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VAT a long way to go
The name itself is synonymous with its character Value Added Tax. The principle of reducing multiple taxes and levies in Sales Tax. Keeping in line with the VAT principle that other taxes including turn over tax, surcharge and special additional surcharge will be abolished. The present tax rules and regulations made traders to evade sales tax resulting in heavy losses which indirectly effects income tax. The low collection of Income Tax made the Central government to implement VAT system. VAT experts say since Central Government is compensating the State Governments for the deficit, the state could scrap entry tax and special entry tax as it goes well with VAT implementation. Central Government will encourage state Government for implementation of VAT by compensating 100 percent in the first year and 75 percent and 50 percent in the subsequent years.
With VAT coming into effect, State sales tax and central sales tax will not vanish. State sales tax as well as other taxes, cess and levies will continue to apply on goods out side of the list of 550 items brought under VAT regime. Petrol and diesel are kept out of VAT. Tamilnadu Government insists that the rice is also to be kept out of VAT . All this we have to watch. Central sales tax will not be abolished but will be reviewed in 2006. What all this means is that business still exists with multiple taxes. Total migration to simple and value taxation is a long way to go.

For further details please see “White Paper on VAT” below.


V A T why late?
Progressive opinion in India has always been in favour of the reform but any reform in India or for that matter in the whole world has never been welcomed or took off easily.
The switching over to weight and measures system itself is an interesting story. Vested interests ruled the roots and made the process slow for nearly a century.

The story goes likes this:
In our country there were as many as 143 different systems of weights and measures in use. In order to streamline the vast differences in weight and measures a council was appointed in 1867. The chairman of the committee Colonel Strachey, in his Memorandum, on the chaotic condition of weight and measures in India, recommended the setting aside of the old system and introduction of simple and single uniform measurement in the country. He suggested metric system as the appropriate one. To his Memorandum he appended the draft bill to regulate weights and measures in India. He even proposed January1st, 1871 as the date from which the bill should come into force.
Colonel Strachey’s bill provided for establishment by law, the metric system of weight and measures. He also suggested the various steps and machinery for enforcing and regulating the new system.
The publication of Memorandum led to severe criticism. In 1870 the bill was enacted, but it could not be implemented. As majority of Colonel Strachey’s colleagues on the committee with vested interests in India and England opposed it and took a stand in favour of old system. Colonel Strachey therefore resigned from the committee. Thus the great reform in weight and measures was abandoned.
With the passage of time, the truth and wisdom of Colonel Strachey’s suggestions become more and more evident, but it was only after independence and after lapse of nearly a century, the parliament of India adopted Colonel Strachey’s proposals through its acceptance of the metric system.
The Metric System, Publication Division Government of India 1957.

The story of VAT is the same story:
The Karnataka Government during the tenure of Sri S M Krishna as the Chief Minister made inroads by giving training to commercial tax officers and introducing computers with necessary software. Due to the failure of the Central Government to co-ordinate with different states, the VAT failed to take off.
The present Government recently passed VAT bill and the bill will come into force from 1st, April 2005. Recently, the finance minister of Karnataka has stated that if VAT system comes into effect the state has to face an additional Rs.1800 crore deficit. Further he stated that Karnataka’s stand depends on what Tamilnadu Government and other neighboring states do. With the deadline fast approaching, confusion still persists about VAT. There are chances that finance minister Sri P.Chidambaram may again be forced to defer the implementation.
The nation wide bandh against the proposed VAT on 21st February 2005 and traders threatening to go on an indefinite strike and also on hunger strike from 17th March 2005 shows how the reforms of VAT is taking place.
Those who blindly oppose it constitute certain traders, politicians and officials with vested interest. In spite of it, some traders are against to certain draconian multiple taxation law; which corrupt officials as a weapon to harm the traders.



White Paper on VAT
White paper is the collective effort of all the States of India towards formulating the basic design for VAT. It is the result of the Empowered Committee of State Finance Ministers at New Delhi on January17th 2005 in particular; which was constituted by the Ministry of Finance, Government of India on the basis of resolution adopted in the conference of the Chief Ministers on November16th, 1999.
VAT, as elaborated in this White Paper has certain distinct advantages over existing sales tax structure; it abolishes the burden of several of the existing sales taxes such as:
• Turnover tax
• Surcharge on sales tax
• Additional surcharge
• Special additional tax
• Central sales tax (in next phase)
As a result, the overall tax burden will be rationalized and prices in general will fall. More over the VAT will replace the existing inspection system from commercial tax by self assessment by traders and manufacturers. Thereby the tax structure will become simple and transparent.

