(I) The working of the Sales Tax system
in Kerala State-both its structures and administration
has been subjected to detailed study from time to
time. The earlier Committees, one set up by the former
Travancore-Cochin Government and the other five by
the Kerala Government, had studied the problem carefully
and made several recommendations, aimed at improving
the working of the sales tax system in the
State. The first Tax Reforms Committee
was constituted in 1955-56, in the wake of the report
submitted by the Taxation Enquiry Commission of
the Government of India. It considered in detail
the major recommendations of that Commission, and,
inter-alia, recommended a package of measures to improve
the working of the sales tax system in the State.
The major reform suggested by that Committee was the
conversion of the multi point system into a single
point system-a change, which was almost unanimously
demanded by the business and trading community. Its
other recommendation related mainly to the enhancement
of the single point rates in respect of a number of
commodities. The same Committee also recommended
the building up of regulated markets for the State's
major agricultural commodities.
(II)
In 1960, due to persistent pressure from trade and
industry for simplification of the sales tax system
in the State, a Committee was constituted by the Kerala
Government, with Shri Nataraja
Pillai as Chairman,
to study and to report on all aspects of sales tax
law and administration. The Government also felt
the need to tighten up the administration and plug
loopholes in the Sales Tax law leading to evasion.
Shri Nataraja Pillai Committee submitted in March
1961, a draft of the Sales Tax Bill which formed the
basis of the Kerala General Sales Tax Act of 1963,
the legislation which governs the field of sales tax
administeration in Kerala at present.
(III) Presenting the budget for 1967-68, the Minister
for Finance announced the decision of the government
to constitute a committee to advise Government on
the ways and means to raise resources. By G.O (P)
549/67/Fin. Dated 19th December, 1967,
a Taxation Enquiry Committee
consisting of the following Members was set up to
make "a comprehensive study of taxation structure
in the State and to suggest fresh avenues of revenue
for raising the additional resources required for
the implementation of the Five Year Plan Schemes":
1.
Dr. M.J.K. Thavaraj, Indian Institute of Public Administration
(Chairman)
2.
Shri. C. Achutha Menon
(Member)
3.
Shri. R. Sankar
(Member)
4.
Shri. K. Chandrasekharan, M.P
(Member)
5.
Shri.T.Abdulla, Professor of Commerce, Farook College
(Member)
6.
Shri. N. Chandrabhanu, Special Secretary (Finance)
(Member)
7.
Dr.K. Mathew Kurian, Economic Adviser,
State Planning Board
(Member)
8.
Dr. P.K. Gopalakrishnan, Director, Bureau of
Economics & Statistics
(Member)
9.
Shri. K.V.Thomas, Joint Secretary, Finance Department
(Member Secretary)
(IV)
Terms of reference of the Commission.
The
terms of reference to the Committee are:
(i)
To examine the State tax laws with particular reference
to the incidence of the levy on the various classes
of people in the State and the declared objectives
of State policy and to suggest such modifications
as are necessary by way of additional taxation, abolition
of any of the existing taxes and alterations in the
rates thereof etc.;
(ii)
To examine whether the field of State taxation as
defined and demarcated in the Constitution has been
fully exploited and make necessary proposals to raise
revenues keeping in view the developmental needs of
the State.
(iii)
To review the existing machinery for the collection
of State taxes and suggest ways and means for improving
its efficiency, while keeping the collection charges
at the optimum level;
(iv)
To examine how far the State Government has been able
to raise resources from non-tax revenues and to suggest
new measures that might be introduced in this field;
(v)
To review the existing pattern of distribution of
resources between the State Government and the local
bodies and to re-define their respective tax-jurisdictions
to the extent necessary, keeping in view the requirements
of the local bodies under the Panchayati Raj; and
(vi)
To review the Constitutional provisions relating to
taxes and allocation of resources between the Centre
and the States and advise the Government about the
lines on which the Government of India should be moved
for making changes to the existing pattern.
