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Published by: asifanis on Jun 09, 2010
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VAT - in IndiaVAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There isno sales tax on the further distribution channel. VAT, in simple terms, is a multi-pointlevy 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 rawmaterials by a manufacturer. Only the value addition in the hands of each of the entities issubject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 onwhich the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 beingthe value addition in his hands.Purchase price - Rs 100Tax paid on purchase - Rs 10 (input tax)Sale price - Rs 120Tax payable on sale price - Rs 12 (output tax)Input tax credit - Rs 10VAT payable - Rs 2VAT levy will be administered by the Value Added Tax Act and the rules made there-under.VAT can be computed by using either of the three methods detailed belowThe Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).Tax credit method: This entails set-off of the tax paid on inputs from tax collected onsales.India opted for tax credit method, which is similar to CENVAT. Note : Also look for MODVATStates such as Andhrapradesh, Kerala, Maharashtra, Madhyapradesh, Delhi and Haryanahave experimented with VAT albeit in a limited manner, covering only limited goods.The experiments never had the full-fledged features of VAT and were only concoctions.These states have even called off their experiments owing to different reasons. If oneanalyses why VAT or its variant failed in Maharashtra, which was the only state to comecloser to a true VAT regime, the following reasons emerge:1. Dual methodologies of computation of VAT credit Error! Hyperlink reference notvalid. , one for the Manufacturing stage and the other for the trading stage, thus breaking
the audit trail. It may be noted that one of the advantages of VAT system, as we would bedealing later on, is the audit trail that is created in the VAT chain.2. Presence of a large number of tax deferral and holiday schemes, which resulted in anarrow base. It may again be noted that under VAT, which is multi-point, the tax rateshave to be reasonably low, and lower tax rates presupposes that the tax base is wide.These two features were not present in the Maharashtra tax regime.3. Low level of awareness among traders, and even administrators, giving rise to fearsand apprehensions. Owing to this, there was considerable consternation among the trade,which gave rise to open revolt against the system.4. Partial implementation of the ideal VAT with the existing system coexisting evenunder this regime.5. Increased burden on retailers of Bookkeeping and compliance.6. Multiplicity of rates of tax under the VAT regime.7. Drop in revenue for the State Government, though there are no studies attributing suchreduction to the system of taxation.Thus States had indeed tried some variations of VAT, but eventually gave up due to avariety of reasons.
VAT - The Global Meaning
Globally, VAT is regarded as a tax that is best levied by the Central government - a condition thatis difficult to meet in a federal finance system such as ours. It is true that 123 countries haveadopted VAT, but most of them have unitary systems of government. VAT is a centrally-administered tax with a revenue-sharing mechanism. It is hard to visualise VAT as a revenue-neutral measure, or one where the states will not lose out in relation to the present system, in afederal set-up.If VAT is Centrally administered, the tax base is quite wide, comprising imports, production anddifferent stages of sales. If the base is divided between the Centre and states, the chain isbroken, making tax evasion easier and affecting the states' tax base. In countries where VAT isadministered by a federal government, revenue collection on imports accounts for a larger portionof total VAT revenues. In an IMF study of 22 developing countries, it was discovered that in abouttwo-third of them, more than half the VAT revenue was collected from imports. In Pakistan andBangladesh, VAT collection from imports was 64 per cent of the total proceeds from the tax. Astax evasion on bulk imports is difficult, it also helps in checking tax evasion at subsequent stagesof the tax chain.
Necessity of VAT in India
India, particularly the trading community, has believed in accepting and adopting loopholes in anysystem administered by the state or the Centre. If a well-administered system comes in, it willclose avenues for traders and businessmen to evade paying taxes. They will also be compelledto keep proper records of their sales and purchases.
Many sections hold the view that the trading community has been amongst the biggest offenderswhen it comes to evading taxes.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 inputs can beclaimed back from the tax authorities.At a macro level, there are two issues, which make the introduction of VAT critical for India.Industry watchers say that the VAT system, if enforced properly, forms part of the fiscalconsolidation strategy for the country. It could, in fact, help address the fiscal deficit problem andthe revenues estimated to be collected could actually mean lowering of the fiscal deficit burdenfor the government.The International Monetary Fund (IMF), in its semi-annual World Economic Outlook released onApril 9, expressed its concern over India's large fiscal deficit - at 10 per cent of the GDP.Further any globally accepted tax administrative system, will only help India integrate better in theWorld Trade Organisation regime
Advantages of VAT
Since ages always a reform is made for the benefit in the process of development. It wasChanakya who first wrote that a government should tax its people like a shepherd shears his flockor a bee gets nectar from a flower. But apparently that fiscal wisdom died with him. Let us notexperience the same with VAT in India. It has a baggage full of benefits. Few advantages of VATin India are mentioned below.It will be a virtual crime not to look to the other side of the coin of the Indian VAT system.Disadvantages will always give birth to amendments to the existing policy so that traders can ride jerk free on it adding value to the existing Indian taxation system. We have also discussed uponthe friction of VAT below.
Advantages of VAT
In the advantages part we will first look after the broad coverage of VAT in the Indian market.Then we will consider the level of security the Indian VAT is having on our revenues. Obviouslythe selection of items to be covered by VAT in India will be given a bullet to think upon and at lastwe will check out the co-ordination VAT in India will be having with our existing direct tax system.
1) Coverage
 If the tax is carried through the retail level, it offers all the economic advantages of a tax thatincludes the entire retail price within its scope, at the same time the direct payment of the tax isspread out and over a large number of firms instead of being concentrated on particular groups,such as wholesalers or retailers.If retailers do evade, tax will be lost only on their margins because customers that are registeredfirms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay moreto the government themselves. Under other forms of sales tax, both seller and customer gain byevading tax. One particular advantage is that of the widening of the tax base by bringing alltransactions into the tax net. Specifically, VAT gives the new government the opportunity to bringback into the tax system all those persons and entities who were given tax exemptions in oneform or another by the previous regime.
2) Revenue security

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