20161002

Switch over to VAT Diktat and Its Tetragon in India



Dr. Vijay Pithadia

Prologue:

VAT, the popular English usage and also adopted throughout this study is a concept which originated during the first quarter of the present century. In other country VAT known as Added Value Tax, (AVT, in the American tax nomenclature), tax on valued added (TVA, at the French and Germans refer to it) the primary interest in such a tax may largely be attributed to its manifold objectives.  1) While the objectives are explained in part 2) the principle 3) justification have been critically examined

State Governments, Even in respect of Central sales tax (CST) , though the tax is levied under Central act, the  CST is collected n the state from which goods are sold, A high power committee (termed as ‘Empowered Committee) consisting of senior representatives of all 29 states chairmanship of Dr.  Asim Dasgupta, Finance minister, west Bengal.  Introduction of VAT was delayed on several occasions.  Finally, it was announced that all states have agreed to introduce VAT was delayed on several occasions.  It was announced that all sates have agreed to introduce VAT.  A ‘white paper’ was released by Dr. Asim Dasgupta, Chairman of Empowered committee.

Hariyana was the only state to introduce VAT w.e.f. 1-4-2003about 21 States have introduced VAT (though in diluted from) i.e. 1-4-2005.  These include Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and west Bengal.  States ruled by BJP like Gujarat, Chaatisgarh, Jharkahnd, Madhya Pradesh and Rajasthan have not introduced VAT.  In addition, Tamilnadu, Uttar Pradesh and Uttaranchal also have not introduced vat till May 2005.  It is expected that they will introduce VAT in due course.

What is VAT? [Value Added Tax]:

VAT is charged and collected by dealers on the price paid by the customers. VAT is paid by dealers on their purchase is usually available for set-off/input credit against VAT collected on sales.

VAT applies to all types of business including;

  • Importers
  • Manufacturers
  • Distributors
  • Wholesalers
  • Retailers
  • Works Contractors
Historical Emergence:
(a)Conceptual
(b)       Operational
In this two part my emergence in an India

Objectives:

(a)VAT and CIT
In general, there are several problems associated with a CIT.  It would introduce locative distortions, Discriminatory treatment of distributed and undistributed profits (d) there are a locative efficiency problems


(b)             VAT and Turnover Tax
(a)As a substitute for turnover tax of various types, VAT would help to avoid the cascading or pyramiding effects in production.  For inclusion of inputs and raw materials in the base a turnover tax levied at an earlier stage in production-distribution chain accumulates up to the final stage of distribution and thereby are three firm A,B and C
(b)          Compared to a turnover tax, VAT would facilitate ease and accuracy in the computation of tax liability on exports.  As a result, it would be possible to operate the mechanism of refund of tax on exports and imposition of compensatory duties on imports.
(c) The intermediate purchases such as inputs and raw materials are subject to tax under a turnover tax.   Therefore, there is a scope for vertical integration of firms to avoid liability for taxation.

Principles of justification:

(A)  General Welfare Theory
(B)  Social Expediency Theory
(C)  General Benefit Theory

1. Separate Law for each States: - Each State has made changes as per their needs.  Though basic concepts are same in VAT acts of all states, provisions in respect of credit allowable, credit of tax on capital goods, credit when goods are sold interstate are not uniform.  Even definitions of terms like’ businesses ‘Sale’.’ sale price’, ‘goods’, ‘turnover tax. Are not uniform
2. Possible loss of revenue to States: - State Governments are worried that introduction of sales tax VAT may lead to loss of revenue to them central Government has agreed to compensate State Government up to 100% 

Features of VAT & How Does It Differ From Sales Tax:

VAT is a multi-point tax without any troubles of double taxation effect. It is chargeable at every point of sale\transfer of goods and services. The mechanism of VAT is quite simple and easy to understand. It has no cascading effect on the multiplicity of taxpayer’s liability to pay tax on the same aspect again and thus it effectively surpasses the pyramiding of tax incidence as is inherent in the conventional sales tax procedures and therefore, it is often called as improved sales tax. Under VAT there is no tax on tax since only value added at any stage of production or distribution of goods is made subject matter of tax and an allowance is offered for the previously taxed material cost and other overhead charges so incurred.

These features of VAT encourage voluntary disclosure of complete information on business turnover. Every business transactions carried on by individual, partnership, companies etc. will come within the purview of VAT. It will not cover small businesses with a turnover below a certain limit that will be decided by each state. Medium size business can opt for VAT or a composite system of tax turnover.

The VAT rates scheduled to be applied are – the zero rate, 1%, 4%, and a general rate of 12.5%. These rates will be uniform in all states across the country. The same set of goods will be charged at the same rates in all states. Most essential commodities are exempts from VAT or fall in the category of 4%. Most business purchases will carry a VAT charge. VAT paid as input tax can be adjusted against VAT on output. This will include VAT paid on purchases of raw material or goods purchased for resale.

