OBJECTIVES OF PROJECT:
To understand the concept of Value Added Tax (VAT). Its implication for a developing economy like India. Its Advantages and Disadvantages for India.
SCOPE OF PROJECT:
The project is confined to only study of Value Added Tax (VAT) and does not extend to the detail understanding of the indirect tax structure of the country. Also the project does not intend to get into the intricacies of understanding the tax structures of CENVAT and MODVAT.
METHODOLOGY USED FOR PROJECT:
The methodology used in the project for collecting data is secondary data. The collection of secondary data includes all the relevant information extracts from known published sources.
2.1. HISTORICAL PERSPECTIVE:
Kalidasa, the ancient Indian poet laureate (5th. Century A.D.), mentioned in one of his epics that the king collects taxes for the good of his subjects just as sun draws moisture from the earth to give it back a thousand fold* [* Kalidasa: Raghuvainsa (Canto 1, Verse 18)]. Historically, India can trace the origin of her taxation system to fourth century B.C. Kautiliya's Arthashastra, one of the earliest treatises on statecraft and public finance, records an elaborate direct and indirect taxation system prevalent in India around 300 B.C. Income Tax constituted a major part of state revenues and interestingly, it was collected inter alia from dancers, musicians, actors etc. This taxation was not progressive but proportional to the fluctuating income and there was a provision for Excess Profits Tax. General sales tax was levied on sales and a tax called Yatravena was collected from the pilgrims. Indirect taxes called shulkas (duties) were levied on commodities; pravesya shulka was a duty on imports, niskramya shulka was a duty on exports and abhyantara shulka was excise duty on indigenous commodities. There was a definite rule that goods were not to be sold at the place of their production and fines were levied for purchasing metals directly from the mines, horticultural products directly from the gardens or grains directly from the fields. The object obviously was to control the turnover of all goods so that duty was not evaded. The rates of customs and excises were the same and state goods were apparently exempt from taxation. Though revenues were collected
from all possible sources, the underlying philosophy was not to exploit or overtax people but to provide them and the king immunity from external and internal danger.
2.2. EVOLUTION OF TAX SYSTEM IN MODERN INDIA:
The taxation system in modern India was developed by the British during the colonial period through various legislation. The first Income Tax Act was introduced in 1860 which was amended through subsequent legislation and Income Tax Act, 1922 gave the final shape to the direct tax regimen in India. This Act continued till it was replaced by Income Tax Act, 1961 which governs the Income Tax and Corporation Tax regimen in India today. The other Acts for direct taxes are Wealth Tax Act, 1957, Gift Tax Act, 1958, Interest Tax Act, 1974 and Expenditure Tax Act, 1987. Estate duty has been abolished from the fiscal year 1985-86. The Indirect Tax Acts are Central Excise and Salt Act, 1944 and Customs Act, 1962 which succeeded the Sea Customs Act, 1878 introduced by the British in India. The basic distinctions between the direct and indirect taxes are: • Direct taxes are levied directly on the ultimate taxpayer; indirect
taxes can be transmitted to another party • Direct taxes are charged on income/capital/wealth; the charge of
indirect taxes is on expenditure/factor cost • Direct taxes' impact point is receipts; indirect taxes' impact point
is manufacture/transaction In the federal set-up in India, the jurisdiction of taxation powers is divided between the Central and State Governments. The direct and
indirect taxes acts mentioned above are Central Acts and revenues collected through these acts devolve on the Central Government. The main taxes collected by the State Governments are: • • • • • • • • • Taxes on sale or purchase of goods Excise duty on alcohol Land revenue Taxes on motor vehicles Electricity duty Stamp duty Taxes on entertainment Taxes on professions, trades, callings and employment Taxes on goods and passengers carried by road or on inland
waterways (terminal taxes on goods or passengers carried by railway, sea or air are collected by the Union but assigned to the States) Apart from the revenues levied and collected by the State Governments a portion of the Central revenues like Income Tax and Central Excise is allocated to the State Governments as per the distribution formula periodically fixed by the Finance Commission, a statutory body under the Constitution of India. The net proceeds of taxes, which are shared with the States, are certified by Comptroller and Auditor General of India. Besides tax receipts, Government revenues also flow from non-tax receipts. The two basic distinctions between tax and non-tax receipts are: (a) while a tax receipt is imposed by law, a non-tax receipt is derived from rule, tariff or other agreement and (b) while a tax receipt does not represent a direct quid pro quo, non-
tax receipt generally involves a supply or service from the Government, Non-tax receipts are characterized by three criteria: • Large volume but small money value (school receipts, hospital
receipts, police receipts etc.) • Contractual but outside the parameters of statutes (forest
receipts) • Contractual but within the parameters of statutes (mining
royalties, etc.) Major non-tax receipts are interest receipts, mining receipts, forest receipts etc.
3.1. During the fiscal year 1995-96 Government revenues realized from various sources were as follows:
Union Receipt (In Indian Rupees*) Direct Taxes2 Central Excise Customs Total tax receipts Non-tax receipts3 335,592.80 million 400,085.90 million 357,280.00 million 1,092,958.70 million 686,210.00 million
6% Non Tax Revenue 6.6% 25. Estate duty and other miscellaneous direct taxes 1. Interest tax.2% Non-tax revenues Total revenues to GDP 2.
State Receipts (In Indian rupees) Tax receipts Non-tax receipts Total State receipts 609. Gift tax.2% 8.2% State Governments Tax revenues 6.2%
25. Income tax.6% Percentage of tax and non-tax revenues (union and the states) to GDP
.320.50 million 213.374.779.6 Total Union receipts 1.30 million
Tax and non-tax revenues of Union and State Governments as a percentage of Gross Domestic Product (GDP) (Fiscal year 199596): Union Government Direct Taxes Indirect Taxes 3. Includes External Grant Assistance and Aid Material and Equipment.80 million 823. 1997 are indicated in Appendix 1 (Pg. Expenditure tax on hotel receipts.4% Total revenues to GDP 17.4% 7.168.945. 475) 2 Includes Corporation tax. and Wealth tax.70 million
* Exchange rates for different currencies vis-à-vis the US $ as on 31st March.
increasing the role of the private sector. Broadening the tax base. reducing the tax rates and simplifying tax laws and
ECONOMIC POLICY AND FISCAL REFORMS
Indian economy has entered a new era in the last decade of the present century. the country is passing through a state of transition from a command economy to a market economy. The new economic policy launched by Government of India in 1991 aims at reducing the extent of Government controls over various aspects of the domestic economy. The reorientation of the economic policy has necessitated consequential reforms in the taxation structure to attain a fiscal symbiosis with the shift in economic objectives. In other words. redirecting scarce public sector resources to areas where the private sector is unlikely to enter and globalisation of the economy.
