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ROOTING FOR VAT IN APRIL 2005
The Finance Minister P Chidambaram has made it very clear that his Government will implement VAT in India in April 2005 and the Empowered Committee comprising of the Finance Ministers of the states have also announced this via the White Paper published on the 17th January 2005. However, many still doubt it and the real question now is "will it be implemented from April 1, 2005?". Going by the history of passing new legislations in this country, it is only natural that the whispers down the corridors of power have begun questioning if VAT will happen this year.
What is VAT
The reasons why VAT should be implemented in India as it has been in 150 other countries around the world is really very clear. The VAT regime will in the long run benefit everybody. Lets look at the Government first. To begin with, it is not possible under the present sales tax system to bring in transparency as regards incidence of tax or the quantum of tax payable on goods. It encourages transactions 'without bill'. VAT encourages voluntary compliance and thereby simplifies assessment procedures. In addition, it fully eliminates disputes as regards tax liability of a transaction or rate of tax applicable and reduces compliance costs. VAT reduces the number of tax rates and tax concessions on different goods. It eliminates allied levies like resale tax, turnover tax, cess, additional tax and surcharge. VAT seeks to prevent the problem of under-valuing and inflation as all stages of production and distribution are subject to tax. It proposes to permit claim of credit for taxes only on the receipt of invoice.
Impact of VAT
VAT is most certainly a more transparent and accurate system of taxation. The existing sales tax structure allows for double taxation thereby cascading the tax burden. For example, before a commodity is produced, inputs are first taxed, the produced commodity is then taxed and finally at the time of sale, the entire commodity is taxed once again. By taxing the commodity multiple times, it has in effect increased the cost of the goods and therefore the price the end consumer will pay for it.
The transaction chain under VAT assuming that a profit of Rs 10 is retained during each sale:
Tax implication under Value Added Tax Act:
| Seller |
Buyer |
Selling Price
(Excluding Tax) |
Tax Rate |
Invoice value
(Incl Tax) |
Tax Payable |
Tax Credit |
Net TaxOutflow |
| A |
B |
100 |
4% CST |
104 |
4 |
0 |
4.00 |
| B |
C |
114 |
12.5% VAT |
128.25 |
14.25 |
0 * |
14.25 |
| C |
D |
124 |
12.5% VAT |
139.50 |
15.50 |
14.25 |
1.25 |
| D |
Consumer |
134 |
12.5% VAT |
150.75 |
16.75 |
15.50 |
1.25 |
|
Total to Govt. |
VAT
CST |
16.75
4.00
|
*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same though it could to be reduced to 2% when VAT is introduced and eventually phased out.
VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases (inputs) and capital goods. What this means is that dealers can actually deduct the amount of tax paid by him for purchase from the tax collected on sales, thereby paying just the balance amount to the Government.
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