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A strong fiscal monitoring system

Monday, January 24, 2011
By Mayura Shanbaug

To curb corruption and ensure transparency and efficiency...

India is on the brink of major tax reforms and is also seeking a major change in its accounting practises by switching to the International Financial Reporting Standards (IFRS). Then there is the pending implementation of the GST. Other issues on the tax front also need attention. But how will we go about it?
One person who is always at the helm of affairs as far as the word tax goes has all the answers. She is Bhavna G Doshi, a Fellow Member of the Institute of Chartered Accountants of India (ICAI) who is serving on the Council of the ICAI. Doshi has served as a Member of the Compliance Advisory Panel of the International Federation of Accountants, headquartered in New York and as a member of the South Asian Federation of Accountants (SAFA) Standards and Quality Control Committee. With over 25 years of professional experience in taxation and regulatory services, she provides consultancy services to corporates.

A former Partner of Member firm KPMG in India, she is now a Senior Advisor to KPMG. She also serves as an Independent Director on the Board of several companies including Seamec, a Technip Group (France) company, Reliance Globalcom, (formerly, Flag Telecom), and LIC Pension Fund.

Ms Doshi led two large VAT implementation projects for two States and was member of the ADB - funded VAT project team; in this capacity she was involved in conducting workshops and training senior officers on VAT implementation in different parts of India. Currently fulfilling her role as vice president of the Indian Merchants’ Chamber, Doshi also champions social causes in matters such as health, water and sanitation and is also associated with a project for senior citizens. Her views…
What should the Indian government do to increase the tax net and have a more efficient tax collection system?

As far as direct tax is concerned, year after year the net has expanded as more and more people are brought into the tax net. The government has taken various measures by which they are now able to monitor. With the help of electronic data gathering system the government has sufficient and good data and what it needs to do is analyze the data more vigorously so that tax evaders can be traced and made to pay.

Moreover, government also needs to ensure that there is more transparency in the system and the corruption menace which is very high in the tax department needs to be tackled effectively. There are a few cases brought to our notice of falsely implicating businessmen for tax evasion and sometimes harassments by the tax officers and bribe demands and the government needs to have a very strong monitoring system by which they can monitor the work of the accessing officers and strong action should be taken against the corrupt.

In my opinion the government should appoint an independent panel who would take decision on the additions made by the accessing officers so that the corruption that creeps in can be curbed. What we need is transparent, objective and effective monitoring of the system.  

Should sectors like agriculture which are untouched so far be taxed now?
In agriculture we have two very clearly visible classes; one is the marginal labour who will not be covered under tax net, even if government brings in the taxes. The people who will be covered are high-income people. Those high-end people are not agriculturists in the true sense and under the name of agriculture, numbers of other activities are going on and benefits are being claimed. Secondly, if Corporates are involved in the agricultural sector then they must be taxed.

 Has the government failed in implementing VAT properly?

I do not agree at all that VAT has failed. Ideally VAT is an indirect tax which is supposed to flow through the economy and ultimately the consumer pays the burden. VAT, therefore is an ideal system since it is a complete flow through by which the consumer knows how much is the tax component he is paying when he is buying the product or the service. Secondly, since it is a system by which the next man in the chain who pays VAT gets credit for tax paid at the earlier stage, the general system works as self policing system. The person who wants to take credit makes sure that the earlier one has paid his taxes so it is very unlikely that one will find that nobody wants to pay taxes in the entire chain.

In fact, the feedback we received from the small and middle level businessmen is very positive, they are very happy with the fact that they are not been pushed around by the big players in the chain. Earlier they had to make all sorts of adjustments but now they get the bills of their purchases and they sell on bills and things work well.

One little problem as you mentioned is implementation of the system at the state level. It needs a little strengthening after which it will become a very good system. The VAT we have is sort of partial VAT today, and it is a state level trade tax, where in you get tax credit every time you do the sale.
The Government will soon be introducing the Goods and Services Tax (GST) is India ready for it?