There is no surcharge on foreign companies.22. has been modified to exempt all productive assets including financial assets such as bank deposits. The floor limit for levy of wealth tax has been raised considerably and stands at Rs. tax deduction at source has been introduced on interest income on term deposits. leasing or hiring of trucks. income in respect of units of Mutual Funds.75 percent for a widely held company (shares quoted in stock market) and 57. which were 51. These include presumptive taxation for small business and estimated income scheme for persons engaged in business of civil construction and of plying. The maximum marginal rate of personal Income Tax has been reduced from 56 percent to 30 percent.8
procedures have been the main areas of concern.5 percent for a closely held company (family concerns) have been unified and reduced to 35 percent. shares and other securities. With the same objective. professional fees and a host of contracts.1.40. The wealth tax.1. The major strides taken in the fiscal area are as follows:
4.5 million. Fiveyear tax holiday has been introduced for investments in infrastructure facilities (highways. ports and mass
. Surcharge on domestic companies has been reduced from 15 percent to 7. The rates of corporate income tax. Tax rate on foreign companies (branches) has been reduced from 65 to 50 percent. bridges. which was earlier applicable to all personal assets. airports. The incentive structure for savings in the form of financial asset has been strengthened.5 percent.000 in 1995. DIRECT TAXES:
Exemption limit for levy of Income Tax was raised from Rs.000 in 1991 to Rs. A number of provisions have been introduced to widen the tax base.
The number of duty rates has been brought down to 10 (including nil rates). discount structure etc. INDIRECT TAXES:
4. marketing pattern.9
rapid transport).1. backward States and electronics hardware and software. The manufacturer. is required to keep and maintain all the necessary records in respect of manufacture.2. The amount of Excise duty is required to be deposited before the goods are removed. Excise duty is levied by the Central Government on production or manufacture of goods. stock and removal of goods depending upon the type of product.2. CENTRAL EXCISE:
There has been a switch-over from a system where excise duties were specific and numerous and varying in nature with a large number of exemptions.
4. specified quality control. pollution control and R&D equipment. Excise duty is levied only once when the finished goods are purchased except in certain cases when the finished goods produced by using the components and raw materials on which duty is paid and are subject to CENVAT or Proforma Credit. is required to be declared.2. In case of excise duty is levied on the basis of value of goods. CUSTOMS DUTIES:
Import duties were inordinately high and in several cases were more
. testing. Petroleum Oil Lubricants (POL) and spun yarn from fibres.2. It is either based on volume of production or value of goods manufactured. who is required to pay Excise duty. to one largely based on ad valorem basis with fewer duty rates and exemptions Ambit of MODVAT (tax credit for taxes paid on inputs) has been extended to capital goods. power generation and distribution.
This was accompanied by lowering of duties on ferrous and non ferrous metals to 35/40 percent in 1995. The import duty on capital goods for general projects and machinery which was 85 percent prior to reforms was brought down and unified for nearly 80 percent of machinery. it is exempt from sales tax. The numbers of duty rates have been brought down to 12 (including nil rates). dried grapes. Sales tax is levied on the seller who recovers it from the customer at the time of sale.2.10
than 300 percent prior to economic reform. Customs duty on power projects and related machinery was reduced to 20 percent and the same for fertilizer projects to nil. If the product is sold subsequently without being processed further. which is produced or imported and sold for the first time. SALES TAX:
Sales tax is levied on the sale of a commodity. The gradual reduction has been from 110 percent in 1992 to 50 percent in 1995 with the exception of passenger baggage.
. at 25 percent in 1995. almonds and ball and roller bearings. State sales taxes that apply on sales made within a State have rates that range from 4 to 15 per cent. exports and services are exempt from sales tax. However. 4 per cent tax is generally levied on all inter-State sales. Also. Sales tax can be levied either by the Central or State Government. A phased reduction in the peak rate of customs duty was undertaken in each of the six budgets since 1991. Central Sales tax department. Sales tax is also charged on works contracts in most States and the value of contracts subject to tax and the tax rate vary from State to State. alcoholic beverages.
the tax on the sale or purchase of goods is at single point. manufacturer etc. Main Principles in State Sales Tax Laws: 1. The sales tax or the purchase tax is levied on that assessee on the basis of his category such as dealer. Under the provisions of some state laws the assesses are divided into several categories such as manufacturer. In most of the cases related to the sales tax. 4. Only the parliament can levy tax on inter-state sale or purchase of goods. The goods have been divided into different categories and different rates of sales tax are charged for different categories of goods. A sale or purchase of goods is said to take place when the transfer of property in the existing goods or future goods takes place for consideration of money. 2. and such as assess is required to obtain a registration certificate to that effect.
. selling agent etc. No state can levy sales tax on any sale or purchase where such sale or purchase takes place (a) outside the state and (b) in the course of import of goods into or export of goods outside India. 3. on production of certain forms or certificates (and differential rates of sales tax are levied). 2.11
The power to levy Sales tax: 1. dealer.
Easier to collect: Indirect taxes are easier to collect as indirect taxes are mainly on goods/commodities.3 ADVANTAGES OF INDIRECT TAXES:
Psychological advantage to tax payer: It is psychologically very difficult for as person to pay some amount after it is received in his hands.e. 7.12
5. The sales tax laws of the states prescribe the procedure to be followed in case an assessee prefers to make an appeal. a quarter returns of sales or purchases is insisted upon and the assessee is required to furnish the return in the prescribed form. At the time of assessment. The registration certificate number should be quoted in all the bill / cash
4. Manufacturing activities are carried out mainly in organized sector. On the other hand. the customer i. certificate to that effect. the ultimate tax payer does not feel a direct pinch while paying indirect taxes and hence resistance to indirect taxes is much less compared to resistance to direct taxes. 8. the assessee has to furnish all the documentary evidence and satisfy the concerned sales tax / commercial tax officer. where records and controls are better. On the other hand. 6. for which record keeping.
. since the price of commodity or service is already inclusive on indirect taxes. verification and control is relatively easy (at least in organized sector). Every dealer should apply for registration and obtain a registration memos. Generally.
Litigations in courts also is also much higher in direct tax matters than indirect tax matters. newspaper etc.4% of total revenue. High revenue from indirect taxes: It is interesting to know that during budget discussions and news in TV. though indirect taxes constitute over 71% of the tax revenue. [Tax planning bordering tax avoidance is not uncommon in organized sector]. firma or corporate bodies. tax evasion of indirect taxes is common in unorganized sector. discussion is more on direct taxes than indirect taxes.
