1.1.1. Kalidasa, the ancient Indian poet laureate (5th. Century AD), mentioned in one of his epics that the king collects taxes for the good of his subjects just as sun draws moisture from the earth to give it back a thousandfold (Kalidasa: Raghuvamsa (Canto 1, Verse 18)). Historically, India can trace the origin of her taxation system to fourth century B.C. Kautiliya's Arthashastra, one of the earliest treatises on statecraft and public finance, records an elaborate direct and indirect taxation system prevalent in India around 300 B.C. Income Tax constituted a major part of state revenues and interestingly, it was collected inter alia from dancers, musicians, actors etc. This taxation was not progressive but proportional to the fluctuating income and there was a provision for Excess Profits Tax. General sales tax was levied on sales and a tax called Yatravena was collected from the pilgrims. Indirect taxes called shulkas (duties) were levied on commodities; pravesya shulka was a duty on imports, niskramya shulka was a duty on exports and abhyantara shulka was excise duty on indigenous commodities. There was a definite rule that goods were not to be sold at the place of their production and fines were levied for purchasing metals directly from the mines, horticultural products directly from the gardens or grains directly from the fields. The object obviously was to control the turnover of all goods so that duty was not evaded. The rates of customs and excises were the same and state goods were apparently exempt from taxation. Though revenues were collected from all possible sources, the underlying philosophy was not to exploit or overtax people but to provide them and the king immunity from external and internal danger.
1.2.1. The taxation system in modern India was developed by the British during the colonial period through various legislation. The first Income Tax Act was introduced in 1860 which was amended through subsequent legislation and Income Tax Act, 1922 gave the final shape to the direct tax regimen in India. This Act continued till it was replaced by Income Tax Act, 1961 which governs the Income Tax and Corporation Tax regimen in India today. The other Acts for direct taxes are Wealth Tax Act, 1957, Gift Tax Act, 1958, Interest Tax Act, 1974 and Expenditure Tax Act, 1987. Estate duty has been abolished from the fiscal year 1985- 86.
1.2.2. The Indirect Tax Acts are Central Excise and Salt Act, 1944 and Customs Act, 1962 which succeeded the Sea Customs Act, 1878 introduced by the British in India. The basic distinctions between the direct and indirect taxes are:
1.2.3. In the federal set-up in India, the jurisdiction of taxation powers is divided between the Central and State Governments. The direct and indirect taxes acts mentioned above are Central Acts and revenues collected through these acts devolve on the Central Government. The main taxes collected by the State Governments are:
1.2.4. Apart from the revenues levied and collected by the State Governments a portion of the Central revenues like Income Tax and Central Excise is allocated to the State Governments as per the distribution formula periodically fixed by the Finance Commission, a statutory body under the Constitution of India. The net proceeds of taxes which are shared with the States are certified by Comptroller and Auditor General of India.
1.2.5. Besides tax receipts, Government revenues also flow from non tax receipts. The two basic distinctions between tax and non-tax receipts are: (a) while a tax receipt is imposed by law, a non-tax receipt is derived from rule, tariff or other agreement and (b) while a tax receipt does not represent a direct quid pro quo, non-tax receipt generally involves a supply or service from the Government. Non-tot receipts are characterised by three criteria :
