Staring into a Revenue Blackhole

Finance minister P Chidambaram has inherited a Customs and Excise mess, courtesy controversial CBEC officials

In June 2012, the Indian Government, with much fanfare, unveiled a new Service Tax Regime. The idea was simple and efficient—every item that was not on the negative list would be taxed. In one shot, the standard practice of listing out goods to be taxed had been overturned. The new regime was held up as an example of tax rationalisation and effective governance.

There was a problem, though. Deepak Garg, the OSD (officer on special duty) at the Tax and Revenue Unit (TRU), the most important budgetary body in the country, who had drafted the tax regime, should never have been posted there. In fact, his service record raises serious questions about his posting to sensitive units such as the TRU.

That was not the only problem: no background consultation papers appear to have ever been prepared. The policy put up for approval on 13 February 2002, was cleared by the Joint Secretary (TRU) II, Member (Budget) of the Central Board of Excise and Customs and Chairman (CBEC) on the very same day. The then Secretary, Finance, approved it the very next day and it was cleared by the then Finance Minister Pranab Mukherjee on 18 February 2002.

The efficiency in clearing the new regime may be explained by pre-budget constraints, but that cannot excuse serious lacunae in framing the law. Even the enabling provisions for the law had to be later brought in through executive order. The regulations as cleared also left out an important provision that leaves open the question of services provided by someone outside India where the recipient is in India. This accounts for as much as 20 per cent of all service tax collected. This was no minor omission. The current budget provisions estimate revenue of Rs 1.24 lakh crore from service tax collections, and confusion over this single provision has the potential of calling this target into question. A retired official once part of the TRU calls this unprecedented.

This strange set of circumstances doesn’t seem to be an exception. The manner in which some officials went out of their way to appoint Deepak Garg, who under government norms should have been barred from such a sensitive post, illustrates a generic problem with a department tasked with collecting the bulk of India’s tax and excise revenues.

In this case, the officer in question, Deepak Garg, was DC (Preventive) at Indira Gandhi airport when the Olga smuggling case took place. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) noted in its ruling that an inspector of the department had deposed ‘unequivocally that 60 per cent of the bribe money used to go to the Preventive Department of the Airport, which also manned the exit gates of the Airport. Superfluous investigations were conducted and blame was put entirely on the officers involved in baggage clearance, keeping the Preventive Wing completely out of the scope of investigation…’

No action was ever taken against Deepak Garg, but his name has been on the ‘agreed’ list prepared by the department in consultation with the CBI and CVC that bars an officer from being appointed to posts designated ‘sensitive’. This includes his current post at the Department of Revenue Intelligence and all posts at the TRU. Attempts by Open to find out from the revenue department, including the revenue secretary, how orders appointing Deepak Garg to his post in the TRU were issued have been met with silence.

His superior in the TRU II, joint secretary VK Garg, enjoyed great discretionary power during Pranab Mukherjee’s tenure in the Ministry, so much so that important policy decisions were being taken or reversed simply based on circulars issued by VK Garg. A relatively junior officer in the policymaking section enjoyed so much power simply because the charge of Member (Budget) who handles the TRU was given to seven different officials in a period of six months.

In one case, earlier reported in Open (‘Finance Ministry’s Flight of Fancy’, 14 May 2012), the circular put out by VK Garg argued for a Rs 800 crore service tax exemption to flying clubs across the country. Coincidentally the circular was put up for approval even as a final decision on the first such service tax matter was pending with the CESTAT. This was an appeal by Indore-based Yash Air against the imposition of a Rs 20 crore penalty by the Customs and Central Excise Department.

In another case related to service tax on money transfer agents, a circular was issued on 10 July 2012 even as judgment was reserved on 21 cases by a CESTAT on 6 July. The financial implications of this circular were again estimated to be well over a hundred crore. This backdoor legislation by circular was all undertaken at the level of VK Garg because the Member in the CBEC handling policy was changed half a dozen times in six months, allowing VK Garg to virtually function independently.

The issue attracted enough attention for the new incumbent, Finance Minister P Chidambaram, to intervene personally and direct that ‘CBEC will not issue circulars, instructions and guidelines frequently…. Besides circulars, instructions and guidelines that will be issued may be brought to my notice at the final draft stage.’

The mess in the department was not confined to the TRU or policymaking. The agreed list itself was manipulated or ignored to ensure sensitive postings went to officials who would never otherwise have been considered. This continued to happen despite the embarrassment suffered by the department in connection with the case of Arup Kumar Srivastava, who was appointed Central Excise Commissioner, Delhi. The CVC sent three office memorandums (dated 2 November 2011, 21 November 2011 and 24 January 2012) directing that Arup Kumar Srivastava, then Central Excise Commissioner, Delhi (a ‘sensitive’ post), be posted to a non-sensitive post and his name considered for the ‘agreed’ list. The department refused to act till Srivastava was arrested by the CBI on 14 January 2012.

Despite specific facts listed in a number of queries addressed to the revenue secretary and joint secretary, revenue, and despite verification that these mails had been received by the respective officials, the department has sent Open no reply on any of these issues for over a month. Under the circumstances, we had no choice but to go ahead with this report without any official version from the Government.

CustomsexciseFinance Minister P Chidambaram