FOREWORD

Even though Value Added Tax (VAT) is an indirect tax in the sense that the tax is collected from someone other than the person who actually bears the cost of the tax, VAT levied on the sale of goods and services has increasingly become popular with many governments in many countries. In some countries like Singapore, Australia, New Zealand and Canada, this tax is known as Goods and Services Tax (GST). SAFA earlier initiated A Study on VAT in SAFA Countries. A team worked on its various aspects like the tax base, tax rates, the types of goods and services taxed, the mode of calculation of VAT, the exemptions allowed, etc. etc. To my knowledge the team has worked very hard on the subject and their time-consuming job has enabled it to produce a valuable document for reference as well as action. Mr. Ashok Chandak, Past President, SAFA, who is very thorough and immaculate in discharging his responsibilities supported by the team of officials of the ICAI including Mr. R. Devarajan, Additional Director and Secretary, Fiscal Laws Committee, Ms. Priya Subramanian, Sr. Education Officer and Ms. Mukta Kathuria, Executive Officer deserve congratulations for tackling a difficult subject in a most professional way. I am also extremely thankful to Mr. Sunil Goyal, Past President and Mr. Kamlesh S. Vikamsey, current President of the ICAI for providing ICAIs support to the study. I am also thankful to the other member-bodies of SAFA for making available inputs relevant to the respective countries and for the comments given on the draft, and Dr Ashok Haldia, Permanent Secretary SAFA for his guidance to the ICAI officials in preparation of the Study. I am sure this Study Report is going to prove useful and helpful to all those who would refer to it.

August 2005

Md. Nurul Hassan President, SAFA

ii

CONTENTS
Chapter No. 1. 2. Taxonomy of VAT 2.1 2.2 2.3 2.4 2.5 3. Different stages of VAT Variants of VAT Methods for computation of tax Rate Structure under VAT Merits and demerits of VAT Particulars Introduction and object of the study Page No. 1 3 3 8 10 14 14 19 19 19 19 21 23 24 24 24 25 28 29 29 29 30 30 30

Federal structure and tax systems in India 3.1 3.2 Introduction Tax structure Union taxes State level taxes Local-level taxes 3.3 3.4 Collection and sharing of revenues Domestic indirect taxes Structure Sales tax Central Sales Tax Need to reform domestic indirect taxes 3.5 Recommendations of various Committees on tax reforms Jha Committee Technical group Long-term fiscal policy Chelliah Committee

iii

4.

VAT in Indian Federation 4.1 CENVAT Structure of CENVAT 4.2 4.3 Administrative controls under CENVAT Obligations under CENVAT Declarative obligations Accounting obligations 4.4 Weaknesses of the system under CENVAT

32 32 32 35 36 36 38 39 42 42 43 44 45 46 46 47 47 49 52 63 66 66 66 66 66 67

5.

VAT in Indian States 5.1 5.2 5.3 5.4 Committee of State Finance Ministers Expert Group on taxation of Inter-state sales Committee on the draft model VAT law Various models of VAT Union VAT State VAT Dual VAT 5.5 5.6 5.7 5.8 Move towards VAT in States Dr. Vijay Kelkars views White Paper on State-Level VAT in India Further developments and concerns

6.

VAT in Nepal 6.1 6.2 Background Basic features Type of VAT Scope Rate

iv

6.3 6.4

Taxable supply Place and time of supply Place of supply Time of supply

68 68 68 68 69 70 70 70 71 71 71 71 71 72 72 72 72 73 73 74 74 75 76 76 76 76 76

6.5 6.6

Taxable value Tax credit In case of taxable supply In case of mixed supply Partial credit No credit

6.7

Tax refund Refund to exporters Refund to non-exporters Refund to diplomats Other refunds

6.8

Administration Registration De-registration Taxpayer Identification Number

6.9

Invoicing Tax invoice Abbreviated invoice

6.10

Accounting Purchase book Sales book VAT Account Others

6.11 6.12 6.13

Submission of return Payment of tax Tax assessment General Computer assessment Management assessment

77 77 78 78 78 80 80 80 81 81 82 82 82 82 82 83 83 83 84 84 85 86 87 87 87

6.14 6.15 6.16 6.17 7.

