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Structure and Enforcement of Sales Tax in Uttar Pradesh Was Entrusted to This Institute by the Finance Department, Government of Uttar Pradesh in June 1990

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Structure and Enforcement of Sales Tax in Uttar Pradesh Was Entrusted to This Institute by the Finance Department, Government of Uttar Pradesh in June 1990 STRUCTURE AND ENFORCEMENT OF SALES TAX IN UTTAR PRADESH Mahesh C Purohit Gautam Naresh O.P. Bohra March 1993 NATIONAL INSTITUTE OF PUBLIC FINANCE & POLICY NEW DELHI FOREWORD The National Institute of Public Finance and Policy is an autonomous non-profit organization whose major functions are to carry out research, undertake consultancy work and impart training in the area of public finance and policy. The study of Structure and Enforcement of Sales Tax in Uttar Pradesh was entrusted to this Institute by the Finance Department, Government of Uttar Pradesh in June 1990. The team which underlook the Study was headed by Mahesh C. Purohit. The other members of the team were: Gautam Naresh and O.P. Bohra. The study was planned and conducted by Mahesh C. Purohit. As the association of O.P. Bohra with the Study Team was for a short period, most of the field work relating to the Study was carried out by Gautam Naresh under the overall supervision, planning and guidance of the Team Leader. An interim report indicating sources of evasion of sales tax with a few major recommendations suggesting improvements in the tax system was submitted in November 1991. The Interim Report with some modifications is incorporated into relevant parts of different chapters of this Report. The Governing body of the Institute does not take responsibility for views expressed in this Report- The responsibility belongs to the staff of the Institute and more particularly to the authors of the Report. Raja J. Chelliah Chairm an M arch, 1993 PREFACE As in all the other States, in Uttar Pradesh too sales tax has been buoyant and yielding larger resources during the successive Plans. The State Government has made intensive efforts to curb evasion of tax through various anti-evasion measures. Also, it has attempted to change the structure of the tax as and when necessary to lap its full potential. With a view to examining the overall strategy of tax enforcement, to analyse the evasion of tax in the light of its structure and also to suggest changes in documentation formalities this Study was entrusted to the NIPFP by the Government of Uttar Pradesh. The thrust has been on an integrated tax policy and enforcement strategies. In this context the Study aims at analysing the rates, the base, and the exemptions including incentives provided for industrialization. These structural aspects have been integrated with the administrative as well as operational aspects. Various sources of modus operandi of tax evasion have also been kept in view while analysing the above aspects. In the light of the structural reforms being implemented by the Government of India at the macro level, the tax policy of the State has to be rationalized both in the short and in the medium-run. In view of the regional differences and variations in the objectives of the State policy within the framework of the tax policy of the country, this Study presents reforms to raise enough resources for the State and to have requisite industrial development. It is hoped that the implementation of the recommendations of this Study, would prove Uttar Pradesh as a model for other States in the country. In conducting this Study we have been helped by various persons and organisations. We wish to express our thanks to the officials of the Department of Sales Tax for the warm hospitality and courtesy extended to us during our stay in Uttar Pradesh. We received excellent cooperation from the officials concerned through all the phases of the Study. We wish to record our deep appreciation of the help given by Shri Sujit Banerjee, the then Commissioner of Sales Tax, and by Shri P.K.Mishra, the present Commissioner of Sales Tax, Government of Uttar Pradesh. (i) We were greatly benefited by the kind assistance of Shri T.N. Bajpai, Deputy Director (Staistics), Liasion Officer to the Study Team, who not only extended help in arranging various meetings with different organisations and Departments of the Government but also spared much of his valuable time for extended discussions with the Study Team. He also maade necessary arrangements for the Study Team to visit various regional offices as well as checkposts; and arranged collection of data from all the Sales Tax Regions in the State. We would like to especially mention the help receivd from Shri Arun Kumar, Additional Commissioner (Law); Shri R.C.L Srivastava, Deputy Commissioner (New Units); Shri C.C. Pant, Asstt. Commissioner (Computer); Shri Ghan Shyam, Asstt. Commissioner (SIB); Shri Q.A. Naqvi, Joint Director, Training; Shri M.K. Aggarwal, Deputy-Director, Training