Delhi HC order on sandal vs chappal row is reminder of how bizarre our tax system is

A news item has been evoking a lot of mirth on the social media. The Delhi High Court had, last week, ruled that a woman’s footwear doesn’t need to have a strap to be called a sandal and not a lowly chappal. Surely, everyone sniggered, our higher courts have better things to do.

Actually, the case is a sobering reminder of how bizarre India’s tax regime can be.

The high court order related to a dispute between a footwear manufacturer and the customs department dating back to 2003. The firm claimed a 10 percent duty drawback (a refund exporters are entitled to for imported inputs) for sandals that it exported, but the customs department would only allow 5 percent on the ground that the footwear exported were chappals, since they did not have straps. The matter went back and forth, with the Council for Leather Exports and the Footwear Design and Development Institute also getting dragged in.

Will the matter end here or will the customs department go in appeal to the Supreme Court? It wouldn’t be surprising if it did; tax dispute cases are known to drag on for years, with each party appealing an order it does not like. As of March 31, 2015, there was Rs 6.14 lakh crore locked up in tax disputes – that was almost half of the gross tax collections for the year. In the report of the Tax Administration Reforms Commission (TARC) he headed, Parthasarathi Shome had pointed out that India has “by far the highest number of disputes between the tax administration and taxpayers with the lowest proportion of recovery of tax while arrears in dispute resolution are pending for the longest time periods”.

 Delhi HC order on sandal vs chappal row is reminder of how bizarre our tax system is

Representative image. Reuters

This issue never figured in finance ministers’ budget speeches. Arun Jaitley broke that silence in his maiden budget speech in July 2014 and promised steps to reduce litigation. He did follow up on the promise. Last year the boards for direct and indirect taxes notified rules on schemes for one-time settlement of tax disputes – the Direct Tax Dispute Resolution Scheme and the Indirect Tax Dispute Resolution Scheme.

Creditable as these steps are, they are about one-time settlement of pending disputes (as of 1 March 2016 in the case of indirect tax and 29 February 2016 in the case of direct tax) – a kind of tax Lok Adalat. What’s more important is to ensure that there’s little scope for fresh disputes to arise in the future.

Many cases relating to indirect taxes (excise, customs and service tax) are over minor classification details – a strap on a footwear, buttons and zips on a dress, whether leftover pieces of steel used in something else is scrap or a steel sheet, whether a toothpaste with ayurvedic formulation is a medicated one or an ordinary one. This article has a wonderful collection of such classification disputes.

The way out, clearly, is to have a simple, uncomplicated tax structure. Ideally, the budget should pave the way for this. But the imminent introduction of the goods and services tax (GST) regime queers the pitch somewhat, since the GST rate will be set by the GST Council and the finance ministry cannot do anything unilaterally.

And that is where there is some bad news lurking. In November 2016, the GST Council decided on a four-slab structure for goods – 5 percent, 12 percent, 18 percent and 28 percent. There have been whispers about more than one rate for services as well. Fiscal experts like Vijay Kelkar and M. Govind Rao have criticised this, pointing out that this will only complicate the tax regime, instead of making it simpler, which was the goal of a GST. Kelkar bats for a single rate while Rao has said a two-slab higher rate would have been better.

What this is almost certain to lead to is intense lobbying by industry groups as well as a repeat of the classification disputes that will have courts holding forth on straps on footwear.

Indirect taxes, admittedly, have a less than 20 percent share in total amounts under dispute. Direct taxes have always accounted for upwards of 70-80 percent of disputes. Within indirect taxes, disputes relating to customs duty are just around 10 percent of the total; excise and service tax disputes account for the bulk. In 2013-14, excise accounted for 45 percent of the disputes and service tax 44 percent. In 2014-15, the share of service tax jumped to 55 percent and that of excise fell to 35 percent. But the amount involved – Rs 1.17 lakh crore - is not exactly small beer. There’s a lot that can be done with that money.

As Jaitley puts the final touches to his watershed budget, this is something he needs to give serious thought to. His hands may be tied by the decision of the GST Council, but he should use whatever little elbow room he has to boot out the root causes of such disputes.

Updated Date: Jan 30, 2017 11:34:09 IST