dealers are subjected to pre verification by the CTD before issuance of registration. The inspectors of the corresponding wards to which dealer belongs visit the dealers business premises for verification.

Dealers are issued registration without pre verification by the CTD in normal case. The issuance of registration certificate is followed by a post verification and advisory visit to the dealer premises. When a dealer submits registration form, the dealer is assigned a score by the CTD based on a list of 8 indicators (Refer AP registration form VAT100).Pre verification becomes essential if a dealer gets a score of 6 or above.

There is no field verification (dealers business premises) before the issuance of registration. However, a week after submission of registration form dealer has to come to the CTD with his original documents for verification by allotted CTO. If the documents provided by the dealer are found to be authentic and satisfactory registration order is issued.

The process of registration involves a hearing session and pre verification prior to issue of Registration. Hearing session: The dealer or a person authorized by the dealer appears before the Assistant commissioner of the corresponding area for verification of original documents. This is followed by a verification of the dealers business premises by a CTI/ STO of the corresponding jurisdiction. The STO submits a report to the Assistant Commissioner who issues the registration order of there are no objections.

Page 48 of 118

S. No 12

Parameters Is there any monitoring of dealers on a periodic basis after they are registered?

Delhi No

Andhra Pradesh If a dealer files 3 nil VAT returns or does not file return for a period of 3 months continuously, system automatically prepares a list of such dealers against whom the CTD will initiate suo motto cancellation of their registration.

West Bengal No

Gujarat A defaulter process automatically runs in the system to generate a list of dealers who do not have a history of filing returns regularly. The CTD initiates suo motto cancellation of their registrations.

13

Centralized/ Decentralized TIN generation process

The process of TIN generation is centralized.

The process of TIN generation is centralized.

The process of TIN generation is decentralized and done at the respective Divisions.

The process of TIN generation is centralized.

14

Collection and Processing of registration forms

The collection of registration forms is done centrally at VAT front desks.

The collection and processing of registration forms is done in a decentralized fashion in the corresponding circles.

The collection and processing of registration forms is done in a decentralized fashion in the corresponding charges.

The collection and processing of registration forms is done in a decentralized fashion in the corresponding units.

The processing of the registration forms is carried out in a decentralized fashion in wards

15

Registering Authority

VAT officer of the ward to which dealer belongs is the registering authority.

CTO of the circle to which dealer belongs is the registering authority.

Deputy Commissioner of the circle to which dealer belongs is the registering authority

Assistant Commissioner of the circle to which dealer belongs is the registering authority

Page 49 of 118

S. No

Parameters

Delhi

Andhra Pradesh

West Bengal

Gujarat In 18 unit offices out of total 103 unit offices, the Commercial Tax officer is registering authority due to absence of an Assistant commissioner.

16

Mode and place of submission of the registration form

Dealers are required to submit a hard copy of registration forms at VAT front desk in CTD.

Dealers are required to submit a hard copy of registration forms. The form can be submitted By post to CTD At Dealer Service centers (division level) To the CTO of circle to which dealer belongs

Dealers are required to submit a hard copy of registration forms directly at circles/ charges to which the dealer belongs.

Dealers are required to submit a hard copy of registration forms directly at unit office to which the dealer belongs.

17

Modes of dispatch of Registration Certificate (RC) to dealer

Dealer has to come to the ward to which he/ she belongs to collect his RC.

The CTD dispatches RC of the dealer by post addressed to the dealers business premises. For the CTD this serves as a method of verification of place of business as stated by the dealer.

The CTD dispatches RC of the dealer by post addressed to the dealers business premises. For the CTD this serves as a method of verification of place of business as stated by the dealer. Only at the transition stage when VAT Act was introduced,

Dealer has to come to the unit office to which he/ she belongs to collect his RC.

18

Linkage between VAT, CST and

A dealer registered under CST/ DST Act, Delhi Sales Tax on

A dealer registered under CST/ APGST automatically deemed to

A dealer registered under CST/ GST act automatically deemed

Page 50 of 118

S. No

Parameters previous sales tax registrations

Delhi Works Contract Act, Delhi Sales Tax on Right to Use Goods Act automatically deemed to be registered under VAT.

Andhra Pradesh be registered under VAT.

West Bengal the dealers who were registered under the WBST Act, 1994, were considered to be registered under VAT Act, 2003 provided they submit duly filled in FORM2.

Gujarat to be registered under VAT.

19

Process of making amendments to Registration Certificate (RC)

Dealers have the provision to make amendments online by logging into the DVAT website.

Dealer has to submit hard copy of the form specifically prescribed for amendments to respective circle to which he/ she belongs.

There is no particular form prescribed for making amendments. The Dealer has to submit the RC issued to him/ her in original for making the changes thereon.

Dealer has to submit hard copy of the form specifically prescribed for amendments to respective unit office to which he/ she belongs.

20

Presence of Sales Tax practitioners (STPs)

Delhi does not have the concept of STPs.

AP does not have the concept of STPs.

The VAT Act, 2003 itself mentions as to who can represent a dealer in all cases, including the hearing for registration. There is no need for STP to get himself registered with CTD for starting practice. However, to act as an Agent a person other than an Advocate/ CA/Cost Accountant, has to obtain permission from the

STPs empanelled by the CTD are authorized to represent dealers during hearing session conducted prior to issue of registration.

Page 51 of 118

S. No

Parameters

Delhi

Andhra Pradesh

West Bengal Commissioner of Commercial Taxes, W.B.

Gujarat

21

Risk assessment at the time of registration

There is no formal risk assessment of the dealers done by the CTD at the time of registration.

The system assigns every dealer a to the nature of the dealer like if he is an exporter, if he deals in interstate transactions, if it is a startup business etc. A score of 6 or above indicates that the dealer is risky. This warrants pre verification of the dealer before issuance of RC.

There is no formal risk assessment the time of registration.

There is an internal checklist filled by the Commercial Tax inspector, Commercial Tax Officer and Assistant Commissioner to classify the dealers into different risk categories.

score based on 8 parameters relating of the dealers done by the CTD at

Table 8: Comparison of process of VAT registration across the four states

Page 52 of 118

Based on our study of the registration process in the four representative states, following are the key observations with respect to process of registration of dealers under VAT: Security deposit: There is significant variation across states with respect to security deposit

collection and referral requirement as reflected in the table 8. Discussion with the CTD officials reveals that the reason for collection of security deposit by the CTD is to cover their risk from bogus dealers and there is no identified rationale in the amount prescribed as security deposit. Direct correlation between the collection of security deposit and reduction in risk has not been established by CTD either by means of a survey or study. Also no study has been undertaken to establish the adequacy of the amount prescribed as security deposit in risk coverage. The process of collection of security deposit is a one time activity during process of registration. There is no regular monitoring done to identify if any changes are required in the amount prescribed based on changes in the dealer status. This further strengthens the argument that security deposit cannot be an effective method for risk reduction/ coverage. the registration process for genuine dealers. TIN formats: The Taxpayer Identification Number (TIN) was envisaged as a unique number for dealers in a state. Each dealer was expected to have only one unique TIN during the period of functioning of the business. The first two digits were designed to represent the state and the remaining nine were left for states to generate a running serial number as per the format prescribed by EC. But some states have customized the format of TIN to reflect additional details like location of dealer, act under which registered, date of registration etc as shown in figures below. West Bengal TIN format It is evident that mandating a security deposit for registration under VAT does not serve as a barrier for bogus dealers but it can definitely be detrimental in

State code for WB

Charge code for the charge to which dealer belongs

Act under which dealer is registered

Check sum

1, 2, 3, 4 -> the four places in the 11 digit TIN available for a running serial number Fig 8: Format of Taxpayer Identification Number (TIN) in West Bengal

Page 53 of 118

Gujarat TIN format District code for the district to which the dealer belongs o 1 2 3 4 5

State code for Gujarat

Taluka / city code for the Taluka/ city to which the dealer belongs

1, 2, 3, 4, 5 -> the five places in the 11 digit TIN available for a running serial number Fig 9: Format of Taxpayer Identification Number (TIN) in Gujarat o From the above figures of WBs and Gujarats TIN formats it is evident that in a 11 digit TIN only 4 /5 digits respectively for WB and Gujarat are available as a running serial number. This limits the maximum number of dealers that can be given unique TINs within a district to 9999 / 99999 respectively for WB and Gujarat. When the number of dealers within a district cross this number it becomes necessary to split the district. o The coding of area and district to which the dealer belongs into TIN creates problems when the dealer shifts his place of business to a different area/district. It would not be possible to continue with the same TIN as the district/area wise revenue collection figures would be misreported. If a new TIN is issued to the dealer the previous TIN issued would have to be cancelled and internally the dealer records will have to be linked to the new TIN. This would amount to a significant administration effort. o In states like Gujarat, there is a linkage between CST TIN and VAT TIN issued to a dealer. The CST TIN is 50 lakh plus the VAT TIN i.e. for example if VAT TIN of a dealer registered in Gujarat is hypothetically 10000000000, the corresponding CST TIN would be 10005000000. There is no clarity on the issue of what happens to CST TIN in case the VAT TIN changes when the dealer shifts his place of business from one district to another. If the CTDs decide to issue a new CST TIN to the dealer, this will have a significant impact on the effective use of TINXSYS for tracking of inter- state transactions. It is essential that TIN formats be streamlined both from a point of view of administrative ease as well to preserve integrity of dealer information especially from the point of view of inter-state exchange of information. Page 54 of 118

Standard Industry Code: Most of states collect information with respect to top three commodities the dealer deals with. There are a few drawbacks associated with the system of commodity classification due to which the collection of commodity wise information from the dealers would not be useful to the department for the purpose of statistical analysis or audit case selection. o o Commodity classification is not standardized across states making it difficult to compile inter-state statistics The range of commodity codes required to classify the entire gamut of commodities is significantly large. Collection of information from the dealer at this level of granularity does not help in meaningful statistics compilation. o There is significant amount of ambiguity with respect to commodity classification. To produce statistical information for analyzing the performance of the tax system and for better auditing, it would be necessary for CTDs to collect information relating to Standard Industry Code (SIC) of a dealer. SIC would help the CTD in scientific audit case selection. Each industry has a standard mark up ratio defined specific to that industry. Any deviation from the standard ratio can serve as a trigger for that case being selected for audit. Since SIC is an established code being used by many national agencies like Central Statistical organization, capturing SIC of the dealers would help the CTD in sharing of data across such agencies.

