PROSPECTS OF VAT IN INDIA

PROSPECTS OF VAT IN INDIA

By: 1. Mallikarjuna N Kaddipudi
2. Dr Basavaraj C S


Mallikarjuna N Kaddipudi SSL in Commerce Government First Grade College HIREKERUR
 3. Shivanand Teppad***

INTRODUCTION:

Indirect tax system plays an important role in the economic

development of a country. With the efforts of several tax Reforms

Committees and the recent Empowered Committee of State Finance

Minister’s meeting held in New Delhi on 22 nd September 2004, reviewed the

present system. Broad discussion on phasing out CST, and introduction of

Value Added Tax. It has been debated upon for a fairly long time about the

need for a major reform by the state to garner revenues. It has been felt that

introduction of VAT creates a level playing field to industries and a VAT

scenario address the challenges of globalization for replacing the archaic

system of Sales Tax in revenue generation. With a view to compensate from

the centre to the State as 100% of revenue loss for the 1 st Year, 75% of

revenue loss for the 2nd year and 50% of the revenue loss for the 3rd Year.

HISTORY OF THE VAT:

As back as 1921. F.von Siemans proposed Value Added Tax as a substitute in

place of German Turn over Tax. VAT was introduced in France as early as in

Dr. Basavaraj C S Chairman & HOD of Dept of Commerce and Management Gulbarga University
GULBARGA
***
Shivanand Teppad SSL in Commerce Government First Grade College HIREKERUR
the year 1954 and its scope was expanded to include services in 1978,

agriculture in 1983. VAT therefore became one of the most important fiscal

innovations of the last century. It is presently being practically by over 130

countries all over the world.

They raise revenue, on an average equal to 27% of total tax

revenue and over 5% of GDP. Some federal countries were already

introduced they are: Brazil 1967, Germany 1968, United Kingdom 1973,

Norway 1974, Canada 1987, , Korea 1977 Argentina 1993. VAT has been

flourishing tax in EEC countries . EEC countries adopted VAT as a tax

harmonization instrument within the community. There are different

systems, procedures, rates and practices concerning VAT & GST (Goods and

Service Tax) through out the globe. About 70% of the world population lives

in the countries with VAT.

Some of our neighboring countries were already introduced

VAT are: Indonesia 1985, Japan 1989, Pakistan 1990, Bangladesh 1991,

China 1994, Singapore 1994, Nepal 1997, Srilanka 1998, Mauritius 1998

and India 2005.

WHAT IS VAT?

THE value added Tax is a tax on the value added by a business

firm, VAT could be defined as “as a tax on Value addition at different stages
of manufacturing and distribution of goods and services”. It is a form of

indirect tax in the nature of a multi point sales tax with a set off or credit for

tax paid on purchases/services. Each transaction of goods sold in the course

of business is taxed. Thus providing revenue to the government on value

addition at each stage. On account of set off being provided on preceding

purchase, cascading effect on the cost of goods is avoided. It is a self

policing system reducing the tax evasion scope.

VAT is based on the best international practice, characterized by

trust, transparency, stability, simplicity, efficiency and a dealer friendly tax

system.

VAT has the following features:

1. Value Added Tax is collected on each sale or resale.

2. No exemption is made for sales to registered persons i.e. sales to both

registered and non-registered persons are taxable.

3. Only registered persons are allowed to claim a credit/ refund of tax

paid purchases for use in taxable activities.

4. VAT is levied only on the value added at each stage of transaction.

COMPUTATION OF VAT:

VAT can be computed by adopting three alternative methods

they are:
 1. Addition Method: calculation of value added can be done by

summation of all the elements of value added (i.e. wages, profits,

rent, and interest) This method is known as addition method

2. Subtraction Method: estimates value added by taking the

difference between the value of outputs and inputs

3. Tax credit Method: under this method the tax on inputs is

deducted from the tax on sales to arrive at the VAT payable by the

dealer (Out put – Input) In practice, most countries use this

method.

In a nutshell VAT system can be understood in a simple manner

with an example of two-nail system. On one nail you put all your vouchers

showing the taxes paid on all your input and on the other nail you put

vouchers in which your taxes paid on your output is shown. Thus, if the tax

difference between the tax paid on output and tax on input is positive, you

get the tax refund, if it is less, you pay the difference to the exchequer. Thus,

the difference between the total sales and purchases is the value added.