Collection Penal provisions Appeals Conclusion

VAT in Sri Lanka 7.1 7.2 Introduction Imposition of Value Added Tax (VAT) Chargeability of VAT Rate of VAT VAT not to apply on certain wholesale or retail supply of goods Time of supply of goods Time of supply of services Supply in the case of instalments/hire purchase Value of taxable supply of goods or services Value of goods imported Zero rated goods Exemption in respect of entries in First Schedule Place of supply of goods or services 7.3 Registration

vi

7.4

Returns and calculation of tax Return (Section 21) Credit for input tax against output tax (Section 22) Accounting basis (Section 23) Bad Debts (Section 24) Adjustment of tax by credit or debit note (Section 25)

94 94 96 98 98 99

Imposition of Value Added Tax on the supply 100 of financial services by specified institutions Monthly taxable period (Section 25B) Calculation of tax (Section 25C) Tax credit (Section 25D) Payment of tax (Section 26) Penalty for default (Section 27) 7.6 Assessment of tax Power of Assessor to make an assessment (Section 28) 100 100 101 103 103 104 104

Assessor to state reason for non-acceptance 104 of a return (Section 29) Power of Assessor to determine open market value (Section 30) Additional Assessment (Section 31) Evidence of returns and assessment (Section 32) Limitation of time for assessment or additional assessment (Section 33) Definitions ANNEXURE I ANNEXURE II
vii

104 105 105 105 105

FIRST SCHEDULE SECOND SCHEDULE

112 118

8.

VAT in Pakistan 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 8.10 8.11 8.12 8.13 8.14 8.15 8.16 8.17 8.18 8.19 8.20 8.21 8.22 8.23 8.24 Introduction General history of sales-tax in Pakistan Move towards VAT Sales tax is a value added tax Excise duty and Sales Tax Distinction Definitions Scope of tax Chargeability of sale tax Conditions to levy sales tax under section 3(1)(a) Sales tax is a tax on consumption Sales tax a Value Added Tax Rate of sales tax Retail tax Collection of excess tax Zero rating (Section 4) Change in the rate of tax (Section 5) Time and manner of payment (Section 6) Determination of tax liability (Section 7) Levy and collection of tax on specified goods on value addition (Section 7A) Tax credit not allowed (Section 8) Debit and credit note (Section 9) Excess amount to be carried forward or refunded (Section 10) Assessment of tax (Section 11) Short-paid amounts recoverable without notice (Section 11A)

121 121 121 122 123 123 124 129 129 129 129 130 130 130 131 131 132 132 132 133 134 134 134 135 136

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8.25. 9.

Exemption (Section 13)

136 137 137 139 140 141 143 144 144 145 146 148 148 154 154 154 154 155 156 156 156 157

VAT in Bangladesh 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 9.14 9.15 9.16 9.17 9.18 9.19 9.20 9.21 9.22 9.23 Definitions Imposition of VAT Application of tax rate Computation of value for charge of VAT Time and method of payment (Section 6) Attachment of stamp or banderol Collection of VAT at source Imposition of supplementary duty Turnover tax (TOT) Large taxpayer unit (LTU) Credit of taxes Correction of accounts after payment of tax Settlement of excess input tax Credit on input stored at the time of commencement of Act (Section 12) Drawback of tax paid on inputs used to produce or manufacture of exported goods (Section 13) Exemption Books of account Tax invoices Period of keeping records Submission of files/records etc.

Power of release of goods without payment of VAT 157 and drawback of VAT on some goods Refund Drawback in case of exported or imported goods 157 157

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9.24 9.25 9.26 9.27

Drawback in case of goods used in the mean time of import and export Drawback not allowed under certain cases Other Provisions The Value Added Tax Act, 1991

158 158 158 158

Chapter 1

Introduction and Object of the Study

VAT is the youngest member of the sales tax family. This tax was proposed for the first time by Dr. Wilhelm Von Siemens for Germany in 1919 as an improved turnover tax. "The improvement consisted in the subtraction of previous outlays from taxable sales with the results that the tax base of each firm would be reduced to the value which it added to the product." In 1921, VAT was suggested by Professor Thomas S. Adams for the United States of America who observed "sales tax with a credit or refund for taxes paid by the producer or dealer (as purchaser) on goods bought for resale or for necessary use in the production of goods for sales." VAT was also recommended by the Shoup Mission for reconstruction of the Japanese Economy in 1949. However, the tax was not introduced by any country till 1953. France led the way in 1954 by adopting a VAT that covered the industrial sector alone and the tax was limited up to the wholesale level. The tax was limited to the boundaries of France until the fifties. VAT has, however, been spreading rapidly since the sixties. The Ivory Coast followed France by adopting VAT in 1960. The tax was introduced by Senegal in 1961 and by Brazil and Denmark in 1967. The tax has gathered further momentum as it was made a standard form of sales tax required for the countries of the European Union (then European Economic Community). In 1968, France extended VAT to the retail level while the Federal Republic of Germany introduced it in its tax system. The Netherlands and Sweden imposed this tax in 1969 while Luxembourg adopted it in 1970, Belgium in 1971, Ireland in 1972, and Italy, the United Kingdom, and Austria in 1973. Of the other members of the European Union, Portugal and Spain introduced VAT in 1986, Greece in 1987, while this tax was adopted by Finland in 1994. Many other European countries have adopted VAT. Similarly, many countries in North and South America, Africa and Oceania have introduced VAT. VAT has been spreading in the Asian region as well. The Republic of Vietnam adopted VAT briefly in 1973. (VAT was abolished soon but it was reintroduced in 1999 in Vietnam.) South Korea introduced VAT in 1977, China in 1984, Indonesia in 1985, Taiwan in 1986, Philippines in 1988, Japan in 1989, Thailand in 1992, and Singapore in 1994 while Mongolia has been implementing this tax since 1998.

