An abbreviation for Value Added Tax VAT is similar to the national sales tax, except that instead of a one-time tax at the time of a retail sale, under VAT, a samller tax is added each time a product is resold or when a new value gets added. For example, a tax is added when a product gets passed from manufacture to a wholesaler and again from a wholesailer to retailer. As a result, under VAT, tax is paid at every step in the value addition chain and every stage is also liable for input tax credit. The proposed VAT act will enable a dealer to claim credit(known as input tax) for the tax paid on the goods that he purchased from a dealer registered in the state, making it more transparent process ( by redcuing the number of transactions in the parallel economy). Which is one reason why the trading community is resisting VAT, tooth & nail.
In fact states like Haryana and Tamil Nadu have already limited 'VAT-able ' tax
What Tax Will Vat Replace
Currently the proposal is to replace only the local, State Sales TAx including turnover tax and surcharge. The Central Sales Tax (CST) will continue to be levied on inter-state sales. However, this will also be phased out over the next three years on a sacle of 2%, 1%, 0% reduction.
The Genesis Of VAT
It started with liberalosation and Dr. Manmohan Singh's attempts at tax reforms. He felt that the sales tax system, which is mainstay of the state revenue, is very complex and distorted, often acting as an impediment in creating a uniform market across state borders.
Therefore in his Budget speech for the year 1994-95, he intoduced a new concept of service tax, "there is no reason for extempting services from taxation," adding that his long term aim would be to move to a VAT system. Earlier recommemndations by the Tax Reforms Committe headed by Dr. Raja Chelliah in 1990 had also recommended a tax akin to VAT.
The committefelt that indirect taxes imposed by the Centre should be neutral to production and consumption of goods and in course of time also covers commodities and services. It was felt that as central excise duties on goods is transformed into VAT at the manufacturing level, service tax would also get woven into this system, thereby widening the tax base by covering all exempted commodities.
It was felt that this would also reduce the cascading burden of service tax on customers. Amongst the services that were to be brought inder this tax net were advertising , insurance, share broking and telecom.
Many advanced countires like US and UK followed the VAT system, though with mixed results. While it's been hugely successful in the European Union (EU), in the US it has reportedly caused more confusion, rather than streamlining the earlier tax regimes. Yet, there are government claims that VAT has been successful in 150 nations, including some of our neighbouring countries.
The government interest in VAT is not difficult to understand. Under this system, the government can start collecting tax right from the beginning of manufacturing process without having to wait till the product reaches the final consumer. This will reduce tax evasion to some extent 9 which is estimated to exceed Rs. 4000 crore per year in the NCR alone).
Leakage of revenue at any point in the value chain will be prevented since the onus will now be on the dealer or manfacturer to keep proper records of tax payement. In this sense , it's a 100 percent self-assessment process, since only records on a purchase and sales book are required, besides preservation of tax invoices.
The workload of the sales tax authorities will however increases manifold. Their book keeping will have to be extremely tight in order to keep track of the input tax credits, the various refunds etc.
Hence, there"ll be no tax deduction at source, no statutory forms to be filled, no TDS certificates to be issued. Though the system promotes a liberal regime based on trust, penalties are stringent and non discretionary under VAT.
A section of consumer is also resisting VAT, fearing this might lead to some inflation. These fears are not completely unjustified. In States where current sales tax rates are higher than the VAT Revenue Neutral Rate (RNR), no inflation will be caused;rather prices will come down.
But States with higher RNR than sales tax may experience inflation, although this can be countered to some extent by the elimination of other taxes, such as entry tax, work contract tax etc.
The price of some commodities will also increase due to withdrawl of exemtipns, removal of industrial incentives and bringing close substitute at tax parity. Generally it's felt that a VAT like structure is more suitable for countries with a homogeneous market set-up rather than for a country like India, which has such a strong federal character and where every changes takes ages to be implemented.
11 States Ready For VAT From June
Atleast 11 states accounting for 2-3 of the country's trade and industrial output are ready to introduce VAT from june, but a final decision would be taken after a meeting of the Empowered Committee with Fianance Minister Jaswant Singh shortly.
Even if the centre does not reduce the Central Sales Tax to 2.0%, the Empowered Committee claimed that 11 states were willing to implement VAT with 4.0% for the next 6 months after which the remaining states are expexted to fall in line.
"The committee assessed that 11 states are fully prepared to implement VAT beginning June 1. We requested the Finanace Minister to examine the Centre by May 8-9, and support the states in receiving the Presidential assent and compensation for revenue loss," VAT panel chairman Asin Desgupta told reporters.
The Finance minister has assured that VAT bills will be duly examined and a meeting would be convened shortly and a collective decision will be taken regarding the date for the introduction of the new tax regime, he said. Till now, the states which are ready for VAT are Andhra Pradesh, Maharastra, West Bengal, Gujrat, Karnataka, Madhaya Pradesh, Kerala, Assam, Meghalaya.
Tamil Nadu & Haryana have already introduced VAT bills in their respective assemblies. The panel has changed the VAT rates only on medicines, which has been reduced to 4.0% from the previous 12.5%.