BASIC ELEMENTS OF VAT:

 VAT provide broad tax base

 VAT is an indirect tax on consumption

  VAT is charged and collected at each stage of production/processing

/trading i.e. multi point

 VAT mainly requires maintenance of accounts of tax paid on

purchases and sales

 VAT contemplates rebating of tax paid on inputs/purchases and capital

goods

 In VAT, the tax component in any transaction is

identifiable/transparent.

 VAT would give the big – push for a micro – jump in the economy

 VAT enhances tax neutrality in the international trade.

VAT DESIGN:

The high power committee of VAT has debated upon various

issues relating to VAT and have broadly arrived at a national consensus

which are briefly enumerated.

 VAT rates- a set of exempted goods, 4% on necessities and selected

inputs, minimum RNR of 12.5% ,1% for gold & jewels and 20% for

Petroleum

 Rebate of state tax paid on purchases in local / inter state sale of goods

 CST to continue- with amendments & later to be phased out

 Export to be zero rated

  Petrol, Diesel, ATF, and Sugar can be kept out of VAT

 Special VAT rate for jewels and alcohol

 TOT, Entry tax etc to be merged in VAT

 Sales tax exemption to be removed

 Composition Scheme for small businesses

 No rebate for inter – state purchases

 Rebate for goods sent out of state as Branch Transfer in Consignment

beyond 4% CST rate

PROBLEMS IN THE PRESENT TAX SYSTEM

 Narrow base

 Multiplicity of Levies & Complexity of Structure

 Cascading Effects

 High tax Rates

 Lack of Transparency

 Vertical Integration

 Exports un competitive

 Administrative in efficiency

 Lot of Disputes.

CONCLUSION:
 VAT is the most certainly a more transparent and accurate

system of taxation; it has the experience of most of the countries with

increase in revenue to the extent of 27% of total tax revenue over 5% of

GDP. It is the money making machine to the Government. While existing

sales tax structure allows for double taxation thereby increase the burden.

However VAT can be considered as a multipoint sales tax with set-off for tax

paid on purchases and capital goods.

Place: Hirekerur
Date :06-02-2006 Yours

Mallikarjuna N Kaddipudi
SSL in Commerce,
Government 1st Grade College,
HIREKERUR- 581 111
Dist: Haveri
References:
1. Dr. Hemalata Rao , VAT (Design and Policy Issues
2. Ajay Joshi, Concept & Procedure of VAT in India
3. NIPFP New Delhi, Primer on VAT
4. Sandeep Tandon & Others, The Indian Journal Of Commerce voi.58
No 1 Jan – Mar 2005

ABSTRACT

INTRODUSTION:
Under VAT, the consumer pays tax for the value of the products
only once. Small dealers or products are exempted from VAT if their
turnover is below the limit is fixed . Indirect tax system plays an important
role in the economic development of a country It has been felt that
introduction of VAT creates a level playing field to industries and a VAT
scenario address the challenges of globalization for replacing the archaic
system of Sales Tax in revenue generation.

WHAT IS VAT?

THE value added Tax is a tax on the value added by a business

firm, VAT could be defined as “as a tax on Value addition at different stages
of manufacturing and distribution of goods and services”. It is a form of
indirect tax in the nature of a multi point sales tax with a set off or credit for
tax paid on purchases/services. Each transaction of goods sold in the course
of business is taxed. Thus providing revenue to the government on value
addition at each stage. On account of set off being provided on preceding
purchase, cascading effect on the cost of goods is avoided. It is a self
policing system reducing the tax evasion scope.
COMPUTATION OF VAT:

1. Addition Method
2. Subtraction Method
3. Tax credit Method

BASIC ELEMENTS OF VAT:

 VAT provide broad tax base

 VAT is an indirect tax on consumption

  VAT is charged and collected at each stage of production/processing

/trading i.e. multi point

 VAT mainly requires maintenance of accounts of tax paid on

purchases and sales

 VAT contemplates rebating of tax paid on inputs/purchases and capital

goods

 In VAT, the tax component in any transaction is

identifiable/transparent.

CONCLUSION:

VAT is the most certainly a more transparent and accurate

system of taxation; it has the experience of most of the countries with

increase in revenue to the extent of 27% of total tax revenue over 5% of

GDP. It is the money making machine to the Government. While existing

sales tax structure allows for double taxation thereby increase the burden.

However VAT can be considered as a multipoint sales tax with set-off for tax

paid on purchases and capital goods.