In the South Asian Association for Regional Cooperation (SMRC) region, VAT has been considered in great depth in India. This country introduced VAT in a different way under the name of modified value added tax (MODVAT) in 1986. Unlike the VAT system of other countries, the-Indian MODVAT system is designed to correct the excise duty. This tax is adopted mainly to avoid the disadvantages of input taxation, such as tax cascading. The scope of MODVAT has been extended over the years. Further, various attempts have been made to introduce a broad-based VAT in place of several domestic trade taxes. There seems to be a broad agreement among the Indian States to convert the State sales tax into a VAT. Among the other members of the SAARC countries, Pakistan adopted VAT in 1990, Bangladesh in 1991, and Nepal in 1997 while Sri Lanka introduced VAT in 1998. As VAT is less distortive and more revenue-productive, it has been spreading all over the world. This tax had been adopted by eight countries by the end of the 1960s. Since then the tax has been introduced by at least one country each year except 1974, 1978 and 1979. By 2000, about 120 countries have adopted VAT and it is under consideration in many other countries. In fact, VAT has become a popular topic for tax reform in recent years. The objective of this study is to give an idea about the systems of VAT as are prevalent in countries belonging to South Asian Federation namely Bangladesh, India, Nepal, Pakistan and Sri Lanka.

Chapter 2

Taxonomy of VAT
2.1 Different stages of VAT

The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value added (i.e. sales minus purchase) which is equivalent to wages plus interest, other costs and profits. To illustrate, a chart of transactions is given below:
Wholesaler B Sale price Rs. 400 Gross VAT Rs. 50 Net VAT Rs.12.50 (50-37.50)

Manufacturer A Sale price Rs.300 Gross VAT Rs.37.50 Net VAT Rs.21 {Rs.37.50-(12.50+4)

Input For Manufacture r

Product X Sale price Rs. 100 Gross VAT Rs. 12.50 Net VAT Rs.12.50 Product Y Sale price Rs. 100 Gross VAT Rs. 4 Net VAT Rs. 4 Retailer C Sale price Rs. 500 Gross VAT Rs. 62.50 Net VAT Rs. 12.50 (62.50 50)

Note: The rate of tax is assumed to be 12.5 per cent on the transactions of goods manufactured by A. For a manufacturer A, inputs are product X and product Y which are purchased from a primary producer. In practice, even these producers use inputs. For example, a farmer would use seeds, feeds, fertilizer, pesticides, etc. However, for this example their VAT impact is not considered. B is a wholesaler and C is a retailer. The inputs X and Y are purchased at Rs. 100 each on which tax is paid @12.5 % and 4% respectively. The manufacturer A would, therefore, take the credit for tax

paid by him for the use of such inputs. The input price of Rs.200 plus tax would include wages, salaries and other manufacturing expenses. To all this he would also add his own profit. Assuming that after the addition of all these costs his sale price is Rs.300, the gross tax (at the rate of 12.5 per cent) would be Rs.37.50. As manufacturer A has already paid tax on Rs.200, he would get credit for this tax (i.e. 12.50+4=16.50). Therefore, his net VAT liability would be Rs.37.50 minus Rs.16.50. Thus, manufacturer A would pay Rs.21 only (because of this he would take the cost of his inputs to be only Rs.200). Similarly, the sale price of Rs.400 fixed by wholesaler B would have net VAT liability of Rs.12.50 (Rs.50-37.50= Rs.12.50) and the sales price of Rs.500 by Retailer C would also have net VAT liability of Rs.12.50 (Rs. 62.50 - 50 = Rs.12.50). Thus, VAT is collected at each stage of production and distribution process, and in principle, its entire burden falls on the final consumer, who does not get any tax credit. Thus, VAT is a broad-based tax covering the value added to each commodity by parties during the various stages of production and distribution. How VAT operates The operation of VAT can be further appreciated from the following illustrations: Illustration A is a trader selling raw materials to a manufacturer of finished products. He imports his stock-in-trade as well as purchases the same in the local markets. If the rate of VAT is assumed to be 12.50 per cent ad valorem, he will pay VAT as under: (Rs.) 10,000 1,250 20,000

(i) (ii) (iii) (iv) (v) (vi)

A's cost of imported materials (from other State) (A will deposit Rs.1250 duty on the above. Since, this is not a State VAT it will form a cost of input) A's cost of local materials (VAT charged by local suppliers Rs.2,500. Since the credit of this would be available it will not be included in cost of input) Other expenditure (such as for storage, transport, interest, etc.) incurred and profit earned by A Sales price of goods VAT on the above @ 12.50% (Approx.) Invoice value charged by A to the manufacturer, B

8,750 40,000 5,000 45,000

I.

