govt. of india vat report-2

8/3/2019 Govt. of India VAT Report-2

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REPREPOORRTT OONN CCUURRRREENNTT SSTTAATTEE

AASSSSEESSSSMMEENNTT ((ASASIISSPPRROCOCEESSSS

DDOCUOCUMMEENTNTAATTIIOONN))


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TABLE OF CONTENTS

1. EXECUTIVE SUMMARY ........................................................................................................ 8

2. INTRODUCTION .................................................................................................................. .10

2.1. NATIONAL E-GOVERNANCE ACTION PLAN (NEGP)

...................................................................... 10

2.1.1. Key observations made by DIT and DAR&PG while endorsing the NeGP ............................

10

2.1.2. Major activities proposed under the NeGP .......................................................................... 10

2.1.3. Framework for e-Governance under NeGP ......................................................................... 14

2.2. COMMERCIAL TAXES MISSION MODE PROGRAM (CT-MMP)

...................................................... 15

2.2.1. Background to CT-MMP ..................................................................................................... 15

2.2.2. Vision of CT-MMP.............................................................................................................. 16

2.2.3. Overall game plan of CT-MMP ........................................................................................... 19

2.2.4. Key outcomes of CT-MMP .................................................................................................. 20

2.3. VALUE ADDED TAX (VAT)

.......................................................................................................... 21

2.3.1. What is VAT?...................................................................................................................... 21

2.3.2. History of VAT .................................................................................................................... 22

2.3.3. History of VAT in India ....................................................................................................... 22

2.3.4. Self assessment and VAT ..................................................................................................... 23

2.3.5. Operational tasks within VAT.............................................................................................. 24

3. METHODOLOGY FOR CURRENT STATE ASSESSMENT .............................................. 27

4. 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. Registration of dealers under VAT....................................................................................... 425.1.2. Processing of VAT returns and tax collection ...................................................................... 57

5.1.3. Processing of VAT refunds .................................................................................................. 67

5.1.4. Tax accounting ................................................................................................................... 73

5.1.5. Inter-state trade .................................................................................................................. 76


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5.2. TECHNOLOGY ARCHITECTURE

..................................................................................................... 84

5.3. PEOPLE ARCHITECTURE

.............................................................................................................. 90

5.3.1. Delhi Organizational structure............................................................................................ 93

5.3.2. Andhra Pradesh Organizational structure ........................................................................... 95

5.3.3. West Bengal Organizational structure ................................................................................. 97

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5.3.4. Gujarat Organizational structure ........................................................................................ 99

5.3.5. 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

............................................................................... 1126.3.1. Dealers interacted with in West Bengal ............................................................................. 113

6.4. GUJARAT CTD OFFICIALS CONSULTED

....................................................................................... 114

6.4.1. Dealers interacted with in Gujarat .................................................................................... 115

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


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REFERENCE DOCUMENTS FOR INTERNAL USE

1 : Delhi VAT Act, rules and schedules

2 : Delhi VAT Forms

3 : Delhi Checklist for returns scrutiny

4 : Delhi Organization structure

5 : Delhi Note on the computerization in the CTD

6 : 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 : Delhi Select statistics related to Commercial Tax Administration

9 : AP VAT Act, rules and schedules

10 : AP VAT Forms

11 : AP VAT leaflets which have been prepared as ready reckoner on VAT

12 : AP Select statistics related to Commercial Tax Administration

13 : WB - VAT Act, rules and schedules

14 : WB VAT Forms

15 : WB Administrative report 2004-05

16 : 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 : WB Note on computerization in CCT

19 : WB Publication of Trade Circulars

20 : Gujarat VAT Act, rules and schedules

21 : Gujarat VAT Forms

22 : Gujarat Administrative organization at the division level

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23 : Gujarat Proposed organizational structure to be adopted under VAT

24 : Gujarat MIS report on Input tax credit mismatch

25 : Gujarat Note on the checkpost activity

26 : Gujarat Select statistics related to Commercial tax Administration

27 : 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 FORE-GOVERNANCE

.......................................................................................... 14

FIG 3: THE TRIPLE E OF COMMERCIAL TAX ADMINISTRATION

SYSTEM ............................................................. 16

FIG 4: THE SEVEN DIMENSIONS OF E-

GOVERNANCE........................................................................................... 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 FOURSTATES

...................................... 32

TABLE 5: SNAPSHOT OF STATISTICS RELATED TO VAT RETURNS IN FOURSTATES

.............................................. 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 FOURSTATES