Pre verification Versus Post verification: There is significant variation in the approaches followed by each of the four representative states. Streamlining and standardization of the approach is essential to make the registration process efficient and effective. We understand from discussions with the CTD officials in four states that the purpose of verification is to keep the bogus dealers out of the system. The approach of pre verification increases the turnaround time for the registration process. The system of CTD official visiting the business premises of the dealer for verification provides an opportunity for collusion. The CTDs need to explore the possibility of segmentation of dealers and differential approaches to each segment to expedite the process. Under such a system for example, dealers could be classified into risk categories (low risk, medium risk and high risk) based on certain parameters. Affiliates/ subsidiaries of registered entities, Legal/ corporate entities would come under the low risk category. There could be no pre verification for the low and medium risk categories but pre verification would be mandatory for a dealer belonging to high risk category.

The process of registration should not end with the granting of RC to dealer. Registration is a critical process for the CTD with respect to two main aspects of revenue generation and risk reduction. To achieve these objectives it is important for the CTDs to adopt a dynamic approach to registration o Revenue generation: The process of registration has a direct impact on revenue generated as higher the number of registered dealers, higher is the revenue generated. It is the responsibility of the registration CTD to identify and ensure that dealers get themselves registered when they become liable for registration. This may

Page 55 of 118

require the CTDs to undertake periodic surveys of the businesses operating in the state. o Risk reduction: Registration process should act as an entry barrier to keep away bogus dealers from the system. Apart from having stringent requirements for registration, the CTD should undertake continuous monitoring of the activities of a dealer even after he/ she is registered. For example, Andhra Pradesh monitors the returns filed by the dealers every month. If a dealer files nil returns for 3 months this automatically alerts the CTD for further action. More such monitoring mechanisms have to be discussed and implemented to keep the system free from bogus dealers and make the entire system effective. Our study of the four representative states reveals that both these aspects relating to registration process are not well developed in states. There is also a necessity to streamline and standardize process with respect to issues like security deposit, verification, TIN format etc to simplify and expedite the process.

Page 56 of 118

5.1.2. Processing of VAT returns and tax collection The study of the VAT returns and the tax collection process in the four states has revealed that there are significant variations in the process across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below. The parameters have been grouped into two main categories viz parameters related to the design of VAT returns form, parameters related to the actual process and parameters related to tax payment reconciliation. S. No Parameters Delhi Andhra Pradesh Parameters related to VAT returns form 1 Number of pages in main form DVAT 16 is a 2 page form for filing of VAT returns. VAT 200 is a 2 page form for the filing of VAT returns Form 14 is a 7 page form for the filing of VAT returns. Form 14 is a 7 page form for the filing of VAT returns. West Bengal Gujarat

Number of annexures to be attached with main VAT returns form

Number of annexures to be submitted with the main form is 1

Number of annexures to be submitted with the main form is 2

Number of annexures to be submitted with the main form is 7 ( Not all annexures may need to be submitted by all dealers)

Number of annexures to be submitted with the main form is 3

Schedule 1 : To be attached with the main returns form when adjustments in output tax or tax credits are made)

Annexure VAT 200 A : Adjustment of input tax credit

Annexure 201 A: List of sales made by the dealer for the tax period for which return is being filed for.

Annexure A: To be submitted by a registered dealer who opts to pay tax on maximum retail price (MRP).

Annexure VAT 200 B: Annexure to VAT return for the 12 month period ending March for the adjustment of input tax credit.

Annexure 201 B: List of purchases made by the dealer for the tax period for which return is being filed for.

Annexure B: To be submitted by dealers having sales return or purchase

Annexure 201 C: List of

Page 57 of 118

S. No

Parameters

Delhi

Andhra Pradesh

West Bengal return during the period for which the return is being filed. Annexure C : To be filled by exporters Annexure D: To be filled in by a works contractor who is unable to ascertain the amount of deduction for labor, service and other like charges. Annexure E: To be filled by dealers making stock transfers. Annexure F: To be filled for reversal of input tax. Annexure G : To be filled in by dealers enjoying deferment/ exemption/remission

Gujarat inventory for the tax period for which return is being filed for.

Complexity of returns form based on

Medium

Low

High

Medium

Page 58 of 118

S. No

Parameters parameters like Number of pages in the main returns form Layout of the forms Number of annexures Ease of filling the forms Capturing basic data Versus derived data Level of details captured

Delhi

Andhra Pradesh

West Bengal

Gujarat

Availability of pre addressed/ pre labeled forms

No

No

No

No

Availability of forms online

Yes

Yes

Yes

Yes

Page 59 of 118

S. No

Parameters

Delhi

Andhra Pradesh

West Bengal

Gujarat

Parameters related to Filing of VAT returns, tax payment and returns processing 6 Periodicity for returns filing The periodicity of returns filing for a dealer is based on the dealers tax liability. A dealer liable to pay tax upto INR 10 lakh per anum has to file annual returns. A dealer liable to pay tax between INR 10 lakh and INR 50 Lakh per anum has to file quarterly returns. A dealer liable to pay tax exceeding INR 50 lakh per anum (belongs to the LTU) has to file monthly returns. 7 Periodicity for tax payment The periodicity for payment of tax is the same as periodicity for filing of returns. The periodicity for payment of tax is the same as periodicity for filing of returns. The periodicity for payment of tax is monthly irrespective of periodicity of filing of returns The periodicity for payment of tax is the same as periodicity for filing of returns. Every dealer registered under VAT in AP has to file returns monthly. Every dealer registered under VAT in WB has to file returns quarterly (This is the case generally. Some dealers may be asked to file returns monthly.) The periodicity of returns filing for a dealer is based on the dealers tax liability. A dealer liable to pay tax upto INR 60,000 per anum has to file returns annually. A dealer liable to pay tax exceeding INR 60,000 per anum has to file returns monthly.

Page 60 of 118

S. No 8

Parameters Place of VAT returns collection

Delhi Returns collection process is decentralized. The dealers can submit their VAT returns form at the VAT front desk located in the CTD or in the respective wards they belong to.

Andhra Pradesh The dealers submit their VAT returns form in any one of the following places. At eSeva centers present across the state. At dealer service centers located in each division At respective circle offices to which they belong.

West Bengal The dealers submit their VAT returns form at the centralized returns collection unit which has been recently introduced at the Headquarters.

Gujarat Returns collection process is decentralized. The dealers submit VAT returns form in the respective unit offices they belong to

Acknowledgement of returns filed and payment made

Dealers are given acknowledgement for the returns filed, not for the payment made. There are 2 different colors of acknowledgement Pink for returns filed with refund claims and Green for returns filed with no refund claims.

Dealers are given acknowledgements generated from VATIS software which acknowledges both the returns filed and payment made by the dealer.

Dealers are given acknowledgements generated from VAT software which acknowledges the returns filed. No acknowledgement is given for the payment made by the dealer.

Dealers are given acknowledgements generated from VATIS software which acknowledges both the returns filed and payment made by the dealer.

10

Manual Versus eFiling of returns

The dealers submit hard copy of their VAT returns. Online returns filing facility is available for only dealers belonging to the LTU. After filing

The dealers submit hard copy of their VAT returns form.

The dealers submit hard copy of their VAT returns.

The dealers submit hard copy of their VAT returns form.

Page 61 of 118

S. No

Parameters

Delhi of returns online, the dealers have to submit hard copy of their VAT returns form to the CTD at either VAT front desk or in their respective wards.

Andhra Pradesh

West Bengal

Gujarat

11

Modes of payment of tax

Dealer can make tax payment in one of the following forms. Cash Crossed cheque Bank draft

Dealer can make payment to the CTD in one of the following forms. Cheque Demand draft Bank certified challan Electronic funds transfer Cash payment ( exceptional cases) The payment is generally made at eSeva centers or dealer service centers. In case returns is filed at local tax office, payments are to be made at authorized banks prior to filing or payment instruments like cheque / DD will be enclosed.

Dealer can make payment to the CTD in one of the following forms. Cash Crossed cheque Bank draft drawn on an authorized bank The payment accompanied by a tax deposit challan can be made at any bank designated by the WB CTD for this purpose. Drafts/ cheque can be submitted along with the returns filed at the local CTD office for where it is sent to bank for collection.

Dealer can make payment to the CTD in one of the following forms. Cash Crossed cheque Bank draft drawn on an authorized bank The payment accompanied by a tax deposit challan can be made at any bank designated by the Gujarat CTD for this purpose. Drafts/ cheque can be submitted along with the returns filed at the local CTD office for where it is sent to bank for collection.

The payment accompanied by a tax deposit challan (Form DVAT20) can be made at one of the following locations. A Delhi branch of the Reserve Bank of India; A Delhi branch of an authorized Bank; Any other place notified by the Commissioner.

Page 62 of 118

S. No 12

Parameters Processing of VAT returns

Delhi The processing of VAT returns is decentralized and it is done at the respective Ward office.

Andhra Pradesh The processing of VAT returns is decentralized and it is done at the respective Circle office. The scrutiny of VAT returns is computerized. Basic numerical checks are carried out by the system All VAT returns filed by dealers is subjected to 100% scrutiny.

West Bengal The processing of VAT returns is decentralized and it is done at the respective Charge office A basic scrutiny of VAT returns is performed manually.

Gujarat The processing of VAT returns is decentralized and it is done at the respective Unit office The scrutiny of VAT returns is manual. There is an internal checklist filled by the CTI, CTO and Assistant Commissioner.

13

Scrutiny of VAT returns ( manual/ computerized)

The scrutiny of VAT returns is performed manually. The checklist used for scrutiny is attached as Annexure 3

14

Scrutiny of VAT returns (selective / complete)

All VAT returns filed by dealers belonging to LTU is subjected to 100% scrutiny. No

All VAT returns filed by dealers is subjected to a basic level of scrutiny.

All VAT returns filed by dealers is subjected to a basic level of scrutiny.