(V).
Recommendations of the Commission.
1.
To find a solution to the problems arising out of
the disparities in sales tax rates in Madras and Kerala
in regard to petrol and diesel oil.Efforts may be
made to come to an agreement between States through
inter-State consultations.
(Paragraph 6.34)
2.
The problem of avoidance of sales tax by means of
branch or depot transfers inter-State may be examined
in consultation with other States. It may be possible
to solve this problem by suitably amending the provisions
of the relevant Central Acts.
(Paragraph 6.48)
3.
In the new set up, two additional posts of Appellate
Assistant Commissioners and one post of Deputy Commissioner
at the State headquarters, who may also function as
exofficio Additional Secretary to the Board of Revenue,
may be created. The Sales Tax Appellate Tribunal
may continue to deal with second appeals as at present.
(Paragraphs 5.37 & 5.38)
4.
Food grains and firewood are being articles of mass
consumption may be exempted from sales tax.
(Paragraphs 6.29 & 6.30)
5. While increasing
the purchase tax on coconut and copra from two to
three percent, relief may be given to the Oil millers
in the State by adopting the more feasible and practicable
of the following alternatives: -
(i)
Foregoing the existing one per cent tax on sale of
oil and cake;
(ii)
Collecting tax on sales at one per cent as at present
and refunding the purchase tax on coconut and copra
to the extent of two per cent;
(iii)
Increasing the tax on sales turnover from one percent
to two per cent and refunding the entire purchase
tax at three per cent. (Paragraph 6.37)
6.
Among the measures that may be adopted to reduce the
scope of evasion of sales tax are simplification
of the tax system, drafting the laws
and rules in precise and clear terms and enumeration
of the taxable and non-taxable goods without vagueness
and ambiguity. A constant search may be made
to find out the loopholes in the laws and systems
and to plug them effectively.(Paragraph 6.45)
7.
The feasibility of introducing double-point taxation
in the case of commodities, which are now taxed only
at the last purchase point, such as rubber with a
view to solving the problem of avoidance of tax by
the sale of goods inter-State directly by the producers,
may be considered. If this is feasible, the following
alternative rate-structure may be considered in regard
to rubber;
(a)
two per cent at the first sale point and three per
cent at the last purchase point;
(b)
three per cent at the first sale point and two per
cent at the last purchase point.(Paragraph 6.49)
8. The time limit of six months may be fixed
for disposing of fresh appeal cases; cases that are
delayed beyond this period should be separately reviewed
by the Board of Revenue and suitable remedial action
taken.(Paragraph 6.56)
9.
It is not necessary to appoint Judicial Officers as
Appellate Assistant Commissioners. But in selecting
officers to the cadre of Appellate Assistant Commissioners
preference should be given to persons having legal
qualifications; senior officers may be posted for
appellate work so that they would, not only be able
to maintain high standards of detachment, impartiality
and justice but also inspire confidence in the public.
(Paragraph 6.57 & 6.58)
10. An officer selected for placement as Appellate
Assistant Commissioner may, before he starts functioning
as appellate authority, be given training for, say,
three months by attaching him to the Presiding Officer
of a Civil Court, so that he may develop a judicial
frame of mind.(Paragraph 6.58)
11.
Formal application for compounding tax need not be
insisted upon; all dealers whose turnover is within
the prescribed limits may be enabled to pay tax at
compounded rates without further formalities. Necessary
amendments may be made in the Act and Rules for the
purpose. (Paragraph 6.63)
12.
The taxable turnover, and not the total turnover,
may be the basis for allowing composition of tax.
(Paragraph 6.64)
13.
As in the case of dealers in cooked food the compounded
rates may be expressed in terms of fixed sums in the
case of other dealers also. The rates suggested in
paragraph 6.64 may be adopted for this purpose.
(Paragraph 6.64)
14.