..................................... 38

TABLE 8: COMPARISON OF PROCESS OF VAT REGISTRATION ACROSS THE FOURSTATES

..................................... 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 FOURSTATES

........................................... 70

TABLE 11: COMPARISON OF TAX ACCOUNTING ACROSS THE FOURSTATES

......................................................... 75

TABLE 12: COMPARISON OF PROCESS OF MONITORING INTER-STATE TRADE ACROSS THEFOURSTATES ............... 79

TABLE 13: COMPARISON OF EFFECTIVENESS OF VARIOUS CONTROLS RELATED TO INTER-

STATE TRADE............... 81

TABLE 14: COMPARISON OF TECHNOLOGY ARCHITECTURE ACROSS THE FOURSTATES

........................................ 88

TABLE 15: COMPARISON OF ORGANIZATIONAL STRUCTURE ACROSS THE FOURSTATES

....................................... 92

TABLE 16: COMPARISON OF TAXPAYER SERVICES OFFERED BY THE CTDS ACROSS THE FOUR

STATES ............... 106

TABLE 17: FEEDBACK FROM DEALERS ACROSS THE FOURSTATES.................................................................... 108


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1. Executive Summary

National e-Governance Plan (NeGP) was conceptualized jointly by Department ofInformation 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 Taxes-

Mission 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 ofdealers 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 post-

verification, 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 s tudy 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 oftax

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 e-

Governance 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-cen tric 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 e-

Governance, 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 e-

Governance 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 Impact in terms of number of people likely to be affected by project

o Impact in terms of likely improvement of the quality of service

o Impact on the economy or economic environment in the country

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o Impact in terms of the likely cost-benefit of investments in the project

o Readiness and willingness of ministry/ CTD to position a National Mission Project

o 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 Income Tax Ministry of Finance/Central Board of Direct Tax

2Passport Visa &

Immigration ProjectMinistry of External Affairs/Ministry of Home Affairs

3 DCA21 Department of Company Affairs

4 Insurance Department Of Banking

5National Citizen

DatabaseMinistry of Home Affairs/Registrar General of India (RGI )

6 Central Excise Department of Revenue/Central Board of Excise & Custom

7 PensionsDepartment Of Pensions & Pensioners welfare & CTD Of

Expenditure

8 Banking Department of Banking

Mission mode projects under State government

9 Land Records Ministry of Rural Development

10 Road Transpor t Ministry of Road Transport & Highway

11 Property Registration Department of Land Resources

12 Agriculture Department of Agriculture & Cooperation

13 Treasuries Ministry of Finance

14 Municipalities Ministry of Urban development and Poverty Alleviation

15 Gram Panchayats Ministry of Panchayati Raj

16 Commercial Taxes Ministry of Finance

17 Police (UTs initially) Ministry of Home affairs

18 Employment Exchange * Ministry of Labor

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Mission mode projects under Integrated services category

19 EDI (E-Commerce ) Ministry of Commerce and Industry

20 E-BizDepartment of Industrial Policy & Promotion / CTD of

Information Technology

21Common Service

CentresDepartment of Information Technology

22 India Por talDepartment of Information Technology and CTD of

Administrative Reforms and Public Grievances

23 EG Gateway Department of Information Technology

24 E-Cour ts* Ministry of Justice/ Ministry of Home Affairs

25 E-Procurement* Ministry of Commerce and Supply

* Additional mission mode projects proposed

Table 1: List of Mission mode projects underNeGP

Development of Core Infrastructure: This involves development in areas like National e-

Government 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 cos t 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 E-

Governance 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 Undertaking e-Readiness assessment of various States/ Departments

o Setting up of Virtual e-Governance Forums

o Assessment of e-Projects

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o Study of best practices for e-Governance

o Development of e-Governance National Resource Database

o Newsletters on e-Governance, workshops/ seminars/ Conferences,

o Setting up e-Governance forum for NGOs, Private Sector, Academicians

o Setting up of Training Institutions

o Create awareness through different media like films.

