Option to Opt Made LTU “Optional”
Introduction:
The rupee may be falling, the stock markets may be volatile, the cost of living may become costlier still premium class will remain classified in all the cases. Premium class a class with premium benefits in terms of facilities and comfort. More leg space, more privacy, exciting food, more personal attention and so on. But this concept of premium class is not limited to airlines or restricted to frequent flyers only. It extends to every field including the economy as a whole and the taxpayers of our country too.
Let us discuss another way. The ABC analysis in Cost Accounting theory is not new to us where A category represented 80% value of the total inventory but may be 10-20% of the total quantum. So if this portion of inventory is being taken care to the fullest the overall control can be established.
The above theory did not remain untouched even by the Finance ministry. The revenue generating units may be in the form of direct taxes or indirect taxes got classified in 3 categories:
- Large Units 2. Medium Units 3. Small Units
So if we keep the large units as A category inventory for our economy we should not be wrong as significant portion of revenue is being generated by these units in terms of value. So what is new in it? Nothing but redefinition of these units as large taxpayer units having premium facility and an edge over medium and small units.
But what led to such classification? Do we need it at all? Why such segregation?
In the beginning of 1980s there has been recommendation from IMF that member country for strengthening the tax administration and improved statutory compliance need to establish the LargeTax Payer Units. The dominant environmental factors including globalisation, political instability and weak administrative processes have caused the demand for improved taxpayer services. The voices were raised by the taxpayers who have been struggling to reduce the high compliance cost and shield themselves against the arbitrary treatments by the tax administrators. First time in 2005 the honourable finance minister mentioned about the system of large tax payer unit (Speech Extract)“As a measure of facilitation, I propose to follow international practice and establish the large taxpayer Units. To begin with, these units will be set up in major cities. I would like to invite the large taxpayers, whether of corporate tax or income tax or excise duty or service tax, to participate in the programme and avail of the single window service.”
But who can qualify as a large tax payer unit? What should be the criteria for defining the LTUs?
Criteria for LTU as an International Perspective:
If we look at the criteria’s used by different countries you shall find various patterns. Some countries use single criteria for all business activities while others use different criteria’s for different business activities. For example: Netherland and Denmark define the large tax payer based on the turnover. Germany considers turnover and profit for manufacturing. Ireland counts on turnover and tax. Based on the survey report of IOTA(Intra-European Organisation of Tax Administrations) the total turnover is most popular, and then tax dues are number two followed by asset value and the profit criteria at number three and four respectively. However India opted the criteria based on the tax dues.
Eligibility for Registration under LTU:
Any person, engaged in the manufacture or production of goods, or a provider of taxable service, who has paid during the financial year 2004-05 or during the financial year preceding the year of filing of application for registration under LTU,
- duties of excise of more than rupees five crores in cash or through account current; or
- service tax of more than rupees five crores in cash or through account current; or
- advance tax of more than rupees ten crores under the Income Tax Act, 1961,
and is presently assessed to income tax or corporate tax under the Income Tax Act, 1961, under certain jurisdictions of Chief Commissioner of Income Tax, Bangalore, Mumbai, Delhi and Chennai.
Legal Meaning of LTU:
LTU is a self-contained tax administration office under the Department of Revenue which acts as a single window clearance point for all matters relating to central excise, income tax/corporate tax and service tax. Entities would be able to file their excise return, direct taxes returns and service tax return at such LTUs and for all practical purposes will be assessed to all these taxes at these LTUs. Such units are equipped with modern facilities and trained manpower to assist the tax payers in all matters relating to direct and indirect tax/duty payments, filing of documents and returns, claim of rebates/refunds, settlement of disputes etc. The scheme aims at reducing tax compliance cost and delays, and bringing about uniformity in the matters of tax/duty determination. An eligible taxpayer can opt to avail of the facility of LTU scheme.
SO Called Benefits:
Single window for documents and Returns:
Single PAN based entity shall be able to file all the documents pertaining to all its geographically dispersed units at single window of LTU. All the returns whether pertaining to income tax, central excise and service tax shall be routed collectively through these LTUs.
Dedicated Client Executives:
The officers at the level of AC/DC/JC would act as dedicated client executives for assistance in all the tax matters. This shall ensure single point contact instead of interacting with different sections/officers of the LTU.
Restriction on Jurisdictional Field Officers:
With respect to any issue relating to these assesses who have opted for LTU the jurisdictional field officers will be restricted from the suo moto visit to the units or any kind of interaction. However in order to comply with the express provisions of the law where physical control or verification is a compulsory requirement the Jurisdictional Commissionerate shall act under the directives of LTU.
No Cenvat Reversal for Movement of Input/Capital Goods:
As against the existing provisions of law the manufacturing units shall have the added advantage of non reversal of cenvat credit availed against the input and capital goods if the same are moved to different units situated at diverse geographical locations. Also any excess credit available at one unit may be shifted to other eligible units in a hassle free manner.
Pending Cases to be dealt centrally:
If the cases where the show cause notices/ demand notices have been issued by jurisdictional offices but not adjudicated till the exercise of the option of LTU will stand transferred to the LTU and the officers of the same shall adjudicate the same.
Risk Based Audit:
No mandatory audits for LTU. Based on the risk assessment the taxpayer shall be identified and that too in consultation with them thereby reducing the possible inconveniences to the minimum. Boon to the corporate as they will become prepared with their team for audit without having an element of surprise at least on the visit part.
Could LTU Be A Success Story?