15

Cross matching of invoices

No

No

Gujarat has implemented the system of cross matching of invoices. It collects the invoice level details of all purchase and sales made by the dealer during the tax period for which returns are filed through its annexures 201 A and 201 B.

Parameters related to payment reconciliation 16 Number of copies of The challans are in quadruplicate. Page 63 of 118 The challans are in triplicate. The challans are in quadruplicate. The challans are in quadruplicate.

S. No

Parameters challans used in tax payment

Delhi

Andhra Pradesh

West Bengal

Gujarat

17

Reconciliation of payment

Information regarding the tax paid by a dealer is received by the CTD from multiple sources. Dealer submits a challan copy at the time of filing of returns. RBI sends a summary scroll of all the VAT payments received by it bank wise. The banks send an e-scroll to the CTD at the end of each day containing a summary of all challans received by the bank in the day as well as hard copy of challans. Data entry of the hard copy of challans received from the banks is done at the CTD and this is reconciled with e-Scroll from the banks.

All payments made by the VAT dealers and related challans are aggregated at UTI bank.

Information regarding the tax paid by a dealer is received by the CTD from multiple sources. Dealer submits a challan copy at the time of filing of returns. Treasury sends a summary scroll of all the VAT payments received by it to the CTD ( treasuries located outside Kolkatta) Banks send a summary scroll of all the VAT payments received by it to the CTD ( only if the banks are located within Kolkatta) The dealers challan copy is not entered into system. The challans from treasury are

Information regarding the tax paid by a dealer is received by the CTD from multiple sources. Dealer submits a challan copy at the time of filing of returns. Treasury sends a summary scroll of all the VAT payments received by it to the CTD. Banks send a summary scroll of all the VAT payments received by it to the CTD. The dealers copy is entered into the system to capture the VAT payment details of a dealer. There is no reconciliation of this data with the data received from

The challan information is entered into the banks system and an e-Scroll is sent to the CTD at the end of each day.

Reconciliation between the hard copy of challans received from the bank and e-Scroll has to be performed.

Since the payment information is not captured from the dealer at any point in time, it eliminates the need for reconciliation between the information received by the department

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S. No

Parameters

Delhi All the e-Scrolls received from the bank are reconciled with the RBI scroll. The challan copy submitted by the dealer at the time of filing of returns has to be reconciled with the e-Scroll from the bank.

Andhra Pradesh from the dealer and information received by the department for the bank.

West Bengal entered into system by Information Systems Division and used for reconciliation.

Gujarat treasury to authenticate the claim made by the dealer.

Table 9: Comparison of f VAT returns processing and tax collection across the four states

Page 65 of 118

Based on our study of the VAT returns process in the four representative states, following are the key observations: Design of the VAT returns form: There is significant variation across the states with respect to design of VAT returns form. There is a strong demand from the dealers for simplification and standardization of VAT returns form. The dealers face problems in filing up of VAT returns forms as the forms are lengthy, complex and require the dealers to furnish significant amount of details. The complexity increases because of lack of clarity on policy issues relating to proportionate input tax credit, credit on capital goods etc. Return forms should be designed to collect information which is meaningful, useful and verifiable by the CTD else it becomes a burden both for the dealer filling the form and for the CTD in processing the data. Some states are of the opinion that asking all information from dealers will act as a psychological deterrent to the dealers from performing fraudulent activities. But it is evident that voluntary compliance cannot be increased by just asking dealers to furnish details which cannot be used effectively by the department. Effective and efficient tax administration is the only way to improve voluntary compliance. The processing of returns is slowed down mainly because of the significant amount of data entry that requires to be done. The CTD needs to explore Online filing of returns and e-Payment to expedite the process, reduce cost and better service delivery to taxpayers. Initiatives in areas of e-Payment and obtaining data with respect to payments made by dealers electronically from banks and treasuries can decrease the burden of data entry significantly. These initiatives would have a significant impact in the area of reconciliation of tax payment. In the present system, the CTD spends a significant amount of its resources in data entry of the hard copy of challans received from dealer and from bank/ treasuries. Further to this reconciliation of the tax payment information received from multiple sources has to be performed. With e-Payment and interface with banks much of this burden can be reduced. It is also a good idea to explore the role of intermediaries in VAT returns collection and payment collection. Internationally, using banks to collect VAT has been generally successful since they are used to receiving payments and handling money.

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5.1.3. Processing of VAT refunds The study of the VAT refunds process in the four states has revealed that there are significant variations in the process across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below.

S. No 1

Parameters Processing of VAT refund claims made by dealer

Delhi The processing of refunds is a continuation of processing of returns. If the refund due to a dealer is below the threshold specified by the department, the refund order is passed after performing basic scrutiny. When the refund due to a dealer is greater than the threshold specified by the department, before passing of the refund order, the refund has to be scrutinized and approved at a level determined by the refund amount.

Andhra Pradesh

West Bengal

Gujarat * Not applicable

The processing of refunds is a The system of refunds is not well continuation of processing of developed in West Bengal. Refunds returns. When there is a refund due to the dealer, checks are imposed to ensure that the conditions for eligibility of refund claim are met. All refund claims are assessed for risk on the basis of information in VAT dealer file. Generally refund claims above INR 5,000, First time refund claims, refund claims where significant risks have been identified are subjected to audits before are made primarily to exporters after verification of the relevant documents.

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S. No

Parameters

Delhi The following are the different levels : o o o o Assistant VATO VATO Assistant Commissioner Additional Commissioner

Andhra Pradesh issue of refund order Refund amounts exceeding INR 10,000 but less than INR 5 lakh have to be authorized by Deputy Commissioner. Refund amounts exceeding INR 5 lakh have to e authorized by the Commissioner.

West Bengal

Gujarat *

Mode of issuance of VAT refunds

Electronic clearance System: The approved refund is automatically credited to the dealers account specified at the time of registration. The refunds are routed through the treasury.

Electronic clearance System: The approved refund is automatically credited to the dealers account specified at the time of registration. The refunds are routed through the treasury.

If the VAT refund is approved by the CTD, a cheque for the approved amount is presented to the dealer. This is the case for Kolkatta. For the rest of WB, a refund voucher is issued to the dealer with a copy to the treasury. The treasury finally makes the payment instruction to the banks.

Not applicable

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S. No 3

Parameters Manual Versus Automatic scrutiny of VAT refund claims

Delhi Refunds are scrutinized manually by the department.

Andhra Pradesh The scrutiny of refunds is computerized.

West Bengal Refunds are scrutinized manually by the department.

Gujarat * Not applicable

Complete Versus Selective scrutiny of VAT refund claims

Delhi follows the system of selective scrutiny of refund claims. Only all VAT refund claims above a prescribed threshold are subjected to scrutiny.

All VAT refund claims made by any dealer registered under VAT in AP is subjected to scrutiny.

Complete scrutiny All VAT refund claims made by any dealer registered under VAT in WB is subjected to scrutiny

Not applicable

Time taken by the CTD to grant VAT refunds to dealers (calendar days0

The CTD takes 30 days to issue refund order from the date of refund claim made by dealer.

In case the refund claim is by an exporter and if refund amount is greater than INR 10 lakh the CTD takes 45 days to process refund claim and issue refund order. Refund claims less than this amount are generally carried forward.

Refund system is under development. Purchases by exporters have been made tax exempt. So there is no case for refunds to exporters.

Not applicable

If the refund has not been approved by the CTD, a notice is accordingly sent to the dealer citing the reason within 30 days.

The input tax credit due to nonexporters is generally carried forward and refund order is issued at year end if the dealer makes a refund claim.

In case of non exporters, the input tax credit due to the dealer is carried forward till end of year (31 st March).

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S. No

Parameters

Delhi

Andhra Pradesh The dealer can then submit forms to claim the refund due. The CTD takes 90 days for processing of refunds and issuing a refund order to the dealer.

West Bengal

Gujarat *

st *VAT has been implemented in Gujarat from April 1 , 2006. There have been very few VAT refund claims till now and the system is under development. Table 10: Comparison of process of VAT refunds across the four states

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The VAT refund process across states is largely non existent and only a minority of states have a refunds process in place. Internationally as well, experience with VAT implementation in many countries shows that refund of credits to taxpayers has been the Achilles heel of the VAT. It has been a source of tension between the tax authorities and the business sector and, in some countries, has led to complex administrative measures that have significantly undermined the functioning of the VAT system. In theory, VAT refunds should be paid promptly following receipt by the tax authority of a VAT return giving rise to an excess credit. That is the practice of most developed countries, where refunds are generally paid within four weeks of a refund claim being made. The situation is different in developing and transitional countries, however, where it often takes several months, and sometimes more than a year, to process refund claims. In export-oriented countries, such practices can seriously undermine the competitiveness of the export sector. The prevalence of fraudulent claims of input tax credit by dealers is often cited by tax officials as a major reason for delaying payment of refunds. The CTD generally lacks information needed to verify the authenticity of the claims. Some states like Gujarat, Rajasthan etc have taken a step in this direction by mandating all VAT dealers in the state to provide invoice level details of all purchase and sales made during the tax period for which returns are being filed. The states intend to perform cross matching of invoices to verify the authenticity of VAT refund claims made by dealers. Based on our study we can conclude the system is not functioning effectively primarily due to the following reasons: The large volume of data involved makes it necessary for the CTD to invest significant time and effort to digitize the entire data. In Gujarat out of the 11 lakh returns filed in the financial year 2005-06, detailed entry of returns ( Annexures 201 A and 201 B) has been made for only 72000 returns ( as on 13/9/2006) i.e. approximately 6.8%. The burden of data entry of the CTD can be decreased by the collection of invoice details in an electronic format from the dealers. As a step in this direction Gujarat has made it compulsory for all VAT dealers with annual gross turnover over INR 1 crore to provide annexures 201 A and 201 B electronically. But with only this data available electronically it is not possible to do successful cross matching of invoices as data across entire value chain is not available. Hence for successful cross matching of invoices, it should be mandatory for all invoices abov e a certain threshold value to be provided electronically by the dealers. The possibility of data entry errors can reduce the effectiveness of the system. Non-availability of a software for cross matching of invoices Lack of uniformity in periodicity of filing of returns Lack of clarity with respect to exception handling: The number of cases where software detects a mismatch might be extremely high. Complete verification of each of the cases might not be practically feasible.