A's liability for VAT

Tax on the sales price Less: Set-off of VAT paid on purchases On imported goods On local goods Net tax payable

Rs. 5,000 Nil 2,500 2,500 2,500

In the above illustration (as well as in illustrations that follows) it is assumed that set off of VAT paid on imported goods from outside countries or other States is not allowed. Further it is assumed that VAT is levied on goods only and not on services rendered. If it were to be so levied, in the above illustration, assuming that A had stored his goods in a hired godown, the owner would have levied VAT on godown charges. Similarly, the contractor transporting A's goods for delivery to B would have charged VAT on transport charges recovered from A. In that event A would have been entitled to claim set-off of VAT paid on godown and transport charges. Now B manufactures finished products from the raw materials purchased from A and other materials purchased from other suppliers. His liability would be as under: (Rs.) 40,000

(i) (ii)

(iii) (iv) (v) (vi) II.

Bs cost of raw materials (VAT recovered by A Rs.5,000) Bs cost of other materials Local purchases (VAT charged on the above Rs.2,500) Inter- State purchases (CST paid Rs.400) Manufacturing and other expenses incurred and profit earned by B Sale price of finished product VAT on the above Invoice value charged by B to the wholesaler, C

20,000 10,400

29,600 1,00,000 12,500 1,12,500

B's liability for VAT

Tax on the sales price Less: Set-off of VAT on purchases To A To other suppliers Net tax payable
5

12,500 5,000 2,500

7,500 5,000

When C, after repacking the goods into other packing, sells the finished product to a retailer. The following would be the position: (i) (ii) (iii) (iv) (v) (vi) III C's cost of goods (VAT recovered by B Rs.12, 500) Cost of packing material (VAT charged on the above Rs. 250) Expenses incurred and profit earned by C Sale price of goods VAT on the above Invoice Value charged by C to D, a retailer Cs liability for VAT Tax on the sales price Less: set-off of VAT paid To B To other suppliers 15,000 12,500 250 Net tax payable 12,750 2,250 (Rs.) 1,00,000 2,000 18,000 1,20,000 15,000 1,35,000

When D sells the goods to the consumers, the position would be as under: (i) (iii) (iv) (v) (vi) IV. Ds cost of goods (VAT recovered by C Rs.15,000) Expenses incurred and profit earned by D Sale price of goods VAT on the above Invoice value charged by D to the consumers Ds liability for VAT Tax on the sale price Less: Set-off of VAT paid to C Total recovery It would be seen that in the above illustrations, at the successive stages which the raw materials and other goods pass till they are sold to the ultimate consumers, VAT would be collected as under:
6

Rs. 1,20,000 20,000 1,40,000 17,500 1,57,500

Net tax payable

17,500 15,000 2,500

(i) (ii) (iii) (iv) (v) (vii) (viii)

Paid by suppliers selling raw materials to A Net tax paid by A on his sales to B Paid by suppliers selling other materials to B Net tax paid by B Paid by suppliers selling packing materials to C Net tax paid by C Net tax paid by D Total recovery of revenue

(Rs.) 2,500 2,500 2,500 5,000 250 2,250 2,500 17,500

Now, if tax was leviable under a sales-tax law at the last stage in a series of successive sales (when the finished product is sold to consumers) the authorities in the above case would have recovered the entire tax of Rs.17, 500 from D at 12.50 per cent on his sale price of Rs.1,40,000 and all earlier stages are to be exempted. If an equal amount of tax was leviable under Sales-tax law at the first stage, in the above illustration, it will have to be levied in the hands of 'B' only as the goods are manufactured by him. The rate of tax will have to be determined taking into account the amount of tax paid on raw material, etc., which will be done in the following manner only. Total tax amount leviable Tax recovered from A 1. On local purchases 2. On imports Tax recovered from B On other raw materials Tax recovered from C On packing materials (Rs.) 17,500 Nil 2,500 2,500 15,000 2,500 12,500 250 12,250

Less:

Less: Less:

There will be no recovery of tax from D as sale by 'D' to the consumer will be a resale or sale of tax paid goods. Therefore, balance amount of Rs.12, 250 will have to be recovered at the point of sale by 'B' only. The sale price of B being Rs. 1,00,000 the rate of tax will be 12.25%. Under the VAT, liability of B is only Rs. 5,000 as against Rs. 12,250 under first stage.
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2.2

Variants of VAT

VAT has three variants, viz., (a) gross product variant, (b) income variant, and (c) consumption variant. These variants, as presented in a schematic diagram given below could be further distinguished according to their methods of calculation, viz., addition method and subtraction method. The subtraction method could be further divided into : (a) direct method (b) intermediate method and (c) indirect method. Different variants of VAT

Gross product variant

Tax levied on all sales with no deduction for capital inputs.