Design and development of Organizational Structures such as National Electronic

Governance Council/ National Information Services Board, National Institute for Smart

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%

Integrate d ser

vices

2

%

HRD and Tr

aining

4

%

Te chnical assis

tance

1%

Or

ganizational

structues

1% Researchand

Developme

nt

1

%

Aw areness

and

Assessme

nt

2%

Support

and

Infras

tructure

5%

Cor e Infr

astructure

10

%

Core proje

cts

73

%

Coreprojects Core Infrastructure Support and Infrastructure

HRD and Training

Technical assistance

Integrated services

Or anizational structues

Core Policies

Res earch and Develo ment


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Awarenes s and Assess m ent

Source: Website of Department ofInformationTechnology

Fig 1: Major activities proposed under NeGP and budget allocation

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Citiz

en

s

Bus

iness

es

2.1.3. Framework for e-Governance under NeGP

Under NeGP, a framework/ overall architecture has been developed for the effective implementation of e-

Governance 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 governmen tportals.

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 e tc

to increase the effectiveness of service delivery.

GOI

Agencies

Service

Providers

State

Agencies

GOI

Portals

e-India

Portal

State

Portals

M idd le w a re

Communication

Infrastructure

Central Data Banks

Gateways

Security

Infrastructure

Front-end

interface

I n t e g r a t e d se r v ices

e n a b led

Citizen Portal

E-biz

Mobile

Home

PCs

Integrated

CSC

Kiosks

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 subjec t 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 SmartGovernment (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-cen tralized

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 Facilitating inter-state trade

o Uniformity and standards in Commercial Tax administration

o Enabling free exchange of information

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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 ofIndia.

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 nega tive 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 .

ProgramManagement

ProcurementManagement

ExpectationManagement

Knowledge

Management

TechnologyManagement

ProcessreformManagement

ResourceManagement

Fig 4: The seven dimensions ofe-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 evalua tion framework to be used by

the Department of Revenue and the states for assessing the progress ofthe 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

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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 ofexisting

resources.

Technology management The pace with which technology landscape is changing necessitates re-

definition 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 CT-

MMP best practices for program management, governance, processes for management ofCommercial

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 expec tations

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 and comprehensive Commercial Taxes MMP Model/multiple models for

implementation, consisting of

o Functional Architecture - developing requirements of the functionality of the solutiono Process Architecture - defining the scope of BPR in selected core areas along with the BPR

itself in those areas

o Technology Architecture - Technical solution, Information Security and Disaster

Management Plan

o People Architecture - Capacity Building & Change Management Plan

o 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 oftaxation 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 o ftaxes, 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-offon

input tax paid and tax paid on previous purchases

Abolition of multiple taxes like turnover tax, surcharge, additional surcharge

Rationalization of overall burden oftaxpayer

General fall in prices of goods over a period of time after stabilization of VAT sys tem

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 righ t 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 o fVAT,

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 ofconsumption 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 theGovernment of India for approximately last ten years. The first preliminary discussion on S tate-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 ofall 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 S tates 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 incen tive

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 setup.

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

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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-tax-

related 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 ofIndia 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 oftaxpayers:

Considering the facts relating to their own financial affairs

Interpreting and applying the law to those facts

Determining the amount of tax owing

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Making that determination with an appropriate degree offinality

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 vas t 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 ofadministrative

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 paymen ts

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 opera tional 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 o ffraudulent 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

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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 The pace with which arrears can accumulate if businesses are not registered

immediately they commence

o The requirement for taxpayers to issue valid invoices to their customers from the day of

commencement

o The compliance risks associated with false registration.

Hence the key requirements of the registration system are:

o On commencement of the VAT to ensure that all existing businesses with turnover above

the threshold are registered automatically

o 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 thecompanies 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 Issuance and collection of registration forms

o The automated allocation of a taxpayer identification number

o Issue of a VAT registration certificate

o 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

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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 Reducing the level of face to face contact between taxpayer and CTD officials.

o 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 Non-registration of businesses

o Underreporting of gross receipts

o Abuse of multiple rates

o 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 Use of fake invoices

o Classifying domestic sales as exports to benefit from zero rating

o 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.

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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

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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 underCT-

MMP

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 s tates are as

follows:

Status of development of tax administration in the s tate 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 Relevant Consideration

Gujarat Nascent state of VAT Implementation

Open to reforms

West Bengal Large State

Traditional (Evolving) tax administration

Mix of manufacturing and trading activities

Andhra Pradesh Advanced tax administration

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State Relevant Consideration

Delhi Ease ofImplementation

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 Delhi : July 24 to July 27 , 2006

o Andhra Pradesh: August 22 to August 24 ,2006

o West Bengal : August 28 to August 30, 2006

o Gujarat : August 31 to September 2 , 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 Support processes

Registration

Return processing and tax payment

Refunds processing

Audits

Tax accounting

Taxpayer services

Inter-state transactions

Enforcement Mobile squads, Checkposts

Debt collection/Recovery

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 indica tive 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 DelhiAndhra