It depends on the will of the government at both levels, state and central. The Central government understands it totally and I hope the state governments would understand it too. The whole GST system is a major tax reform. We are a federal republic so we have centre and state and there is a clear cut demarcation between the areas of taxation amongst both. A uniform GST would need amendments in the constitution, so the dual GST system is the only system we can apply currently… maybe going forward ten years down the line when we will have conducive environment at place, we can have uniform GST system. 

The GST is a very good system and it would benefit the central and state governments, businesses and the consumers. There is lots of misconception about this system. Even today we have dual tax systems, we have central level taxes like excise duty, service tax and at the state level you have VAT. So on all the goods we pay excise duty and then VAT, so there is double taxation at present. In fact there is a cascading effect since you pay VAT on excise duty as well. In GST this cascading effect will be taken care of.

Secondly, today service providers are paying only central taxes; they are not paying state taxes. In GST they will have to pay state taxes, but in that scenario the burden would be evenly distributed across the economy on the goods and the services. Today the goods bear much higher burden of taxes than services. As a service provider you pay only 10% taxes but as a goods manufacturer or trader, you first pay excise duty then you pay 12.5% VAT at state, effectively you pay 22% of your income in taxes. Now as we are becoming a service oriented economy, we need to tax services more, so that overall burden is equally distributed between goods and services. The rate of taxes will also come down eventually. We need to train government officials for efficient implementation of the system which is missing right now.     

An ordinance to formalise International Financial Reporting Standards (IFRS) converged standards or what will now be called ‘IndAS’ is expected by early next month. What are the challenges ?
That’s right; an ordinance to notify IFRS is likely to be promulgated by early next month. The IFRS is the only recognized standards globally. IFRS convergence standards, what will now be called ‘IndAS’ have been vetted by the Ministry Of Law. In fact the changes which need to be made to the companies act for IFRS convergence have also been approved by the Law Ministry.

These new standards will be notified under the Companies Act 1956. As you probably know these are based on the concepts of fair valuation and time value of money. The Government thinks that an investor needs to know the fair value of the business. The two concepts have been used in India for the purpose of financial decision making, but are very new for purposes of accounting.

Fair value is actually the current value or the market value. Our standards are based on historical costs, which take into account actual income that one has received. India has not accepted IFRS in totality…what we are doing is looking at it from Indian conditions and have carved out those parts that are applicable, to be applied to about 300 companies in the phase I and thereafter others. In the first phase, only manufacturing, trading and some of the service sector companies like power and telecom are included. Insurance, banking, NBFCs and reality have not been included.

Many of these companies are already preparing their accounts under IFRS . All companies whether they are listed or unlisted will have to prepare consolidated financial statements for the purpose of being more investor friendly as is required by IFRS. But the dividends and the tax liabilities will be computed on the basis of financial statements prepared as per Indian GAAP which practically means that the companies will have to prepare two sets of accounts.

As far as the challenges I see are, globally these are primarily applied for investors and investors look at consolidated account statements not stand alone ones. We in India are applying it on stand alone statements as well and that I feel is a difficult part. Nobody has an idea how the statements would read, what would be the bottom-line, how the profits would be impacted, whether the standards will be used or will it be misused.

What are the concerns of the Industry ?

On the concern side is the determination of fair value. Fair value will change from corporate to corporate because circumstances would be different. Some body will have a good market reputation, somebody will not have a good market reputation and based on that the fair value will change. Secondly we are applying it on the stand alone basis. We are afraid about the fact that there may not be adequate understanding of the standard. Whether other regulators will follow it and if not, it will result into confusion with effects like changed debt-equity ratio, net-worth of the company coming down as also resulting into more complications with the lenders. Other regulators have still not had a chance to look at the statements so far. The main concern is whether we have so many valuers to determine fair value. The first few years are going to be chaotic. In fact countries like Australia and Japan are going to switch to IFRS by 2016. So what is the big hurry in India? We should delay the process till we are completely ready for it.    

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