. Admittedly. where millions of transactions are carried out in lakhs of places and keeping an eye over all such transactions is virtually impossible. In 1960-61.13
direct taxes mainly on income/wealth of individuals. indirect taxes constituted 64% of total tax revenue of Central Government. Slightly less tax evasion: Tax evasion is comparatively less in indirect taxes in organized sector due to convenience in control. in 1990-91 indirect taxes constituted 78. while. Naturally. government is relying more and more on indirect matters. Supporting local industry: Government can and does shield indigenous industry from international competition (or dumping) by levying high customs duty.
CENVAT (Central Value Added Tax):
CENVAT (Central Value Added Tax) has its origin in the system of VAT. who carries out the further processing and supplies it to third manufacturer. Thus the output of the first manufacturer becomes input for second manufacturer. If
. raw material passes through various stages and procedures till it reaches the ultimate stage. which is common in western European countries generally any tax related to selling price of product.1.14
CENVAT AND MODVAT
5. In modern production technology. This process continues till a final product emerges.
As stage of production and / or sales continue each subsequent purchaser has to pay tax again and again on the material which has already suffered tax.e. When B supplies this good to C at Rs 150 the tax will apply on it also.g. Even though the term MODVAT is not defined in central exercise act 1944 or rules made there under. This is called cascading effect. modified value added tax is a unique scheme under central excises which enables a manufacture to avail credit of duty paid on notified eligible and duty paid inputs used in or in relation to the manufacturer of the notified dutiable final products directly or indirectly and whether or not contained in final product and utilizes such credits towards payment of duty on any final products whether or not such inputs have been actually used in the manufacture of such other final product.” MODVAT is nothing but MONEY and therefore every manufacturer of excisable goods is keen to avail this facility which reduces the liability of duty on the final products to the extend of duty already paid on notified eligible inputs used in or in relation to the
. It can be describe in following words: “MODVAT i.15
a tax is based on selling price of a product the tax burden goes on increasing as raw material and final product passes from one stage to other e. let us assume that tax on a product is @10% of selling price. Now Manufacturer “A” supplies this product to manufacturer B at Rs 100. MODVAT (Modified Value Added Tax):
MODVAT—modified value added tax is a concept in central excise law introduced with effect from 1-3-86 and has gained momentum with more and more industries beginning to avail this facility.2. Thus B gets material at Rs 110.
In short MODVAT is unique concession granted to manufacture of
manufacture of excisable goods referred as final products. with proper duty paying documents and utilizing the same in or in relation to the manufacture of final products and utilization of credit towards discharge of duty when such final products are removed. tax on inputs as well as tax on final products.e. Still there are some grey areas which need to be tackled. As is common with any new concept. MODVAT scheme also operates with full freedom to manufacturers to opt for the same after complying with the prescribe procedure and documentation. The purpose of MODVAT scheme is to avoid double taxation i. MODVAT also faced many teaching troubles when implementing and even though certain loopholes are plugged and certain practical difficulties removed. MODVAT is not an altogether new concept but was existing under different schemes such as proforma credit under rule 56A/chapter X Procedure etc. MODAVT is therefore to avoid cascading effect of taxes paid on inputs which are used in the manufacture of final products which again attracts excise levy. It can also be perhaps termed as SRP i.e. Like the self removal procedure (SRP) permits an assessee to carry on with manufacturing. storing and removing excisable goods subject to following prescribed procedure and documentation. MODVAT comes in existences as a result of report submitted by Technical Study Group appointed by government to study VAT prevailing in European countries and to suggest adopting of VAT in India and to mitigate the cascading effect of indirect taxes. self receiving procedure since the entire scheme deals with receiving of notified and eligible inputs.
all provisions in respect of waste & scrap have been removed in CENVAT rules. CENVAT Vs. It was creating procedural hurdles without any benefit. RG23A and RG23C have been scrapped. Inputs & capital goods can be sent to for job work under CENVAT without payment of 10% duty. MODVAT:
Major differences between Cenvat and Modvat are as follows: The most welcome change is the scrapping of Modvat declaration. assessee should reverse the Central credit.
5. However. Statutory records i. It is also specified that if the inputs/capital goods do not come back within 180 days. but assessee can now maintain the records on computer or in a form convenient to him. Waste & scrap is treated as any other ‘final product’ in CENVAT. Specific provision has been made permitting removal of moulds & dies to a job worker to manufacture goods on behalf of assessee according to his specifications. Hence.
.e. Uniform time limits of 180 days have been specified for bringing back the inputs & capital goods after job work.3.17
excisable goods and in view of its simple rules for compliance. the private records have to any way maintained. he can himself take credit if the inputs/capital goods come back later. It can be send under assessee’s own challan & no statutory records have been prescribed. Distinction between ‘original’ & ‘duplicate’ copy of Invoice has been removed. the concept has come to stay as a recognized part of excise law and it is not an exaggeration to state that knowledge of central excise law is incomplete without knowledge of MODVAT. CENVAT credit can be taken under any copy of Invoice. Of course.
The mechanism of VAT is such that. however. Earlier rule 57T(2) provided that assessee cannot claim depreciation u/s 32 of Income Tax Act or as revenue expenditure in respect of excise duty portion of the capital goods.18
Time limit of 6 months of validity of duty paying document for availing CENVAT credit has been removed. Though Value Added tax is similar to Sales Tax instead of implementing on tax of a certain percentage at the time of retail sale.
6. be collected in stages (installments) from one stage to another. and subsequent seller pays tax only on the value addition done by them-leading to total tax burden exactly equal to the last point tax. for goods that are imported and consumed in a particular state. corresponding new rule 57AC (4). Since the tax is collected at each stage as he adds value to the
. there is smaller tax added each time the product is resold or when “value” has been added. INTRODUCTION:
Value Added Tax (also referred to as input tax or turnover tax) is an indirect tax levied at every economic stage from the manufacturer to the retailer. VAT would. the first seller pays the first pint tax. VALUE ADDED TAX (VAT)
6. The words ‘as revenue expenditure’ are missing from.1. India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods.
Country Argentina Bolivia Brazil Chile Columbia Denmark France Ireland October 1973 January 1967 March 1975 January 1975 July 1967 January 1968 November 1972 Month of VAT introduction January 1975
. Let’s assume that his Central Sales Tax (CST) liability is 10% on the sales he has to pay Rs. It is charged at percentage of prices at each stage. hence it is the Value Added Tax. i.5 = Rs. In a quarter.i. Let’s assume he has to pay 5% local tax on this.earlier.e. which is known as VAT.100000.10000/. Example: Let’s analyze the situation in case of a Colour TV’s to understand the concept better. the wholesaler purchases 10 CTV’s @ Rs.e.