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If the software used for invoice matching does not have tolerance levels built into the system, cases where in there might be minor numerical mismatches will also be thrown up as exceptions. Lack of security features in the system for protection of the information provided by dealers. Our study of the international leading practices reveals that the countries following the system of invoice matching collect the data electronically from the dealer and store the data in an encrypted format. This encrypted data can be decrypted only by the software used for cross matching of invoices. This preserves the integrity of data and ensures the security of data provided by the dealer.

Our study of the international leading practices reveals that the system of cross matching of invoices has been implemented successfully in countries like Pakistan, Korea and China. The following case studies, detailing the process of invoice matching in Pakistan, Korea and China have been attached as Annexure 27: Pakistans Sales Tax Automated Refund Repository (STARR) Korean Invoice Matching System Chinas Golden Tax Program

There is a significant scope for improvement of VAT refunds process across the four states by incorporating the international leading practices. The important aspects in which they differ are as follows: Time frame for granting refunds Special schemes required for exporters ( Zero rated supplies) Preferential treatment for good compliers (Gold/ silver status schemes) Certification of refund claims by intermediate authorities Refunds related to capital goods.

In conclusion there is a strong need for the development of a standardized, efficient and effective VAT refunds system across the states incorporating some of the international leading practices.

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5.1.4. Tax accounting Tax accounting is critical to any tax administration system. The process becomes complicated because of the multiple entities involved and hence the need for reconciliation of information from the different sources. Generally the entities involved in Tax accounting are Dealer registered under VAT CTD Banks designated to collect payments on behalf of CTD Treasury of the state Bank which maintains the account of the CTD

The department receives the tax payment details of a dealer by means of a challan which generally includes the following details. TIN of the dealer registered under VAT Dealer name and address Tax period Total payment made Break up details of payment under the heads of tax, penalty, interest and others

The department receives this challan information from multiple entities at different points in time. Dealer submits his copy of the challan at the time of filing of his returns as a proof of payment made by him. Banks send a scroll at the end of each day containing summary information of all the challans received by them from dealers toward payment of VAT. Banks also may send the hard copy challans to the department for reconciliation with the scroll sheet. Treasury sends a scroll with bank -wise summary of payments received.

The department has to spend significant time and resources in reconciliation of this information received form multiple entities. The assessment of payment reconciliation process in the four states has been covered in Table 9, Section 5.1.2 Tax accounting also involves maintaining and updating the profiles of all dealers at a central location. The tax profile would include every detail of the dealer with respect to the current and previous tax periods. Internationally one of the leading taxpayer services in this area is exposing the departments view of taxpayer profile to the dealer upon login. Our study of the four states reveals that tax accounting need a significant amount of streamlining and standardization. In most of the states, the process is manual and the details captured in the tax profile of a dealer do not give a comprehensive view of the dealer.

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The table below lists the possible fields to be included in a dealers tax profile and their availability status across the four states. This is an indicative list based on our study of the international leading. The absence of a Yes in the table does not mean the absence of that particular information with the CTD but suggests that it is not available at a central location. If the information is available but in a paper based system, it has been indicated as manual in the table. The details would be displayed for the current tax period with a carry forward of the cumulative balance from all the previous tax periods. However the dealer would be able to view the history that is the details of previous periods if he/ she wants.

S. No 1 2 3 4

Parameters Dealer name and TIN Circle and division to which he/ she belongs Economic Activity Code. EDR (Effective Date of registration) Whether the dealer has opted for CST registration Period for which the returns is filed Date of filing return Credit carried forward form previous tax periods Input tax and Output tax for the current period Tax due in the current period Adjustment Net tax payable Refunds due to the dealer Excess credit due to the dealer Adjustments against CST Net credit due to the dealer Tax paid by the dealer

Delhi * Yes Yes No Yes

Andhra Pradesh ** Yes Yes Yes Yes

West Bengal Yes Yes No Yes

Gujarat Yes Yes No Yes

Yes

Yes

Yes

Yes

6 7 8

Yes Yes Yes

Yes Yes Yes

Yes Yes Manual

Yes Yes Manual

9 10 11 12 13 14 15 16 17

Manual Yes Yes Yes Yes Yes Manual Manual Yes Page 74 of 118

Yes Yes Yes Yes Yes Yes Yes Yes Yes

Manual Yes Yes Yes Manual Manual Manual Manual Yes

Manual Yes Yes Yes Manual Manual Manual Manual Yes

S. No 18 19 20

Parameters Interest levied and Interest paid Demand levied and Demand paid Penalty levied and Penalty paid

Delhi * Manual Manual Manual

Andhra Pradesh ** Yes Yes Yes

West Bengal Manual Manual Manual

Gujarat Manual Manual Manual

* In case of Delhi, the information is available only to the large tax payers ** In case of Andhra Pradesh, though all the information is automated and available centrally, it is not exposed to dealers yet Table 11: Comparison of tax accounting across the four states

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5.1.5. Inter-state trade The study of the Inter-state trade process in the four states has revealed that there are significant variations in the process across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below. S. No 1 Parameters Does the state have checkposts? 2 Does the state have system of waybills? Delhi does not have system of waybills for intra/ inter state purchases or sales. Andhra Pradesh has system of waybills for intra /inter state purchase and sales. The state plans to abolish intrastate waybills. 3 Is the waybill a document given by the CTD? Not Applicable Waybills are documents issued by CTD. These documents have watermarks and holograms for purpose of authenticity. 4 Is the process for application of waybills manual/ online? Not Applicable In AP, the application of waybills is done manually. When dealer submits an application for issuance of waybills, a booklet of waybills is issued by the Waybills are documents issued by CTD. These documents have watermarks and holograms for purpose of authenticity. In WB, the application of waybills is done manually. When dealer submits an application for issuance of waybills, a booklet of waybills is issued by the The CTD only prescribes the format for the waybill. Dealers can produce their own waybills in the prescribed format. Not Applicable as the dealer does not need to apply for waybills. West Bengal has the system of waybills for inter-state purchase only. Gujarat has the system of waybills for inter-state purchase and sales. Delhi Delhi does not have checkposts. Andhra Pradesh Andhra Pradesh has 17 checkposts West Bengal West Bengal has 28 checkposts Gujarat Gujarat has 10 checkposts

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S. No

Parameters

Delhi

Andhra Pradesh CTD. CTD.

West Bengal

Gujarat

Tracking of waybills

Not Applicable

In case of intra/ inter state purchase or sale, the consignment has to be accompanied by copies of the waybill related to the transaction.

In case of inter state purchase transaction by a WB dealer the corresponding consignment of goods has to be accompanied by copies of waybill related to the transaction.

In case of inter state purchase/ sale transaction by a Gujarat dealer the corresponding consignment of goods has to be accompanied copies of waybill issued by the dealer.

The AP checkpost verifies the contents in the consignment at random and collects the waybill from the transporter.

The WB checkpost verifies the contents in the consignment at random and collects the waybill from the transporter and endorses it.

The Gujarat checkpost verifies the contents in the consignment at random and collects the waybill from the transporter and endorses it.

Waybills collected at checkpost are transferred to the CTD and are sorted circle wise.

In the case of absence of a checkpost at the point of entry of the goods into WB, the waybills need to be endorsed at the nearest charge office.

Details related to waybill like invoice number, transporter details, commodities, quantity, value etc are entered into the VATIS at the checkposts which maybe used later for verification.

When a dealer is selected for audit, the waybills corresponding to the transactions of the dealer are used for cross matching

Details related to waybill like

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S. No

Parameters

Delhi

Andhra Pradesh with invoices and C forms for verification.

West Bengal invoice number, transporter details, commodities, quantity, value etc are entered into the VAT software at the checkposts which will be used later for verification.

Gujarat

Do the states have mobile squads for checking of vehicles?

Yes

Yes

Yes

Yes

Process for requisition of central statutory forms by dealers and issuance of statutory forms by the CTD

The dealer has to request the department for issuance of statutory forms manually.

The dealer has to request the department for issuance of statutory forms manually.

The dealer has to request the department for issuance of statutory forms manually.

The dealer has to request the department for issuance of statutory forms manually

The CTD does not issue statutory forms in advance to the dealers.

Blank statutory forms are issued by the CTD in advance to dealers.

The CTD does not issue statutory forms in advance to the dealers.

Statutory forms are issued by the CTD in advance to dealers. But the CTD does not issue blank forms for security reasons. The forms are stamped with the TIN of the selling dealer with whom Gujarat dealer would

When the dealer submits requests for issuance of statutory forms, the dealer has to furnish all details of the transaction (like seller

When the dealer submits requests for issuance of statutory forms, he/ she has to provide the CTD with an utilization report stating all Page 78 of 118

When the dealer submits requests for issuance of statutory forms, the dealer has to furnish all details of the transaction (like seller

S. No

Parameters

Delhi TIN, Invoice No., Commodity, Quantity, and Value) against which he/ she requires the statutory forms.

Andhra Pradesh details (like seller TIN, Invoice No., Commodity, Quantity, Value) of the transactions against which the previously issued statutory forms were utilized.

West Bengal TIN, Invoice No., Commodity, Quantity, Value) against which he/ she requires the statutory forms. transact.

Gujarat

When the dealer submits requests for issuance of statutory forms, he/ she has to provide the CTD with a utilization report stating all details of the transactions against which the previously issued statutory forms were utilized.

Table 12: Comparison of process of monitoring inter-state trade across the four states Based on the study of inter-state trade in the four states, it has been observed that the area of inter-state trade is critical to the CTD because of possibility of significant frauds. The CTD has come up with the following set of controls to try and minimize frauds related to inter-state trade: Waybills Checkposts Statutory forms Mobile squads

Based on discussion with the CTD officials, the following are the key objectives for the establishment of controls by CTD: To ensure that every movement of good in the state is based on a taxable transaction. In case of inter-state transactions specifically, the objective is three fold o To verify that the inter-state sale is genuine Page 79 of 118

o o

To verify that the inter-state purchases are used for the declared purposes To ensure that when an inter-state purchase is made by the local dealer, it is accompanied by a subsequent resale and local tax is realized by the CTD

Analysis of the effectiveness of controls in controlling frauds related to inter-state trade The table below lists the various controls implemented by the CTD and their effectiveness in controlling various possible frauds related to inter-state trade.