Food served in hotels with an annual turnover of not
less than Rs.2 lakhs may be taxed at a higher rate
of ten per cent. (Paragraph 6.70)
15.
The Board of Revenue may issue a set of instructions
to the subordinate officers for improving the relations
between the public and the sales tax department
(Paragraph 6.74)
(VI)
The history of taxation reveals that the growth of
the tax system has been haphazard, erratic and largely
conditioned by financial exigencies of the day. In
more recent times,changes in tax rates and tax base
have been quite frequent, the main objective being
to raise resources of a given order for financing
developmental as well as non-developmental outlays
and in this process due regard has not always been
paid to the evolution of a rational and progressive
tax structure. It has therefore become necessary
to have a new look on the structure of the State tax
and non-tax revenues not only from the point of view
of resource potential, but also in the light of the
accepted principles of a progressive tax policy.
(VII)
Various measures were taken to improve the structure
and administration of sales tax in the state in the
light of the recommendations of the various Committees.
However, as will be seen from a study of the trends
in sales tax collections since 1968-69, when the Thavaraj
Committee submitted its report, the gap between the
tax potential and tax realisation over the subsequent
years has remained wide. This aspect is discussed
at some length in the report. To give a background
to the appointment of the Committee, it should suffice
to say here that,while during the sixties, the average
annual rate of increase in sales tax revenue was of
the order of 11 per cent, during the first quinquennium
of the seventies, the rate of increase came down to
about 9.6 per cent, despite the fact that the price
rise during this period had been substantially higher
as compared with the price rise in the earlier decade.
Though the gap between the tax potential and tax realisation
in the State came up for comments on different occasions
by different bodies including the NCAER and the Sixth
Finance Commission, the need for an in-depth study
of the reasons underlying this was evidently felt
in all its seriousness only as late as in 1974-75.
(VIII)
It was in this background, the Government of Kerala
by its order No. G.O. No. 113/74/TD dated 11th
September, 1974, set up an expert Committee with Professor
I.S. Gulati, Fellow,
Center for Development Studies, Trivandrum as Chairman
and the following persons as members, to study matters
relating to commodity taxation in the State:
1.Shri
K. Ramunni Menon,
Member, Board of Revenue, Trivandrum
2.
Dr. V.Venkitanarayanan,
Secretary to Government, Taxes Department, Trivandrum
3.Shri
A.Bagchi,Senior Fellow,Indian Council of SocialReserch,New
Delhi.
4.Shri.T.K.Bhagavaldas,
Secretary (Taxes), Board of revenue,Trivandrum.
5.Shri.K.V.Nambiar,
Economist, StatePlanning Board.Trivandrum.
(IX)
The Committee was required to cover specially the
following areas and formulate suggestions for toning
up the efficiency of tax administration in the State
to help augmentation of revenue.
1.
An exhaustive study of the rate structure and commodity-wise
analysis of the tax revenues for the period from 1.4.1968.
2.
Detailed analysis of the administrative apparatus
for tax procedures currently followed.
3.
A thorough study of trade practices in respect of
important agricultural and industrial commodities,
which are produced within the State, and also which
are imported into the State from the point of view
of commodity taxation.
The
Chairman and all the members of the Committee served
in an honorary capacity. There was no separate
secretariat for the Committee. The secretarial assistance
was provided by the Board of Revenue.The Committee
held its first meeting on October 5, 1974 to decide
on the program of work. Dr. K.G. Adiyodi inaugurated
this meeting, the then Minister of Finance.
(X)
SUMMARY OF MAIN RECOMMENDATIONS
- For
an effective administration of commodity taxation,
it is absolutely essential for the Department
to be in possession of commodity – wise information
starting from production or importation. Commodity
– wise studies should, therefore, be undertaken
on a continuing basis. (Para 3.1)
- To
prevent tax leakage in respect of coconut and
its products, and also to offer the much needed
protection to the innumerable small growers from
the ravages of middlemen, a broad – based approach
on the following lines would be necessary:
(i)
Coconut including copra should be notified for
purposes of regulated marketing. To notify both coconut
and copra should imply that one or the other must
be dealt with in the regulated market but not necessarily
both.
