Value added Tax (VAT) is a sales tax levied on the sale of goods and services. In some countries, the tax is know as “goods and services tax or GST. VAT is an indirect tax, in that the tax is collected from someone other than the person who actually bear the const of the tax.
A taxable person is defined as one of the following carrying on a business”
· An individual
· A partnership
· An unincorporated association, e.g. trust or charity
· A limited company.
States in India had decided in 2003 to introduced Value Added Tax system in place of the exiting Sales Tax System. The honorable members are aware that due to the circumstances prevailing at the time, the introduction of VAT came to be postponed. However, the focus on VAT was not lost. The Empowered Committee of State Finance Ministers continued to meet to find out ways or resolving the differences amongst the States. VAT was introduced with effect form 1st April 2005. The states have also implemented uniform floor rates of sales tax in respect of over two hundred important commodities. With a view to simplifying procedures, different sales tax law will be replace and replaced by the new VAT act. Thus, the exiting Bombay Sales Tax Act. The Works Contract Tax Act the Lease Tax Act and the Motor Spirit Tax Act will be replaced by the Maharashtra Value Added Tax Act.
WHAT IS VALUE ADDED TAX- VAT?
DEFINITION OF VAT
Value Added Tax is a tax on the value added each stage of production and distribution process and can be aptly defined as one of the ideal forms of consumption taxation since the value added by a firm represent the difference between its receipts and cost of purchased inputs.
VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain. With the facility of set-off of input tax- that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax.
· Value Added Tax is a general consumption tax assessed on the value added to goods and service.
· It is a general tax that applies, in principal, to all commercial activities involving the production and distribution of goods and the provision of services.
· It is a consumption tax because it is borne ultimately by the final consumer. It is not a change on companies.
· It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
· It is collected fractionally, via a system of deductions whereby taxable person can deduct form their VAT liability the amount of tax they have paid to other taxable persons on purchase for their business activities. This mechanism ensure that the tax is neutral regardless of how many transactions are involved. The following table illustrate this
CALCULATION OF VAT
AVT due on Sales output Tax.
Credit for Input Tax Paid
Payable to Sales Tax Department Net Tax
Raw Material (+) other Inputs/ Over heads & Margin Total Cost of Manufacturer. (+)VAT @ 12.5% on cost Rs.200
Purchase cost to wholesaler (+) other Inputs/Overheads & Margin Total Cost of wholesaler. (+) VAT@12.5% on cost Rs.225
Purchase cost to retailer(+) other inputs/overheads & margin Total Cost of earlier (+) VAT@ 12.5% on cost Rs.200
Thus while tax is collected at all stages of Sales/Purchase, the same is rebated at the next stage of sales. The only tax that does not get refunded is tax collected on the ultimate sale to the consumers. Thus VAT is clearly beneficial to both manufactures/ distributors and the eventual consumer:
Generally, there are two methods that are followed while charging and collecting the VAT:
INVOICE OR TAX CREDIT METHOD
The tax is collected and charged separately on the basis of the tax is paid on the purchase and the tax that is payable on the sale, shown separately in the invoice. Therefore, the difference between the tax paid on purchase and the tax payable on sale as per the invoice is the VAT. The above example is of the invoice credit method.
Under this method, the tax is collected and charged on the aggregate value of the tax payable on sale and purchase by applying the rate of tax, applicable to the goods. Therefore, the difference between the sale price and purchase price would be VAT. It means VAT is the tax which consumers ultimately face. It is collected at each stage. The tax earlier paid can be allowed as set off or credit. Therefore, it is called as “Last point Tax”
· INPUT TAX CREDIT/REBATE/SET OFF
Input tax credit means that the tax paid on purchases effected within the State shall be allowed to be set off against the output tax payable. The input tax credit will be eligible only on purchases effected from VAT registered dealers. Input tax credit shall not be available on interstate purchases and purchases that are used for personal consumption or provided free of charge as gifts. Input tax credit shall be available only on goods purchased for use in manufacture of other goods or for resale.
· PURCHASE TAX
Purchase tax is the tax levied on purchase of capital goods or other goods from unregistered dealers. Input tax credit will, of course, be available for the purchase tax paid
· VAT TAX INVOICE/TAX INVOICE
The format of invoice prescribed for a sale to be eligible for input tax credit is called VAT tax invoice. Input tax credit will be allowed only if the tax invoice is in the format prescribed.
· THRESHOLD LIMIT- GENERAL REGISTRATION
General Registration threshold refers to the turnover limit above which a dealer should compulsorily register as a dealer. The General registration threshold limit is likely to be Rs.3 lakhs to Rs.5lakhs. Dealers below the threshold limit may opt for voluntary or General VAT registration.
· ZERO RATED SALES
A zero rated sales is one on which no output tax is payable but input tax credit is eligible. The difference between an exempt sale and a zero rated sales should be properly understood.
An exempt dealer pays VAT on his purchases, but is not entitled to claim input tax credit, as he cannot charge VAT on his exempt sales. Dealer effecting zero-rated sales can claim refund of the VAT on his input but pays no his output. E.g. Export.
· OUTPUT TAX
Output tax is the tax payable by a registered dealer on the sale of goods effected.
Refunds in VAT will arise in the case of Zero Rated sales, Refunds may also arise in the case of a dealer whose input credit exceeds the output tax payable.
· RNR-REVENUE NEUTRAL RATE
The revenue neutral rate is the rate of tax at which the revenue accruing to the State Government under the present system of levy of tax and VAT is neutral. There is unfortunately not enough statistics or reliable mathematical models to arrive at the RNR.
· SELF ASSESSMENT
Self-assessment is finalization of assessment by the department based on the returns filed by the dealer without calling for and examining the books of accounts.
Since under VAT the tendency to evade tax is expected to be lower, the self-assessment turnover limit is expected to be higher.
· TAX IDENTIFICATION NUMBER (TIN)
The registration number allotted to a VAT registered dealer is called tax identification number allotted to a VAT registered dealer is called tax identification number. The TIN is likely to be linked to the permanent Account Number allotted under the Income Tax Act.
A PROBLEMS WPST SALES TAX SYSTEM
· At present the sales tax is levied on the gross value without allowing any credit or set-off for the taxes paid on input (i.e., tax is levied on gross value). Consequently, it tends to create the phenomenon of cascading resulting in increased consumer prices by an amount higher than what accrues to the exchequer by way of revenues from it.
· Also, there is the problem of multiplicity of rates. All the states, provide for plethora of rates. These range from one to 25 per cent. This multiplicity of rates increases the cost of compliance while not really benefiting revenue. Heterogeneity prevails in the structure of tax as well. Apart from general sales tax, most states levy luxury tax as also an entry tax on the sale of imported goods. All these practices of heterogeneity in structure as well as rates cause diversion of trade as well as shifting of manufacturing activity from one state to another.
· Further, widespread taxation of input relates to vertical integration of firms
The existing system of taxes militates against ancillary industries and more of the inputs needed rather than purchase them from ancillary industries.
REASONS: WHY GOVERNMENT PROPOSED TO IMPOSE VAT?
Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of service Tax and stated that “there is no sound reason for exempting services from taxation, therefore. I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers”.
Service Tax had been levied on the recommendations made in early 1990’s by the Tax Reforms Committee headed by Dr. Raja Chelliah. The committee pointed out that the indirect taxes at the central level should be broadly neutral in relation to production and consumption of goods and should, in course of time cover commodities and services. The committee felt that we should move towards full-fledged value Added Tax (VAT) system covering services and commodities.
Service tax must be a part of VAT at the central level. It was envisaged that as the central excise duties on goods would get gradually transformed onto a value added tax at the manufacturing level, service tax would get woven into that system. Therefore, a tax could be levied oil services that enter into the productive process. The Committee emphasized the importance of moving towards VAT, for making the system of indirect taxation broadly revenue neutral in relation to production and consumption and widening the tax base by covering exempted commodities. It is felt that VAT mechanism would mitigate the burden of service tax and take care of the cascading effect on the ultimate customers.
VAT aims to cut multiple layers of state and federal taxes and impose uniform tax rates across the country.
REASONS: WHY TRADERS OPPOSED VAT IN INDIA?
The power to enhance the rate of tax will rest with the finance department of the states. The industry fells that this will be largely misused, and rates could be increased at the wishes of the bureaucrats, ignoring the stipulations. The bureaucracy will have full control over every dealer and trader. And will have the authority to inspect not only the books of accounts, but verify case or stock too. This is absurd, fells the industry.
The department will have the power to attach provisionally, any money which is due or which may become due in the course of any enquiry, inspection or proceeding. The revocation of such an attachment will cease to have effect after the expiry one year, the Commissioner has the power to extend his period up to two years. Getting refunds of the VAT would be a cumbersome procedure.
The sales tax commissioner has the power to declare any transaction null and void. According to the industry, it would be almost impossible to get the commissioners clearance to make a contract, and would give rise to various malpractices.
Even as the dealers will be heavily penalized for any mistakes they may make. Moreover, The interest charged for late payment is 24 percent, whereas late refund would attract only a nine percent interest. There will be no set-off on inter-state sales.