Income variant

Consumption variant
Tax levied on all sales with deduction for all business inputs .

Tax levied on all sales with set-off for depreciation on capital goods.

Addition method
Aggregating all the factor payments and profit.

Invoice method
Deducting tax on inputs from tax on sales for each tax paid

Subtraction method

Direct subtraction method

Deducting aggregate value of purchase exclusive of tax from the aggregate value of sales exclusive of tax

Intermediate subtraction method

Deducting tax inclusive value of purchases from the sales and taxing difference between them.

The gross product variant allows deductions for taxes on all purchases of raw materials and components, but no deduction is allowed for taxes on capital inputs. That is, taxes on capital goods such as plant and machinery are not deductible from the tax base in the year of purchase and tax on the depreciated part of the plant and machinery is not deductible in the subsequent years. Thus, deducting aggregate tax-exclusive value of purchase from the tax exclusive value of sales the economic base of gross product variant is equivalent to Gross National Product. In this variant of VAT capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and machinery is delayed due to this double tax treatment. The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as depreciation on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off. Net investment (i.e., gross investment minus depreciation) is taxed and, therefore, the economic base of the income variant is equivalent to the Net National Product. In practice, however, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation. Consumption variant of VAT allows for deduction on all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. The economic base of the tax, therefore, is equivalent to the total private consumption. It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. This form is neutral between the methods of production; there will be no effect on tax liability due to the method of production (i.e. substituting capital for labour or vice versa). The tax is also neutral between the decision to save or consume. Among the three variants of VAT, the consumption variant is widely used. Several countries of Europe and other continents have adopted this variant. The reasons for preference of this variant are: First, it does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive). Secondly, it is more in harmony with the destination principle. Hence, in the foreignrade sector, this variant relieves all exports from taxation while imports are taxed.
9

Finally, the consumption variant is convenient from the point of administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. In practice, therefore, most countries use the consumption variant. Also, most VAT countries include many services in the tax base. Since the business gets set-off for the tax on services, it does not cause any cascading effect. Origin/destination principle VAT is being implemented either under origin or destination principle. Under the 'origin principle', value added domestically on all goods whether they are exported or internally consumed is subjected to tax. Consequently, tax cannot be levied on value added abroad and this principle confines VAT only to goods originating in the country of consumption. In short, exports are taxable under this principle while imports are exempt. It is mostly used in conjunction with income VAT and is unpopular for obvious reasons. Under 'destination principle', value added irrespective of the place of origin is taxable. All goods are taxed if they are consumed within the country. In this regime, exports are exempt while imports are subjected to tax. Destination principle is normally used along with consumption VAT. In a federal set-up like India, destination principle is preferred for taxation of products consumed within the various States of the country, Another attractive feature of this principle is that it treats imported goods at par with domestic products unlike the origin principle which gives indirect protection and even preference to the producers abroad, The origin' principle amounts to unfair treatment of domestic producers which is economically and politically inadvisable. In the EEC countries, origin principle was once considered for eliminating border controls and problems of valuation, but was subsequently given up as being impractical and destination principle is now followed.

2.3

Methods for computation of tax

There are several methods to calculate the 'Value Added' to the goods for levy of tax. The three commonly used methods are (a) addition method,
10

(b) (c)

invoice method and substraction method.

Addition method This method aggregates all the factor payments including profits to arrive at the total value addition on which the rate is applied to calculate the tax. This type of calculation is mainly used with income VAT. Addition method does not easily accommodate exemptions of intermediate dealers. It is also not suitable for exempting exports and valuation of imports under the destination principle. Another drawback of this method is that it does not facilitate matching of invoices for detecting evasion. Invoice method This is the most common and popular method for computing the tax liability under 'VAT' system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage is allowed as set-off. In other words, out of tax so calculated, tax paid at the earlier stage i.e., at the stage of purchases is set-off, and at every stage the differential tax is being paid. The most important aspect of this method is that at each stage, tax is to be charged separately in the invoice. This method is very popular in western countries. In India also-, under Central Excise Law this method is followed. This method is also called the 'Tax Credit Method' or 'Voucher Method'. From the following illustration, the mode of calculation of tax under this method will become clear: VAT Liability 125 Less VAT Credit Tax to Government 125

Stage 1.