(ii)
Appropriate steps should be taken to cover coconut
growers by co-operative marketing societies, with
membership restricted to those with holdings of 2
hectares and less. There should be at least one such
society for every regulated market. Pending the establishment
of regulated market for coconut and copra, the Coconut
Development Corporation should proceed to establish
trade links within as well as without the State for
the sale of copra and immediately, thereafter, engage
in the buying and selling of coconut and copra. As
soon as the regulated market scheme comes into being,
the Corporation will naturally operate through the
regulated market.
(iii)
The Corporation should employ the marketing co-operatives
as its agents in the regulated market.
(iv)
Where the Corporation purchases coconut, the Corporation
may get it converted into copra through the market
co-operatives on payment of a fee;
(v)
The Corporation may, in addition, buy copra in
the regulated market;
(vi)
The Corporation should try to dispose of coconut
/ copra at as remunerative a price as possible. For
this purpose, the working of the Corporation could
be modeled on the lines of the Central Arecanut Marketing
and Processing Co-operative Society (CAMPCO for short).
(vii)
The Corporation may, however, have all or part
of the Coconut / Copra it procures converted into
oil either through the private oil mills in the State
or through its own mills.
(viii)
The Corporation should also establish necessary
trade links within, and without the State, for the
sale of oil at as remunerative a price as possible.
(ix)
The Corporation should set up storage facilities
of its own and use other storage facilities so that
it is under no pressure to unload its stocks when
the prices are least remunerative.
- In
order to ensure that trade in arecanut passes
through channels which can be easily located for
purposes of sales taxation, the State Government
should not only revive regulated market in arecanut
but also establish a supporting net work of co-operative
marketing societies on more or less the Karnataka
pattern so as to enable the CAMPCO to extend its
procurement and processing operations in Kerala
very soon (Para 3.43).
- Production
estimates in respect of rubber should be made
independently on a regular by the State Bureau
of Economics and Statistics. (Para 3.45).
- All
the ‘N’ Forms so far issued by the Rubber Board
for trading in rubber should be invalidated, and
new forms reissued in different colours for manufacturers,
dealers and producers with proper accounting.
This is for the Rubber Board to implement. (Para
3.50).
- In
the absence of a suitable modification in the
Central Sales Tax Act to enable taxation of consignment
sales, and transfers on growers accounts the State
Government should consider seriously the canalization
of the entire rubber produced through a State
agency modeled somewhat after the Coffee Board.
This would naturally call for appropriate legislative
action. (Para 3.53).
- A
complete census of the Cardamom holdings should
be undertaken by the State Government, and this
should be followed by an annual sample survey
to determine fluctuations in area and output from
year to year. (Para 3.67).
- The
State Government should consider bringing pepper
within the fold of regulated market. The regulated
markets could be built around important trading
centres like Cochin and Alleppey in the Southern
region and Calicut, Tellicherry and Baliapatam
in the Northern region (Para 3.74).
- The
State Government should relinquish its legal right
to tax imported raw cashew for a period of three
years, and the position may be reviewed thereafter.
(Para 3.84).
- In
view of the urgency the State Government attaches
to the procurement of raw cashew, a beginning
could be made with the notification of cashew
under the regulated market scheme. Monopoly procurement
should then be much less difficult to enforce.
(Part 3.85).
- There
should be a separate tax on cashew kernel consumed
within the State and kernel meant for dispatch
to other States, in addition to the last point
purchase tax on raw cashew procured internally
(Para 3.86).
- To
co-operative marketing structure should be built
up to canalize processed prawns so that not only
will the fishermen be assured of a fair and stable
price, but also the tax collector will have no
came to fear any tax leakage whatsoever. (Part
3.92).