S. No. 1

Nature of fraud Unreported Inter-state purchase and sales

Mobile squads Road Yes, partial Non road Partial

Checkposts/ waybills Road .Yes, partial Non road No partial

Manual statutory forms Road No control Non road No control

Electronic statutory forms Road No control Non road No control

Overstating of purchase

Partial control since 100% physical verification of the consignment is not practically feasible

Partial control since 100% physical verification of the consignment is not practically feasible

Partial control as there is no real time data sharing relating to utilization of statutory forms between transacting states. There might be collusion between buying and selling dealer.

Partial control as there might be collusion between buying and selling dealer

Understating sales

Partial control since 100% physical verification of the consignment is not practically feasible

Partial control since 100% physical verification of the consignment is not practically feasible

Partial control as there is no real time data sharing relating to utilization of statutory forms between transacting states. Also

Partial control as there might be collusion between buying and selling dealer

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S. No.

Nature of fraud

Mobile squads

Checkposts/ waybills

Manual statutory forms there might be collusion between buying and selling dealer

Electronic statutory forms

Faked/ forged waybills/ statutory forms

No control

No control

Partial control

Full control as real time data sharing relating to utilization of statutory forms between transacting states through TINXSYS is possible

Mis-utilization of statutory forms

No control

No control

No control

Full control as real time data sharing relating to utilization of statutory forms between transacting states through TINXSYS is possible

Table 13: Comparison of effectiveness of various controls related to inter-state trade

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In conjunction with Table 13, the following observations can be made regarding the effectiveness of controls in preventing fraudulent activities related to inter-state transactions Mobile squads: Mobile squads as a control are limited to controlling the frauds related to unreported inter-state purchase/ sale transactions. They cannot be completely effective in frauds relating to mis-reporting of sales/ purchase values as complete physical matching of the goods in consignment with the value stated on waybills/ invoice is not practically feasible. Waybills: The system of waybills is only partially effective as a control in curbing the fraudulent activities related to inter-state trade. Some of the relevant issues in this regard are : o Waybills are intended to establish control over the physical movement of goods and to ensure that corresponding to every declared transaction; goods are delivered at the declared destination and vice versa. o The administration of waybills varies a lot form state to state. In some states it is a government document whereas in some other states waybill can be a dealer generated document. Feedback from the dealers indicates that the process of application for waybills and getting them issued from the CTD is cumbersome and causes inconvenience to the dealers. In some states, it is necessary for the dealers to maintain all waybill related data and provide the same to CTD at the time of filing of returns. o Details of the waybills collected at the checkpost needs to be entered into the system. This requires significant time and resources of the CTD. This data can be used effectively for verification only if all invoice data is available electronically and software exists that can cross match waybill details to invoice details. o Physical verification of complete stock on each consignment at checkpost is critical. Since the check is random in nature and not all consignments necessarily pass through checkposts (because of by-pass routes) waybills cannot serve as an effective control. o A significant portion of trade is carried out through non-road channels like sea, air and rail and also through freight forwarding/courier agencies. The system of waybills needs to be enforced on all such channels for effective control of physical goods movement. In conclusion, the system of waybills is only partially effective but it is a significant administrative burden for the CTD and inconvenience to dealers. Statutory forms: Statutory forms are an important means of capturing the value of inter-state

transactions. It must be noted that they only serve as a means to track the financial information and not a check on the physical movement of goods. Some of the relevant issues in this regard are: o o Possibility of fake statutory forms Frauds with respect to information content of the forms and validity

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o o o o o o

No real time sharing of information related to utilization of statutory forms between states Time delays in submission of statutory forms utilization report across states. Process of obtaining statutory forms causes a lot of inconvenience and harassment to dealers. Issuance and maintenance is also a significant administrative burden for the CTDs. Some states issue blank statutory forms in advance in which case there is no control over the usage and there are significant opportunities for fraud. Statutory forms are relevant only for the recorded transactions. They are not effective as a control with respect to unreported inter-state sale/ purchase transactions.

For streamlining of monitoring of inter-state transactions process and making it effective, real time exchange of statutory form related data between states is necessary. In this regard it would be a good idea for the CTDs to examine role of TINXSYS in dematerialization of statutory forms. Based on the above analysis, the following are the key conclusions related to inter-state transactions: The controls are only partially effective (as reflected in table 13 ) Administering and monitoring of the controls is an administrative burden on the CTD Adhering to these controls results in higher compliance costs for the taxpayer Increases physical interfaces between the dealer and CTD

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5.2.

Technology Architecture

The study of the technology architecture in the four states has revealed that there are significant variations across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below. S. No 1 Parameters List of Online services provided by the CTD to the taxpayers Delhi Delhi CTD provides all dealers registered under VAT with a user name and password to login to their website. Upon logging in, the dealers belonging to LTU can avail the following services : View tax payment details View details of statutory forms issued to them View refund details Update profile Change password View history of returns Change tax period File online returns File revised return Dealer verification based on search in name, TIN The Department plans to roll Page 84 of 118 Andhra Pradesh VAT dealers in AP can visit the AP CTD website for dealer verification based on search on name and TIN of the dealers. West Bengal VAT dealers in WB can visit the WB CTD website for dealer verification based on search on name and TIN of the dealers. Gujarat VAT dealers in Gujarat can visit the Gujarat CTD website for dealer verification based on search on name and TIN of the dealers.

S. No

Parameters

Delhi out these services to nonLTU dealers also shortly.

Andhra Pradesh

West Bengal

Gujarat

Has the CTD outsourced all its data entry activities? ( Data entry of registration and returns forms along with annexures, Data entry of challans, Data entry of waybills and statutory forms)

Delhi CTD has outsourced all its data entry activity to Comat Technologies.

AP CTD performs all its data entry activity in house. The data entry is done at all circles by junior and senior assistants of the circle.

WB CTD has outsourced data entry of the waybills endorsed at checkposts and transit declarations at 3 checkposts to CMC.

Gujarat CTD has outsourced all its data entry activities and all the scanning of documents that needs to be done to Jayatma Informatics Pvt. Ltd.

Annexure 6

Annexure 16

Does the CTD have centralized or distributed server architecture?

Delhi CTD has a centralized 3 tier architecture having web enabled applications.

AP CTD has distributed server architecture with regional servers present at each division level.

WB CTD has a centralized 3 tier architecture having web enabled applications.

Gujarat CTD has a distributed server, 3 tier architecture. There are 30 distributed logical servers connecting 105 unit offices. Gujarat is following the model of

Data is stored in a single central database.

Data is stored in a single central database. The connectivity of the Page 85 of 118

Data is stored in a single central database The connectivity of the

Is the data

S. No

Parameters storage centralized or distributed?

Delhi

Andhra Pradesh divisions and circles to AP Headquarters is through leased lines provided by BSNL.

West Bengal charges and circles to WB Headquarters is through West Bengal State Wide Area Network and leased lines.

Gujarat decentralized decision making Data is stored in distributed databases. The connectivity of the unit offices and ranges to the Gujarat Headquarters is through Gujarat State Wide Area Network. transaction

capturing and centralized

Processes which have been computerized

VAT Registration Processing of VAT Returns : Computerization is partial as the scrutiny if returns is still done manually

VAT registration Processing of VAT returns Processing of VAT refunds Tax accounting

VAT registration Processing of VAT returns Tax Accounting Waybill system including inter-state purchase invoice system.

VAT registration Processing of VAT returns

VAT Refunds Tax Accounting: Computerization is partial. The dealers belonging to LTU can login to the website and view their tax profile

Issue and utilization of central forms

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S. No

Parameters

Delhi online. It is planned to roll out the service to non- LTU dealers shortly.

Andhra Pradesh

West Bengal

Gujarat

Procedure followed by the CTD with respect to Back-up of data Disaster recovery Business Continuity Planning

Back-up: In Delhi CTD, at the end of each day 2 back ups are taken of entire data (export backup and archive backup) At the end of each week complete back up of the entire system data is taken. At the end of each month complete remote back up is taken. Delhi CTD does not have a defined disaster recovery or Business Continuity plan in place

Back-up: Regular data back- up Back-up: Daily and weekly is taken backup of data is taken

Back-up: The distributed architecture adopted by Gujarat CTD helps build a lot of redundancy into the system Tape Backup is taken at each of the 30 locations where there is a logical server at the end of each day. At the CTD Headquarters there is SAN for backup. Disaster recovery: As a part of disaster recovery, Gujarat CTD head quarters has implemented real time clustering with CTD office located at Sachivalaya.

AP does not have a defined Disaster recovery: A disaster disaster recovery or Business recovery server with capacity of Continuity plan in place. storage equal to central data storage has been placed in a geographically different disaster back up site at Salt lake. This has been implemented by a cluster of server connected through a hotstand by move to ensure high availability and instant switch over in case of failure. There is no defined Business Continuity Plan in place.

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S. No

Parameters

Delhi

Andhra Pradesh

West Bengal

Gujarat

There is no defined Business Continuity Plan in place. 6 Has the CTD outsourced Maintenance of its infrastructure? 7 Extent of computerization The 10 zones have been computerized. Computerization at level of wards is partial and in progress. 25 divisions and 193 circles are computerized and connected to HQ. Delhi CTD has outsourced the maintenance of its computer infrastructure AP CTD has outsourced the maintenance of its computer infrastructure WB CTD has outsourced the maintenance of its computer infrastructure. Refer Annexure 17 Offices in Calcutta, the moffussil offices of Raigunge, Behrampore, Siliguri, Durgapur, Asansol, Medinipur, Jalpaiguri and 7 checkposts are connected through LAN, WAN and WBSWAN. Gujarat CTD has outsourced the maintenance of its computer infrastructure 103 unit offices have been computerized and connection has been established with the 30 logical distributed servers.