Particulars Manufacturer/first seller in the State sells the goods to distributor for Rs.1000. Rate of tax is 12.50%. Therefore, his tax liability will be Rs.125. He will not get any VAT credit, being the first seller. Distributor sells the goods to a wholesale dealer for say Rs. 1200

2.

150

125

25

11

@ 12.50% and will get set-off of tax paid at earlier stage at Rs. 125. His tax liability will be Rs. 25. 3. Wholesale dealer sells the goods to a retailer at say Rs. 1500. Here again he will have to pay the tax on Rs. 1500. He will get credit of tax paid at earlier stage of Rs. 150. His tax liability will be Rs. 37.50. Retailer sells the goods to consumers at say Rs. 2000. Here again he will have to pay tax on Rs. 2000. He will get credit for tax paid earlier at. Rs. 187.50. His tax liability will be Rs.62.50. Total 187.50 150 37.50

4.

250

187.50

62.50

712.50

462.50

250

Thus, the Government will get tax on the final retail sale price of Rs. 2,000. However, the tax will be paid in instalments at different stages. At each stage, tax liability is worked out on the sale price and credit is also given on the basis of tax charged in the purchase invoice. If the first seller is a manufacturer, he gets the credit of tax paid on raw materials, etc. which are used in the manufacturing. From the above illustration, it is clear that under this method tax credit cannot be claimed unless and until the purchase invoice is produced. As a result, in a chain, if at any stage the transaction is kept out of the books, still there is no loss of revenue. The department will be in a position to recover the full tax at the next stage. Thus, the possibility of tax evasion, if not entirely ruled out, will be reduced to a minimum. However, proper measures should be implemented to prevent the production of fake invoices to claim the credit of tax at an earlier stage. It is said that in this method the beneficiary is the trade and industry because in the above example, the total tax collection at all the stages is Rs.712.50 whereas tax received by the State is only Rs. 250. The set-off available is also tax paid. If the profit margin is to be kept at the constant level then the set-off will have to be considered to avoid cascading effects of taxes.

12

Subtraction method While the above-stated invoice or tax-credit method is the most common method of VAT, another method to determine the liability of a taxable person is the cost subtraction method, which is also a simple method. Under this method, the tax is charged only on the value added at each stage of the sale of goods. Since the total value of goods sold is not taken into account, the question of grant of claim for set-off or tax credit does not arise. This method is normally applied where the tax is not charged separately. Under this method for imposing tax, 'value added' is simply taken as the difference between sales and purchases. The following illustration will make the working of this system clear: Stage No. Turnover for tax under VAT (Rs.) 1,125 225 Tax @ 12.50% (Rs.) 125 25

Particulars

1. 2.

3.

4.

First seller sells the goods to a distributor at say, Rs. 1125 inclusive of tax Distributor sells the goods to a whole-seller at say, Rs.1,350. Here taxable turnover will be Rs.1,350 - Rs.1,125 Wholesaler sells the goods to a retailer at say, Rs 1,687.50. Here taxable turnover will be Rs. 1,687.50 - Rs. 1,350 Retailer selling the goods at say, Rs. 2250. Taxable turnover will be' Rs.2250 - Rs. 1687.50

337.50

37.50

562.50

62.50

2,250 Tax is calculated by the formula TR 100 + R

250

T = Taxable turnover, R = Rate of Tax Thus, under this system also, the incidence of tax is at each stage and the incidence of tax on the final sale price to the consumer will remain the same as in the earlier method. However, this holds good till the time the same rate of tax is attracted on all inputs, including consumables and services, added at all the stages
13

of production/distribution. If the rates are not common, then the final tax by the two methods may differ. The method is being objected to by arguing that under this method, tax is levied on income. The value addition at each stage may not be only due to profit but may be partly due to freight/transportation and other services. The incidence of tax is on the sale of goods. However, the mode of calculation of taxable turnover is value added. Therefore, the method cannot be said to be imposing tax on income/profit.

2.4

Rate Structure under VAT

VAT can operate either with a single rate or with multiple rates. When multiple rates are used, in addition to zero-rate, lower rates are prescribed for granting concessions. Multiple rates conveniently allow preferential treatment to certain commodities, firms or sectors and a zero rate is normally applied to exempt mass consumption Articles. Generally, luxuries are taxed at a rate higher than the normal rate to curb consumption and make the tax structure more progressive. Such a rate of differentiation can achieve the objective of tax policy only at the retail level in tax credit method when the commodity or service is finally passed on to the consumer. Multiple rates have no impact if they are applied at earlier stages as they only make the producer or wholesaler pay lesser tax on the value addition. The retailer subsequently gets a smaller tax credit against the standard rate which is invariably higher than the tax liability at earlier stages. Under the subtraction method, it is possible to apply different rates at each stage of transaction. With multiple rates, there is a heavy burden on the retailer as he is required to maintain a complete account of exempted goods, goods having concessional rates, standard rates, source of purchase, etc. which increases the cost of compliance and even induces unintended evasion. Therefore, it is suggested that a single rate of tax is preferable despite its inherent regressivity. However for varied reasons, this is not possible. More than half of the total number of VAT operating countries now use two to four rates.