The new VAT provisions give power to the authorities to create check nakas at their discretions. No redressal system of recheck. Audit requirement under VAT on a, turnover of Rs40 lakh is required to he audited and assessed. When there is already an audit of accounts for income tux purposes, a separate audit requirement for VAT is a duplication of the work.
Penal provision for a lapse of even a single day in filing return is very high, to the extent of 50 per cent of the tax payable. Traders dealing in products with brand names will be required to these are provided.
JUSTIFICATION OF TRADERS TO VAT
Though the introduction of VAT is going to adversely affect large sections of people it is only the traders who are showing an organized protest against this. After protesting at state levels they called for an all India traders’ bandh on February 21. After the success of the bandh their all India body, confederation of All India Traders (CAIT), which is spearheading the protest has threatened to go an Indefinite strike against VAT.
Though VAT requires the traders to maintain proper records, it is unfair to say that they are opposing the introduction of VAT only for that reason alone. Besides, the bulk of the small trades and business find it difficult to survive even now. This tax will crush them. They are also protesting against the “harsh” clause in the VAT and the inclusion of essential commodities. The penal provision in the proposed VAT are deliberately made harsh not with the intention of ensuring compliance from traders but to push them out of the business. They are basically meant for facilitating the entry of giant retail store chains.
To dilute the opposition for VAT from traders, small dealers with a gross annual turnover not exceeding Rs.50lakh, they are given an option either to pay VAT or gross turnover tax of 1% (which will be more than the VAT amount.) however those who opted for turnover tax will not be eligible to claim input tax credit. The Rs5lakh limit is ridiculously low is that would mean only those traders who have sales of about Rs40, 000 per month.
Besides, most states switched over to single-point-taxation in the 1990s (on the first sale). VAT will entail a multi-point taxation. Though all goods may not have been under the system of large proportion. Under single point taxation, a large section of traders, especially the smaller ones. Were out of the tax net. This exempted them from not just the demands of record-keeping, paper work and costs it entailed, they were also free from the arbitrary harassment of tax officials. Now with VAT, even on the earlier scheme the bulk of the sales tax was paid by the manufacturer (i.e. on the first sale) and the traders escaped most of the burden. Now the overall tax will fall equally on the traders – both big and small. Not only that, tax officials can harass each and every trader who will be forced to keep records as very few will be able to explain that they have sales of mere Rs40,000 per month. And even to prove this they will have to maintain proper records. So, we can a VAT terror police roaming the lanes and by-lanes harassing even the small retailers.
After the introduction of VAT small shop keepers will not be able to comply with the documentary evidences to claim input tax rebate and they will end up in laying more tax than what they are paying now. The complicated system of VAT will force them out of the business paving way for the large retail chain outlets of MNCs.
The small traders and retail shopkeepers see a threat in the invasion of Indian markets by international giants and are fighting for their survival. Their demand to exclude essential items from the purview of VAT is a demand of the interests and even survival, should be seen as a part of the anti- imperialist struggle.
WHY CONSUMERS WILL SUFFER?
The consumers are still in dark. They do not have proper knowledge about the consequences of the VAT though the implementation of VAT is primarily affect them. The implementation of the VAT would affect the consumers adversely by leading to a price-rise. VAT will be a multipoint levy and will replace sales tax. The rates of sales tax are 7 to 8 percent, whereas the rate of VAT will be 12.5 percent, in general. It means there is a straight 50 percent increase in taxes which is going to increase the return of rhe government. VAT at 12.5 percent is one of the highest tax rates in the world. Not only that the actual tax paid will always be on the final sales value (as all value added will be taxed at each stage of the chain), while in the earlier case most of the sales tax was on the first sail, at the point where goods were manufactured. So, overall the tax paid by the consumers under VAT will be much higher than what is paid now.
Another important aspect is that VAT covers almost all goods. The prices of diesel, kerosene, petrol, eco-friendly CNG, other petroleum related products, rice pulses and other such essential commodities will go up after the introduction of VAT the present level of 12% tax on petroleum related products will be increased to 20% and the essential items like bread, salt, spices, pulses, food grains and other related items on which there is on tax at present will come under a 4% tax slab.
Who is going to pay for this? Definitely not the traders. It will be borne by t he consumers. Moreover as VAT will be multipoint levy, the value and the rate will be higher at each subsequent higher rung with means the actual tax which consumers are going to pay is not just 12..5% but it is much more than this. Therefore the introduction of VAT instead of bringing down the prices it will break the consumers back with a sharp rise in price.
Besides, in the name of encouraging exports the tax rate on them is made zero and yet credit will be given on tax paid on inputs. This helps the exporters to make super profit..
ADVANTAGES OF VAT
v Removes the cascading of taxes due to its inherent features of offering set-off taxes paid already.
v Encourage widening of tax base and reduction in rates of tax.
v A properly designed system of VAT does not distort trade and production methods i.e. it does not induce shifting of production bases, vertical integration or disintegration, or changes in Constitution of the entity.
v Encourage better compliance due to the availability of set off of taxes paid, and thereby less evasion.
v Improves economic efficiency with its neutrality with respect to forms of organizations, production facilities and location.
v Particularly improves export competitiveness of local industries due to ‘zero rating’ of exports.
v It creates an audit trail due to its inherent nature where the purchase invoice forms the basis for obtaining credit of tax. It also has a “Self-policing effect” since it r requires proper maintenance of purchase and sale documents to avail the credit.
v The VAT has a self-enforcing effect in that buyers demand invoices from suppliers, which would otherwise not be sought by most buyers.
v VAT is usually accompanied by a lesser number of rates, which makes administration much easier and record keeping less tedious for traders.
In today’s global economic environment where countries are negotiating free trade agreements to develop common markets that facilitate growth, such as the common markets that has emerged in the European Union, India should accelerate greater economic integration within its own States. Moreover, India has committed under the WTO regime by adopting VAT regime by 2005.
While VAT as a system has its own advantages, it is not quite clear as to how effective this system could function in the Indian economy where 2/3rd of the industry is in the unorganized sector as contrasted to the western economies (where VAT is followed ) in which right from production to retailing the entire operation is organized. There could also be undue demands on the dealers by way of requiring elaborated Book keeping producer such as maintaining proper books of accounts, and maintaining not only sales invoices, but also purchases invoices.
LIMITATIONS OF VAT
· There could be cases where the VAT is collected by the dealer, but not paid to the Government. As a result, the set off of such VAT paid by the purchaser may not be allowed to the purchasers. A mechanism has to be devised to tackle such situations.
· A situation of refund would arise if no VAT is payable on the final sale. As a result the set off cannot be availed. In such cases, the tax paid becomes the cost or the same has to be claimed as refund. Hence, the mechanism of refund has to be framed.
· VAT would also contain multiple rates of tax due to multiple types of items. in countries such as India where in there exist sakes taxes already covering a wide range of commodities. Replacement of those taxes by a revenue-neutral value added tax should lead to no inflationary consequences. The dealers will now be required to maintain up to date records of purchase and sales in order to claim set off. Many small dealers maintain only primitive accounts, which were accepted by the department.
· Since central sales Tax Act continues to remain in force, there can be conflict between the VAT and CST.
i) VAT –IMPACT ANALYSIS
VAT is going to change the way of doing business. It would be a misconception to believe that the implementation of VAT is only a change in the system of levy of tax and that it is just a replacement of the present sales tax Act. It is commonly believed that VAT would impact only the pricing policy. Impact of VAT will encompass all facets of the business i.e., procurement, manufacturing, distribution, costing and accounting. Staff need to be educated on the implications of VAT and the software need to be modified to be compatible with the VAT accounting and reporting requirements.
Though there may be certain common factors relevant to all trade and industry, the impact of VAT needs to be analyzed specific to the business model of the individual business. A sound knowledge of VAT law applicable to the individual business model is required. Planning transition to VAT will pose significant challenges to Trade and industry.
The impact will be marginal to small traders and manufactures operating within a particular State, procuring all inputs and raw materials within the State and marketing the goods within the same State. In the case of such entities, the only impact will be on pricing.
The impact wills be significant for larger organizations with operations spread over India. Since it is difficult to present a common VAT impact analysis applicable generally to all business, the areas which require attention to plan transition are.
PRE TRANSITION CAPITAL EXPENDITURE
Input tax credit on capital goods used in the manufacture of taxable goods for sale is eligible subject to such conditions and restrictions as may be specified in the respective state VAT Acts. Therefore, it may be advantageous to plan capital expenditure after implementation of VAT depending upon business exigencies.