Centre; Dr. K.K. Srivastava, Assistant Commissioner (Law) and Shri Ved Prakash, PRO. At the field level, we have been immensely helped by Shri J.P. Misra, Dy. Commissioner (E); Shri P.K. Singh, Dy. Commissioner (SIB); Shri G.M. Aggarwal, Asstt. Commissioner (Enforcement) and Shri A.K. Singhal, STO (Enforcement) of Lucknow Region; Shri N.C. Sharma, Dy. Commissioner (SIB); Capt. S.B. Khare, Dy. Commissioner (E); Shri Keshav Dayal. Asstt Commissioner (Assessment), Meerut Region; Shri L.M.S. Palani, Dy. Commissioner (E); Shri B.P. Shukla, Asstt. Commissioner (Checkpost); Shri U.C. Dixit, Asstt. Commissioner (Mobile Squads); Shri Rajeshwar Shukla, Asstt. Commissioner (SIB); Shri S.C. Aggarwal, STO-A (Mohan Nagar Checkposts); Shri B.D. Aggarwal, Asstt. Commissioner (Judicial); Shri Kuldip Singh, Asstt. Commissioner (Assessment); Shri Yogendra Kumar, STO-A (NOIDA) Ghaziabad Region; Shri A.P. Shukla, Dy. Commissioner (E); Shri M.U. Khan, Asstt. Commissioner (Enforcement) Aligarh Region; Shri K.K. Tiwari, Dy. Commissioner (E) Bulandshahr Region; Shri S.B. Aggarwal, Dy. Commissioner (E); Shri Prem Chand, IPS, Dy. Commissioner (SIB); Shri Prakash Chand, Asstt Commissioner (Judicial); Shri A.C. Bajpai, Asstt Commissioner (Enforcement) Kanpur Region; Shri M.S. Verma, Dy. Commissioner (E); Shri O.P. Srivastava, Asstt. Commissioner (Checkposts); and Shri Surendra Pal Singh, Asstt. Commissioner (Enforcement); Varanasi Region. We would like to express our special gratitude for the assistance received from Shri K.P.Srivastava, Retd. Additional Commissioner of Sales Tax who helped in making the Study Team understand the complexities of the tax system and also spent a good deal of his valuable time in extended discussions with us. In fact, we were greatly dependent upon him for various technical aspects. We really benefited from his extensive experience in the Department and also from his present counselling work for the dealers. (ii) We would specially like to mention the opportunity provided to the leader of the Study Team by the then Commissioner of Sales Tax, Shri Sujit Banerjee to present his viewpoints to all the senior officers of the State during the meeting of the Deputy Commissioners of the State at Lucknow. The Study Team derived great help in studying operations of different checkposts through the visit by Gautam Naresh to these posts. We would like to put on record our deep appreciation of the help given by the officers on duty at the checkposts and also by the Dy. Commissioners and the Asstt. Commissioners supervising these checkposts in their jurisdiction. We wish to express our sincere thanks to the Director (Bureau of Economics & Statistics); Commissioner (Industries); Director of Industries; Director, Small Scale Industries; Secretaries of the Regulated Markets and Cooperative Societies; Pharmaceutical organisations and auto-parts associations. Our special thanks are due to Dr. B.K. Joshi, Director and Dr. G.P. Misra, Professor, Giri Institute of Development Studies, Lucknow for the literature made available by them. The Study Team wishes to express sincere thanks to Hon’ble Hardwar Dubey, the then Minister of State for Institutional Finance, U.P. for providing an opportunity to the leader of the Team for discussing various proposals for sales tax reform in the State. In collection and processing of data we were assisted by Ms. Ruchika Mathur Ms. Madhurima Mehta, Ms. E. Parvathamma, Shri Ashok Sharma, and Shri Vishwa Nath Alok of the NIPFP at various stages of the Study during different period. Dr. Raja J. Chelliah, Chairman of the Institute, went through the draft report despite his busy schedule and gave very useful suggestions for improvements. We owe our gratitude to him. We want to express our thanks to Shri K.K. Atri, EDP Manager; and the other professionals at the Computer Centre who provided us with the prompt and efficient computer assistance. We are especially thankful to S/Shri Naveen K. Singh, Satish Kamath and J.P. Arya of the Computer Centre. Shri Perinnan, Shri Uma Shanker and Miss Kavita Mehna did accurate word processing and provided excellent secretarial assistance. Shri N. Natarajan efficiently coordinated and managed the entire work of production. We express our sincere thanks to all of them. Mahesh C. Purohit Gautam Naresh O.P. Bohra March, 1993 CONTENTS Chapter Page # Executive Summary 1-19 1. Introduction 1 Terms of Reference Interim Report Selection of Samples Chapter Scheme 2. Fiscal Importance of Sales Tax 3 Growth of Buoyancy Tax-Income Ratio and Tax Burden 3. Existing Sales Tax Structure 11 Rates of Tax Exemptions Point of Levy Input Taxation Surcharge on Tax Incentives to Industrial Units 4. Rationalising Sales Tax Structure 42 Weaknesses of the Existing Structure The Specific Setting for Rationalisation Objective Criteria Reforms in Sales Tax Structure 5. Sources and Modus Operandi of Evasion 60 Evasion Through Recorded Transactions Evasion Through Unrecorded Transactions
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