Over 120 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.e.90000/-. now he has to pay only the remaining tax. the wholesaler sells all the CTV’s @ Rs.4500/. VAT = Total Tax Liability – Input Tax Credit VAT = 10000 – 4500 = Rs.10000. which means that the actual tax burden is visible at each stage of the production and distribution chain.9000/.19
product or goods. goods worth Rs.90000 x 0. So the Input Tax Credit is Rs.2. Since the wholesaler has paid Input tax of Rs. the invoice will show a sale of Rs.5500/-
Israel Italy Netherlands Norway United Kingdom Uruguay
July 1972 January 1973 January 1969 January 1970 April 1973 January 1968
At a macro level. expressed its concern over India's large fiscal deficit – at 10 per cent of the GDP. if enforced properly.21
6. forms part of the fiscal consolidation strategy for the country. First deadline for moving to VAT. there are two issues. in fact. in its semi-annual World Economic Outlook released on April 9. Northern states to move to VAT after this date. Even this could not be adhered to. Lobbyist protest Most states except Haryana announce there will be delay in switching to VAT. VAT IN INDIA:
A lot of thinking process was/is on in India and some of the major thought process is presented: The Sequences Of Events
1 MAR 1986 16 NOV 1999 1 APR 2002 1 OCT 2002 1 APR 2003 MAR 2003 1 APR 2003 APR 2003 1 JUN 2003 JAN 2004 Modvat Introduced in India. 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.3. Second deadline for introduction of VAT. The International Monetary Fund. Conference of CMs and state FMs agrees to replace sales tax with VAT. Deadline deferred as most states were not ready. Industry watchers say that the VAT system. Empowered Committee sets 1 June 2003as new deadline for transition to VAT Around 15 states (excluding the northern states) are expected to move to VAT. 15 States and 5 Union Territories ready by this date. Announced by finance minister Jaswant Singh as third deadline for introduction of VAT. which make the introduction of VAT critical for India. Further any globally accepted tax administrative system will only help India integrate better in the World Trade Organization regime.
rebated as goods move in value
exception rather than rule. in case of inter-state purchase
6. as with the current system. Similarly. IMPLEMENTATION OF VAT:
Under VAT. posts will persist. Exemptions under VAT are the It is threatening to turn out the other way round. Thus. local tax is levied on purchases and an equal amount is set off against the sales tax liability on finished goods. paid on the inter –state transactions. In VAT.
Countries and states use accounting Physical controls like border checkbased controls. the tax levies like entry tax is There will be no VAT on imports. In case the CST liability is less than the local tax paid. there will be no local sales tax/VAT levied on inter-state sales or exports. the only change is the procedure to collect the local sales tax. one has to pay the local tax. countries allow credit for tax on inter-state transactions.22
6. VAT IN INDIA & ABROAD:
VAT covers goods and services
It will only cover goods for a long time to come
There is a single national law on There will be as many legislations as states VAT There is no excise and other duties. covers imports.5. In the case of a manufacturer. Excise will continue as will other There is just a single VAT rate Vat chain In most systems like the European No credit will be available in India Union. this amount is adjusted against his other VAT liability or can be claimed as refund.4. but this would be fully set off from his central sales tax liability.
He will be charged the same tax. In the present system. Thus in chain
. which is equal to the rate of tax applied on the sale price. Under this system the rate of tax is higher as tax is collected on smaller amount though goods are ultimately sold to consumers at a higher price. lack of transparency. vendors to collect forms for sale at concessional rates. cascading effect on prices. Under VAT the tax will be levied at each stage of sale. there would be no double taxation as the entire local sales tax levied on the purchases of an inter-state seller is allowed to be set off against the central liability. on first sale of such goods.6. many traders dealing in goods that are distributed from a particular state are facing problem of double taxation because of withdrawal of footnote facility. under VAT. the seller deducts the tax already paid on the purchases from the tax charged from the customer and pays the balance to the department. there are other drawbacks like. currently. However. In addition to above.
6. export of taxes along with export of goods. all taxes charged are to be paid to the department. the tax is collected by government at first point of sale by importer or manufacturer or in case where source of purchase is other than registered dealer purchase. all local sales will attract VAT liability. Under single point system. many complicated Rules for set offs.23
or imports. OVERVIEW OF MAHARASHTRA VALUE ADDED TAX ACT 2002:
VAT is expected to be paid on Value Addition. there will be no set off since no local tax has been paid on such transactions. at each stage of sale. In other words it is multipoint levy of tax. Under VAT. There would be no difference whether one sells to a dealer or the final consumer. Another difference is that. etc. Differences: In VAT.
the tax slabs would be bare minimum.e. avoidance of multiple levy of taxes like T.O. etc. ultimate consumer price. inter-state sales will get discouraged. 0%. However the tax paid on corresponding purchases will be given credit as set off. since it will help in taking set off and maintenance of accounts.e. which is still not prescribed (though expected at 12%). Also the invoices. For purpose of easy accounting for business community under VAT. For certain items the rate may be 20% or higher. If VAT is implemented in its model way. more and more business transactions will be of local nature.. exports will thus be more competitive. retailer will face several problems. it will help in removing so many drawbacks which are imbedded in present system. The last dealer in the chain of trading. 4% and other rate for general goods. 1%. It will result in transparency.. therefore. Surcharge. From the present classification it appears that the tax slabs will be minimum i. simplicity as no forms to be collected or given. The number of tax paying dealers would increase as also return filing. as also avoiding cascading effect.24
of dealings from manufacturer/importer till consumer at each stage tax is levied. viz. showing tax separately are preferable. The exporters will be benefited since there will not be any tax component involved in exported goods..