Table 14: Comparison of technology architecture across the four states

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Based on our study of the technology architecture in the four states, the following are some of the key observations: Network and data architecture: Some states have gone in for a centralized architecture while some have implemented the distributed server architecture. Each architecture has its own merits and demerits which need to be carefully evaluated by the states in adopting an architecture best suited to their requirements. The selection of a particular model and the extent of computerization may also be affected by availability of connectivity. Some states have been able to use State Wide Area Network for connectivity where as some other states may need to invest on their own exclusive network. The primary advantage of a centralized architecture is its simplicity. Since all the data is concentrated in one place, centralized systems are easily managed and issues related to data consistency or coherence do not arise. Providing security and taking backups is easy with centralized systems. The drawback of centralization is that if the central server goes down it can affect the working of the entire system i.e. there is limited fault tolerance built into the system. High data traffic and limited bandwidth availability may result in centralized server turning into a performance bottleneck in the entire system. In a geographically dispersed organization, it might be a good option to consider a distributed architecture as it keeps data near the point at which it is most used and distributes processing load across multiple servers. But distributed systems tend to be difficult to manage and issues related to data consistency and security may arise. The primary virtue of decentralized systems is their extensibility and fault tolerant nature. The failure or shutdown of any particular node does not impact the rest of the system. Our study reveals that there exists significant variation across states with respect to the use of technology as an enabler in increasing the effectiveness of service delivery to citizens. Based on our research of the international leading practices in this regard, following is a list of the possible areas that CTDs need to explore: o o o o Online registration Online filing of returns e-Payment of tax Electronic clearance of VAT refunds o Online tax profile for dealers to view o Dematerialization of statutory forms Problems with training: For a computerized system to work smoothly it is critical that all CTD employees are imparted with trainings on fundamentals of computers. Though all four states are making efforts in this direction, there is room for significant improvement.

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5.3. People Architecture The study of the people architecture in the four states has revealed that there are significant variations across the four states. The differences across the four states with respect to certain key parameters have been presented in the table below

S. No. 1

Parameters Geographical units of the organization

Delhi The state of Delhi is organized into 10 zones and 106 wards for Commercial Tax administration. Each zone is headed by an officer of the rank of Deputy Commissioner and each ward office is headed by an officer of the rank of a CTO

Andhra Pradesh The state of AP is organized into 25 divisions and 193 circles for Commercial Tax administration. Each division is headed by an officer of the rank of Deputy Commissioner and each circle office is headed by an officer of the rank of Assistant Commissioner or CTO.

West Bengal The state of WB is organized into 16 circles and 67 charges for Commercial Tax administration. Each circle is headed by an officer of the rank of Deputy Commissioner and each charge office is headed by an officer of the rank of Assistant Commissioner or CTO.

Gujarat The state of Gujarat is organized into 7 divisions, 25 ranges and 103 unit offices for Commercial Tax administration. The division is headed by officer of the rank of Additional Commissioner or Joint Commissioner. Each range is headed by an officer of the rank of Deputy Commissioners and each unit office is headed by an officer of the rank of an Assistant Commissioners or CTO.

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S. No. 2

Parameters Policies with respect to job rotation

Delhi No separate cadre for Commercial Taxes. This creates a need for continuous training since the new staff may not be aware of the functioning of the CTD.

Andhra Pradesh Separate cadre for Commercial Taxes

West Bengal Separate cadre for Commercial Taxes

Gujarat Separate cadre for Commercial Taxes

Total number of full time employees in CTD including all levels

900

9900

6169

4968

Does a separate division for large taxpayers in the state exist?

There is a separate centralized unit for large taxpayers called Key Dealer Unit.

There is a separate unit for large taxpayers called LTU. The unit is decentralized and present at each division.

There is a separate centralized unit for large taxpayers called Corporate cell.

There is a separate centralized unit for large taxpayers called Corporate division.

At present the unit has around 683 large taxpayers. The CTD plans to increase the number to around 2000 shortly.

The Corporate Cell comprises of around 917 large tax payers from across the state.

The Corporate Division comprises of around 117 large tax payers from across the state.

The number of dealers across the state belonging to LTU is around 750 to 1000.

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S. No. 5

Parameters Criteria/ threshold for selection of dealers as large taxpayers

Delhi VAT dealer in Delhi with an annual gross turnover exceeding INR 5 crore qualifies as a large taxpayer The tax paid by large taxpayers contributes to nearly 65% of the CTDs revenue.

Andhra Pradesh In AP, the top 25-40 taxpayers of each division are chosen as large taxpayers. The tax paid by large taxpayers contributes to nearly 45% of the respective divisions revenue.

West Bengal In WB, dealers whose monthly tax liability exceeds INR 10 lakh qualify as large taxpayers.

Gujarat In Gujarat there is no specific criterion for selection of large taxpayers. The decision is taken by a committee headed by the Commissioner, CTD.

Special services offered by the CTD to the Large taxpayers

Certain online services like online filing of returns, online view of tax account are available only to dealers belonging to Key Dealer Unit (KDU).

The following procedures are simplified and expedited for dealers belonging to LTU Filing of returns Processing of refunds Audit Issuance of waybills/ statutory forms

The following procedures are simplified and expedited for dealers belonging to LTU Filing of returns Processing of refunds Audit Issuance of waybills/ statutory forms Better staff to dealer ratio results in better service delivery. The CTD also plans to have a separate audit wing for the Corporate cell.

The following procedures are simplified and expedited for dealers belonging to LTU Filing of returns Processing of refunds Audit Issuance of waybills/ statutory forms Better staff to dealer ratio results in better service delivery. The CTD plans to have a separate audit wing for the Corporate division.

Better staff to dealer ratio (1: 120 as opposed to general 1: 1500) results in better service delivery.

Table 15: Comparison of organizational structure across the four states Page 92 of 118

5.3.1. Delhi Organizational structure The Delhi VAT office is an example of a city State with limited geographical spread. It has recently reviewed its organizational structure and is in the final stages of organizational restructuring. The following presents the structure as it will be when implementation is complete. At the headquarters level, the structure is based around functional specialization, while at the field level the focus is primarily geographic. There are about 200,000 registered traders, most of who are administered by officers and staff grouped into 10 zones and 110 wards (proposed to reduce to 40 operational circles and 4 regions). In addition, the structure includes a Key Dealer Unit (KDU) which administers the 700 largest businesses which, in total, account for about 65% of total VAT collections. The organizational Structure of an Operations Unit in the Delhi CTD is as follows:

Commission er

Head Operation s

Region s Or Zones

Circl e Or W ard

Registrati on processin g

Returns processin g

Refunds processin g

Reconciliati on And debt managemen t

Fiel d Unit s

Record Keeping

Fig 10: Organizational Structure of an Operations unit in the Delhi CTD Each circle office administers the affairs of about 2000 traders. In general a ward or circle will comprise one experienced officer, one inspector and clerical support to manage issues such as filing, data entry and stenography.

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The organizational Structure at the Delhi CTD Headquarters is as follows:

Commission er

Internal Audit Taxpaye r Service s Front Office Audit Operations Enforcement Key Customer Dispute s Settlemen t Polic y Planning and Support Functions

Audit teams Investigations and

Industri al Tax

Economic Analysis

Data Entry

Border Services

Front Office

Policy and Legislative

Query and facilitation Forms issuance

Processing

Audit

Communication Fig 11: Organizational structure of the Delhi Commercial Tax CTD

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5.3.2. Andhra Pradesh Organizational structure Andhra Pradesh represents an advanced State with administration spread over a wide geographic area. At headquarters, there is some degree of functional specialization, although an element of tax type structure has been retained. High emphasis has been placed on computerization and enforcement. Large taxpayer management is distributed amongst the field units. The State has about 1, 80,000 VAT traders and staff is located in 25 territorial divisions (7 of which are located in the immediate vicinity of Hyderabad). Each territorial division has about 8 circles (there are 193 in total), each of which manages about 1,000 traders. In addition, there are 8 appellate divisions, 1 appellate tribunal and 17 check posts. The Commercial Tax Office is responsible for managing 9 taxes: VAT, Central Sales Tax, Professions tax, Entertainment tax, Luxury tax, Taxes on horseracing and betting, Motor Vehicle entry tax and a Rural development charge. VAT administration accounts for about 75% of the time of officers. Total staff is about 10,000 of whom 2,500 are low grade support staff. The organizational structure of the AP CTD at Headquarters is as follows: Commissioner

Computers

All acts

VAT

Legal

Audit

Debts Management

Enforcement

Statistics

Fig 12: Organizational structure of the AP CTD at the headquarters

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A different approach to LTU has been taken by Andhra Pradesh. Here each of the 25 divisional offices has established its own large taxpayer unit and has populated it with the 25 largest businesses from that office. This is a very different approach from that normally adopted as There is no centralization, which denies the State the specialization benefits (and denies the taxpayers the improved service which ought to flow) The taxpayer selection process may not lead to the States largest taxpayers being included in the units.

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5.3.3. West Bengal Organizational structure The Directorate of Commercial Taxes, West Bengal is headed by the Commissioner of Commercial Taxes. Below the Commissioner, there are two Special Commissioners. There are Additional Commissioners, Deputy Commissioners, Assistant Commissioners, Commercial Tax Officers and Assistant Commercial Tax Officers to assist the Commissioner. The organizational structure of the WB CTD at the headquarters is as follows:

Commissioner

Bureau of investigation

Collection

Special cell

Information systems division

Inter-state verification cell

Human resources development

Internal Audit wing

Law section

Fig 14: Organizational structure of the WB CTD Following is a brief description of the organizational units in WB CTD: Circles: State of West Bengal is divided into 16 Circles. A Circle is headed a Deputy Commissioner of Commercial Taxes. He/ she is supported by other Deputy Commissioners and Assistant Commissioners. They exercise administrative, appellate and revisional jurisdiction over the Charges under the Circles. Charges: A Charge is the unit office. There are 67 Charges in West Bengal. Usually a Charge is headed by an Assistant Commissioner of Commercial Taxes. He/ she is assisted by Commercial Tax Officers and Assistant Commercial Tax Officers. There are a few big Charges where two Assistant Commissioners are posted. Officers posted in the Charges are entrusted with the power examination of books of accounts of the dealers and to make assessment of taxes payable by them.