Though in the VAT scenario one has to redefine business strategy, one important issue is pricing. Due to multipoint levy under VAT, the price to the ultimate buyer will be higher than at present with the levy of tax on the value addition oat each point of sale and resale. The possibility of passing on the additional cost to the ultimate buyer depends on the elasticity of supply and demand. It the price increase can’t be passed on to the ultimate buyer the manufacture or the trader will have to absorb the price increase depending again upon supply/demand elasticity
VAT will impact significantly manufactures who have plants in different states manufacturing sub assemblies of a single product that is assemble in a particular state. So far the subassemblies would have been stock transferred for assembly at the main plant. In the VAT scenario, stock transfer may not be an ideal option as there are restriction unavailing of input tax credit by the unit effecting the stock transfer of the subassembly. Under VAT input tax credit of raw materials used in the manufacture of goods for stock transfer will be restricted to that paid in excess of 4%. This may not be advantageous if the inputs are sourced locally by the unit effecting stock transfer as most of the basic industrial raw materials may fall in the 4% slab in the VAT schedule.
A decision will have to be taken on the advisability of the relocation of manufacturing units so that all the subassemblies are manufactured in one sate.
A manufacturing unit may be purchasing a sub assembly for a vendor. It may be advantageous to procure the materials, supply to the vendor and get the subassembly manufacture as a pure job work.
Incase of organizations with multi location manufacturing facilities, a relook at the product mix will be required to take advantage in the regime of the benefits available to each of the units based on the pattern of procurement and distribution.
In the VAT scenario one has to redefine distribution strategy, the following aspects that need to be studied are
· Whether stock transfer to depots would be economical than direct inter state sale?
· What should be length of the supply chain?
· How should retail sales and sale to wholesalers be managed? i.e., through the depots or as a direct inter State sake.
· Should the current warehousing or stocking points in different state be continued? Here again the list is illustrative. Only a study of the present distribution policy in the light of the changes in the VAT regime will highlight areas that require a detailed study.
Some of the other aspect that needs to be taken care of are:
· Staff in the purchase, marketing and accounting departments should be trained in all aspects VAT.
· The vendors and distributors need to be educated on the VAT impact.
· Review all existing contracts with suppliers, distributors and job workers for compatibility with VAT requirements.
· Redesign stationery for purchase order, invoices etc.
Last but not the least aspect is to study the VAT draft Act of the respective State. The draft VAT Act has not yet become low. Legislation is drafted by tax administrators and bureaucrats who may not be well versed with business realities. Trade and industry should make strong representations to ensure that the VAT that is to be implemented is fair and practical. In the era of e-governance and transparency, we have the opportunity of studying the draft legislation before it becomes law. This would have been unthinkable a decade back. The opportunity should not be lost.
HOW DOES VAT RESULT IN LOWER PRICE TO CONSUMERS?
The following table gives a comparative statement of taxes collected and prices charged under the First Point Tax system and the VAT system”
VAT RESULT IN LOWER PRICE TO CONSUMERS
First point tax, say 10%
VAT system at 10%
Value of output(Rs.)
Tax due (Rs.)
Value of output (Rs.)
Value of input (purchase cost)
Value of input inclusive of tax
Value of output
Value of input (Purchase cost)
Value added (profit 20% markup)
Value of output
Value of input(Purchase cost)
Value added(profit 10% markup)
Value of output
Value of Goods at point of Sales
It may be appreciated that the sales of goods at successive stages take into account the rebate of sales tax available from the previous stage. For instance, the manufacturer who purchase the input at 110/- inclusive of Rs.10/- of input tax, does a value addition of Rs.50/- yet sells only at Rs150/- and not Rs.160/- since he factors the rebate of Rs.10/- into his selling price. Thus what should have been sold at Rs.160/- plus sale tax is sold for Rs.150/- plus sales tax. This effect through out the production and distribution line result in a lower cost to the consumer.
IMPACT OF VAT IN SEVERAL COUNTRIES
The impact on prices on introduction of VAT in several countries was as follows:
Date of VAT introduced
Immediate Price Change General (in %)
Federal Republic of Germany
It may be seen from the above table that price change in developed countries are lower than in developing economics.
A STATUS SUMMARY OF SOUTHERN STATES – FINDINGS OF THE CII
IMPLEMENTATION OF VAT
In this section, we shall see the findings of confederation of Indian industry- CII on the implementation of VAT in the Southern States of India.
Despite the obstacles and the delays in the implementation of VAT, it would be worthwhile to recollect what has happed and what has been achieved so far in an attempt to introduce Value Added Tax in India. We examine the statues of implementation VAT in the Southern States specifically. Twenty-two Indian states have drafted the VAT Acts for their respective states and some states like Andhra Pradesh, Karnataka, Tamil Nadu, Haryana and Utter Pradesh have also modified there draft VAT Act since its inception. However, despite this, the country is not yet close to implementation of VAT. Haryana is the only states to implement VAT from April 1, 2003.
The postponement of the introduction of VAT has been due to the several reasons such as divergent views on the treatment of existing sales tax incentives, treatment of central sales tax under VAT, and more importantly, the lack of preparedness on the part of the States to actually implement VAT.
The Table below gives the status on the implementation of VAT particularly by the Southern States.
STATUS ON THE IMPLEMENTATION OF VAT BY THE SOUTHERN STATES.
Draft bill finalized
Act Passed by Legislation
Notification on issued obtained
As can be seen from the table above, amongst the southern states, it is only Andhra Pradesh and Karnataka that have made considerable progress in implementing VAT while the rest of the southern states here lagging behind.
ISSUES AND CONCERNS PUT FORWARD BY THE CII
Homogeneity in Law and Procedures
Divers law and procedures
· Threshold limits
· Set off mechanism
· Penal provision
Unification of State Consumption/ Entry Taxes with VAT
Supplementary levies such as Entry Tax are proposed in addition to VAT
Extension of VAT
Set off for inputs
Full Credit Assured, however there is interstate disparity regarding set off mechanism and definition of inputs.
Set off for Capital Goods and CST
· Definition of credit mechanism differs.
· CST to continue without reduction and likely to be phased out over 2-3 years.
· Cascading impact of Tax will continue.
Treatment of AED
AED to be replaced with VAT but there is no clarity.
Refund of utilized credit
· No provision for refund
· Perpetual / Limited carry forward
Transnational provision of closing stock on hand.
Provision for input credit on closing stock differs from State to State.
Provision for Imprisonment
· Excess of discretionary powers and possible imprisonment.
· Lack of clarity on statutory requirements.
· Provision for refund or carry
Document and procedures
Interstate disparities exit with respect to basic documents such as invoices.
ISSUES & SUGGESTIONS BY THE CII
Homogeneity in Law and Procedures
Homogeneity in Law and procedures in a must as it leads to reduction in complexity, litigation and transaction cost improved compliance.
Unification of State Consumption? Taxes with VAT .
· On single VAT covering all other State levies and taxes.
· No discretion to States to impose.
Extension of VAT services
· Service tax to be administered by a single agency.
· Convergence of Service Tax with VAT .
· Input Tax Credit Service Tax to allowed.
Set off for inputs
· Homogenous credit mechanism across India.
· Uniform input definition.
Set off for Capital Goods
· Uniform definition of Capital Goods and Credit mechanism across India.
Central Sales Tax
· VAT, a designation based alternative should replace CST at the earliest.
Refund of utilization credit
· There is need for provision for refund or carry forward.
· Refund and be made by tradable certificates.
Transnational provision on closing stock on hand
· Input credit on closing stock should be allowed without limitation on actual as certified by management or statutory authority
· No provision for imprisonment
· No discretionary powers.
· Predictability and credibility of Law to be maintained.
· Leniency to be practiced during transition.
Documents and procedures
· The assesses should also be allowed to print their own stationery of statutory declaration forms and document which will reduce harassment being faced by in many States.
· Stipulation submission of specified details to the Tax authorities in an effort to protect revenue can provide the built in checks.
· Unconditional self assessment.
· Replacement of self assessment by audits.
OBJECTIVES OF THIS DISSERTATION
1. It would help the reader to learn more about the issues of VAT. The reader would understand why there was so much chaos when VAT was being implemented in the country.
2. The reader would benefit in understanding he intricacies of VAT and its benefits.
3. The shortcoming in the implementation of VAT are put forth.
4. Suggestions have been given to improve the vat system by the people who deal with VAT on a daily basis.
5. The reader gets to know the guidelines and the do’s and don’ts of VAT.
In order to complete the Dissertation, I had to choose retail organizations where VAT is being implemented. So I though of choosing a specific kind of retail shops and compare the study of the implementation of VAT in those various retail shops. For the purpose I choose to compare the stationary shops who have to implement VAT on their goods.
PRIMARY DATA :
The primary data was collected with the help of questionnaires. I tried to cover more areas but when I approached a few shop, they did not entertain me thinking that it is some kind of government survey. So I restricted my survey only in the Nerul, Navi Mumbai stationary shop
The secondary data that I have collected is mainly from the following sources.
· Impact of vat by Kulbhushan.
· Vat-by dr. Pallai
· ICFAL journal – VAT by Chidambaram of April 2004.
· Commentary of the Maharashtra value added tax act, 2002 rate schedules, rules, forms, notification and circulars by Ajay Joshi and Dilip Phadke.
· Maharashtra sales tax vat news for calendar year 2006.