The White Paper on VAT is presented in three parts.
1. Justification of VAT
2. Design of VAT
3. Implementation of VAT

1 Justification of VAT:
In the existing sales tax there are problems of double taxation of commodities and multiplicity of taxes resulting in cascading tax burden. For instance before a commodity is produced inputs are taxed (raw material) and after commodity is produced with tax load, output is taxed again. Primarily this has been removed in VAT.
A full-fledged VAT was initiated first in Brazil in 1960; then in European countries in 1970’s and subsequently introduced in 130 countries excluding US. In Asia it has been introduced in large number of countries including China and Sri Lanka. In India too VAT system was introduced by Government of India in respect of Central excise duties for the last ten years.
The events that took place for VAT is recorded as under:
• 1995 Preliminary meeting of Chief Ministers convened by the then Union Finance Minister Dr.Manmohan Sing.
• 1999 The significant meeting of all Chief Ministers on 16th November by Sri Yashwanth Sinha the then Union Finance Minister. Three important decisions were taken with great thrust.
• 2002 Important meeting of all Chief Ministers convened by the Prime Minister on 18th October when Sri Jaswanth Singh was Finance Minister. Clearly stated of introducing VAT from 1st of April 2003.
About 29 states and Union territories have sent their bills to Finance Minister, Government of India for finalization. Madhya Pradesh and Haryana have already introduced VAT. As per recent report of Empowered Committee the Government will go ahead with its plan to implement VAT from 1st, April 2005 even if any other state doesn’t comply.

2 Design of VAT:
The design of VAT has been worked out by the Empowered Committee after several rounds of discussion with the states. The essence of VAT is in providing set-off for the tax paid earlier. The Value Add Tax is based on value addition to the goods. For example:
• Rs.1,00,000 Input purchased in a month
• Rs.2,00,000 Output sold in a month
• Input tax paid @ 4% :Rs.4000/-
• Output tax @10% :Rs.20000/-
• VAT payable during the month:Rs.16,000/- i.e. (20000-4000)
If the tax credit exceeds the tax payable on sales in a month the excess credit will be carried over to the end of the year. If there is any excess unadjusted tax credit at the end of second year then the same will be eligible for refund. VAT is entirely based on documentation of tax invoices, cash memo and bill. Every registered dealer having a turnover of sales above an amount specified , shall issue to the purchaser serially numbered tax invoice with prescribed particulars, this tax invoice will be signed and dated by the dealer . The dealer shall keep a counter foil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty.
Registration of dealers with gross annual turnover above Rs.5 Lakhs will be compulsory. There will be provision for voluntary registration. All the existing dealers will automatically get registered under VAT Act. Small dealers with annual gross turnover not exceeding Rs.5 Lakhs will not be liable to pay VAT.
The Tax payer Identification Number (TIN) will be issued. It consists of 11 digit numerals throughout the country. First two numbers will represent the state code as used by the Union Minister of Home Affairs. Next nine numbers may be different in different states.
Simplified forms of returns will be notified and are to be filed monthly/quarterly as specified in the State Acts/Rules.
The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation fuel etc. As per recent report some food grains are exempted from VAT.
Under the system about 550 goods is covered .There will be only two basic VAT rates of 4% and 12.5%. A special VAT rate of 1% on gold and silver ornaments.
• Under 4% VAT rate 270 goods common for all states like medicine, agricultural inputs etc.
• Under 12.5% rate common for all states, most of the commodities will fall under this category
• Under the exempted category a set of 10 commodities chosen by individual states from a list of goods of local importance.

3 Implementation of VAT:
States have taken several steps towards implementation of VAT which is going to be implemented from 1st, April 2005.
Implementation of VAT may lead to revenue growth, but there may be loss of revenue in some states; in view of this Government of India has agreed to compensate for 100 per cent of the loss in the first year,75 per cent in the second year and 50 per cent in the third year of introduction of VAT .
After VAT is introduced CST (Central Sales Tax) will be phased out for which Empowering committee has taken initiative of setting up of Taxation Information Exchange and is expected to be completed with in one year. The main purpose of this exchange is to compensate the loss of revenue due to abolishing of CST .This will be reviewed by the Empowering Committee during 2005-06.
A proposal for VAT on imports, including collection mechanism with adequate safeguards for protection of interest of land locked states is being discussed with Government of India.
Similarly the question of collection and appropriation of service tax by the Center and the States is also taken up.
For successful implementation of VAT the Empowering Committee has set up a consultative Committee with one representative from each of the national level trade organizations and national level chambers of commerce and industry.
A comprehensive campaign on VAT will be launched to communicate in simple and transparent manner the benefit of VAT for common people, traders, industrialists and also State Governments. The purpose of this campaign will be a two-way interaction between the Government and the trade and industry as well as the common people.
It may be noted that VAT design has been worked out carefully by the Empowering Committee to strike a balance not only between the common points of convergence and federal flexibility, but also a balance what can be done to begin with and what should be incorporated subsequently for further perfection of the VAT system.

Source: myicwai.com/resource.asp


The country is not prepared for VAT. The Government should redress the grievances of traders. Yashwant Sinha


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