Kerala discovers tax leak to the tune of Rs 1,500 crore

THIRUVANANTHPAURAM: The Commercial Sales Tax department has come to the conclusion that the state’s revenue stream is bled Rs 1,000 to 1,500 crore annually (more than the additional resources of Rs 705 crore the state hopes to mobilise this fiscal) as a result of three major mistakes committed by tax officials with increasing impunity: misclassification of commodities, application of incorrect rate of tax and false claims for special rebate and input tax. These mistakes could be the result of either negligence or ignorance.

However, top CST officials say that most are the result of wilfull misconduct or corruption. “These evasion techniques are virtually foolproof as they are difficult to detect,” a top source said. Misclassification is a popular collusion tool. Between 2010-11 and 2013-14, the annual returns of a multinational dealer in healthcare products, included medicines taxed at four per cent on maximum retail price.

But what went unnoticed was that among these medicines were Eau-de-cologne (a perfume), detergents, shampoos and cosmetics, all of which should have been taxed at 14.5 per cent. Application of incorrect rate of tax is another subtle form of evasion. Kerala Value Added Tax Act, 2003, states that bakery products including biscuits sold under a brand name are liable to be taxed at 14.5 per cent.

At least three cases have come to the notice of the Kollam circle last fiscal where tax on the entire sales turnover was self-assessed at four per cent, instead of the correct 14.5 per cent applicable to branded food products. This happens rampantly in the case of ayurveda products. It has come to notice that ayurveda cosmetic products, which should be taxed at 14.5 per cent, are taxed only at 4 per cent.

Incorrect claim of special rebate and input tax is yet another easy means of evasion. For instance, government by a notification had excluded building material and fixtures used in construction activity from the purview of capital goods and hence these goods shall not be entitled for input tax credit. The latest CAG report, for instance, shows that this stipulation is rampantly ignored, allowing construction companies to secure compensation above their entitlement.