1.2.6. Major non-tax receipts are interest receipts, mining receipts, forest receipts etc.
2.1. During the fiscal year 1995-96 Government revenues realised from various sources were as follows:
| Union Receipts | |
| (In Indian rupees*) | |
| Direct Taxes** | 335,592.80 million |
| Central Excise | 400,085.90 million |
| Customs | 357,280.00 million |
| Total tax receipts | 1,092,958.70 million |
| Non-tax receipts$ | 686,210.00 million |
| Total Union receipts | 1,779,168.70 million |
* Exchange rates for different currencies vis-a-vis the US $ as on 31st
March, 1997 are indicated in Appendix 1 (Pg. 475)
** Includes Corporation tax, Income tax, Expenditure tax on hotel
receipts, Interest tax, Wealth tax, Gift tax, Estate duty and other
miscellaneous direct taxes
$ Includes External Grant Assistance and Aid Material and Equipment
| State Receipts | |
| (In Indian rupees) | |
| Tax receipts | 609,945.50 million |
| Non-tax receipts | 213,374.80 million |
| Total State receipts | 823,320.30 million |
Tax and non-tax revenues of Union and State Governments as a
percentage of Gross Domestic Product (GDP)
(Fiscal year 1995 -96)
| Union Government | ||||
| Direct Taxes | Indirect Taxes | Non Tax Revenue | Total revenues to GDP |
|
| 3.4% | 7.6% | 6.2% | 17.2% | |
| State Governments | ||||
| Tax revenues | Non-tax revenues | Total
revenues to GDP |
||
| 6.2% | 2.2% | 8.4% | ||
| Percentage of tax and non-tax revenues (union and the states) to GDP | 25.6% | |||
3.1. Indian economy has entered a new era in the last decade of the present century. The new economic policy launched by Government of India in 1991 aims at reducing the extent of Government controls over various aspects of the domestic economy, increasing the role of the private sector, redirecting scarce public sector resources to areas where the private sector is unlikely to enter and globalisation of the economy. In other words, the country is passing through a state of transition from a command economy to a market economy. The reorientation of the economic policy has necessitated consequential reforms in the taxation structure to attain a fiscal symbiosis with the shift in economic objectives. Broadening the tax base, reducing the tax rates and simplifying tax laws and procedures have been the main areas of concern. The major strides taken in the fiscal area from 1991-92 to 1996-97 are as follows:
3.2.1. Exemption limit for levy of Income Tax was raised from Rs.22,000 in 1991 to Rs.40,000 in 1995. The maximum marginal rate of personal Income Tax has been reduced from 56 percent to 30 percent. A number of provisions have been introduced to widen the tax base. These include presumptive taxation for small business and estimated income scheme for persons engaged in business of civil construction and of plying, leasing or hiring of trucks. With the same objective, tax deduction at source has been introduced on interest income on term deposits, income in respect of units of Mutual Funds, professional fees and a host of contracts.
3.2.2. The incentive structure for savings in the form of financial asset has been strengthened. The wealth tax, which was earlier applicable to all personal assets, has been modified to exempt all productive assets including financial assets such as bank deposits, shares and other securities. The floor limit for levy of wealth tax has been raised considerably and stands at Rs.1.5 million.
3.2.3. The rates of corporate income tax, which were 51.75 percent for a widely held company (shares quoted in stock market) and 57.5 percent for a closely held company (family concerns) have been unified and reduced to 35 percent. Surcharge on domestic companies has been reduced from 15 percent to 7.5 percent.
3.2.4. Tax rate on foreign companies (branches) has been reduced from 65 to 50 percent. There is no surcharge on foreign companies.
3.2.5. Five year tax holiday has been introduced for investments in infrastructure facilities (highways, bridges, airports, ports and mass rapid transport), power generation and distribution, backward States and electronics hardware and software.
3.3.1. Central Excise:
3.3.1.1. There has been a switch-over from a system where excise duties were specific and numerous and varying in nature with a large number of exemptions, to one largely based on ad valorem basis with fewer duty rates and exemptions.
3.3.1.2. Ambit of MODVAT (tax credit for taxes paid on inputs) has been extended to capital goods, specified quality control, testing, pollution control and R&D equipment, Petroleum Oil Lubricants (POL) and spun yarn from fibres.
3.3.1.3. The number of duty rates has been brought down to 10 (including nil rates).
3.3.2. Customs Duties:
3.3.2.1. Import duties were inordinately high and in several cases were more than 300 percent prior to economic reform. A phased reduction in the peak rate of customs duty was undertaken in each of the six budgets since 1991. The gradual reduction has been from 110 percent in 1992 to 50 percent in 1995 with the exception of passenger baggage, alcoholic beverages, dried grapes, almonds and ball and roller bearings.
3.3.2.2. The import duty on capital goods for general projects and machinery which was 85 percent prior to reforms, was brought down and unified for nearly 80 percent of machinery, at 25 percent in 1995 Customs duty on power projects and related machinery was reduced to 20 percent and the same for fertiliser projects to nil. This was accompanied by lowering of duties on ferrous and non ferrous metals to 35/40 percent in 1995.
3.3.2.3. The number of duty rates have been brought down to 12 (including nil rate).
3.4.1. Service tax has been introduced by imposition of a 5 percent tax on the amount of telephone bills, premium payments for general insurance and on commission/brokerage charged by the stock brokers.
