Value Added Tax (VAT), 2013 (India)
In one the most large scale reforms of the country's public finances in over past 50 years, India has finally agreed the launch of its much-delayed Value Added Tax (VAT) from 1st April 2005. At a rate of 12.5%, VAT will come in on April 1, 2005. The tax, agreed after state finance ministers met in New Delhi, is designed to make accounting more transparent, cut trade barriers and boost tax revenues.
The system had been postponed many times, mainly because of opposition from the powerful trading lobby. Ashim Dasgupta, who heads a panel overseeing the implementation of VAT, said: "We are very happy to announce that a broad consensus among states was arrived at the meeting to introduce VAT on April 1, 2005." The Congress-led new left-leaning United Progressive Alliance (UPA) government has made implementing VAT one of its key priorities.
According to analysts VAT is essential in tackling the problem of tax evasion. In India, all the state governments collect over Rs 85,000 crore (Rs 850 billion) by way of sales tax and further over 20,000 crore (Rs 200 billion) by way of Central Sales Tax. This is what officially comes mostly from petroleum, liquor, iron and steel and cement companies. Rough estimates suggest that these industries account for over 50 per cent sales tax for the states and the Centre. Majority of the officials in sales tax departments believe that what they actually collect is less than 50 per cent of the revenue that should otherwise accrue to them if all transactions are accounted for by the businessmen.
March 24, 2005: The state finance ministers in consultation with Finance minister P. Chidambaran decided to scale down the composite tax to 0.25 per cent from the earlier one percent over sales Turnover. This levy will be applicable to traders out of the VAT ambit and having a sales turnover between Rs. 5 lakh-Rs. 50 lakh per year.
The Next major decision by the state finance ministers is to phase out central sales Tax (CST) during next three years. While the 4 percent CST stays during 2005-06, it will be slashed to 2 percent in 2006-07. CST will not be levied from April 1, 2007.
India has a large un-organised market, especially agro-based industries and here a large number of transactions go unrecorded. The menace of stock transfers adds to the problem of tax evasion. In India, introduction of VAT will only change the collection methods for sales tax rather than reform the indirect tax system.
VAT is nothing but sales tax at source. Instead of collecting it after five months or so, the state governments would collect the same in advance and then allow set-offs to the businessmen. All tax paid on inputs, subject to rules made, shall be allowed to set-off against the tax on output. There would be exceptions like CST not allowed to be set off if sales are made locally in some other state; octroi not to be set off against output tax, etc.
What about Central Sales Tax Act, 1956? Well, this will remain and might be the biggest stumbling block for successful introduction of VAT in India. Double taxation under the Central Sales Tax Act, even for declared goods under Section 14, has been permitted. But the biggest problem is that the central sales tax paid by the businessmen will not be allowed to be set off against local output tax payable. A city like Delhi will suffer the most.
State governments have agreed not to start new incentive schemes giving sales tax exemptions. 'C' forms have been made mandatory even when the local sales tax is less than 4 per cent. 'C' forms are required even when sales are made from sales tax free zones. Therefore, the power given to the state government under Section 8(5) of the Central Sales Tax Act is now virtually redundant as even if the sales tax is reduced to zero, the 'C' forms would still be required. It would be a difficult scenario for local VAT and CST to co-exist. Single VAT, which should be a combination of sales tax, service tax and excise duty is what we should have aimed for.
Necessity of Value Added Tax: The General perception of the existing single point sales tax system is that it is highly complex with multiplicity of rates, plethora of explanation, many rates in some group of item, extensive use of statutory forms, high and unrealistic quota of assessment, loss of revenue on value additions, Tax rate war between States. etc. The consensus was that a new system is needed and Value Added Tax has emerged as a principal instrument of taxing domestic consumption world wide during last four decades. It is now in operation in more than 100 Countries. The basic advantages of Value Added Tax can be stated as its neutrality, transparency, certainty and self policing mechanism.
What is VAT
Value Added Tax is a multi point sales tax with set off for tax paid on purchases. It is basically a tax on the value addition on the product. The burden of tax is ultimately born by the consumer of goods. In many aspects it is equivalent to last point sales tax. It can also be called as a multi point sales tax levied as a proportion of Valued Added.
State Value Added Tax.
The discussion regarding the VAT and the implementation which is being planned is only confined to the State. There is no proposed Central VAT at present in the time frame of 1.4.2003. All the States are drafting their separate Value Added Tax Act and as per the present position, every States will have a separate VAT Act with different provision not corresponding with each other. It can be stated that the proposed VAT Act is the primary stage of VAT.
It is proposed that there would be Two tax rate slabs on which tax would be levied. The first one would be 4% and would covered all essential items. The second one is 10% and all luxury items would be covered. In addition special rate slabs are also proposed which are 1% for bullion and jewellery, 20% for Non Essential Goods and exemption to certain goods like agricultural produce etc. Petroleum products are not included in VAT rates. Separate rate would be notified for them.