· To an extent I also collected data form various sites over the internet.
v Need to introduce VAT in out country.
v VAT having benefits over Sales Tax.
v VAT affect all segments of the industry ( Manufacturer, Distributor & Retailer)
v Service Tax included in VAT
v Central Sales Tax to be abolished.
v The Central Government compensate the State Government for the sales tax portion of VAT.
v Success of Harayana State’s VAT system.
v What does VAT offer for the consumers?
v Why are traders apprehensive about VAT?
v How does VAT help?
v Educate the masses about VAT .
v Benefits of VAT to the traders.
PROBLEMS FACED DURING COMPLETING THIS DISSERTATION
While working the sample. I had to face the following problems:
1. The traders were very reluctant to give details of VAT. They were hesitant in answering since they doubted if it was form of government survey.
2. Some of the traders answers not reliable and they were not answering all the questions that I posed.
3. Although I wanted to do the survey from different areas which I tried but was unsuccessful. Most of the traders in areas other than Nerul, Navi Mumbai, refused to entertain the moment I utter the word VAT. This restricted my survey to only Nerul, Navi Mumbai area where I had already developed contacts.
4. Even in case of Nerul, Navi Mumbai some of the traders said that they never heard term VAT and they were not paying any such tax.
5. There are lot of technical terms which the traders themselves did not understood properly, the said. So they were not able to answer properly to some of the questions in detail. Since most of them were unaware of the rules they were finding it difficult to answer the queries.
IMPLEMENTATION OF “VAT”
ii) Implementation of VAT – an Indian scenario
Ø VAT – a series of events
Ø Why opposition to VAT ?
Ø Why we should not oppose VAT?
Ø VAT- a key for Economic Growth!
THE VAT MODEL
The VAT regime being implemented in India is based on the fundamental norm of “set-off” for the tax paid earlier through the input tax credit mechanism. In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. 1 for instance, under the original system, before a commodity is produced, input are first taxed, and then after the commodity is produce with input tax load, output is taxed again. This causes double taxation. Under the VAT regime, whoever, a set-off is given for input tax as well as tax paid on previous purchases. Entities engaged in the manufacturing and trading of goods are bale to claim tax credit on the materials and services that they buy to make further supplies or services directly or indirectly sold to end- users. 2 this prevent the ‘cascading effect of taxes’ on the production and distribution processes of goods and services and encourages economic growth. In essence, this prevents overall distortions in the taxation regime.
THE IMPACT OF VAT ON THE INTEGRATION OF THE DOMESTIC MARKET
However, it is essential that we ensure that regional disparities don’t distort the benefits of this economic boom. To ensure regional party in national development, there is need for integrating domestic markets to ensure smooth inter-state trade and commerce. In this context, the introduction of the state level VAT system is a laudable change in the indirect taxation system as it leads to harmonization of state taxation regimes across the board. As experiences in the European Union have shown, the harmonization of the taxation system through initiatives like VAT is crucial step in the unification of domestic markets. I am confident that even in India, VAT will play an important role in the integration of the domestic markets and boost inter-state trade and commerce.
VAT LEADS TO BETTER TAX ADMINISTRATION AND COMPLIANCE
The VAT design will significantly bring in simplicity and transparency in the tax structure, thereby improving tax-compliance and eventually boosting the revenue growth of state governments. The hallmark of the VAT system is that VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting off the tax credit. The existing system of compulsory assessment at the end of each year will be discontinued. Compulsory assessments will now be limited to a few cases where a specific notice is issued. This would make tax administration simpler and reduce the costs involved in revenue collection.
This system of self-assessment will be supplemented by audited mechanism where the assessments of certain member of traders, selected on a scientific basis, will be assessed every year. This will ensure accountability and transparency in the system while avoiding under harassment of traders and dealers.
Due to the inherent transparency and accountability in the system, VAT leads to not only better tax administrations but also higher levels of compliance and lesser evasion. Tax evasion is a grave problem in a developing country like outs as it leads to a creation of a ‘resources crunch’ for developmental activates of the state. Reputed international institution like the World Bank and IMF point out that the VAT regime prevents tax evasion and boosts revenues to help cash starved governments to come out of their debt-trap. 3.
It is because of these benefits that VAT has been adopted in every region of the world, and by so many different kinds of nations. The system was initiated first in Brazil mid 1960’s while Europe adopted the system in 1970’s. in Asia, a large number of countries including out neighboring countries like China and Sri Lank have been following his system for a number of years. We too have modified out tax regime to the VAT model and it seems that the experience so far by those states which have adopted VAT has been very positive.
If is seen that in states where VAT has been implemented there has been a substantial increase in the tax revenues of the government. There has been and increase of 20% of revenues in 2003-04 & 30% increase in 2004-054 in Haryana, Delhi has seen 29% rise in tax collection under VAT5. Several other states have also reported significant increase in tax revenues after the introduction of the new system. In the years to come, it seems, VAT may provide greater revenue to State governments.
ISSUES THAT NEED TO BE ADDRESSED
The Kelkar Committee Task Force has, however, highlighted some important issues that need to be addressed for the successful transformation to a VAT regime. To ensure that the immediate benefits accrued so far from this system are not lost, those issues should be examined.
PREPAREDNESS FOR STATE VAT :
There is a manifest need for public awareness amongst the general populace. Joint programme should be undertaken by all stakeholders to disseminate information about VAT and its benefits.
UNIFORMITY OF DEFINITIONS :
A conscious and earnest attempt needs to be made by all state governments to ensure uniformity of all state legislations, procedures and documentation relating to VAT. This would ensure greater harmonization between the taxation regimes of different states, eliminate unhealthy competition and lead to the integration of the domestic market.
COMPENSATION TO STATES:
The issue of compensation is possibly the most controversial and problematic point of contention in debate surrounding VAT. It must be tackled through mutually acceptable mechanisms.
UNIFICATION OF ALL LOCAL TAXED:
The introduction of VAT should be supplemented by rationalization of the overall tax structure.
CREDIT ON INTER-STATE TRANSACTIONS:
The recommendation of the task force that needs to be effectively considered is the grant of credit of duty by the importing state for the duty paid in the exporting state, in the course of inter-state movement of goods. The implementation of this measure would ensure smooth inter-state trade and benefit the economy.
STABILITY AND CONTINUITY OF THE VAT REGIME:
Another aspect is step about the creation of VAT Council. The Empowered Committee of State Finance Ministers has done good work in the implementation of VAT. A permanent suitable committee should be considered and may be vested with adequate powers to take steps against discriminatory taxes and practices and eliminate barriers to free flow of trade and commerce across the country.
BACKGROUND TO THE IMPLEMENTATION OF VAT
Indirect tax reforms have been an integral part of the liberalization process since 1991.in the first phase, India has been steadily attempting to move towards a tax structure that it simple, moderate, rational and easy to administer and comply with. At central level, the move has been to bring down the tariffs – both excise and customs, reduce the number of rates, correct anomalies, get rid of the complexities in the system and on the whole reduce the interface with the government. Reforms at centre level were smooth and brought in mainly through annual budget presentation in the parliament and are applicable through out the country. In addition to indirect taxes levied by the centre, states are empowered to levy certain indirect taxes and sales tax from major part of revenue for almost all states. There was wide variation in sales tax rates of the same commodity in different sates. In many states both inputs as well as outputs are taxed creating cascading effect. Te viable solution found was to shift to estimation based VAT i.e. value added tax.
OBJECTIVES OF VAT
The switchover form the present tax system to VAT should ensure that the following objectives are achieved:
§ The first and the primary objective of VAT system should be to increase the competitiveness of Indian industry by removing the cascading effect of the various taxes and levies.
§ As a corollary of the above, in order to improve competitiveness of, the industry, the removal of the multiple taxes which is prevalent in, the Indian tax system is absolutely essential.
§ Thirdly, it should also ensure that all barriers to inter-state trade and commerce should be removed and a unified national market is created.
§ The VAT system should also ensure that there is simplicity and transparency in the system.
§ The approach to move towards a VAT regime should be consistent in structure and approach.
¡ Ensuring revenue neutrality in the long run should also be the primary objective of a VAT regime.
¡ As far as possible the mechanism should be self-regulated. Lastly, during the transitory period, there are bound to be some teething problems and adequate provisions need to be incorporated to ease over this phase. It is understood that states will be allowed by the central Government to concurrently levy tax on certain services and also allow additional services to be taxed at state level. The scope of VAT should 4cover set-off for service tax paid.
NEED FOR VAT
Value Added Tax is one of the most radical reforms that have been proposed for the Indian economy after years of political and economic debate. The reasons for advocating for VAT is that it will replace a complicated tax structure that will also do away with the fraudulent practices.
¡VAT will encourage and result in a better-administered system that deters tax evasion. The taxpayers will also be compelled to keep proper records of their sales and purchases.
· VAT avoids the problem of under valuing, as all stages of production and distribution are subject to a tax. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax levied on the input can claimed back from the tax authorities.
¡ VAT (if computed using the input tax credit method) permits easy and effective targeting of tax rates as a result of which the exports can be zero-rated.
¡ The input tax credit method encourages a system that ensures better tax compliance by generating a trail of invoices that supports effective audit and enforcements.