4.1. Tax payments are made by the tax payers at the authorised branches of public sector banks. Refunds of taxes are also made by the authorised banks on the basis of refund advice issued by the revenue department. All the challans meant for payment of taxes contain one counterfoil for the zonal accounts office, one for the revenue department and two for the tax payers, out of which one is for his retention and the other is for submission with the return of income. The receiving banks furnish daily bank scrolls separately for each major head of taxes. For Central Excise a personal ledger account (PLA) for each assessee is maintained by the assessment units and a copy thereof is sent to the Chief Accounts Officer (CAO). The Pay and Accounts Office independently sends compiled accounts based on returns from banks to the Chief Accounts Officer. The credit for duty claimed by assessee as per PLA is checked by CAO with reference to compiled bank accounts and supporting challans received from bank. The CAO also checks the refunds of duty paid.
5.1. The Comptroller and Auditor General of India (CAG), whose authority extends over both the Union and the States, derives his overall audit mandate from Article 149 of the Constitution of India. The Comptroller and Auditor General's (Duties, Powers and Conditions of Service)(DPC) Act, 1971 framed under the Constitution of India lays down the specific duties of the CAG of India in relation to audit of all government transactions. Section 16 of CAG's (DPC) Act states "It shall be the duty of the Comptroller and Auditor General to audit all receipts which are payable into Consolidated Fund of India and of each State and of each Union territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make for this purpose such examination of the accounts as he thinks fit and report thereon." The audit of receipts in India thus covers the receipts of both Union and the States. It is conducted through checking of individual assessment records as well as verifying the systems and procedures of all aspects of tax administration. The provisions of the CAG's (DPC) Act vest unqualified discretion with the CAG in deciding the scope, quantum and manner of audit. The provision of the Act also vest in the C&AG the authority to secure access to any accounts, books, papers and other documents which deal with or form the basis of or are otherwise relevant to the transactions to which his duties in respect of Audit extend.
5.2. Though under the CAG's (DPC) Act, the SA1 of India has access to all government documents, since dossiers of individual tax payers are confidential documents, a mirror provision exists in the Income Tax Act, 1961 making the revenue department statutorily responsible to furnish all confidential records to CAG.
6.1. In the audit of receipts, the CAG is supported by a well structured professional group within the Indian Audit and Accounts Department. At the Headquarters in New Delhi there are three wings which assist the CAG in overseeing the audit of receipts - one for the direct taxes of the Union, another for the indirect taxes of the Union and the third for the state receipts. Audit of non-tax receipts of the Union government is overseen by the wing which is in charge of direction and control of audit of union government's civil expenditure. Two Principal Directors head the groups dealing with tax receipts of union government and state receipts (tax and non-tax) and report to CAG through two Additional Deputy CAGs. In respect of union tax revenues the two Principal Directors function as Principal Audit Officers and are charged with the responsibility of preparing the Annual Audit Reports, which after the approval of CAG are submitted to the President of India for being laid before each house of Parliament.
6.2. The audit of receipts is conducted in the field under the overall supervision of the Accountant General (Audit) of every State. For Union receipts the important findings are reported by them to the Headquarters at New Delhi where, after technical scrutiny and screening, selected material is included in the audit report after obtaining the Ministry's replies on the issues. These officers who represent the C&AG in the States in respect of matters arising within their audit jurisdiction, propose the material to be included in their state receipt audit reports. These reports, after the approval of the C&AG, are sent to the concerned Governors of the states for being presented to the respective Legislatures.
6.3. In each Accountant General's office, there are separate groups for audit of receipts. Field inspection parties, consisting of 3 or 4 staff members, visit the offices administering fiscal statutes or collecting revenues, according to prescribed time-schedules and conduct audit of receipts. In the case of customs audit, the audit is done concurrently with assessments and for this purpose, audit teams are located in the Collectorates. The concurrent audit method is followed in customs since in customs revenue the demand gets time-barred after six months and there are no formal assessments like direct taxes. The audit is done with reference to bills of entry and shipping bills which are available in custom houses only. Since central excise/state excise assessments are based on 'self-removal procedure', audit teams have also to visit the assessee's premises to carry out audit.
6.4. Where collections of receipts are comparatively small, as in the case of most spending departments (like Public Works Department etc.), audit of receipts is generally done by the expenditure audit parties though in some offices there are separate receipts audit parties for such audit.