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Corporate Division: The large taxpayers are dealt with by the Officers of this wing. It is headed administratively by an Additional Commissioner. Some more Additional Commissioners are entrusted with the work of monitoring collection of revenue at respective units of Corporate Division. A few Deputy Commissioners and Assistant Commissioners work as assessing and appellate officers at the Corporate Division. Central Section: There are three units of Central Section, one each at Kolkata, Siliguri and Asansol. The Officers posted in the Central Section are empowered to work all through out the State of West Bengal. Main functions of the Central Section are Cross verification of purchases and sales, Inspection, search & seizure, Investigation.

The Central Section also deals with the matters relating to non-resident dealers, way bills to unregistered dealers/persons having place of business within the Calcutta Municipal Area. Bureau of Investigation: Bureau of Investigation is the prime investigating wing of the Directorate. It is headed by a Special Officer who is an Additional Commissioner. When a case is generally referred to the Bureau for investigation, the bureau is responsible for liaison with external agencies/ bodies to obtain all the information required for the verification of the referred case.

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5.3.4. Gujarat Organizational structure The current organizational structure at Gujarat CTD is as follows: Commission er

Specia l Commission er

Addition al commission er

Addition al Commission er

JC Enforceme nt

JC Ta x administratio n

EDP and Statistic s

Establishme nt

Audit cell

Corporate

Accounts and

Training hostel

Appeals Vigilance

Administrati on

Fig 15: Organizational structure of the Gujarat Commercial Tax CTD There is a proposal for organization restructuring after the implementation of VAT and the proposed organizational structure is enclosed as Annexure 23. The Commissioner of Commercial Tax is the head of organization. He/ she is assisted by officials ranging from Special Commissioner to Commercial Tax Inspectors in administering the Acts and recovery of taxes. The Commissionerate has its headquarter at Ahmedabad. The Commissionerate is further organized in divisions, ranges and unit offices. The Divisional offices are 7 in number and headed by officer of the rank of Addl. Commissioner or Joint Commissioner. There are 25 range offices headed by an officer of Deputy Commissioner rank. The cutting edge of the CTD is the unit office popularly known as Ghatak office. These offices are headed by an officer of the rank of Assistant Commissioner of Commercial taxes

or tax officer.

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5.3.5. Key observations on the As-Is organizational structure Analysis of the organizational structure on the four states reveals that there is no single standard structure that will be appropriate for all states. Factors such as number of staff, number of taxpayers, geographic spread, quality of management and the Commissioners strategic aims will all modify structural needs. However, there are some basic features which, ideally should be reflected. Following are some of the drawbacks of the existing system of organization of the CTD into geographic units like wards/ circles: The primary feature of a ward/ circle system is the performance of all tasks by a single officer. The nature of the tasks to be performed as a part of administration is so diverse that each task requires very specific skills on the part of the officer to perform the task efficiently. A single person most likely would not have all the necessary skills and competencies resulting in sub standard delivery of services to tax payers. In a ward system, the performance of all functions by a single officer creates scope for collusion between the officer and dealers. There is significant duplication of effort with, for example, audits being conducted by multiple units within CTDs Basic tasks such as data entry, query resolution are distributed widely throughout organization and performed at the ward/ circle level. This prevents the CTD from acquiring the benefits of economies of scale. The management of large taxpayers done centrally rather than at ward level can lead to the creation of centers of expertise leading to higher quality output Lack of a purposeful and focused approach to different tasks

Following are the additional observations regarding the current organizational structures in the CTDS across the four states: Although functional structure elements are being adopted at headquarters levels, the circle office remains the predominant operational delivery mechanism Administrative workloads are high because of process design inadequacies. For example, modern risk based approaches to verification and audit are not evident. Staff allocations between core functions of taxpayer services, audit processing and debt management is unbalanced. Taxpayer services functions are generally undeveloped.

Large taxpayers (Key Customers) Tax administrations in many countries (including all of those with the best practices) have concluded that it is important to closely manage the few large taxpayers who, in combination, account for the majority of the taxes collected. Administrations have found that the best way Page 100 of 118

to manage such taxpayers is to centralize their management into a single unit and to give it responsibility for delivering all operational functions (with the possible exception of centralized data capture and processing) for them. The main benefit of this centralization is that it enables the administration to bring their best auditors together in one place so that a centre of expertise is established which can match the level of expertise being applied to tax matters by the taxpayers. This centralization enables industrial specialization to be applied and improved intelligence and analysis to be applied. There is wide variation in the States approach to large taxpayer management. The approach taken by some is close to best practice although there is need for some enhancements, for example to Redefine the definition of a Key Customer in terms of its turnover level rather than in terms of the tax paid (clearly a large taxpayer could easily avoid the higher level scrutiny by evading tax - the opposite of the desired position); Improve intelligence gathering and analysis Develop a structured audit plan and a risk based case selection system and commence audits Allocate increased staff to the unit. the existing organizational structure and the international leading

The above analysis of

practices with respect to organizational design for an efficient VAT administration emphasize the need for states to adopt a functional organizational structure. The following are some of the advantages the states will derive by moving towards a functional organizational structure: Purposeful and focused approach to different tasks Be more amenable to measurement of performance Be conducive to better administrative and managerial control Reduce the scope for corrupt practices and non performance of duties since collusion between multiple staff and dealers is more difficult compared to a single officer system. Central design and decentralized implementation Reap the benefits of economies of scale

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5.4. Taxpayer Services An effective program of taxpayer service activities is a critical objective of all revenue authorities. The general complexity of tax laws coupled with the relatively large populations of taxpayers to be administered mean that, fundamentally, all revenue authorities must rely substantially on taxpayers voluntary compliance to achieve the outcomes expected of them. It is axiomatic that to achieve high levels of voluntary compliance, taxpayers and their representatives must have a good standard of services to help them determine their obligations under the laws and to complete the steps required to acquit those obligations. Revenue authorities can facilitate voluntary compliance by: Providing clear explanations of the law, in a form and manner and at a time suitable to taxpayers Establishing arrangements that assist taxpayers meet their obligations at minimal cost & inconvenience Giving accurate responses to taxpayers questions in reasonable periods of time Giving refunds of overpaid taxes in reasonable periods of time Quickly resolving taxpayers complaints

Some of tax payer services provided across the states are listed below. The states are moving in the right direction and for increased voluntary compliance this is one of the areas that need to be further strengthened.

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Delhi VAT helpdesk at each circle to provide VAT related clarifications to dealers

Andhra Pradesh VATIS helpdesk one in each circle and VAT counseling center at the HQ to provide VAT related clarifications to dealers Advisory visit conducted by CTD officials to the business premises of the dealer post registration to educate the dealer about various VAT related aspects like record keeping etc Dealer service center at division level and e-Seva centers distributed across the states serve as front desk of the CTD. The dealer can visit these centers for filing of returns, tax payment , collection of forms etc.

West Bengal Information not available

Gujarat VAT Helpdesk at CTD HQ to provide VAT related clarifications to dealers Every unit head also performs the function as the VAT guide and helps resolve queries of VAT dealers of the respective unit. A 60 page booklet on VAT has been sent to all the registered dealers. VAT awareness meetings are held in all Talukas, with Trade bodies, Bar Associations etc to provide a forum and opportunity to the dealers for discussion of their issues with the CTD.

Information provided by Delhi VAT website About CTD of trade and taxes Acts, rules and schedules

Information provided by AP VAT website CTD history Citizen charter

Information provided by WB VAT website About the directorate White paper on VAT

Information provided by Gujarat VAT website Acts, Rules, forms, Schedules for VAT, GST, CST, MST,

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Delhi DVAT CST Right to Information act 2005 VAT FAQs Public documents Notifications Circulars Tenders Determinations order Orders Return defaulters Contact information Know your TIN dealer search by name, address, TIN Dealer area

Andhra Pradesh Organization Acts, Rules, schedules and ordinance APVAT, Right to info act, CST, APPT, Entry tax 1996, Entry tax 2001, Luxury tax, HRBT, RDC, APGST GOs and notifications CM, Minister (CT)s message Contact Suggestions Links FAQs Tender notices Calculator Case Laws online Statistics Officers transfers and Promotions Central and state government links Advance rulings VAT leaflets on all topics which can be used as a ready reckoner by dealers Page 104 of 118

West Bengal Act, rules, schedules, notifications VAT o o Sales Tax Profession tax

Gujarat CESS, professional tax, entry tax, sugarcane tax, on luxury commodities. VAT FAQ Organization Notifications Contact Statistics Suspended, cancelled dealer Feedback Queries Dealer accounting tool Template Citizen charter VAT ordinance

VAT at a glance Contacts of key officials List of new registered dealers List of return filers Recent changes and amendments List of recent employee transfers

Delhi

Andhra Pradesh TIN info Hot topics Representations and clarifications, credit notes, hotels, apartments, input and sales tax credit, drugs and medicines, invoice, tax invoice

West Bengal

Gujarat

Services available through website E-Mails to dealers regarding notifications from CTD SMS to dealers on due returns, refunds credited to dealers account Dealer verification based on search in name, TIN View Tax paid details View Forms issued details View Refund due/ credited details Update profile Change password View history of returns

Services available through website Dealer verification based on search in name, TIN A number of online services like online registration, returns and refunds are planned

Services available through website Dealer verification based on search in name, TIN A number of online services like online registration, returns and refunds are planned

Services available through website Dealer verification based on search in name, TIN A number of online services like online registration, returns and refunds are planned and are in pipeline.

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Delhi Change tax period File online returns File revised return

Andhra Pradesh

West Bengal

Gujarat

These are available on login to dealers (many are as of now available only to dealers belonging to KDU).