- To
prevent large scale consignment transfers of goods
manufacturered within the State and to enable
the State to get its tax due, the appropriate
modification of the C.S.T. Act to cover consignment
transfers within the definition of ‘sale’ is urgently
called for. This is, of course, for the Central
Government to implement. (Para 4.15).
- A
comprehensive study should be conducted by the
proposed Research and Statistics cell of the Sales
Tax Department of the movements of major industrial
commodities into the State. The study should bring
out the magnitudes of goods moving into the State
by various modes of transport, and relate them
to the points at which sales tax is attracted,
so that the extent of leakages, if any, can be
determined. One of the urgent tasks of the cell
should be to organize collection of data in this
regard in a systematic manner from the railways,
port authorities and bordercheckposts. (Para
4.19).
- On
a balance of various considerations, while the
Committee is in favour of bringing under single
point taxation all those items of which trade
channels can be identified and stage of taxation
located without difficulty, it recommends retention
of multipoint taxation for all the other commodities,
even if their contribution to revenue is not significant.
(Para 5.22).
- From
the point of view of both effective administration
and the convenience of tax payers, a last point
purchase tax may be more efficient as well as
convenient for commodities which involve a large
number of producers but only a few dealers. All
agricultural products, particularly those which
are largely exported out of the State, should
by this token, be taxed at the point of last purchase
within the State. In the case of commodities where
the opposite situtation obtains, a single point
tax at the first stage of sale would have more
to commend itself. Commodities manufactured in
the organized sector would fall in this category.
In the case of imported commodities, the point
of taxation should be that of first sale within
the State. (Para 5.23).
- The
question what the general level of sales tax rates
should be has to be decided on the basis of a
number of considerations such as revenue requirements,
the level of other taxes and duties levied on
a given commodity, tax rates in neighbouring States,
nature of the commodity involved etc. High inter-state
differentials could lead to unintended trade diversion.
At the same time it cannot be overlooked that
a State Government might, on valid economic considerations,
deliberately maintain rate differentials vis-à-vis
other States. In a vast country like India with
wide inter-state disparities in the levels of
income, employment and industrialization, it would
be extremely unrealistic to aim at uniformity
in sales tax rates. Thus, the rates of tax on
different commodities have to be fixed on a balance
of these different considerations ensuring at
the same time an economic rationale for the tax
structure as a whole (Para 5.24).
- To
the extent possible, specific items which are
to be granted general exemption should all be
brought within the purview of section 9 of the
KGST Act, while Section 10 should include, as
far as possible, agencies and organizations whose
purchases / sales are to be granted conditional
tax exemptions (Para 5.27).
- The
present tax exemptions on items like green tea
leaves, toddy, eggs and meat should, be removed
while items like food grains sold through rationshops,
atta, bread, country herbs notebooks, school and
college textbooks, candle and clay products should
be given total exemption (Para 5.29).
- The
concessional tax rate on raw materials and components
should be granted only when the final product
is taxable. For the concession to be effective
in the promotion of industries, there should be
complete exemption of raw materials including
components used in manufacturing regardless of
whether or not they are also subject to single
point tax. (Para 5.34).
- The
classification of commodities for the purpose
of fixing sales tax rates should be modified on
the basis of the Revised Indian Trade Classification,
which would also considerably reduce the scope
for conflict in interpretation of the clarifications
in this regard (Para 5.36).
- The
existing rate differentials should be narrowed
and the rate structure should be built around
four rates below 10 per cent and four rates between
10 per cent and 50 per cent, the latter being
largely applicable to semi-luxuries and luxuries.
The revised rate structure recommended by the
Committee is given in Table 5.2 (Para 5.37).
- The
existing separate enactment on surcharge on sales
tax should be repealed and incorporated in the
KGST Act itself (Para 5.37).
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