Organisation Chart of Revenue Audit Wing
7.1. The object of receipt audit is to seek evidence that revenue is assessed and collected according to law and errors of omission and commission are avoided in assessment. Audit also seeks assurance that pre and post control systems operate efficiently and in accordance with the stated objectives in the sovereign and subordinate legislation. It is the duty of Audit to identify the lacunae in acts/rules leading to non-fulfilment of stated fiscal objectives of the government and the legislative intent and to suggest remedies to overcome the legal infirmities. The collection and accounting systems of Government revenues are checked in audit to assess whether the internal procedures and controls adequately provide for and in fact secure regular accounting of collection and allocation and credit of the collection to Government account.
7.2. Receipt Audit is conducted with reference to the basic records maintained by the tax offices and the revenue departments. The pattern of audit is cyclical and closely follows the assessment cycles adopted by the assessment officers, as most fiscal laws have built-in provision regarding time limit for rectification of mistakes and reassessments. Since the assessing officers perform a quasi-judicial function in discharge of their duties and the assessees have a number of legal/appellate avenues available under the fiscal statutes, care is taken not to question the discretionary powers of assessing officers unless exercise of such powers are based on errors in facts, contrary to law/judicial pronouncements or are arbitrary in nature. Administrative orders/notifications issued by the revenue departments for administration of the fiscal statutes are also examined in audit. While checking individual assessment cases, controversial law points often arise in India due to (i) difference with the revenue administration regarding interpretation of law and (ii) contradictory judgements by different High Courts of different States on the same point of law. In such cases of disagreement between Audit and the revenue department in interpretation of a law point or the application of the correct law, tripartite meetings are held with the Ministry of Law or the cases are referred to the Attorney General, the highest law officer of the Parliament, for advice. Attorney General's opinion is taken as the final advice in matters of law, subject of course to the established system of judicial review wherever the aggrieved party might choose to seek judicial remedy.
8.1. A scientific audit plan is a sine qua mm for optimum use of limited audit resources, maximisation of audit output and minimisation of audit risks. In audit planning in revenue audit, establishment of the order of priority amongst the auditee units is based on risk perception. The basic risk parameters identified for direct taxes and central excise are as follows:
A. Direct Taxes
B. Central Excise
Two simple menu driven computerised audit plans have been developed in SAI of India.
8.2. Audit is done through test check of assessment files, selected at random. Auditors apply the prescribed checks to see whether the tax due from the assessees in accordance with the provisions of law has been correctly worked out, assessed and levied.
8.3. To assess the efficiency of the systems available under the fiscal statutes or employed by the tax authorities for proper tax administration, audit takes up a few selected areas every year for system appraisal. Some instances of such audit studies done in direct taxes are summary assessment scheme, working of investigation circles, tax recovery machinery etc. Such systems audits are planned carefully after a pilot study and framing of proper guidelines and the studies have been helpful in bringing about substantive improvements in the working of tax administration and in tax laws.
8.4. Apart from the normal audit process involving the standard audit checks, SAI of India has also a system of investigative audit which goes beyond the scope and opportunity of normal audit. The distinction between the two audits are:
8.5. The unitary audit set-up in a federal system of polity helps in the process of investigative audit since Audit has the advantage of having access to all the records of both the Central and the State Governments as well as the records of all revenue departments, Central or State. The information gathered in one unit of administration can be fruitfully utilised to check the tax angle e.g. the details of payments received by contractors etc. from a Government department can be cross checked with their tax returns. Similarly an across the board check may be conducted in audit with reference to assessment records of an assessee available with different tax authorities.
9.1. Skill formation and skill upgradation are two essential pre-requisites for effective revenue audit because of the complexity of tax laws and fast changing fiscal scenario. The Indian Audit and Accounts Department is fully alive to this requirement and the management of limited human resources is carried out through various measures. A qualifying examination for receipt audit is conducted for the field staff annually. The syllabus takes into account the essentials of tax laws and audit strategy and passing the examination is an important step in skill formation. Induction and in-service trainings are institutionalised which contribute to skill upgradation. Annual workshops are held all over the country for strategy planning, both long term and short term. Seminars are held regularly to discuss the systems appraisals undertaken in audit. Regular interactions with the tax administrators at all levels are also institutionalised.