Methods of Calculating Vat:

1. The subtraction method:
The difference between the value of output & cost of inputs

2. The addition method:
The value added is computed by adding by all the payments i.e. payable to factors of production.

3. The tax credit method:
It is set off of the tax paid on inputs form. Tax collected on sales. It is similar to CENVAT.

VAT: WHITE PAPER

1. Design of State-Level VAT:
1.1 As already mentioned the design of State-Level VAT has been worked out by the Empowered committee through several rounds of discussions and striking a general balance between the common points of convergence regarding VAT and flexibility for the local characteristics of the states. Since the state level tax is centered on the basis of “set-off” for the tax paid earlier, the needed common points of convergence also relate to this concept of set-off/input tax credit, its coverage and related issues as elaborated below.

1.2 Concept of VAT and Set-off/Input Tax Credit:

The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say a month).

1.3 Coverage of Set-off/Input Tax Credit:
This input tax credit will be given for both manufacturers and traders for purchase of input / supplies meant for both sales within the state as well as to other states, irrespective of when these will be utilised/sold this also reduces immediate tax liability.
1.4 Carrying over of Tax Credit:

If the credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund.

1.5 Treatment of Exports:

For all exports made out of the country, tax paid within the state will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax within three months.

1.6 Inputs procured from Other States:

Tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit. However, a decision has been taken for duly phasing out of inter state sale tax or Central sales tax. As a preparation for that, a comprehensive inters state tax information exchange system is also being set up.

1.7 Treatment of Opening Stock:
All tax paid goods purchased on or after April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input tax credit, subject to submission of requisite documents. Resellers holding tax paid goods on April 1, 2005 will also be eligible. VAT will be levied on the goods when sold on and after April 1, 2005 and input tax credit will be given for the sales tax already paid in the previous year. This tax credit will be available over a period of 6 months after an interval of 3 months needed for verification.
 1.8 Compulsory Issue of Tax invoice, Cash memo or Bill:

This entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turned over of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars.

This tax invoice will be signed and dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep a counterfoil or duplicate of such tax duly signed and dated. Failure to comply with the above will attract penalty.

1.9 Registration, Small Dealers and Composition Scheme:

Registration of dealers with gross annual turnover above Rs. 5 lakh will be compulsory. There will be provision for voluntary registration. All existing dealers will be automatically registered under the VAT Act. A new dealer will be allowed 30 days time from the date of liability to get registered.
Small dealers with gross annual turnover not exceeding Rs. 5 lakh (or such limit as may be fixed by the States) will not be liable to pay VAT.

States will have flexibility to fix threshold limit within Rs.5 lakh.
Small dealers with gross annual turnover not exceeding Rs.50 lakh who are other wise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a half percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax.


1.10 Tax Payer’s Identification Number (TIN):

The Tax Payer’s Identification Number will consist of 11 digit numerals throughout the country. First two characters will represent the State Code as used by the Union Ministry of Home Affairs. The next nine characters may be different in different States.

1.11 Return:

Under VAT, simplified form of returns will be notified. Returns are to be filed monthly/quarterly as specified in the State Acts/Rules, and will be accompanied with payment challans. Every returns furnished by dealers will be scrutinized expeditiously within prescribed time limit from the date of filing the return. If any technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately.

1.12 Procedure of Self-Assessment of VAT Liability:

The basic simplification in VAT is that liability will be self assessed by the dealers themselves in terms of submission or returns upon setting off the tax credit. Return forms as well as other procedures will be simple in all states. There will no longer be compulsory assessment at the end of each year as exists now. If no specific notice is issued proposing departmental audit of the books of accounts of the dealer within the time limit specified in the Act, the dealer will be deemed to have been self-assessed on the basis of returns submitted by him. Because of the importance of the concept of self-assessment in VAT, provision for “self-assessment” will be stated in the VAT bills of the states.

1.13 Audit:

Correctness of self-assessment will be checked through system of departmental Audit. A certain percentage of dealers will be taken up for audit every year on a scientific basis. If however, evasion is detected on audit, the concerned dealer may be taken up for audits for previous years. This audit wing will remain de-linked from tax collection wing to remove any bias. The audit team will conduct its work in a time bound manner and audit will be completed within six months.

1.14 Declaration Form:

There will be no need for any provision for concession sale under the VAT Act since the provision for set-off makes the input zero-rated. Hence, there will be no need for declaration form, which will be a further relief for dealers.

1.15 Incentives:
Under the VAT system, the existing incentive schemes may be continued in the manner deemed appropriate by the State after ensuring the VAT chain is not affected.

1.16 Other Taxes:

As mentioned earlier, all other existing taxes such as turn over tax, Surcharge, Additional Surcharge and Special addition tax (SAT) would be abolished. There will not be any reference to these taxes in the VAT bills. The states that have already introduced entry tax and intend to continue with this tax.
 1.17 Penal Provisions:
Penal provisions in the VAT bill should not be more stringent than in the existing Sales Tax Act.
1.18 In general all the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit.
The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the Sales Tax Act or any other State Act or even by making special provisions in the VAT Act itself and with uniform floor rates decided by the Empowered committee.