. through branch transfers. Thus the vendor as such will be liable to pay differential amount or in other words tax on hi profit margin. There are certain other relevant issues that will arise under this new system.T. The business pattern will change since set off will be relating to local tax. tax rate should be lower since tax is collected on higher amount i. Under this system.
which is not in BST Act. However it is possible that in certain cases there will not be inflation. tax will be levied on each sale. It is also possible that I long run the prices may come down. b) A category of non-resident dealer and his agent is specifically included. supplying. The VAT also expects more accounting work for dealers. selling or distributing goods. etc are covered under this definition. a company. a) a local authority. As per Sales Tax Act “Dealer“ is any person who carries on (whether regularly or otherwise) the business of buying. HUF or other association of
. directly or indirectly. The effect of levy of purchase tax will be minimum since set ff is immediately available. a body corporate. c) The persons engaged in ‘deemed sale’ transactions. club. remuneration or other valuable consideration. Since under VAT. for cash or for deferred payment.25
There is a fear of inflation due to VAT as tax will be on ultimate consumer price. any co-operative society or other society. leasing the goods. or for commission. However the provisions for levy of purchase tax do exist in VAT act. Some important definitions in comparison to Sales Tax are as follows: 1. firm. like executing Work Contracts. there should not be any tax on purchase side. Dealer: As per VAT Act The definition of dealer is same as that as per Sales Tax Act except for following changes a) The word ‘Carrying on’ is replaced by ‘engagement’.
stocks. commission agent. and whether of the same description as hereinbefore metioned or not. and c) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal.
. however. or any other mercantile agent. del credre agent. actionable claims. or securities. articles or commodities and all kind of movable property. shares. b) a factor.26
persons which carries on such business. goods belonging to any principal whether disclosed or not. by whatever name called. who carries on the business of buying. As per Sales Tax Act Goods include all materials. Goods: As per VAT Act The definition of goods is same as that as per Sales Tax Act except for following changes: Lottery ticket is specifically removed from ’Goods’ and hence lottery ticket will not be liable under VAT. 2. include newspapers. broker. whether disclosed or not and whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of the principal. selling. supplying or distributing. The term does not.
Conversion of raw material into finished goods would be termed as ‘manufacture’. probably there is no need for the above definition. b) fuels and consumables. It is. f) computer internal telephone system used for production purposes.27
3. Goods eligible for being used “in manufacture” a) raw material. d) storage and handling equipment for materials. c) machines. thus a process without which the ultimate product or finished goods would be commercially viable. Goods not eligible for being used “in manufacture”— a) office stationary for administrative use. etc. spare tools.
. b) motor cars (not for factory). However. For example conversion of bamboo into paper would be termed as manufacture. this definition may be necessary to decide the dealer who are entitled to set off on Capital assets and in what manner. as in relation to capital assets set off is going to be staggered. As per Sales Tax Act It means conversion of goods into a new form whereby an altogether different article emerges. Manufacture: As per VAT Act The definition of manufacture is same as that as per Sales Tax Act except for following changes: There is no provision to prescribe any processes as not amounting to manufacture or notifying any process as amounting to manufacture. When full set off is available on purchases. e) goods required for research and development.
c) coolers. furniture for office. d) building material for constructing a building.
It may be noted that deposits received for returnable cylinders is not includible in the sale price. This ratio may apply in relation to other returnable deposits also. Freight/Transport charges for delivery of goods.
As per Vat Act Consequent to inclusion of deemed transaction of Works Contract and Lease in VAT Act. d. h. if charged separately. if goods are insured by the seller. Central Sales Tax (whether or not shown separately). b. The concept of deposits as is under BST Act is also continued in relation to these definitions under VAT. c. Packing charges. the definition of purchase price/sales price in relation to such transactions. Cash discounts for making timely payment. Cost of installation. c. Bonus discount or incentive bonus for additional sales affected by the distributor/dealer. if charged separately.
. Excise Duty (whether or not shown separately). Cost of freight. f. Cost of packing material. Deposits towards purchase /sales are included in purchase/sales price subject to deduction in case of refund of deposits in prescribed time. g. As per Sales Tax Act It means the amount payable to a dealer as consideration for the sale of any goods. It includes the following: a. e.29
4. The following shall not be a part of sale price: a. Insurance charges. b. Any sum charged for anything done by dealer in respect of goods at the time or before delivery thereof. if not shown separately.
Check Posts & Transit Passes: As per VAT Act For the first time sales tax for check posts will be paid by Maharashtra. That's because there are major differences among the state draft VAT Acts. The owner or driver will have to carry tax invoice and produce the same at check post. And g. If a vehicle carrying taxable goods is passing through the state then it must obtain a transit pass at the first check point and submit duplicate copy of transit pass at last check post or barrier within prescribed time before it exit from the state. f. Goods rejected. e. Besides.30
d. Insurance charges of goods insured on behalf of the buyer or at the request of the buyer. VAT within India and within each state also promises to be quite unique. DIFFERENCES BETWEEN STATES:
VAT in India will be very different from VAT as it is understood internationally. Trade discounts. The check Post Officer can stop the vehicle and keep it stationary so long as may be required by the Officer to examine the goods and inspect the record relating to the goods carried by the vehicle. 5. Goods returned within 6 months of the date of sale. it shall be presumed that goods are sold within the state by owner. these are subject to constant revisions (The registration threshold in the Rajasthan state
. obtain seal on the same and give copy of sale bill at check post. subject to extended time if any.
6. If the goods and vehicle do not exit the state during stipulated time.7. The sale bill copy with check posts seal should be retained till the termination of the journey.
Delhi. It also requires certified copies of the VAT registration to be displayed at each additional place of business. getting new registration numbers. complete departments of consultancy firms like KPMG. the same dealer might have to . which will be a burden for dealers and costly for the state administrations. a dealer needs to apply afresh for registration under VAT and in others they do not. The floor for exemption (dealers with turnovers below this floor need not register for VAT) also varies across states. for instance. modifying accounting books for VAT and
. Kerala requires VAT certificates to be renewed annually. Dealers are not even sure that they will get enough time to prepare .reorganizing themselves. the revisions are not even announced. one has to spend hours to find the change in any draft. a dealer with an annual turnover of less than Rs 5 lakh need not pay VAT. Assam requires transporters of taxable goods to be registered with the tax authorities. In many states. Often." explains an exasperated E&Y official. but some. Consultants say often state government officials themselves are unaware of the changes made in the draft. is now on its third draft and no one knows what the exact changes in each draft have been. printing invoices with required information. whereas in Delhi. "Changes are not announced or highlighted on the state websites. Ernst and Young (E&Y) and Accenture are monitoring changes in state drafts. For instance. Most of the state drafts are silent on the period for filing of returns. In fact. Kerala and Madhya Pradesh intend to charge registration fees from applicants wanting to register.there the threshold has been set at Rs 3 lakh. require an annual filing. like Assam. States like Chhattisgarh.31
draft act has changed seven times!). in Uttar Pradesh.