¡ As far as India is concerned, VA, if enforced properly could help in fiscal consolidation for the country. As a steady source of revenue, it could be used for reducing the debt burden.
¡ Further, any globally accepted tax administrative system like VAT will help India integrate better in the WTO regime.
¡ VAT dose not distort business decisions as it does away with cascading. For instance, only the market forces rather than tax structure will guide vertical integration decisions once VAT is implemented.
¡ Under a VAT regime, the point of levy will be shifted to consuming state. The producing states would still earn higher revenue, as higher production in the state of origin would also lead to higher employment, overall development and ultimately higher consumption levels in that state. In such scenario, all investment decisions to a great extent would depend upon the quality of infrastructure, skilled and cheap labor and other non-tax incentives provided by the country and eventually it will improve the competitive advantage of Indian industry to face global competition.
STEPS FOR IMPLEMENTATION OF VAT
Step 1- Issuing of draft VAT Bill for public comments.
Step 2- Issuing of modified Draft Bill based on feedback on first draft.
Step 3- passing of VAT Act by the state Assembly:
This is a vital step and involves following stages:
1. vetting of the draft Act by the legal department of the state
2. obtaining cabinet approval of the draft
3. submission of draft to ministry of finance &company
4. putting up the bill in the assembly
5. passing of the Act by the assembly
Step 4- obtaining assent of the VAT Act from the president of India: in view of the Article 304 of the Constitution of India, VAT Act of each state will require assent of president of India. Home ministry is the coordinating ministry for getting assent of the president.
Step 5- Notifying the VAT Act: This is very important step and VAT Act has to be notified after the president assent is obtained. State can stop implementation of VAT by not notifying the VAT Act even after it has been passed by the assembly and assent of the president has been obtained. The classic example is of modified Delhi Rent control Act which was assed and assent of president obtained 6years ago but not yet notified due to resistance from traders in Delhi.
Apart from the above 5 steps, each state is required to issue Rules under the VAT Act. Rules supplement the provisions in the Act and prescribe procedure for registration of dealers, forms for issues of 4 invoice, periodical returns to be submitted by the dealers etc. only few states have issued the draft Rules for comments. Final Rules can bae notified only after VAT Act is notified by the states. Whereas amendment in the Act can be done only by the assembly, Rules can be amended by issue of notification as and when required.
VALUE ADDED TAX AN INTRODUCTION
WHAT IS VAT?
ß Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services.
ßIt is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
ß It is a consumption tax because it is born ultimately by the final consumer. It is not a charge on companies.
ß It is charged as a percentage of prices, which means that the actual tax burden is visible at each stage in the production and distribution chain.
ß It is collected fractionally, via a system of deductions where by taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
VALUE ADDED TAX (VAT )
Is unanimously acknowledged to be a major reform in the in the indirect taxation system for the following reasons:
§ It eliminates the cascading effect of taxes;
§ It promotes competitiveness of exports;
§ It has a simple and transparent structure; and
§ It improves compliance.
Presently there are more than 120 countries in which VAT is in force. Only the USA and India are amongst the more populous countries that do not have a VAT . Economists have generally shared the view that VAT is best suited as a federal or Central tax, and not at the state-level. However, states and provinces in a few large federal countries like Brazil, and, to a lesser extent, Canada, have adopted VAT, with varying degrees of success.
The implementation of VAT is closely linked to the administration of other indirect taxes and impacts the tax to GDP ratio. Most countries have taken several years to implement VAT. In India, an empowered committee of the Finance Ministers of the states has been constituted for the purpose of implementing a nationwide state-level VAT. The Empowered committee is indeed a unique experiment in federal fiscal planning and has achieved much in terms of building a consensus on many of the critical issues relating to implementation of VAT in a relatively short spell of time. It is proposed that VAT will become applicable w.e.f. April 1, 2003 on a nationwide basis.
Decisions have already been taken on the important features of VAT such as
§ Replacement of the sales Tax levied by the states (though some other local taxes like octroi, mandi cess etc. may continue);
§ The Revenue Neutral Rate (RNR) and other rates;
§ The tax to be a multi-pint levy, with the tax paid on inputs within the State being set off against the tax payable on the dealer’s sales (subject to a threshold limit);
§ Phasing out of CST in 4 years; adoption of uniform classification, etc.
The Kelkar Committee Task Force has highlighted few issues to ensure successful implementation of VAT, and its continuity and stability in a dynamic sense.
Preparedness for State VAT : it is recommended that a publicity awareness programme should be started jointly by the Central Government and State Government and the former should extend financial support for this, if required.
Uniformity of definition: it is recommended that an attempt should be made towards uniformity of all State legislations, procedures and documentation relating to VAT.
Compensation to States: it is recommended that issue of compensation, if it arises, must be tackled through mutually acceptable mechanism of additional resource mobilization through Service Tax and not through budgetary support.
VAT to unify all local taxes : It is recommended that with the introduction of VAT, all other local taxes be discontinued, and the same should be taken into account in determining the RNR
VAT and AED : it is recommended that whereas AED my continue for textile up to 2005, it may continue even thereafter for cigarettes which should not be subjected to VAT .
Credit on inter-state transactions: it is recommended that the VAT scheme should provide for grant of credit of duty by the importing State for the duty paid in the exporting State, in the curse of inter-state movement of goods.
Stability and continuity of the VAT regime: It is recommended that for the stability and continuity of VAT, a VAT Council or permanent suitable alternative vested with adequate powers to take steps against discriminatory taxes and practices and eliminate barriers to free flow of trade and commerce across the country should be explored.
IMPLEMENTATION OF VAT – AN INDIAN SCENARIO
VAT – A SERIES OF EVENTS
Ø Formation of empowered committee – In India, an Empowered Committee of the Finance Ministers of the States has been constituted for the purposed of arriving at a consensus and implementing a nationwide state-level VAT as a substitute for the present sales tax which is one of the main sources of revenue for the state.
Ø Members of the committee – The empowered committee of state finance ministers – headed by West Bengal Finance Minister Asim Dasgupta and comprising the finance minister of Assam, Delhi, Gujurat, Jammu & Kashmir, Jharkhand, Karnatak, Madhya Pradesh, Maharashtra, Punjab, Tamil Nadu and Uttar Pradesh – endorsed the suggestion that every State law on VAT should have a minimum set of common features.
Ø At the conference of state finance ministers it was agreed that all the 28 states as well as the Union Territories would introduce VAT with effect form April 1, 2003.
Ø This position was reiterated during the conference of state chief ministers that was presided over by the Prime Minister.
Ø The commitment to introduce VAT was repeated at a conference of finance Ministers of States and Union Territories.
Ø The Kelkar Committee on tax reforms has also recommended introduction of VAT in its report. Subsequently, budget of 2003 announced implementation of Value Added Tax (VAT ) all over the country, to be effective since April 1, 2003.
Ø But many Sates subsequently dithered. Only one Haryana was able to introduced VAT by the April 1, 2003 deadline. Though 16 states have agreed to introduce VAT, 10 of them have not even passed the necessary legislation. Most of the North Indian states have made no preparation to introduce VAT.
Ø The deadline was extended to June 1, 2003 due to differences among states. Dr. Asim Dasgupta, tile West Bengal Finance Minister and Chairman of the Empowered Committee declared that VAT would be in place by June 1, 2003. Dr. Asim Dasgupta argued that the 16 states that have agreed to introduce VAT represent 75% of the country’s trading and industrial activity and it would not matter if other states did not come forward to implement it.
Ø States who agreed - States that had agreed to implement VAT form June 1st were Maharashtra, Gujurat, West Bengal, Madhya Pradesh, Karnataka, Andhra Pradesh, Tamil Nadu, Kerala, Haryana, Assam, Orissa, Bihar, Jharkhand, Triputa, Goa and Meghalaya. The Union Territories of pondicherry, Daman & Diu had also decided to go ahead with the new tax regime form June.
Ø Reasons for the delay - According to him, the reason for the delay in implementation by the northern states was “ political” and not “economics”. The, Delhi Government is apparently citing election to its states assembly in November for not implementing VAT immediately. And since Delhi is not implementing VAT now, the neighboring states are also hesitating”
Ø Budget 2005 - The United Progressive Alliance government has decided on the introduction of a Value-added Tax ( VAT ) from 1st April 2005. However, it is crucial that the necessary preparatory work be done before its implementation. As this had not been done. Imposition of VAT has postponed three times.
Ø Laws but no procedures - Many states have brought out tax laws but most of them had not prepared VAT procedures. The states that have the procedure find that these have many aberrations and anomalies in them. Since the procedures affect the cost of compliance and causes harassment to the taxpayers, it is imperative that the states not only bring out VAT laws and Procedures well in time, but also seek public reaction to them prior to their implementation.
Ø The empowered committee of states finance ministers has finalized the Value Added Tax (VAT ) rates for about 500 item with essential commodities.
