TARC in its first report had addressed four terms of reference.  These terms of reference related to customer focus, structure and governance, people’s function, dispute management, key internal processes and ICT.  This report of the TARC, which is the second report, addresses two important aspects of tax administration, capacity building of the customs department and data and information exchange. The terms of reference for the TARC on these aspects  are:

  • To review the existing mechanism and recommend measures for “Capacity building” in emerging areas of Customs administration relating to Border Control, National Security, International Data Exchange and securing of supply chains. (Chapter VIII in this continuing TARC report)
  • To review the existing mechanism and recommend measures for strengthening of Database and inter-agency information sharing, not only between Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) but also with the banking and financial sector, Central Economic Intelligence Bureau (CEIB), Financial Intelligence Unit (FIU), Enforcement Directorate etc. and use of tools for utilization of such information to ensure compliance. (Chapter IX in this continuing TARC report)

The importance of the customs capacity building is to be seen in terms of rapidly growing global trade, not only by rise in trade volumes but also in terms of complexity of supply chains. It may be stated that in the last 30 years, world merchandise and commercial services trade have increased by about 7 per cent per year on average. The share of developing countries in the world exports and imports is now close to 50 per cent. The growth in trade has also spurred fragmentation or specialisation in production chains, creating a network of activities. The response of the countries has been to engage in various trade treaties and harvest the competitive advantage that the global trade integration is offering. While globalization has given impetus to economic growth, customs administration, as part of the tax administration, is being engaged in multidimensional challenges. Customs administration which so far has had a traditional role of import and export processing of goods and administering export incentive schemes or duty drawback is now confronted with areas such as administering a complex web of rules of origin for granting preferential treatment in duty to imports from a particular country, developing a robust risk management system so that there is pre-arrival risk assessment and post-clearance compliance management for facilitating trade and moving towards “smart” customs. While all these measures will go to improve trade facilitation, aspects of security, which comprise another aspect of customs administration cannot be compromised. Emergence of e-commerce has created yet another dimension to global trade and presents a challenge to the customs administration while maintaining sufficient control to prevent the abuse of this channel.

All these will require a strategic reorientation of customs, shedding the overwhelmingly transactional and administrative mind-set that dominates the present thinking. Chapter VIII addresses the aspects of capacity building with a keen eye on promoting voluntary compliance with enhanced technological capabilities to control the cross border movement of goods and persons with almost no intrusion. The customs administration will also need to be more customer focused and forge closer links with trade and industry in design and implementation of policies, as part of the larger governance framework. The issues of security at the borders on illicit drug trafficking, public health and safety, and importation and exportation of environmentally-sensitive goods like CFC gases and hazardous waste will require close co-ordination by the customs administration with the specialised agencies for better compliance. Customs administration for all these aspects will have to be engaged in a modernization process, adopting global best practices, facilitating legitimate trade, safeguarding revenue collection and securing the borders. Initiatives such as SAFE framework, mutual recognition, pre-arrival information, air cargo security, supply chain integrity and dematerialization of documents will be other parts of the modernisation requiring international co-operation and exchange of information. Customs to customs sharing of information will be crucial for such co-operation and exchange. Thus, the capacity building of the customs administration in this fast integrating world will not only be confined to People’s function as already covered in Chapter IV in the first TARC report but will require modernisation of equipment, environment and, importantly, the mind-set.