2.5

Merits and demerits of VAT

It has been explained earlier that when compared to the other systems of imposing sales tax on a transaction of sale, VAT has an edge over them. The working of VAT is quite simple. This is one of the reasons as to why a host of other countries
14

adopted the system. The other merits of VAT are explained below. However it should be carefully noted that the following merits will accrue in full measure only under a situation where there is only one rate of VAT and VAT applies to all commodities without any question of exemptions whatsoever. Once concessions like differential rates of VAT, composition schemes, exemption schemes, exempted category of goods etc. are built into the system, distortions are bound to occur and the fundamental principle that VAT will totally eliminate cascading effects of taxes will also be subject to qualifications. Neutrality The greatest advantage of the system is that it does not interfere in the choice of decision for purchases. This is because the system has anti-cascading effect. How much value is added and at what stage it is added in the system of production/distribution is of no consequence. The system is neutral with regard to choice of production technique, as well as business organisation. All other things remaining the same, the issue of tax liability does not vary the decision about the source of purchase. VAT facilitates precise identification and rebate of the tax on purchases and thus ensures that there is no cascading effect of tax. In short, the allocation of resources is left to be decided by the free play of market forces and competition. A significant factor in the importance attached to VAT in the EU countries is its ability to treat intra-community trade as also trade with other countries with complete neutrality, that too without any distortion by taxation. This is possible when the VAT is applied where the goods are consumed and not at a place where goods are produced. In the federal structure of India in the context of sales-tax, so long as Central VAT is not integrated with the State VAT, it will be difficult to put the purchases from other States at par with the State purchases. Therefore, the advantage of neutrality will be confined only for purchases within the State. Certainty and transparency The VAT is a system based simply on transactions. Thus there is no need to go through complicated definitions like sales, sales price, turnover of purchases and turnover of sales. The tax is also broad-based and applicable to all sales in business, thus there is little room for different interpretations. Similarly, due to the basic feature that it gives credit of tax paid on earlier stage, the buyer will always ask for invoice. Thus the scope of tax avoidance or evasion will be much less. The disputes will also be fewer. Thus, this system brings certainty to a great extent. So
15

also, the buyer knows, out of the total consideration paid for purchase of material, what is tax component. Thus, the system ensures transparency also. Besides, this transparency will enable the State Governments to know as to what is the exact amount of tax coming at each stage. Thus it will be a great aid to the Government while taking decisions with regard to rate of tax etc. Harmonized system of taxation VAT became popular because of its built-in advantage of harmonizing the tax structure. It leaves very small room for interpretation. Even the entries prone to varied interpretations, under 'VAT, do not make any difference either to dealers or the Government. Ideally under VAT, there should be only one basic rate. In any case, typically, VAT involves lowering the number of tax slabs/rates resulting in reduction of litigation. Better revenue collection and stability The Government will receive its due tax on the final consumer/retail sale price. There will be a minimum possibility of revenue leakage, since the tax credit will be given only if the proof of tax paid at an earlier stage is produced. This means that if the tax is evaded at one stage, full tax will be recoverable from the person at the subsequent stage or from a person unable to produce proof of such tax payment. Thus, in particular, an invoice of VAT will be self enforcing and will induce business to demand invoices from the suppliers. Another attribute of VAT is that it is an exceptionally stable and flexible source of government revenue. The stability of VAT as a revenue source stems from the fact that if consumption is less volatile the income system provides a flexible instrument of taxation, since it is collected on a current basis. The decision about revenue can also be taken correctly as variance in rate of tax has direct relation with revenue collection. Better accounting systems Since the tax paid on an earlier stage is to be received back, the system will promote better accounting systems. Effect on retail price A persistent criticism of the VAT form has been that since the tax is payable on the final sale price, the VAT usually increases the prices of the goods. However, there
16