Ø Manufacturing inputs slated to attract a 4.0 percent tax. The VAT, as per the latest decision of the committee, had come into force from April 1st 2005. States agreed on the 4.0 percent VAT for 250 items including, agro products and manufacturing inputs, while 217 other items would attract 12.5 percent tax
About 41 items like petrol, diesel, ATF, agriculture equipments and newspapers would be exempt form VAT, while precious metals like gold and silver would attract only 1.0 percent tax. Sugar, textile and tobacco item would be out of the VAT net at least in the first year.
WHY OPPOSITION TO VAT ?
There had been opposition to VAT on several grounds.
õ STATES ARE RELUCTANT
States are reluctant to introduce VAT because it would reduce the revenue. The Center has acknowledged the possibility of reduction in revenue following substitution of sales tax by VAT and had offered to compensate the states for the revenue reduction for three years. Though initially there might be a fall in the revenue, after a period of time the revenue would be buoyant, as the compliance would improve.
õ TRADERS LOBBY
The traders lobby is opposed to the introduction of VAT and the traders and observed an all-India strike opposing its introduction. Over 1,00,000 traders from all over the country converged in Ramlila grounds in a rally on April 8, 2003 to protest introduction of VAT. The traders lobby cites the possibility of harassment by the tax inspectors as the outward reason for their opposition. Under VAT system pucca records need to be maintained which is very cumbersome and would lead to harassment. They said that, “The VAT is good for manufactures, but bad for traders. We are protesting against the extensive procedural formalities that will have to be followed by traders under the new regime, resulting in increased transaction costs”. Sanjay Sethi of the Confederation of All-India Traders said that, “However the real reason is different. There is less scope for tax evasion under VAT, and there will be stricter compliance. The traders lobby wants to retain the scope for tax evasion as it exits u1 present under the sales tax.” This being the real underlying reason for their protest there can be on sympathy for their opposition. To exempt small traders form VAT the minimum turnover for VAT has been made Rs.5,00,000, but the traders lobby argues that this limit is too low.
Some have expressed apprehensions that introduction of VAT would lead to price rise. If we go by the experience of other countries only in Uruguay and Chile there have been high inflation following the introduction of VAT and in other countries the price rise has been marginal.
õ NEGATION OF THE FEDERAL PRINCIPLE
Dr. Ashok Mitra, noted Marxist economist and former Finance Minister of West Bengal, has opposed VAT because it would be a negation of the federal principle as it would concentrate more powers at the Center and also because it is being introduced at the behest of the WTO. The World Bank has also urged India to expedite the introduction of VAT, as this is the best way to tax services, which now form more that half of the GDP. Some states are reluctant to introduce VAT in a situation when many, other states have not introduced it. The advantages would accrue to all only if all the states introduce VAT, those which introduce, will be at a disadvantages.
What unites truckers and traders and the opposition to VAT is not the assumed burden of VAT itself, for this may very will reduce lax burden. In fact state governments apprehend revenue loss and the Center have promised to bridge the gap. The real fear is about getting found out. VAT will make income more transparent requiring the new class of tax liable households in the services sector to pay income tax. The fear of having to file income tax returns and be captured by the direct tax scanner has fuelled the opposition to VAT.
WHY WE SHOULD NOT OPPOSE VAT ?
The VAT system is non-cumulative and neutral in respect of competition; the system ensures equal distribution of tax burden between similar products; it exempts subcontracting from taxation; it is not levied on export goods; it exempts goods which have already been taxed and also purchases of capital goods among others.
Many states resorted to discriminatory taxation in their anxiety to stimulate trade of industry within the state. This had resulted in a rate war. The states also had too many structures or levels of sales tax- as many as 15 different rates in some states- distorting competition.
Although ‘Customs Union’ in the economic empowered committee came into effect on July 1st 1968 and trade from member counties was free from custom duties, physical controls at internal frontiers of the member countries had to be carried out because of differential indirect taxed such as turnover or sales tax and excise duties. This is a situation similar to out sales tax check-posts at the state borders. A uniform VAT could be avoiding this.
Under the value added system - non-cumulative multi-stage system where tax is levied only on the net value – tax on gross output minus tax on the cost of all material used. Whereas in a cumulative multi-stage system, the tax liability accrues at each stage in the course of production and distribution.
In this situation, it is never possible to know how much sales tax is paid on a product at each given point in the production or distribution process, for this depends entirely on how many stages the product itself, its components, and the equipment and services utilized have passed through. Even in a single industrial sector, these can vary considerably from product to product. At each taxable point, the tax paid accumulates on top of the tax levied at earlier stages resulting in cascading effect, which leads to vertical integration.
Consequently, the cascade systems as in the case of sales tax are not economically neutral. They distort competition in internal as well as international trade. Of course, this necessitates maintenance of proper records, which out trade and industry detest for obvious reasons.
Collection of VAT levied down to retail stage can be explained by comparison with the single-stage tax levied on retail transactions. If the rate is 10per cent, the retailer pays a tax of Rs.10 on a turnover of Rs100. with a 10 percent tax on the value added, the retailer takes 10 percent of turnover and deducts from that amount the taxes his suppliers have already paid on the goods and invoiced to him. If the retailer’s purchases amount to Rs,80 of his Rs.100 turnover, then he would over the tax collector Rs.2 i.e. 10 per cent of Rs.100 les 10 percent of Rs.80. this amount corresponds to 10 percent of Rs.20, the value added by the retailer to the product. As with the single-stage system, he will have to pass on to his customers the full 10 percent of Rs.100 in order to recover the amount in tax that he has paid indirectly through his suppliers, Rs.8 and directly to the tax authorities, Rs.2.The tax is levied in the same way at the wholesale level, and all the steps in production before the wholesaler. The system is non-cumulative and neutral in respect of competition. The only real difference consists in the methods of collection; at one point in the case of retail sales tax, and spread over all stages in the case of VAT.
1. VAT ensures equal distribution of the tax burden between similar products, irrespective of the length of the production and marketing processes, whereas under other system the tax burden weighs more heavily on unintegrated firms.
2. VAT is not levied on goods when they are exported, whereas under other systems exports may be partly taxed (this is the reason why we get refund of VAT at airports or by post).
3. Under VAT, imported goods are subject to exactly the same tax as domestically produced goods, while under other system discrimination is often unavoidable.
4. VAT exempts from tax purchases of goods and certain general expenses essential for running a business.
5. VAT is also a multi-stage tax less liable to evasion than sales tax. The buoyancy is also greater avoiding the need for tinkering in every budget.
In the Economic Empowered committee, VAT system was introduced first in the member countries barring Italy which was always a laggard and was given a year extra. At the second stage, uniform VAT rates were adopted. So, in India too, it is advisable to introduce in all States at a time. The Government of India has also made a good gesture of compensating the losses, if any. So, there is no excuse to postpone it further to pleas the industry and trade lobbies.
VAT IS THE KEY FOR ECONOMIC GROWTH
“States lose over 52% of their tax collection due to corruption. VAT can enhance value for State Governments and release them from various debt traps. The implementation of Value Added Tax (VAT ) can’t wait any longer. VAT has to come for an overall improvement in tax reforms in the country and is linked to India’s economic growth. For sectors such as telecom, roads and power sectors, VAT is an important area, said Dr. Ramesh Clrandra, Secretary, Empowered Committee on VAT, Union Finance Ministry.
According to him, the State Tax (sales tax) collection is a major harassment to Indian trade and is one of the main sources for corruption. “States lose over 50 percent of their tax collection due to corruption. Introduction of VAT would not only enhance value for State Governments but also release them from various debt traps”
While the industry is by and large in favor of implementing VAT, the trade including exporters is averse to such a tax system. The exports argue that they do not pay any tax at the moment, and would be prying if VAT were implemented. “if the trade is not in favors of VAT, it is an indicator of failure in out system”, he said. Over 100 countries including US, Brazil and Canada have implemented VAT either fully or partially. To begin with, India can also adopt VAT partially. A uniform tax reform would attract a lot of investors and help hassle-free goods movement within the country.
On the Central Sales Tax (CST), Dr. Chandra said, it is “a big irritant and problem for us”. The annual revenue for CST is about Rs.200,000 cores to State Governments, who feel they would lose this amount if VAT is implemented. “The Central Government has agreed to compensate the loss to the sate governments”
Dr. Chandra also emphasized that would not result in any increase in prices of goods. He said that such an impression was being created by “vested interest”. However, he agreed that because some links in the value chain, that are now evading tax, would come into the tax net, and because of that there could be an increase in prices. But he said that such an increase would be “legitimate”.
“If you had to pay sales tax while buying a product, which you were able to evade earlier, would that be price increase?
Dr. Chandra said that the Karnataka Government had done a study on the impact of VAT on the prices of some 80 commodities, and found that there would be no increase in the prices. He further said that he expected that the States would get richer after introduction of VAT, because (a) more transactions would come into the tax net and (b) there would be tax revenue form service tax.
DATA ANALYSIS, INTERPRETATION
ANALYSIS OF DATA
The data collected through interview of 80 shopkeepers is analyzed.
1. Value Added Tax Means:
The data collected through interview of eighty shopkeeper of Nerul Navi Mumbai.
