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 set- up.
The Empowered Committee meets regularly, attended by the State Finance Ministers, and also by the
Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior
officials of the four Revenue CTD of the Ministry of Finance, Government of India. Through
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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.
Parameters DelhiAndhra
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.
Parameters DelhiAndhra
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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Parameters DelhiAndhra
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.
Parameters DelhiAndhra
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
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