in some states these are to be converted into a deferral. VAT will fail". we have no intention of giving any credit at all. some states have announced that the credit for transition inventory would be given after three months or in 6-12 monthly installments. What are companies to do?" says a senior functionary at the Confederation of Indian Industry. If inventory is a problem. There was apparently a national consensus to include deemed sale transactions in VAT. some manufacturers that were earlier exempt from tax have been allowed to deposit the VAT after five years. he will be charged a VAT. There may be inventory on which sales tax has been paid. while other states like Madhya Pradesh and Kerala have said that they would not give credit at all (which will hurt companies substantially). So. Others are yet to prescribe the deferral period. "It's bizarre.32
changing computer systems are some of the realities dealers will have to grapple with. For instance. Many companies hold large stocks in inventory. A finance ministry official says "if some states allow such exemptions and others do not. then suppliers based in Maharashtra will have a price advantage. some say six months. And some states like Maharastra and Gujarat are still debating whether to withdraw the exemption or not. There is no uniformity on taxation of petroleum goods and liquor. Yet when the company sells it to the final buyer post-VAT. But Sikkim has excluded it. In UP. As for exemptions. Inventory is another problem. Kerala has included them in VAT and
. indecision by states or different states adopting different practices can hit them substantially. Some states are saying we'll give credit in three months. If they do. some say eventually we'll give the credit and some say forget it. so is deemed sales.
Madhya Pradesh and Sikkim) contain provisions for imposition of special additional duty on specified goods and there is no proposal to allow input tax credit on it. The
. it is not clear whether the levy of this tax will continue." says an expert.
6. In Bihar. There is no clarity on whether input tax credit will be available for capital goods. I won't." says a E&Y official working on VAT. but are silent on the period for which it will be allowed. but if I am in Gujarat. If I am operating in Madhya Pradesh. VAT will be meaningless because the cascading effect of taxes will remain. Gujarat and Kerala do not allow input tax credit on capital goods at all. This would lead to cascading of tax into the prices of goods making dealers of these goods less competitive". could bring in huge revenues. ADVANTAGES FOR COUNTRY LIKE INDIA:
VAT regime. "There is utter confusion. Chhattisgarh. He says this will lead to the very situation one was trying to avoid: claiming purchases in one state and not in another. The drafts of some of the states (Assam. There is also no consensus on additional levies like special additional duty and entry tax.33
Sikkim has excluded them. if correctly implemented. which would actually reduce the fiscal deficit burden. Tamil Nadu and Karnataka. "This is not part of standard VAT. explains one finance ministry source.8. Kerala. for instance. "Entry tax can be anywhere between 2% to 20%. I will get input tax credit on my capital goods purchases. So if this continues. What is even worse is the plight of capital goods makers and users. Madhya Pradesh and Sikkim allow input tax credit on capital goods (each of course defines capital goods in its own way). Certain states are saying that entry tax will continue. Assam needs the credit on capital goods to be spread evenly over 3 years.
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.34
government's borrowing programme could then ease and certainly the financially affected states could later focus on issues like poverty. Of course. the cascade systems as in the case of sales tax are not economically neutral. In this situation. this necessitates maintenance of proper records which our trade and industry detest for obvious reasons. Consequently. the tax liability accrues at each stage in the course of production and distribution. Even in a single industrial sector. It has to be noted that because of the tax component built into the system. They distort competition in internal as well as international trade. and the equipment and services utilized have passed through. Exports of products are extremely important now that many countries are importing cheaper products to India under the WTO agreement. for this depends entirely on how many stages the product itself. At each taxable point. its components. the tax paid accumulates on top of the tax levied at earlier stages resulting in cascading effect which leads to vertical-integration. Taxes paid at different stages of the product line make up for more than 25 per cent of the value of the commodities. healthcare and power transmission Under the Value Added system — a 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 materials used. Whereas in a cumulative multi-stage system. Indian commodities are not competitive in the international market. Only better tax system on par with the international standards would enable the 'Made in India' products to be competitive in the international market!
. these can vary considerably from product to product.
Moreover. Anupam Dasgupta. He added that even though some industries in certain states would have to restructure with the introduction of VAT. as "we need a transparent tax system. Additional Secretary. we can have free flow of trade between states which will remove the existing inequalities between them. the Government does not lose revenues since the lowering of tax rates are more than offset by increased economic activity. Department of Revenue said that the global experience with regard to VAT was that it promoted efficiency in production by allowing tax credit for inputs and reducing the cascading impact of multiple levies. with the implementation of VAT. it is not only the consumer but even the producer who benefits. irrespective of the length of the production and marketing processes.
Mr. 2. VAT ensures equal distribution of the tax burden between similar products." In short we can say that VAT has following advantages: 1. VAT will definitely have decisive influence in the transfer of resources." He further said that the services industry should be brought under VAT. VAT exempts subcontracting from taxation whereas in other systems tax is levied on the subcontractor every time the product liable to tax is processed. chairman of the conference said "Like we have free flow of trade between countries in the liberalized economy. "In the process. whereas under other systems the tax burden weighs more heavily on unintegrated firms. it had to be done without delay." R Seshasayee.
Assuming that there is good record keeping. tax is always levied on an amount which includes the taxes paid at previous stages. most VAT is collected from imports. 7. 9. 6. VAT exempts from tax purchases of goods and certain general expenses essential for running a business. It provides more detailed information about each stage of production. it is easier to enforce than sales tax (sales tax can be avoided by not reporting to the government). retail sales tax is levied only on the retail sector. 4. imported goods are subject to exactly the same tax as domestically-produced goods. while under other systems discrimination is often unavoidable. The buoyancy is also greater avoiding the need for tinkering in every budget. Under VAT. VAT exempts goods on which tax has already been paid from further liability to taxation.36
3. Under other systems.It is collected from all sectors. 10. manufacturing and the wholesale sector. VAT is also a multi-stage tax less liable to evasion than sales tax. whereas under other systems exports may be partly taxed (this is the reason why we get refund of VAT at airports or by post). 8. VAT is not levied on goods when they are exported. 5. On the other hand.
2 9.7 12.0 2.VAT is a consumption tax.1 5. 12.It has a broad base. and thus promotes capital formation.37
11.5 15. when viewed from the producer’s side).8 146.9 8.
