|E X E C U T I V E S U M M A R Y
|VAT is a broad based tax covering the value added in a commodity by a firm at each stage of production and distribution. It is propsed to be levied all over India, w.e.f. April 2003.
There are several objectives associated with VAT, formost being its revenue raising quality, dut to inclusion of items such as wages. interest, profits etc., in its base. It shall also bring in more discipline in the indirect tax regime. It is also imperative that VAT will take care of the cascading effect of the existing indirect taxing system.
There are some issues and concers which have to addressed to while going for VAT regime. The proposed model of VAT is only a state VAT. The target should be to cover the whole contry so as to include credit for interstate purchases
Author has raised some issues and has also suggested some measures to effectively iron out the anomalies in the propsed VAT system.
|Countries are removing barriers to trade perse while we have not benn able to do so even amonst out states. 15 States and 5 Union Territories were expected to move to value Added Tax (VAT) from 1.4.2002. Who shares the blame for the postponement of the move. This time the buck has been passed on to the Central Government.
Relevance of VAT in the changed economic scenario cannot be over emphasized. Introduction of VAT shall bring in more discipline in the indirect tax regime. It goes without saying that VAT takes care of the cascading effect of the existing system. The manufacturere should be too happy to welcome it. How far VAT Regime gets endorsement from the trader community is a question makr. Their apprehensions are genuine and ought to be addressed.
The fact that many State Government have openly protested against VAT for the reason of denial of necessary fiscal support from the Centre cannot be lost sight of. However amendment of CST Act and transfer of services to States would go a long way to mellow the States in implementing VAT. Let us hope that 1st April, 2003 will be dawn of new era when nationwide VAT system is introduced.
|STATES DRAFT VAT - SALIENT FEATURES
VAT is a multi-point tax system but without the effect of double taxation. Tax is chargeable at the rate prescribed at each point of sale. Broadly the necesities are exempt; essentials are chargeable at 4%; Demerit goods include Liquor, Petrol, Diesel, Natural Gas proposed to be taxed @ 20%; Precious Metals @1%. The rate for general goods Revenue Netural Rate (RNR in short) is likely to be between 10 to 25%
Input Tax Credit Method (ITC) to avail VAT has been accepted by the Empowered Committee of the State Finance Minsters. Under ITC Method, credit is allowed for tax paid on inputs / purchases made and adjusted to the extent permissible against tax charged on sales. Input Tax Credit shall be available on exports also.
Opening stock of goods on the date of implementation of VAT would be eligible for ITC at the norms specified. New VAT regime shall allow benefit of tax suffered on purchase of certain capital assets for use in the manufacturer, it is proposed that ITC will be permissible partially to the extent of tax paid in excess of 4%
The proposed of VAT is restirctive to the extent of State VAT in as much as no Input Tax Credit will be available on purchases made from outside the state. Demerti goods i.e. FUELS (Diesel, Natural Gas etc.) are non-vat-able. No Input Tax Credit shall be available on purchases made from unregistered dealer. Dealers enjoying eligibility for exemption from Trade Tax shall be eligibile for facility of moratorium of unutilized Fixed Capital Investment for the unexpired period.
|ISSUES & CONCERNS
Piecemeal implementation of VAT i.e. in some States first and in others later will not render full benefits of VAT. The proposed Model VAT is only a State VAT which does not reflect the real VAT. The target should be to cover the whole country so as to include credit for inter-state purchases and tax on services. An year time can now be retrieved by making necessary constitutional amendments. Following issues need to be suitably attended to :
|I. UNIROMITY IN RATES / CLASSIFCATION / NOMENCLATURE:
It is essential that uniformity in rates in the schedules / classiciation of commodities / nomemclatures on all India basis in introduced. Disparity shall encourage cross border smuggling of goods between neighboring States.
Industrial Inputs be taxed @ 4% to avoid surge in refunds. Any official list can not be so broad based as to take care of all manufactures' requirements; hence Schedules of Inputs should be based on individual entries in registration certificate of the manufacturer.