Concept of the LTU was a bigger reform in the field of Tax Administration with an objective to reduce compliance burden and transaction costs for large corporate, and bring in efficient tax administration thereby focussing the premium tax payers. But the question still remains whether even after 8 years could it achieve its objective? Has it yielded the desired results? Could it deliver upon its promises?
Just Think!
We personally feel that India waited too long to bring the initiative. If we look at the historical perspective the concept of LTU conceived in Latin America way back in 1970s and moved to Africa and Asia. The establishment of LTUs in India follows the precedent set in other countries including Australia, the Netherlands, New Zealand, the UK and the US, where tax administrations have been organized to cater to multiple types of taxpayers.
Option To Opt Made LTU Optional:
Option to opt made the concept of LTU optional. The late adoption followed by making the facility optional instead of compulsory became the biggest barrier to its success. Instead of a long term medication this acted just as a first aid which could not eradicate the loopholes in a complete sense. Various reform processes which are started in India do not reach to its completion stage. This is one of the examples which substantiate the fact. You will also observe that unless the initiatives are top driven they hardly succeed. Today where India is going through the higher Current Account Deficits and the real growth has reached to its bottom line there is a necessity to create a conducive business environment which can excel the economy. At this juncture there is acute necessity to provide advanced tax facilitation to the taxpayers and the policy decisions to come in consultation with these corporate to maximise the benefits for both the taxpayers as well as tax administrators. So unless all the tax payers of the similar size come under the common umbrella it shall be really difficult for the tax administrators to treat them in a particular fashion and provide them the similar benefits.
Dedicated Client Executive: Bigger Challange
Finance Ministry promised to provide client executives to the LTUs. But the fact remains that the revenue from direct and indirect taxes follow the two streams altogether different from each other. Having a single client executive with expertise in both the aspect shall pose a bigger challange for these CE’s to resolve their client’s problems. This again raises the concerns over the single window concept. Though we have been talking about the end results but we are not talking about the resources. Though we are talking about the facilities to be made available but we are not talking about the facilities which are available with us. The whole set up shall require an advance IT infrastructure, well trained staffs, and well managed offices to administer the concept. Has the ministry looked at these aspects? Big question mark which has restricted the concept of LTU to be famous among the CFO’s.
Reduced Transaction Cost: A MYTH at Inception:
Govt has been claiming the reduced transaction costs due to implementation of LTUS. If you look at the current practices particularly for the manufacturing concerns the records are not always kept centrally so as to comply with the existing legal framework. There are requirements of physical records and verification at the respective locations itself. So migrating the voluminous data and bringing the database in the common platform shall not be an easy task even for the big corporate as this shall tantamount to additional cash outflow for the revamping of the whole IT system. Also the parallel maintenance of records at one place for the geographically dispersed locations shall be a cumbersome task requiring deployment of adequate resources and adding to the cost of the taxpayers.
Non- Integration with State Laws:
In today’s context we are moving forward to GST. We are talking about allowing the state vat benefits as against the central levies in the near future. However the non integration of state compliances under LTU will again be a hindrance to the very objective of Single Window rather shall promote the concept of parallel window. The finance ministry must come up with a proposal to build certain mechanism to integrate the same so that the tax payers do not go on incurring the recurring cost over revamping or adopting the existing or new IT Systems and be penalised for opting LTU.
Reduced interference of Jurisdictional Officers:
The laws of the land where it is required to have periodical physical verification and control over various activities it shall be difficult to part with the jurisdictional offices. Also nowhere the concept of LTU’s conveys that the interference from Jurisdictional offices shall be removed. Rather it claims that the same shall be under the directives of the LTU office.
Way Forward:
So what are the options available with the Finance Ministry? How this concept can maximise the benefits for the tax payers and the tax administrators? What can remove the teething problems?
Some of the measures to make the LTU effective may be suggested as below:
- The commitment for setting up LTU must be visible to the investors. In order to make it visible the govt needs to provide with all the necessary resources whether in terms of infrastructure, trained staff or the whole IT system.
- The LTU needs to be made compulsory so as to achieve the true intent and objective of its setting up. Compulsorily bringing the tax payer of a similar size to common platform shall not only ease up the policy maker’s job but shall also take the compliance to the next level.
- The centralized supervision needs to be strengthened so as to cater to the requirements of corporate as well as the administrators.
- There should be continuous up gradation and reform of policies so as to keep the concept of LTU alive as an integral part of the whole system. The frequent changing business environment and the global economy demand for an agile system. The periodical reviews and improvements will prove to be of great help in achieving the agility.
- Looking at the broader perspective, in order to really make it a single window facility for thepremium class taxpayers the LTU should include the state laws requirements with proper mechanism for compliance and sharing of the revenue between the centre and the state. This shall be in parlance to the upcoming GST requirement.
- Also there is need of identifying the performance indices for ensuring the effective management of LTU’s and the reporting of the same. These indices shall reflect the true picture on the aspect that where India stands on the path of consolidated growth in the globe.
It is evident from the above that it has been a positive endeavour on the part of the govt to introduce the concept of Large Tax Payer Unit. However the reforms to be effective needs to carried in a holistic manner. Availability of infrastructure, trained staff, continuous up- gradation, good IT systems is the need of the hour. Without the presence of the commensurate resources the concept shall be a body without soul. The changing business environment and the economic conditions, particularly the current recessionary scenario really demands for the effective reforms. The FDI flows in India are a fraction of what our country deserves. Theoretically it has remained an attractive destination for global investments but to give it a practical shape concept like LTU can play a significant role in rebuilding the domestic and foreign investor’s confidence. So let’s hope that reforms become proactive instead of reactive with a harmonized tax structure benefiting both the tax payers and the tax administrators.
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