Table 16: Comparison of taxpayer services offered by the CTDs across the four states In conjunction with table 16 above, it is evident that there is significant level of variation across the states with respect to tax payer services and e-Services offered by the CTD to dealers. Our understanding of the international leading practices reveals that there is an adequate scope for improving usage of technology to increase the effectiveness of service delivery to taxpayers. The CTDs need to explore the possibility of providing taxpayer services like online filing of returns, e-Payment, online view of taxpayer account etc

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5.5. Feedback from VAT dealers interacted with across four states Structured discussions were conducted with dealers from different industries and segments (Large/ medium/ small) across the four states primarily on the five main processes prioritized under CT-MMP. The table below presents a summary of the discussion: S. No 1 Process Registration of dealers under VAT Feedback from dealers There is significant variation across four states with respect to time taken to grant registration to a dealer. It ranges from 24 hrs in AP to an average of 30 days in Gujarat. There is a feeling among the dealers that the process should be expedited. The lack of standardization across states with respect to security deposit requirements, state specific documents etc. creates problems for dealers needing to register across states. The dealers feel that it would be a good idea to segment the dealers into categories based on certain criteria and the department should accordingly differentiate the service offering among the categories. For example, Process should be made simpler, streamlined, faster and standardized for affiliates/ subsidiaries of already registered entities, corporate bodies since they would fall in the low risk category. From an administrative perspective, the dealers feel that a single TIN would be convenient. Dealers expressed the need to bring about uniformity in aspects such as collection of fees for issuing a new registration/ renewal of registration across states.

Filing of VAT returns

Dealers expressed a strong need for simplified returns forms Positive feedback was obtained from the dealers with respect to Online filing of returns. Many of the VAT returns forms across the states ask the dealers to furnish details with respect to their top three commodities. Dealers expressed lack of clarity on basis of selection of top three commodities (top three commodities purchased or sold or in stock and whether it is based on quantity/ value etc).

Dealers raised the issue of data security in following two main areas o e-Filing of returns

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Providing invoice level details of all their purchases and sales

Processing of refunds

Process of refunds should be electronic and it should be expedited not just for exporters but for all other dealers whenever they are due for refunds.

Dealers expressed lack of clarity with respect to rules related to ITC, Dealers expressed need for forums, discussions with the CTD.

Audit

The dealers feel that if the CTD accepts audit reports from independent certified authorities, it would reduce burden of dealers.

Education of officers who go for audits and who interact with dealers is a must.

Inter-state trade

Majority of problems of the dealers is with respect to interstate trade. Dealers face problems with obtaining and maintenance of waybills for both intra state and inter-state. They need to make multiple visits to the CTD for obtaining waybills. Some states require the dealers to furnish details of waybills utilization at the time of filing of CST returns. This is a significant administrative burden for the dealers.

Positive feedback on Online application of waybills and dematerialization of C forms The cost of compliance has quadrupled with introduction of quarterly submission of C forms.

Tax payer services

Positive feedback for online dealer account/ ledger Communication from the CTD in the form of emails and SMS Request for forums to discuss issues / clarifications with CTD etc

Table 17: Feedback from dealers across the four states

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6.

Stakeholders consulted in the four states

6.1. Delhi CTD officials consulted S. No 1 Name of the person Ms Archna Arora Designation Commissioner Contact Number Mobile and Office 23319691 23318568 2 Mr. Sanjeev Ahuja JC-Policy JC- KCU 3 4 Mr. V.K.Beniwal Mr. Ajay Kumar Bisht JC VI DC (Z-V) 23324338 23318404 9868166000 5 Mr. K. S. Bisht Systems Analyst 23318482 9868721273 6 Mr. Ashok Gupta VATO 23352310 satt@dv at.gov.in jctt6@dvat.gov .in zdctt5@dv at.gov.in 23311496 jctt_kdu@dvat.gov .in Email address ctt@dv at.gov.in

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6.2. Andhra Pradesh CTD officials consulted S. No 1 2 Name of the person Sri.T.S.Appa Rao Sri.T.Yugandhar Reddy Designation Commissioner Addl. Commissioner(CT)(VAT) Contact Number Mobile and Office 040-24732351 040-24657080 9949992301 3 Sri.D.Ramachandra Reddy Joint Commissioner(CT)(Computers) 040-24740840 9949992309 4 Sri.K.Ravi Sankar Asst.Commmissioner(CT)(IT) 040-24732508 Ext.200 9949992881 5 Ms Deepa Reddy Commercial Tax Officer 9949992335 deepareddy@apcomm ercialtaxes.goc.in ravisankark@apcomm ercialtaxes.gov.in drc_reddy@apcommercialtaxes.gov .in Email address apparaots@apcommercialtaxes.gov .in yugandhart@apcomm ercialtax es.gov.in

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6.2.1. Dealers interacted with in AP S. No 1 Name of the person Mr. K. L. Agarwal President Designation Company / Firm Name Iron & Steel Association Ravindra Iron works 2 Mr. Gopal Agarwal Hon. General secretary Iron & Steel Association Basia Steela Pvt. Ltd. 3 Mr. Ashok Somani Joint Secretary Iron & Steel Association Somain Ispat Pvt. Ltd. 4 Mr. Samik Singhal Director Iron & Steel Association Singhal Ispat India Pvt. Ltd. 5 Mr. Raghucharan Vice President Iron & Steel Association Kisan Metal Works 6 7 Mr. Subramaniam Mr. Madhusudhan Rao Branch Administration Executive Asst. Manager (Logistics) Nestle SS Oral Hygiene Products Pvt. Ltd. Contact Number Mobile and Office 040 27540515 9849024112 040 23774178 9848030471 040 23777078 9849016065 040 27543412 9246531929 040 27712379 040 27842048 040 28490010 040 23773247 9440195997 8 9 Mr. Y. R. Mohan Rao Mr. Purnachandra Rao Managing Director Director MacMihan Pharma Ltd. Sandeep Enterprises 040 23097065 98490 30721

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6.3. West Bengal CTD officials consulted S. No 1 2 Name of the person Shri C. M. Bachhawat Shri Himadri Duari Designation Commissioner Special Commissioner Contact Number Mobile and Office 033 2251-8068 033 2251-1930 9830276149 3 4 5 Shri M. Khusmat Shri S. Roy Chowdhuri Shri Atanu Mazumdar Addl. Commissioner Addl. Commissioner Asst. Commissioner (ISD) 033 2251-5785 033 2251-6815 94330 98206 atanu_maj@yahoo.com atanumaj@gm ail.com 6 7 Shri Sushantha Shri Gautam Sengupta Technical Director, NIC Senior Systems Analyst, NIC 033 23590833 033 22510254 9830336285 skm@wbsu.wb.nic.in gautam@wbsu.wb.nic.in Email address ct@comtax .wb.nic.in hduari@rediffmail.com

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6.3.1. Dealers interacted with in West Bengal S. No 1 Name of the person Mr. Arun Kr. Ghosh Designation General Manager , Finance Company / Firm Name Bengal Beverages Pvt. Ltd. Contact Number Mobile and Office 033 2659 3715 9830300151 2 3 4 6 Mr. Mahesh Kumar Mr. Atin Chakraborty Mr. Sandeep Sharad Mr. Sudipta Banerjee Deputy Manager, Sales Tax Regional accountant (East) Senior Manager, Finance Senior Manager, Tax Hindustan Motors Ashok Leyland Tata Steel Ltd. Mahindra & Mahindra Ltd. 033 26647014 033 22831674 033 55508167

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6.4. Gujarat CTD officials consulted S. No 1 2 3 4 5 6 7 8 9 10 11 Name of the person Shri J.P.Gupta Shri Padalia Shri Parag L Shah Shri M.K. Bhanderi Shri M.B. Patel Shri Parimal Soni Shri H.N. Soni Shri Kamal D Shukla Ms Diptiben Shri Shekar Priyadarshi Shri V. K. Advani Designation Special Commissioner Additional Commissioner Asst Commissioner CTO Asst. Commissioner, Unit 8 Asst Commissioner, Unit 6 CTO, CST (legal branch) CTO Registration Consultant, TCS CTO 9824066041 9824349484 9825851148 9426015359 9825081718 9426401445 9825942344 9879598658 9825032278 kam alnayna@yahoo.com Diptivyas2000@gmail.com Shekar.priyadarshi@tcs.com Vkadv ani_sto@yahoo.co.in Paragshah64@hotmail.com Contact Number Mobile and Office Email address

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6.4.1. Dealers interacted with in Gujarat S. No 1 2 3 4 5 6 7 Name of the person Mr. Nitin Gandhi Mr. Jigish Bhavsar Mr. Diren Seth Mr. Asit Oza Mr. Jagdish S Patel Mr. Deepak Mr. Shailesh Shah Designation Deputy General Manager ( Sales tax) Junior Manager Manager (Operations & Services) Director Manager Regional manager Area Manager Company / Firm Name Cadilla Healthcare Ltd. Adari Group of companies Jayatma Informatics Pvt. Ltd. Oza & Associates Electron Color Chemicals Ltd. Reliance Fuel Ltd. Reliance Industries Ltd. Contact Number Mobile and Office 9328271100 9825153397 9825303129 9825430000 9825063525 9998957020 9998111311

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7.

Glossary of terms Abbreviation Expansion Andhra Pradesh Andhra Pradesh Goods Sales Tax Andhra Pradesh Professional Tax Assistant Commissioner Business Process Reengineering Central Statistical Organization Central Sales Tax Chief Minister Citizen Service Centers Commercial Tax Department Commercial Tax Inspector Commercial Tax Officer Commercial Taxes Mission Mode Program Delhi Sales Tax Delhi Value Added Tax Department of Administrative Reforms & Public Grievances Department of Information Technology Department of Revenue Deputy Commissioner Empowered Committee Economic Activity Code Frequently Asked Question Government Order Government of India Gujarat Sales Tax Headquarters

AP APGST APPT AC BPR CSO CST CM CSC CTD CTI CTO CT-MMP DST DVAT DAR & PG DIT DoR DC EC EAC FAQ GO GoI GST HQ

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HRBT JC KDU LTU NeGP NICNET RFP RBI RDC SLA SIC SWAN TIN VAT WB WBST

Horse Rating and Betting Tax Joint Commissioner Key Dealer Unit Large Taxpayer Unit National e-Governance Action Plan National Informatics Centre Network Request for Proposal Reserve Bank of India Rural Development Cess Service Level Agreement Standard Industry Code State Wide Area Network Taxpayer Identification Number Value Added Tax West Bengal West Bengal Sales Tax

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