Out of total eighty, twenty shopkeepers said that, VAT is a kind of sales tax levied on the sales of goods and services. Such shopkeepers are 25%of entire data.
Out of total eight, twenty four shopkeepers defined VAT as an advance Tax. Such shopkeepers are 30%of entire data.
Out of total eighty, twenty shopkeepers defined VAT as Tax that appears in the bill. Such shopkeepers are 25%of entire data.
Out of total eighty, sixteen shopkeepers defined VAT as tax that appears in the bill. Such shopkeepers are 25% of entire data.
Out of total eighty, sixteen shopkeepers said that, VAT is a new name given to tax. Such shopkeepers are 20% of entire data
WHAT IS VAT?
Table 5. 1
Kind of sales tax levied on the sales of goods and services.
An advance tax.
Tax that appears in the bill
A new name given to TAX
WHAT IS VAT?
Figure 5. 1
From perusal of the above analysis we can conclude the VAT is:
a) A kind of sales tax levied on the sales of goods and services.
b) An advance tax.
c) Tax that appears in the bill.
d) A new name given to Tax.
The above analysis also revels that the traders generally are not aware of the meaning of VAT .
Awareness amongst the traders about implementation of VAT Act.
Table 5. 2
Awareness amongst the traders about implementation of VAT Act.
Figure 5. 2
According to traders at Nerul and Navi Mumbai who were interviewed, the government on its part had taken adequate steps to ensure awareness of the new tax system. However if we analyse the answer to question no. 1, is above statements contradicted.
Sales tax before the implementation of VAT in the State was rational
Table 5. 3
Figure 5. 3
Many of the traders believe that sales tax was more rational way of collecting tax than VAT. They say they are not happy the present tax structure after implementation of VAT.
One to the traders said that both VAT and sales tax are beneficial as in case of some goods the rate of tax come down to 4% from the sales tax rate of 8% while in some other goods it was raised to 12.5% on implementation of VAT
As per national consensus. CST will continue to coexist with VAT
Table 5. 4
Yes, ready to pay CST & VAT
No only VAT
As per national consensus. CST will continue to coexist with VAT
Figure 5. 4
Around 20% of traders feel that as they are already paying a tax named VAT, they should be excused or exempted to pay another tax- called CST. So according to them CST should be removed as early as possible. While the remaining 80% don’t mind paying CST as well along with VAT till it continues to coexist.
VAT has removed the cascading effect of sales tax
Table 5. 5
VAT has removed a cascading effect of sales tax
VAT has not removed the cascading effect of sales tax
Sales tax & VAT can’t be compared
VAT has removed the cascading effect of sales tax
Figure 5. 5
The response to this question let to a variety of answers; 25% traders feel that VAT has removed the cascading effect of sales tax while 65 % traders feel that sales tax & VAT cant be compared, 10% of the traders feel that VAT has not removed the cascading effect of sales tax but they believe that it will be removed in the long run but not immediately.
Necessary to introduce VAT on goods & services.
Table 5. 6
Necessary to introduce VAT on goods & services.
Figure 5. 6
Majority of the readers feel that it was not necessary to introduce VAT on goods & services, as introduction of VAT on goods and services, has cost additional burden on the traders as they have to classify and maintain the goods according to their VAT percentage. They are also required to maintain accounts on such goods accordingly.
Suggestions for simplification of business records and formats in VAT regime.
Table 5. 7
Maintain record by own
Use of Computer
Suggestions for simplification of business records and formats in VAT regime.
Figure 5. 7
The view of almost every trader on the implementation of VAT, is that it has become compulsory to maintain various books of accounts, which is a very difficult task. Few traders maintain records by appointing a CA while few of them use modern technologies or use computerized accounting system by employing a data entry operator.
As per national consensus, branch transfers/ consignment sales should be eligible for input rebate in VAT regime.
Table 5. 8
As per national consensus, branch transfers/ consignment sales should be eligible for input rebate in VAT regime.
Figure 5. 8
Majority of them think that this is a limitation. They feel that when they pay VAT they don’t get any deduction nor any rebate in tax. One of the traders honestly told since we don’t get any kind or rebate or deduction on payment of proper VAT, “whatever we pay we pass on to the ultimate consumers” – so we pass the ultimate burden on the consumer only.
Turnover tax/ Resale tax should be on first and not on second sales.
Table 5. 9
Turnover tax/ Resale tax should be on first and not on second sales.
Figure 5. 9
All traders are opposing VAT paid on second sales. When there is an interest sale taking place, once the goods sold at first level VAT is imposed. So in their view., there is no necessity to pay VAT again on the second sales of the same product in the same state.
Litigations are foreseen under the VAT Act.
Table 5. 10
Figure 5. 10
Majority of traders face problem and high costs maintaining various accounts, by appointing a CA. they are also required to maintain separate records fro goods of varying VAT percentage. These may create litigations in the form of percentage applicable to a certain good or the classification of goods etc. They suggest government should implement a uniform VAT percentage on all goods and services which will prove to have a “MIRROR LIKE GUIDELINES.”
Reasons of leading to litigation under the present act (VAT )
Table 5. 11
Lack of awareness about the application of VAT
Classification of the goods
Figure 5. 11
Government has not created enough awareness about the application of VAT on goods and services. The traders should be made aware of how to classify the goods so that they can apply proper tax rates on the goods and services. At present litigations is expected only in the area of classification of goods having different percentage of VAT .
Suggestions in order to minimize disputes and litigations:
Suggestions given by traders in order to minimize disputes and litigations are;
õ Firstly government should implement a uniform VAT percentage on any type of commodity which should not be high.
õ Secondly VAT should be charged only on first sale & not on second sale.
õ Thirdly VAT should be implemented only at one place or at one time i.e. when goods come out of factory & not on MRP of the product.
õ Lastly awareness of VAT rules should be done properly by the government.
Moreover government should see to it that the production cost of raw materials at the production center should be minimum and the administration costs incurred due to implementation of VAT don’t increase the price of the products considerably.
AMBIGUITIES IN THE CLASSIFICATION OF GOODS.
Table 5. 12
AMBIGUITIES IN THE CLASSIFICATION OF GOODS.
Figure 5. 12
Traders fell that there are ambiguities in classifying goods-because there was no uniform percentage of VAT charged by government on various goods, as a result they have to maintain various books of accounts & moreover they have to refer the purchase bill again and again for verifying the percentage charged as VAT for e.g. long books charged @14%.
14.MESURES SUGGESTED TO DEAL WITH TAX EVASION:
The traders suggested the following measures for tax evasion,
B Traders suggested trade bodies to deal with tax evasion is by not giving &accepting bills to anyone or any kind of cash memos to customers.
BFurther saying trade bodies should charge retail tax only in the bracket between 1%-0.5%
BThey suggest trade bodies to remove or to bring each &every tax under the fold of VAT
B Combine all tax &make one single tax called VAT which should be minimum.
SUGGESTIONS FOR BRINGING NUN-RETURN FILING AND NON-TAX PAYING DEALERS IN TO TAX FOLD;
As there is corruption every where, out of 100 shops 30 shops will be paying VAT, remaining 70 shops don’t pay VAT. In order to bring a non tax payer into the tax fold, Government should conduct regular checks of various bills, challans, memos, etc. of various shops in the locality &convert a non tax payer into a tax payer.
IT IS COMPULSORY TO ISSUE OF SALES BILL BY RETAIL-CHAIN TO CONSUMERS.
Table 5. 13
IT IS COMPULSORY TO ISSUE OF SALES BILL BY RETAIL-CHAIN TO CONSUMERS.
Figure 5. 13
It is compulsory to issue of sales bills by retail-chain to consumers.
According to traders it is important and compulsory for them to issue a bill to customers. But it is very difficult for them to issue bill to each &every customers as there are items which range from Re. 1/ - to Rs.500/-.
Moreover they adopt a computerized system for giving bill to customers & they suggest Government to round off the amount of VAT in the MRP itself
“VAT BENEFITS TRADERS’’
Table 5. 14
VAT BENEFITS TRADERS
Figure 5. 14
Majority of shops have said –“VAT benefits Traders” this statement is not at all true- it is a false statement, “VAT benefits only Government & not traders, customers, sealers”- they say that Government collects money from people by introducing various taxes. The money so collected goes in the hands of the Government but no one knows where it is being utilized and who are the beneficiaries. So the beneficiary is assumed to be the Government and not the traders.
POSITIVE ASPECTS OF “VAT” :
Table 5. 15
POSITIVE ASPECTS OF VAT
Figure 5. 15
Majority of traders feel that VAT does not have any positive aspect. Only if there are uniform rates of taxes VAT has [positive aspects. Thus according to the traders if Government improves its policies, procedures of implementation of VAT & have a uniform tax rate for goods and services then VAT will be beneficial.
Changes desire to be incorporated in the VAT Legislation.
Table 5. 16
Changes desire to be incorporated in the VAT Legislation.
Figure 5. 16
Most of them suggest that the uniform percentage of VAT charged on goods and services would be the most desirable qualitative change in the system which will further put an end to corruption in the system.