Draft Model VAT for most of the states are ready. Draft text should be handed over to Model Agency for better co-ordination.
|II. CENTRAL SALES TAX:
Central Sales Tax has a booty of about Rs. 10,000 crores. Centre is committed to amend the constitution and delegate powers to the States to collect CST. Anomaly of the Central Sales Tax Act is that the exporting State collects tax from the importing State while tax benefit does not go the consuming state. In order to remove this anomaly, it is sugested that Central Sales Tax Act be replaced by Central Purchase Tax or Destination Based Purchase Tax and the purchasing dealer pays Central Purchase Tax at the local Revenue Neutral Rate (RNR) . Thus the Central Purchase Tax is eligible for full set off as Input Tax Credit. Similar treatment be also given for Stock Transfer / Consignment Sales Tax be brought down to 0% in a phased manner. However New Units availing benefit of moratorium would be thus put ot disadvantage by lowering of Central Sales Tax.
|III. SERVICE TAX:
Starting with three services in 1994, Central list on services now inlcudes 41 services into its fold. States were apprehensive of revenue loss in the initial phase of the VAT and asked for transfer of certain services to them. It is essential that services relating to public utilities, essential health and educational services be excluded from the tax net. Srivastava Panel Report recommended Centre to retain to itself few priority services like Tele-coounication, Postal, Finance, Banking and Insurance. For soft landing of RNR, tax base can be enlarged by merging service tax with VAT. Such Service Tax should be made modvatable.
|IV. UNIFICATION OF TAXES
Good VAT regime expects to do away with multiple levies like Entry Tax, Turnover Tax Additional Sales Tax, Surcharge, Cess, Octroi etc. There is no room for any other kind of taxes outside the VAT Regime. One window tax reduces the collection cost to the States with less squabble for the taxpayer.
|V. IMPOSITION OF SEPECIAL ADDITIONAL TAX:
Some States have proposed to make good the loss by creating Special Additional Tax on certain selected items. Such provision shall permit the States to exercise discretion to include any particular item under SAT which shall give rise to non-transparency. Moresovoer rates of such items in various States shall not be unifor. Therefore it shall defeat broader principle of uniformity of rates in Sales Tax. The parallel tax imposition mechanism shall result in addition to the cost of production and make it uncompetitive as compared to the open imports under the new WTO regime.
|VI. ADDITIONAL EXCISE DUTY:
Presently Additional Excise Duty (AED) in lieu of Sales Tax is levied on textile, sugar and tobacco. The trade seems to be comfortable with additional excise duty. Nonetheless continuance of AED in the present form shall lead to break in the VAT chain and result in cascading effect on tax. If VAT regime is to cover common man commodity like cloth, sugar etc., systems at the Chekc Post in States have to be thoroughly humanized otherwise it shall create chaos.
|VII. WORKS CONTRACTN / TRANSFER OF RIGHT TO USE:
After 46th Constitutional Amendment Works Contract and Right to Use has become taxable as deemed sale. For Uniformity it should be made vatable and brought into VAT regime for unification.
|VIII. REVENUE NEUTRAL RATE:
RNR is generally the rate at which all the goods except those classified under schedules shall be taxed. Floor rate of 10% is being suggested with capping of 12.5% National uniform rate may have far reaching impact in bringing uniformity across the states yet it may not be possible keeping in view political, social and economic peculiarities of various states. A uniform and well defined base should be formulated to work out the RNR rate by the States.
|IX. THRESHOLD LIMIT:
Threshold limit should not be thrust upon. Initially voluntary Registration can be made for the dealers having turnover in between Rs. Three lacs and Rs. Thirty Lacs complete, dealer shall only buy from a Vatable supplier. Therefore dealer shall themselves be offering to join VAT family.
|X. UNUTILISED EXEMPTIONS:
Units enjoying eligibility for exemption from Sales Tax shall be eligible to the facility of moratorium of unutilized Fixed Capital Investment for the unexpired period. Money can be retained for specific period as interest free loan. Units availing exemption deserve their claim on the grounds of equity as held by the apex course in the case of Amrit Banaspati Co. There is a demand for full remission. How far is this rational, by the non-priority industry in particular?
|XI. REFUND MECHANISM:
There are concerns of actual receipt by dealers of the refunds given, considering the status of financial condition of the states. There have been bitter experience of Government cheques being returned unpaid. It is laudable suggestion from the trade that refund should be made by way of tradable instrument like REP License or DEPB which can be purchased / sold to pay VAT within the State. It is heartening to note that industrial inputs are likely to be classified as essentional taxable @4%. This shall help to minimize the cases of refund.
For exports, refund should be separate and should not be linked with the domestic sale. Exporteres apprehended that their cost of export would go up as they are buying their inputs presently without payment of tax. In the VAT regime, Input Tax credit shall be higher as export does not attract any tax. It shall imply that tax paid on purchase of inputs shall be reimbursed only after the completion of the year and hence there shall be undue blockage of funds without interest for a year.
VAT will in due course of time, result in gaining the competitive advantage. Therefore it is imparative that implementation of VAT should not bne delayed further. Provision for Input Tax Credit and Rates for various commodities be made unifor as much as possible. This will lead to better compliance. State's draft VAT should be made public for open discussion.