6. This is the main reason why many economists prefer a VAT system. DISADVANTAGES FOR COUNTRY LIKE INDIA:
International Experience: Immediate change in prices (in %) 57.It taxes people on what they take out of the system rather than on what they put into it (thus ensuring fairness. 13.5 Country Argentina Bolivia Brazil Chile Columbia Denmark France Ireland
. This is the most important reason why many countries use VAT.9. implying that a country can raise a lot of revenue with VAT. and does not tax or distort savings.
however. Unlike CTTs in which there is a marked 'tax on tax' element. The IMF book quoted earlier states: "Despite its name.2 7. it is pretty complicated.9 6. This has been the experience of various countries in different parts of the world. say experts. a VAT system is supposed to tax value addition.9 66.3
(Source: IMF report as well as country reports circulated by the Confederation of Indian
If so many developed as well as developing countries in the world have witnessed a sharp spurt in inflation in the immediate aftermath of the introduction of VAT.38 Israel Italy Netherlands Norway United Kingdom Uruguay
17. a VAT system is not particularly simple. but with the provision of some mechanism enabling firms to offset the tax they have paid on their own purchases of goods and services
. the VAT is not generally intended to be a tax on value added as such: rather it is usually intended as tax on consumption. will India's experience be any different? Probably not.8 4. In practice." "Its essence is that it is charged at all stages of production. On the contrary.3 5. Biggest constraint of a movement from a CTT-based system to a VAT system is simply that it leads to a sudden spurt in inflation.
the introduction of VAT is expected to increase revenues as the coverage increases to value addition at all stages of sale in the production and distribution chain. Such sectors would include most fast moving consumer goods. the proposed new VAT system could result in greater social tensions in the country as well as strained relations between the Centre and the states. entry tax or luxury tax. Since VAT will bring the entire distribution chain -. certain consumer durables and cement. Many of the countries that have adopted VAT do not levy excise duty. Jaswant Singh said: "Apart from avoiding cascading of taxes.including all categories of wholesalers.' This is where the first hurdle has to be overcome." this person claimed. sectors with relatively long distribution channels would witness a rise in overall costs. said the new VAT regime had the potential of widening regional inequalities. certainly not in a hurry." He added that the revenue loss incurred by states would be 'computed on the basis of an agreed formula. Regional inequality to grow: A representative of a large corporate body. retailers and other intermediaries -. This. pharmaceutical products. VAT is supposed to be a tax to end all taxes. "By hurting certain states more than others. is unlikely to happen in India. however.into the tax net.
. speaking to this columnist on condition of anonymity.39
against the tax they charge on their sales of goods and services." In theory. adding that the transition to VAT would have to be carefully calibrated.
PITFALLS IN VAT:
Apart from the levy of tax. there will always be the question of exempting various goods or selectively defined goods.e.40
In short it can be said It is a regressive tax and difficult to make progressive (when viewed from the poor consumers’ perspective). exemptions distort consumption decisions.10. they may not pay VAT for purchases from their suppliers like farmers but may be charged VAT on their sales to other dealers.e. the narrower the tax base. This could result in a rent-seeking problem. economic. it may change consumption patterns towards goods that are exempted. educational services. many countries exempt certain goods such as foodstuffs which are consumed mainly by the poor. Even here the wholesalers may not be exempted i. medical services on the ground of political. It requires good record-keeping of invoices at each stage of production. from VAT viz. spending time and money trying to get the government to change the rules to the benefit of one’s business (and not on the production of real goods and services). and the more the dead-weight loss. social and administrative convenience. i. in order to offset this disadvantage. But the broader the exemption of a greater numbers of goods. Furthermore.
6. Similarly educational and medical institutions run for
. fruits and vegetables or food grains. People/companies tend to overestimate what they bought from other agents in the production system. thus having a negative impact on non-exempted goods.
profit might be chargeable to VAT whereas government run and charitable institutions who render free service to poor and render service at cost to others may be exempted. Inter branch transfers: It is an accepted rule that since inter branch transfer does not transfer ownership from one party to another (which is one of the criteria for levy of VAT as well as Sales-
. The same questions as in excise and sales tax can arise here which should be resolved by proper rules. a company manufactures three products A. Out of these C is exempt from VAT. NGOs. Then these criteria will have to be worked out clearly and proper procedure for applying for exemption will have to be provided. But here proof will be required that the privileged person has really paid the VAT to the supplier before refund being given and whether the bill is a genuine bill. etc. Certain sales to certain privileged parties may not attract VAT e. C. Claim for VAT paid on purchase of services and goods for adjustment against VAT payable on sale is available only when these services and goods are directly related to the services or goods sold. On the other hand it should be provided that the privileged person can claim refund of VAT paid by him provided the VAT paid on a single purchase exceeds say Rs. But VAT is paid on all the common raw materials purchased. sales to UN officials.g. VAT paid on Hotel bills for entertainment of guests are not generally allowed to be claimed. Here also clear rules will be required to prove that the sales were really made to these privileged persons. Diplomatic privileged people. B. No claim for VAT paid will be available on the raw materials used for the production of C. Here the consumption norms have to be established for each such type of industry and prescribed by a notified authority.g. Thus.
Refund or adjustment of VAT paid on supplier’s bill by the reseller is an area where there is a great scope for fraud since refund can be claimed against VAT which is not paid by the supplier to the Government. This will be possible only when the returns. For the accounts purposes. should the cost of goods be debited by invoice value or custom value? The same problem will arise when excisable goods are sold and the excise authorities place a higher valuation for excise duty purposes and accordingly the value for VAT also will be the enhanced value plus excise duty. payment of tax. Here the paint has been supplied to the contractor and
. For example. How the adjustments for these differences will be made between the supplier and dealer will have to be clearly spelt out in the rules.42
tax). no VAT is payable. But the transfers have to be reported to VAT authorities and reconciliation of dispatches to such branches and sales or transfer by each of the branches will be required so that sales liable to VAT are not allowed to be lost sight of. Another instance where a VAT complication may arise is where company materials are given to outside contractors for working as well as products are used for in-house consumption. paints are supplied to the Contractor who has quoted a rate contract including the paint cost and the cost of paint supplied is deducted from the bill. An internal control system to prevent fraudulent claim for refund or adjustment of VAT not paid by the supplier for any reason has to be established in the Government. Another problem that may arise is when the import is valued by the custom at a higher price than the invoice price and accordingly custom duty and VAT is levied. refund/adjustment claim are electronically controlled by an All India Electronic Network for VAT administration.
nobody has spoken about the consumers as a class. if VAT is to be implemented. 2003 02:42:05 AM ]
Surprisingly. which in many states would see the cost of goods going up significantly. It is not without reason that state like Tamil Nadu is asking for Rs 2. would further aggravate evasion of taxes.11. States manufacturing goods would lose revenue as taxation moves from origin-based to destination based. it must be on a uniform date throughout the country.
6. States like Delhi would be net gainers while states like Gujarat and Maharashtra would be net losers. Otherwise the owner cannot claim adjustment of VAT paid on the paints purchased by it. Most basic is the input tax credit on the inventories lying with the traders on the date of introduction of VAT. Unless these are resolved. With the introduction of VAT.5% VAT on the goods sold by him. but for availing the credit he
a VAT bill will have to be made and similarly the contractor will have to make a VAT bill for his whole contract value. Non-implementation of VAT in a state like Delhi. VAT is bound to impact state finances in a significant manner. the average incidence increases to 12. Under the new system. JUNE 04. For example.