ANY OTHER SPECIFIC SUGGESTION?
No other specific suggestion was given by any of the traders.
A FEW GUIDELINES FOR VAT
An important aspect relates to the obligations of taxpayers in terms of accounting requirements under VAT. The differences in maintaining books of accounts between the past system of sales tax and in the system are crucial. A dealer has to accomplish changes in the accounting system before the new system is introduced.
These changes are all the more important for those who are second sellers and hence do not pay any tax under the present system. Owing to differences in the two systems, most authorities fell that smooth functioning of VAT would critically depend upon taxpayers maintaining complete records
However asking dealers to maintain more detailed accounts increases their compliance costs. The dealers must therefore, maintain sufficient details in order to have information on the following aspects: particulars of invoices giving details of accounts giving information of all purchase and sales, and interactions between invoices, purchase and sates accounts with the tax return form.
The taxpayers, while preparing for the introduction of VAT, should attempt to involve all the concerned departments of their companies. These include sales, pricing, accounting and shipping. In fact, the most important change will be in the invoicing and the accounting systems. To cope with this, it is important for taxpayers to seek information and possible advice on the specific situation for a particular type of business. It is equally important that taxpayers and consumers are provided with the requisite information to enable them to understand VAT. Our experience also suggests that lack of understanding of VAT has resulted in resistance from taxpayers.
Finally, to take dealers into confidence and to have taxpayer-friendly procedures, it is important that government spends time and resources towards client services and takes into account dealers’ views. With a view to having interaction with taxpayers in the process of formulating procedures, states must appoint an advisory committee comprising tax payers, experts and state representatives to have a trouble free switchover to VAT .
DO’S AND DON’TS IN VAT
P DO apply for Registration in time after exceeding the prescribed turnover limit under VAT and obtain valid certificate.
P DO keep a monthly record of your turnover – late registration can result in sever penalties.
PDO display Certificate of Registration at predominant place at the place of business.
P DO notify your local VAT office when major changes take place – changes must be notified within thirty days.
P DO issue Bills/Invoices in respect of any transaction in excess of Rs.100/-.
P DO obtain and keep VAT invoices – these are your authority to claim back VAT on supplies made to you.
P DO file ‘first return’ for the period from 1st April to the end of the month’ in which Registration Certificate has been granted. Thereafter file monthly return for the said Financial year.
P DO File monthly/annual return as applicable, after the end of first Financial year in which Registration Certificate has been granted.
P DO keep Books of account at place of business for seven years and produce for inspection if asked for.
P DO discharge proper tax liability in time to avoid interest/penalty on deferential dues arising after assessment.
P DO claim interest on the refund.
P DO claim proper set-off.
P DO charge VAT on any equipment or vehicles (except major cars) that you sell or part – exchange.
P In case of any doubt apply for determination of disputable questions under section 52 to ascertain.
· As to whether any person, society, club or association is a dealer.
· Whether particular activity amounts to manufacture.
· Any transaction is sale or purchase.
· Any particular dealer is required to be registered.
· Rate of tax applicable to particular sale or purchase.
o Don’t delay in applying for Registration.
o Do not delay in filling returns and discharging tax liability under the provisions of Law.
o Do not falsely represent that you are a Registered Dealer at the time of selling or buying goods.
o Do not knowingly furnish false returns.
o Do not produce false bills, cash memos, certificate or other documents for any purpose.
o Do not keep false accounts of value of goods bought or sold.
o Do not produce false accounts, registers and documents.
o Do not falsely represent that you are holding Authorization or permit at the time of purchase or sale of any goods.
o Do not evade any tax.
o Do not knowingly furnish false returns.
o Do not fail to comply with the requirements of any notice issued under the B.S.T.Act.
o Do not fail to furnish any information required by the Department.
o Do not collect tax in excess of rate applicable on particular commodity or on the tax free goods.
Any lapse in above makes you liable for penalty and prosecution under the VAT Laws of the states.
v What was the need to introduce VAT in our country?
Key benefits for the Union and state government:
1. VAT system, if enforced properly, forms part of the fiscal consolidation strategy for country. It could help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the Government.
2. Less tax evasion and more earnings for the state.
3. Any globally accepted tax administrative system will help India integrate better in the world Trade organization regime. Over 120 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.
v What are VAT benefits over sales Tax?
Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore, the burden of the full tax bond is born by only one dealer, either the first or the last dealer. However, under the VAT system, the tax burden would be shared by all the dealers from first to last. This sharing of tax by the different dealers at various stages, ultimately benefits the end consumers.
Under the CST Act the tax is levied at a single point. Under the VAT system, the retailers are not subject to tax except for the retail tax.
Under the CST Act, general and specific exemptions are granted on certain goods while VAT does not permit such exemptions.
Under the CST Law, concessionaol rates are provided on certain taxes. The VAT regime will do away with such concessions as it would provide the full credit on the tax that has been paid earlier.
Under VAT law, first, the dealer pays tax on the sale or purchase of goods. Thus, the tax burden is shared equally by the last dealer.
v How will VAT affect all segments of the industry (manufacturer, Distributor & Retailer)?
VAT tries to increase the base of sales tax payers and get more people into the VAT net. VAT multi point tax results in sales tax collection on MRP (Maximum Retail price) vs the different base used to levy tax under the current sales tax structure. Businesses which were involved in second and subsequent sales will now have to pay tax on their value additions/margins.
v SHOULD SERVICE TAX BE INCLUDED IN VAT ?
Yes., with the service sector also coming in the tax bracket. The government can generate enough revenue.
v SHOULD CENTRAL SALES TAX BE ABOLISHED?
Central government is planning to phase out the CST. Reduce it to 2%in the first stage from the current 4%and then to 0%. This will happen along with the Implementation of VAT .
v HOW WILL THE CENTRE COMPENSATE THE STATE GOVERNMENT FOR THE SALES TAX PORTION OF VAT ?
100%in the first year of implementation,75%in the second year and 50%in the third year.
v HOW CAN THE SUCCESS OF HARAYANA’S VAT SYSTEM BE MEASURED?
The facts and figures relating to Harayana tell us about increase in the tax collection of the state
v WHAT DOSE VAT OFFER THE CONSUMER?
There is lot of talk these days about the impact of VAT on inflation. We hear that Delhi government is dithering on implementation of VAT purely because of inflationary potential of VAT..
VAT will be inflationary as the tax is charged on the sale price to the consumer as opposed to the first point of levy as at present. Since the value addition in the distribution channel is usually about 30% to 50% or more in the case of consumer products, the tax incidence on the consumer will he higher. VAT will push up prices particularly in commodities that are taxed in VAT at the General Rate of 12.5% and were earlier taxed at lower rates.
The state Government, to protect revenue loss, is likely to charged special Additional Tax on several commodities which will also result in price hike and the poor consumer will have to bear the burden as ultimately it is the consumer, you and me, who pay the tax.
v WHY ARE TRADERS APPREHENSIVE ABOUT VAT ?
Trade in every state has own set of concerns. The common concern is the increase in the tax burden.
v HOW DOES VAT HELP?
1. Exports,- with zero rating of exports, the rate of tax ;on export goods will be zero and yet credit will be given on tax paid on inputs. This will make our exports more competitive.
2. Industry- the system of input tax credit will promote production efficiency of investments. Investment decisions will not, therefore be based on tax differentials, tax holidays etc.
3. Trade – uniform rates of VAT will boost fair trade. 100% self-assessment will reduce the taxpayers’ need to visit the tax department offices on the whole.
v HOW CAN WE EDUCATE THE MASSES?
Masses need to be educated regarding VAT. For this the government should train its officials and also distribute pamphlets and educate people the benefits of VAT with the help of media.
v WHAT ARE THE BENEFITS TO THE TRADERS?
The trade is expected to be benefited by a simplified system of sales tax structure across states and reduction in tax in some states. A single rate of tax and a standardized law across states will remove the complexity out of the current sales structure. The extent of simplification will be clear once the states finalize their respective VAT laws.
At the end concluding the Dissertation on “IMPLEMENTATION OF VAT WITH SPECIAL REFERENCE TO RETAIL ORGANIZATION” under the head stationary shops in Nerul, Navi Mumbai I would like to add few points saying.
1. The implementation of VAT on 1st April 2005 was successful.
2. The traders were happy with the old sales tax and not with the present VAT, but they say that in the long run VAT can be beneficial to them.
3. Moreover the awareness of VAT was not very much in detail – to what extent it was expected.
4. With the help of this Dissertation I am sure I can spread more awareness about VAT among traders, consumers and help them to understand VAT in a better way and help them to learn what are advantages and benefits of VAT.
5. Lastly. I would like to conclude saying that;
THOUGH VAT HAS NOT BEEN AS SUCCESSFUL AS EXPECTED, AS THE TIME PASSES BY, IN THE LONG _ RUN IT IS GOING TO BE A HUGE AND THE MOST IMPORTANT/ CRUCIAL ELEMENT OF THE TAXATION STRUCTURE.”