Interesting snippets from CAG’s report No. 11 of 2005 to Parliament – Central Excise

By Vijay Kumar

1 Budget estimates – Finance Minister misleading parliament? The CAG says that year after year the collections fell short of budget estimates. But the government continued to make optimistic projections. Who is to blame? The FM?

2 Cenvat PLA ratio – The percentage of Cenvat Credit to duty paid through PLA has gone up from 66% to 73%.

3 Cost of collection – The cost of collection of excise duty was 0.95% in 1999-2000 which has come down to 0.83% in 2003-2004. The CAG has no adverse comments on this fall.

4 Outstanding demands – 54560 cases involving a duty of 23276 Crores is pending finalization. 90% of the pendency must be due to objections raised by the Audit and certainly not more than 10% of this amount is going to be realized in the next 50 years. Writing off all these demands and withdrawal of all the cases pending in various judicial forums would de-clog the judicial system and throwing away the tons of records connected with these cases would give a face lift to Central Excise offices.

5 Fraud and penalty - The CAG’s report goes on to state that in the last three years, the recovery from demands on fraud cases was only 130 Crores out of a demand of 1980 Crores. This means that 94% of those accused by the department of fraud are really innocent. On the penalty front the department’s performance is awfully bad. The fact that out of a penalty of over 800 Crores imposed by the department, they could collect only less than 2 Crores (0.2%) shows that the department is hyperactive in imposing penalties.

6 50% of the excise duty comes from five commodities – Refined Diesel oil, motor spirit, Iron and steel, cigarettes and cement contribute to 50% of the total excise duty collected in the country. Just imagine a situation where the excise duty leviable on these commodities is doubled and all other commodities in the country are exempted from excise duty.

7 Audit vs Audit - The CAG is not happy with the much publicized internal Audit mechanism of the department – EA 2000. The CAG says that goals and objective of the system were not achieved due to inadequate and skewed coverage of units, lack of proper selection and lapses in implementation. The CAG laments that while voluntary compliance by the assessee is in place, the necessary audit controls are absent. The CAG recommends that some of the controls in the old system should be brought back. Some more observations of the CAG on audit.

• Data base of assessees completed only for 34% of the units. Work not begun in five commissionerates.

• Non-mandatory units audited at the cost of mandatory ones.
• 82% of the multi-locational units not audited.
• 31.2% of the units audited, produced nil reports.
• 34% objections raised involving over 800 Crores pending.

Does any one audit the CAG? The AG is responsible for most of the ills of the Revenue department. Most of the Show Cause Notices have their origin in an Audit objection or fear of an Audit objection. Even when the AG challenges a notification which has the sanctity of law, Show Cause Notices are issued and the Board never tells the CAG that it is better qualified to decide on notifications than the CAG. On several occasions, AG points out that the Board circulars are wrong or notifications are wrong and the department is forced to issue SCNs to the assessees as to why action cannot be taken against them for following notifications or Board circulars. AND SOMETIMES SUPPRESSION CLAUSE IS ALSO INVOKED. The good Board has instructed the field that whenever an objection is received from the AG, SCN has to be immediately issued. The CAG should undertake a study on the cost of litigation initiated as a result of Audit objections and the amounts realised in those litigations. In every case dropped, the bill should be credited to the concerned AG. Then the cost of collection of excise duty will further come down. The AG should also be asked to compensate the assessee for the unwanted litigation caused by its objections.

The CAG is unduly worried about pending adjudication. But if you look deep, you will realise that the AG is responsible for all the pendency. Look at this real example. The AG raised an objection about a particular exemption which is crystal clear to everyone except the AG. The department has issued SCNs and is continuing to issue SCNs. They are not able to adjudicate the issue as they all know that the Audit objection is outright stupid. And they hope that one day wisdom will dawn on the portals of Audit Bhavan and the objection will be dropped. No such chance. AG makes it a Draft Audit Para and now nobody in the department will touch the case with a barge pole. The assessee continues to get SCNs for the last ten years. And the latest objection from the AG- SCNs are pending for the last ten years involving Crores of rupees. Why? Because of the AG!

My personal experience with the AG’s Audit has not been exactly pleasant. The last time around when I wrote about AG’s Audit, their attitude has been, “kill the messenger”. An AG wrote to my Chief Commissioner that my article undermined the prestige of the AG and my Chief Commissioner promptly ordered a charge sheet against me.