Pradesh

West

BengalGujarat

Number of dealers registered

under VAT

1,91,943 1,45,809 1,74,533 3,45,580

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

Average revenue generated per

dealer per year (in INR)

3,44,894 6,78,216 3,09,693 1,71,127

Average number of pages in the

registration file of a single

dealer (including supportings and

annexures)

15 pages 10 pages 20 pages 20 pages

Average wait time for a dealer to

get the Registration Certificate (

in calendar days)

15 days 24 hours 7 days 30 days

Table 4: Snapshot of statistics related to VAT registration in fourstates

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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 ci tizen 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 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

o 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 mul tiple

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 requiremen ts.

Scope for adoption of international leading practices: Some of the international benchmarks with

respect to registration are as follows

o After initial implementation, all TIN to be issued within three (3) working days ofthe

receipt of registration application

o TIN should be issued immediately for large business taxpayers provided all relevant

documentation is provided with the application

o Ratio of active (operating regularly) to total registered taxpayers > 90%

o 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.


Pradesh

West

BengalGujarat

Number of VAT returns filed in

financial year 2005-06

5,07,114 14,59,799 7,68,345 11,53,384

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 12Quarterly 4

Annual - 1

12 times in a

year for each

dealer

4 System not

yet stabilized

VAT tax collection for year

2005-06 (in INR crores)

6,620 9,889 5,405 5,913

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

Table 5: Snapshot of statistics related to VAT returns in fourstates

Based on the above statistics we can make the following observations with respect to VAT re turns process

Extent of citizen interaction: Return filing is a recurring periodic activity that a taxpayer mus t

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 o f

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.

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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 ofthe figures

across the four states.

o Forms collection ( 3- 5 mins)

o Data entry : 1 hour ( For Gujarat, the detailed entry can take upto 2-3 days depending on the

length of annexures )

o 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 o fthe 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 themanagements attention from more important issues. It also increases expenditure levels without any visible

impact on efficiency or effectiveness ofthe 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.


Pradesh

West

BengalGujarat

Citizen base the refunds

process caters to

1,91,943 1,45,809 1,74,533 3,45,580

Number of refunds made in

year financial 2005-06

12,726 88 20 7,691

Total refunds amount in year

2005-06 (in INR crores)

121.33 35.5 9.5 262.67

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Pradesh

West

BengalGujarat

Average wait time for dealer

for refunds process ( in

calendar days)

30 days 45 days for

exporter, 90

days for

others

NA * 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 fourstates

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 i t 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-to-

date 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 External

3

Banks designated by CTD1

4

Deale

r

2

Commercial

Tax

Departme

nt

10 9 8 7

5

6

Treasury

CircleOffice

Audit Enforcement Other Acts

1 Information about tax paid

2 VAT Refunds issued

3Information on refunds for electronicclearance

4Summary scroll for payments received andchallan scroll

5 VAT Refunds issued to dealers

6 Information about payment realized

7Information for adjustments related toother acts

8 Information on interests and penalties due

9 Information about assessments issued

10 Carry forward information of dealers

Fig 7: Tax AccountingSystem

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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 ofcitizen

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.


Pradesh

West

BengalGujarat

Number of dealers

registered under CST act

1,862 76,734 1,00,831 2,04,399

Number of CST returns

filed in the financial year

2005-06

4,91,656 3,79,079 2,32,508 5,01,389

Amount of CST collected

in year 2005-06 (in INR

crores)

NA * 1 ,037 713.97 2,002

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.

Forthe application

and issuance of

statutory forms

need based

The dealer has to

visit the CTD four

times a year for

filing CST returns.

Forthe

application and

issuance of

waybills/

statutory forms

need based

The dealer has to

visit the CTD four

times a year for

filing CST returns.

Forthe

application and

issuance of

waybills/

statutory forms

need based

The dealer has to

visit the CTD four

times a year for

filing CST returns.

Forthe application

and issuance of

statutory forms

need based

* Data not available

Table 7: Snapshot of statistics related to Inter-state trade in four states

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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 Faked/ forged statutory forms

o Misutillization of statutory forms

o 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 The existence of manual statutory forms gives scope for related frauds.

o 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 requiremen ts.

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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, elec tronic clearance of refunds

and extensive use of internet technologies for tax payment processing and accounting are the hallmarksof any leading VAT administration. Given the intensity of ci tizen 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 va

govt. of india vat report-2

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