1.19 VAT Rates and Classification of Commodities:

Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate of 1% only for gold and silver ornaments etc. Thus the multiplicity of rates in the existing structure will be done away with under the Vat system. Under exempted categories, there will be about 46 commodities comprising of natural and unprocessed products in unorganized sector, items which are legally barred from taxation and items which have social implications.

Included in this exempted category is a set of maximum of 10 commodities flexibly chosen by individual states from a list of goods (Finalized by the Empowered committee), which are of local social importance for the individual states without having any inter-state implications.
 1.20 Effects of the VAT System:

The Empowered Committee has carefully worked out this design of State-level VAT after repeated interactions with the States and others concerned and striking a federal balance between the needed convergence and federal flexibility as well as ground level reality. If now all the components of the VAT are taken together, then it will be seen that the total effect of this VAT system will be to rationalize the tax burden and bring down, in general, the price level.

Advantages of VAT:
  • It is simple, transparent and progressive.
  • Vat is a business friendly system of taxation; because it may be cope up to the business.
  • Reduction in the number of tax rate for two main rates, 4% and 12.5%.
  • Reduction in the effective tax rate for many commodities.
  • Avoid unhealthy competition among the States.
  • Regular audit with Audit Officer.
  • It will improve tax compliance and also expand revenue growth.
  • Other taxes such as, turnover tax, surcharge, additional surcharge etc. will be abolished.
  • Elimination of “tax on tax” existing in the sales tax system.
  • Simplification of tax forms and procedures.
  • Greater reliance on self assessment and voluntary compliance by dealers.
  • Input tax credit/set off available for VAT paid on most business purchase.
  • After getting registration of VAT, you can issue tax invoice to your customers who are registered dealers. This will enable them to claim a set off for the VAT paid by manufacturers.
  • Forms requirements will be done away with, which will cause less hardship to the dealers.
Limitations of VAT:
  • Small dealers have to prepare their accounts.
  • Their may be a financial burden for the registration.
  • Paperwork will be more.
  • Interference may be increased by the tax departments / authorities.
  • Prices may be increased in some products.
  • Goods may become costlier in some cases.

Gujarat & VAT:

The Gujarat Vyapari Hithrakshak Samiti (State traders body) has started that the association will intensify its agitation to effect changes in the existing Gujarat VAT tax bill, 2005. Indications are that the state might implement the vat system from July. Climbing down from the earlier stance that VAT should not be implemented at all, Vyapari Samiti vice-president Jayendra Tanna said on Sunday, that while Vat is bound To come into force some day in state, the trading community cannot accept VAT in its present form “The penalty clauses are too stringent and Samiti has sent several letters to the state government, seeking a meeting.  But none of our requests have been met so far, “Tanna said Commenting on the price rise of goods by around 15% in states where VAT has been implemented, Tanna said that apart from the additional burden inflicted on consumers, there is also confusion about VAT “In a state such as Gujarat, if the government does not talk with traders’ organizations and sort out pending issues, people will face difficulties here,” he said.

Epilogue:

At the concluding part of the study of” switching over to VAT Regime and its implication”, we can conclude that VAT can help in improving the competitive position of dealers of Gujarat. VAT can help in doing away with double taxation and cascading effects, rate wars and trade diversion which are common in the present sales tax system. Switching over to VAT may create a hardship to some groups such as small dealers but in the present era VAT appears to be inevitable and admissible. With the VAT Regime, Government may get better earning in the form of revenue growth. Switching over to VAT Regime and its implications, may affect the accounting system. Accounting system will be maintained more cautiously. The manufacturers, traders and industrialists have to keep records of all sales and purchases. In VAT Regime the need of computerization system will emerged so from it they may get available data at a time and their should be a literacy regarding computer awareness.

In VAT Regime VAT Rates are almost flat in any commodities i.e. 4% and 12.5%. So with the help of VAT flat rate accounting method or calculation may be easier then the existing sales tax method. We may conclude that VAT Regime is a business friendly system of taxation.

Bibliography:

[1] Arvind Kumar, Puspendra Mishra & Bhupesh Kumar Shah (2004), Value Added Tax: An Overall views; Indian Journal of Accounting Vol. XXXIV (2), June

[2] Kalpatary Bandopadhyay & Dhananjay Chatterjee (2004), “VAT in
Practices some countries with special reference to European Union”, the
Management Accountant, December

[3] K.L. Chanchawat (2004), “VAT some key Aspects” The Chartered
Accountant, December

[4] N.P. Agrawal & Sonia Agrawal (2003), “Fundamental aspects and scope of Value Added Tax in India.” The Management Accountant, March

[5] N.P. Agrawal & Sonia Agrawal (2003), Fundamental Aspects and Scope of Value Added Tax in India, the Management Accountant. Vol. 29 March

[6] Uttam Kumar Dutta & Rambilas Manapatira (2003), ‘Value Added Tax: more disciplinary approach in the indirect tax regime, The Management Accountant Vol. 34, August