Extract From Times Network:
VAT a confusing cauldron
RAJIV GOEL [WEDNESDAY. it would be really tough to implement the new system. For. which is also a big sourcing market for traders in adjoining states.200 crore before implementing VAT. So. the average incidence of sales tax in the state of Delhi is in the region of 6 to 7%. the trader would be required to charge 12.5%. and deposit the same with the tax department. There are several procedural issues which have been bothering the trading community.
where staff salaries are outstanding for months together. Considering the fiscal situation of several states. it would be difficult for him to sustain the trade. Considering the margins of the trader. what would be the guarantee that the manufacturer would get the refund at all?
The right path to VAT
V S KRISHNAN [FRIDAY. The books of such manufacturers would always have a VAT credit. It would be useful to involve the tax assessee in the design of these forms.44
would have to wait for months and years. Some states have introduced legislation which allow prorating of input tax credit between six to nine months. a very significant amount for a large manufacturer. while Madhya Pradesh has asked for pro-rating the credit for five years. Simplicity and clarity is essential to make it assessee-friendly. The other important area is the
. JUNE 06. The average incidence to such a manufacturer would be nearly 5 to 6 % of revenue. This may be just initial jitters but what about the case of a manufacturer who buys goods locally and sells only in other states? This would be applicable to goods manufactured in territories like Silvassa and Goa. 2003 03:06:16 AM]
The registration (tombstone data) and periodic return forms need to be innovatively designed. which won’t be refunded till the end of the financial year.
to facilitate computerization. on the basis of CBEC experience. customs and central excise and the state sales tax departments. Standardized invoices for dealers along with colour coding could be considered and introduced. The state sales tax department could consider using the income tax PAN number. This requires considerable preparatory work in ramping up the computerization in the state sales tax departments. which can be used for scientific selection of assessees for scrutiny and audit. In this year’s budget. States should follow suit. which has also been adopted for central excise and service tax assessees. for state VAT. This will improve the public acceptability of state VAT by reducing the physical interface between the taxpayer and the tax department.45
information that is sought to be collected. One important purpose should be to extract risk parameters. The administrative design for state VAT should also provide for introducing the system of electronic filing of tax returns. The other area that is extremely important is the need for a unique identifier number. Information collected must satisfy the test of purpose. the finance minister had announced the implementation of electronic filing for personal income tax returns. The PAN numbers have a wider tax base and would encourage data sharing between central government departments like the income tax.
The cauldron called VAT
. Most government departments are guilty of collecting information and not utilising them. It is suggested that different registration and return forms may be designed for manufacturers and dealers. This would establish a distinct audit trail for dealers. This would have great significance in plugging revenue leakages and exploiting the synergy between the departments.
There are predominantly agricultural states like Punjab. while dealers with annual turnover between five lakhs and forty lakhs of rupees will have to pay one per cent turnover tax on his annual turnover but will not be able to pass on the tax on his sale invoice. Haryana. grains will be taxed uniformly in every states. 2003 02:02:26 AM ]
It will be difficult to create a Common Market within the country by harmonising the taxes under a common central law. Tamil Nadu. an industrially backward state will have to offer tax sops to investors. UP and Bihar. Now. For administrative convenience and giving relief to small traders. Gujarat. thus making grains costlier in the importing states which until now used to exempt the grains from levy of sales tax.46 ARUN K DOSHI [ SATURDAY. Small industrial suppliers will be out of business due to this provision. Otherwise industrialization will skip the region. MAY 31. West Bengal and Andhra Pradesh are industrially developed hence most of the value addition takes place in these regions. anyone who buys goods from an unregistered dealer will have to pay purchase tax on the goods purchased. Chhattisgarh are rich in natural resources like coal and minerals. To attract more investment to develop industries. Some states are rich in plantations and have dense forests. under the proposed VAT regime. States which are deficit in agricultural production need to import grains from surplus states to feed its population. as they will not be able to pass VAT on their sale invoice even though they have paid full tax on his purchase price. Therefore.
. as each Indian state has its own area-specific needs. States like Maharashtra. Jharkhand. dealers with an annual turnover of five lakhs of rupees or less will be kept out of the VAT system. Some states like Bihar. under the present form of VAT scheme.
000 as turnover tax. five lakhs of rupees . Textiles. tobacco andsugar will become classic cases of double taxation under VAT as states will be empowered to levy 4% VAT on these items while the Centre will continue to levy Additional Excise duty under A. Moreover he will be able to pass VAT on to his customer. i.000 VAT.E. (Goods of importance) Act.will pay only Rs 20.e.47
A dealer whose annual turnover is Rs 40 lakh will now pay Rs 40.D. if the goods in which he deals attract 4% rate of tax. This shows how much home work our tax administrators have done. 1957.. whereas a dealer whose annual sales turnover is one crore of rupees with 5% gross profit.
VAT officials have to conduct a survey of potential taxpayers from time to time so that potential tax payers may not remain outside the tax net. Books of account must be audited on a sample basis. For this. Tax officials have to monitor tax-payers from a distance. Now their job requirements have changed from physical control to an audit-based control system. tax administration has to be more efficient and well equipped than under the sales tax. Now tax officials have to establish facts. tax officials can easily reject prices declared by the taxpayers and can increase taxable values arbitrarily.
It will take at least five years for the Government officials. the taxpayers and the professionals to understand the implications and intricacies involved in the administration of VAT in a vast country like India even with proper orientation programs to enlighten the concerned persons.48
7. In the ultimate analysis “VAT is based on the principle of selfassessment by the taxpayers who are required to pay tax on the transaction values. The VAT administration must process the returns submitted by taxpayers on a continuous basis and should notify tax-payers if they have made any mistakes. It is equally necessary to detect nonfilers. This is because under the sales tax system. For this. officials must have advanced accounting and
. The Government should be pre-pared to grant the refund with-out delay where the refund is legitimately due in order to instill confidence in the taxpayers. This means that the VAT administration demands a large number of qualified and trained officials. VAT law does not permit them to do so.
Tax auditing.businessworldtoday. It is the critical aspect of VAT control.indiainfoline.com www.49
auditing skills.com www. to detect fraudulent refund claims. is not carried out by the sales tax administration.com www. which is necessary in order to prevent abuse of the credit mechanism.”
www. and to enhance tax compliance.indiantaxes.bcas.com www.bcas.org www.org
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