Set off. ( Input Credit ): At present the set off would be available on the goods locally purchased within
the State only. No set off would be available to the goods purchased in the course of inter state trade and commerce. It will be necessary to produce the tax invoice to claim set off. The tax should have been charged in the invoice.
Exempted Goods: Some goods would be declared as exempted by the State Government under the proposed VAT Act. However the present view as per guide lines issued by the State Government are that no set off would be allowed on the exempted goods. It means that the tax suffered on the raw material for manufacture of exempted goods would not be refunded
Manufacturer: The manufacturer would be required to purchase raw material after paying full tax on the rate applicable on such material. Unlike the present system wherein the manufacturer can purchase the goods at a concessional rate of tax against declaration form no declaration form will be required to be issued by the Manufacturer. The input tax suffered by him would be adjusted \ set off from the sale of the finished product. The tax adjustment of input credit of the goods purchased within the State would be available on the sales made within the State and also on the inter state sales subject to the tax payable. No adjustment would be available of the input credit in case of branch transfer, consignment sale.
Trader: The trader would be required to collect tax on the sales made by him and the tax liability would be set off \ adjusted from the purchase \ input tax credit of the goods locally purchased in that State.
Issue of Invoice: Under the proposed Value Added Tax Act issue of invoice would be mandatory. No set off \ input credit would be allowed unless the original tax invoice is produced wherein tax is clearly charged separately in the invoice.
Declaration Form: Use of declaration form of purchase of goods on concessional rate of tax or NIL rate of tax under the State Act would be completely finished. There would be no requirement of declaration form under the proposed Value Added Tax. However the Road Permits like ST 18 A and ST 18 C declaration forms would continue. Declarations forms of CST Act would also continue
Accounting: The basic account books required for the purpose of VAT Act are Purchase and Sale Register. Both the registers would be the basis on which the calculation of payment of tax would be made. The normal practice of entering the gross value of Purchase bill would be changed. The assessee would be required to enter the value of goods in the goods A\c and the amount of tax in the Tax A\c separately.
Stocks: Stock statement are required to be furnished as prescribed for the quarter ending and then monthly from January to March. Set off of tax paid stocks would be given. Tax paid stocks as on march ending would be the basis for claiming set of under the new VAT Act. However, no set off would be available for the tax paid stock purchased prior to 1.4.2005.
Capital Goods: Set off would also be available on the tax paid goods at the time of purchase of capital goods under the VAT Act. Basis of set off is yet to be declared. However, it is presumed that set off would be available within a span of 3 years from the date of commercial production.
Export: Export would be zero rated. Tax paid on raw material used in manufacture of goods for export would be refunded by the State Government in cash \ adjustment. The exports would became more competitive in the world market as there would be no tax henceforth on raw material used for manufacture of goods for export.
Registration: All Importers, Manufacturers, Exporters and Dealers having CST registration would be required to seek mandatory registration under the new VAT Act. The existing registered dealers are required to fill a FACT SHEET as notified by the department within a stipulated time which is at present 15.02.2006 and then they would not be required to seek fresh registration. There would be two types of registration. The first is VAT dealers registration and the second is composition scheme dealer registration. The dealers opting under composition scheme would not be able to charge tax in the invoice and he would pay lump sum fee as composition amount. It is apparently for retail traders and the expected limit of turn over for option under composition scheme is maximum Rs. 15 lacs.
Security Amount: Security amount for seeking registration is likely to be increased many fold in VAT Act. The security for registration under the present Act is Rs.10,000.00 which is likely to be increased to Rs. 25,000.00 for small scale industry, Rs. 1,00,000.00 for medium scale industry and Rs. 5,00,000.00 for large scale industry. Apart from it, the assessing authority would have a right to seek additional security equal to 25% of the tax liability.
Audit of Account: Every dealer having a turn over of over Rs. 40.00 lacs would be required to get his account audited by a Chartered Accountant and submit the audit report within the stipulated time. Failure to do so would attract penalty proceedings.
Penalties: Penalties had been increased many folds in the new VAT Act. As per discussion draft on VAT Act circulated, there is more emphasis on penalties.
Works Contract and Leasing: No clarification, provision or guide lines had been issued by the department till date on works contract and leasing transaction. The continuation of existing composition scheme or by what method they would be taxed in future has not been informed.
Concluding: VAT would change the nature of trade in the coming years, but the medium level of trade that is C&F agents, distributors, stockiest etc. would face problems as the companies would reduced the tier of marketing. Similarly small retail dealers would be required to maintained more accounts or pay composition money which cannot be collected from the customers. The present provision of CST and VAT can not go together. After the abolition of CST the direct marketing concept may gain ground and the necessity of having warehouse, godowns etc. in all states may decrease or finish. It would adversely affect the trade and employment of the states. America which has similar federal and state laws \ Constitution has not implemented VAT. It needs study as to why a develop and advance economy like America has not adopted VAT.