Another term of reference covered in this report is on exchange of data and information. With the adoption of ICT by the Indian tax administration, large volumes of data and information are being generated. They provide opportunities to the CBDT and CBEC to harness them for analysing how to improve tax compliance and ensure better enforcement. But so far, the CBDT and CBEC as well as CEIB, FIU and Enforcement Directorate are generating data and collecting information sui generic and there is almost no effort to integrate them or work on a common database. Most of these agencies as reviewed in Chapter IX work on databases that are scattered and disconnected. The seamless flow of information across agencies which has become the norm in most of the advanced tax administrations remains unchartered in India. By contrast, most advanced tax administrations have recognised the importance of exchange of data and information for compliance and enforcement and have adopted collaborative mechanisms among the organisations, which can take forms varying from partnership agreements, MoUs, statements of practice, standard protocols, and others, often backed by law. The collaborating agencies exchanging the data or information apply a consistent approach with a common taxonomy and standards. Such common taxonomy is reflected within each of the three areas – data description, data context and data sharing for standardisation. The idea behind this is to create/collect data or information once while using them many times. A common database enables a “one data, many users” approach, thereby reducing duplication of efforts and minimising the cost of collecting data and time expended on it.

Towards the above framework, TARC has recommended one database to facilitate re-use of data and information to enable arriving at time-critical decisions in an expeditious manner and also to achieve seamless flow of data among participating organisations. Since data would be collected in a common framework with a common taxonomy, format and metadata, it would be ready to be used while cutting down the time and cost of data collection. Second, the use of a Special Purpose Vehicle (SPV) to harness the combined potential of the data created or collected has been recommended. This is in line with the TARC’s earlier recommendation of creation of an SPV. An SPV will facilitate a single repository or storage of data with common taxonomy and standards and will receive all data and information from different entities, such as banks, financial institutions. the FIU. AIR and CIB, placing them on one platform so as to provide a common linkage between the relevant data. The recognition of PAN as CBIN, also recommended in Chapter VI in the first TARC report, will provide common identification of data so that storage, retrieval and use of data will be further eased. For the above strategy to be successful, it will be important that different agencies abandon the culture and practice of information hoarding and instead, embrace the exchange and sharing of data and information. This would be a crucial condition of success in improved exchange across silos and inter-departmental exchanges.

The TARC, keeping in line with its earlier practice, sought the views of various stakeholders, including the two Boards and CEIB, FIU and field offices and held altogether 18 meetings with them. To assess the problems facing the customs administration and to get first-hand information, the TARC visited land customs posts at Attari on the western border with Pakistan and Petrapole on the eastern border with Bangladesh. The TARC also undertook a visit to the Chennai seaport to get first-hand experience of the working of newly installed mobile scanner to facilitate non-intrusive verification. The meetings with the DG (Systems) of the two Boards on data and information exchange were held to understand the current status and also the ambition level. Interaction with DG, CEIB and Director, FIU were to understand their role in providing crucial information and the work carried out by them. A list of such meetings is given at Annexure – I. Sri Sukumar Mukhopadhyay, ex-Member, CBEC in an interaction with the TARC provided valuable inputs on the customs capacity building. The TARC is thankful to all the stakeholders for their suggestions and also for the free and frank discussions. These suggestions formed the basis of many of TARC’s recommendations. The TARC also acknowledges the support of the CBDT and the CBEC in providing information and data.

For an in-depth analysis, the TARC constituted two focus groups for the two terms of reference. These focus groups comprised officers of the two tax administrations – former as well as current – and professionals from the private sector. A list of participants in the focus groups is at Annexure – II. The input of each of the focus group members were discussed in detail within the TARC. These inputs helped the TARC to successfully thrash out many new ideas and emerge with a set of recommendations that should improve the Indian tax administration decidedly.

The TARC’s recommendations were formulated at many meetings, formal and informal. A list of meetings in which TARC discussions were held is at Annexure – III. The TARC’s findings, conclusions and recommendations were unanimous.

The TARC also wishes to recognize the overarching support of the Secretary to the Commission in all aspects. The Director and Under Secretary as well as other support staff were also helpful. The work of two research consultants was important for the background studies that were carried out. The editor’s meticulous work at top speed was crucial. But for their intensive efforts, timely delivery of the report would not have been feasible.

Dr. Parthasarathi Shome
Chairman
Tax Administration Reform Commission

New Delhi

26th September 2014

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