10.1. The initial audit findings as a result of field audit are communicated to the field formations of the revenue department through inspection reports. The more important observations are communicated demi-officially to the Senior Revenue Officers in the field i.e. Commissioners and above. Based on the reaction of the revenue officers the field offices i.e the Accountants General (A.G.) send the important cases to Headquarters for inclusion in the Audit Report to be placed before the Parliament (for Union Receipts)/State Legislatures (for State Receipts). The cases received from As.G. are scrutinised for factual and law points and after scrutiny the fit cases are issued to the Finance Ministry of the Union Government for Central Receipts or sent back to the As.G. for pursuance with the State Governments for State Receipts. The major considerations applied by Headquarters office for selection of cases for the final Audit Report are:
10.2. As laid down in the Constitution of India, the Audit Reports, after approval of the Comptroller and Auditor General of India, are presented to the President of India or Governors of the States for laying before the Parliament or the State Legislatures as the case may be. A Standing Select Committee of Parliament/State Legislature namely the Public Accounts Committee (PAC) takes up the Audit Report for examination. The CAG acts as the "friend, philosopher and guide" for the PAC. In selection of the topics for oral evidence, PAC seeks the suggestion of the CAG/AG before calling the concerned heads of the departments (Secretaries) for giving evidence. The Chairperson and the members of the PAC are thoroughly briefed by the officers of CAG and a Memorandum of Important Points (MIP) on each topic is given to the members of the Committee for ready reference. Based on the Audit Report and the evidence taken, the PAC frames its recommendations which is placed before both the Houses of Parliament/Legislatures. The Government sends Action Taken Notes(ATNs) on the recommendations of PAC which is vetted in audit. The PAC prepares the final report taking into account the ATNs and may give further recommendations considering the ATNs. The topics featuring in Audit Report but not taken up for oral evidence are watched through written replies/Action Taken Notes of the Ministry which are vetted by Audit before being sent to the Parliament.
11.1. The impact of revenue audit is palpable through two manifestations: (a) additions/deductions in revenue due to cases of underassessment/ overassessment pointed out in audit and (b) legislative or systemic changes brought about as a result of audit study of taxation systems and procedures.
11.2.1. In the fiscal year 1995-96, test check in audit had the following impact on government revenues:
A. Direct Taxes (Union Receipts)
B. Central Excise (Union Receipts)
C. Customs (Union Receipts)
D. State Receipts
11.3.1. The Bali Declaration of ASOSAI highlights the need for receipt audit to point out any loopholes, deficiencies and lacunae not only in tax administration but also in tax laws. This task has assumed great importance for SAI of India because of fast changing tax laws, both substantive and procedural. In discharging this mandate, Audit has been able to bring about important legislative changes through the government to streamline revenue administration. Some major changes in the legislative paradigm introduced as a result of audit are indicated below:
11.3.2. Direct Taxes(Union receipts)
11.3.3 Indirect Taxes (Union receipts)
A. Central Excise
B. Customs Duty
(a) Inland Customs bonded warehouses were established to facilitate development of industries in the interior areas of the country. The goods move from the port to the inland warehouses under a transit bond. The Customs Act also permits the importer to pay the duty at the rate prevalent at the time of clearance of goods from the warehouse. During a review on the working of inland customs bonded warehouses it was noticed that:
11.3.3.1. The Public Accounts Committee, while examining the audit appraisal recommended that the Customs Act, 1962 should be amended whereby the owners of the imported goods, who availed the warehousing facility, shall not be given the right to relinquish their title to such imported goods after proceedings were initiated under Section 72 for recovery of dues so that financial interests of the Government were safeguarded. Further, there should be a time limit under Section 23(2) of the Act within which only the owners shall be allowed to relinquish their title to imported goods. Section 23(2) of the Customs Act 1962 was amended in 1994 whereby the owner of the goods may relinquish the title at any time before he clears the goods either for home consumption or for depositing in a warehouse.
(a) Concessional rates of duty have been allowed since 1965 to plant and machinery, components and spares etc., imported for the setting up of a project plant/unit or for substantial expansion of their installed capacities. A review of the scheme revealed that:
11.3.3.3. Even as the PAC was examining the issue, the Government amended the project Import Regulations, in January 1992, with the insertion of Rule 7, fixing the time limit of three months within which the importers were required to furnish the reconciliation statements.
(a) In the Finance Bill 1989, Government announced a reduction of customs duty on import of coke from 85 to 20 percent with a view to encourage the production of low phosphorus pig iron. The condition that this concession was available for manufacturers of pig iron alone, was not incorporated in the exemption notification issued in March 1989. When Audit pointed out that unintended benefit of Rs.71 million had been given to manufacturers in the absence of the end use condition being specified in the said notification, it was amended suitable in conformity with the intentions of the Government.
11.3.4. State Receipts
11.3.5. Non-tax Receipts