appears to be no intrinsic reason as to why VAT should have any inflationary impact if it merely replaces the existing equal yield tax. It is possible that the final price under the VAT system may not be more than the price under the sales tax system. A survey of the price effect of introducing VAT in more than 130 countries resulted in a conclusion that in more than 80% countries it did not alter the rate of inflation. It may also be pointed out that with the introduction of VAT, the tax impact on raw material is to be totally eliminated. Therefore, there may not be any increase in the prices. So far India is concerned what happened to the prices of goods in the several States where State-Level VAT was introduced is worthy of serious consideration and debate because it has created a negative psychological impact in the minds of the general public. Cost of administration to State Another point which needs consideration is the question of the cost of administration to the State. Because of introduction of VAT, the administration cost to the State can increase significantly as the number of dealers to be administered will go up significantly. However, this increase is required to be evaluated against the likely gains under the VAT. Compliance cost to the dealers It is argued that for compliance with the VAT provisions, the accounting cost will increase. The burden of this increase may not be commensurate with the benefit to traders and small firms. Though under sales-tax laws, it may be stated that a transaction of sale is liable to tax, but for the purposes of liability, the purchase nucleus is required to be found out. If the purchases are from a registered dealer, it will be a resale. If purchases are from outside the State, the sale will be a first sale. Therefore, even without the introduction of VAT, for taxation of a sale transaction, the source of purchase has to be considered. Under the VAT also, a detailed account of the purchase will have to be maintained. Therefore, there may not be significant increase in the cost as compared with the present cost. In any case, the inherent benefit of simplicity of the system will overcome this difficulty. Increase in working capital requirement Another possible weak point in the introduction of VAT, which will have an adverse impact on it is that, since the tax is to be imposed or paid at various stages and not on last stage, it would increase the working capital requirements and the interest
17

burden on the same. In this way it is considered to be non-beneficial as compared to the single stage-last point taxation system. This position may depend upon the facts of each case. But the experience of MODVAT under excise law shows that, as a whole a full VAT is likely to bring in much more cash flow benefit. The credit for tax paid on goods lying in stock at the year end but sold in the next year may be used for paying the tax on sale. Regressive VAT is a form of consumption tax. Since the proportion of income spent on consumption is larger for the poor than for the rich, VAT tends to be regressive. However, this weakness is inherent in all the forms of consumption tax. While it may be possible to moderate the distribution impact of VAT by taxing necessities at a lower rate, it is always advisable to moderate the distribution considerations through other programmes rather than concessions or exemptions which create complications for administration and compliance with uncertain

18

Chapter 3

Federal Structure and Tax Systems in India

3.1 Introduction

India has a government that combines the features of both a unitary and a federal system. There are three tiers of government - the union government, the state government and the local government - and all the three tiers are empowered to levy taxes. These powers are enshrined in the Constitution of India. The Indian Constitution assigns the powers of taxation more precisely and in greater detail than most federal countries.! There are also provisions under which the legislature of a state may authorize the local governments (panchayat or municipality) to levy, collect and appropriate taxes, duties, tolls and fees in accordance with such procedure and subject to such limitations as may be specified by law.

3.2

Tax structure

Union taxes Tile main taxes included in the union list are personal and corporate income taxes (except on income from agricultural land), taxes on wealth (except on agricultural land), customs duties, and central excises (except excises on liquor and narcotics and medical and toilet preparations that include alcohol). The union government is also empowered to levy taxes on inter-state sales. Finally, the central government has also the residual powers not otherwise assigned. The existing structure of the union tax system, together with the major developments that have taken place in the 1990s, is outlined below. The union government currently levies income tax (individual and corporate income taxes), tax on interest earnings, wealth tax, gift tax, customs duties, central excises, central sales tax (CST) and service tax. For the purpose of income tax, income is divided into five categories - salary, income from house property, profits or gains from business or profession, capital gains, and income from other sources. Also, companies are classified into two categories, domestic companies (registered under the Indian Companies Act) and other companies. The rate structure of both the individual income tax and the corporate income tax has been rationalized considerably in the 1990s. For example, the top rate of
19

personal income tax for an individual, a Hindu undivided family; an association of persons and bodies of individuals was reduced from 40 per cent in 1990-91 to 30 per cent by 1997-98. Similarly, the rate of corporate income tax for domestic companies was reduced from 50 per cent in 1990-91 to 35 per cent by 1997-98 while the rate of corporate income tax for foreign companies was reduced from 65 per cent in 1990-91 to 48 per cent by 1997-98. A minimum alternative tax (MAT) was introduced in the fiscal year 1996-97 in the case of companies whose total income as computed under the Income-tax Act is less than 30 per cent of the book profits as per the accounts prepared in accordance with the Companies Act 1956. Such companies have to pay a 30 per cent tax on the book profit. A system of presumptive income tax exists for specified small income earners. The interest tax is levied on credit institutions on interest earned on their loans at the rate of percent. The wealth tax is levied on net wealth, which is the excess of assets over debts. Net wealth up to Rs. 1,500,000 is exempt from tax, while the net wealth exceeding Rs. 1,500,000 is subject to tax at a rate of 1 per cent. The gift tax is levied on gifts, defined as transfers by one person to another of an existing movable or immovable property made voluntarily and without consideration in money or money's worth. It is levied not in respect of every gift but in respect of the total taxable gifts made by a person during the year. Gifts up to Rs.30, 000 are exempt and the rest is taxed at the rate of 30 per cent. The union government levies customs duties on a large number of goods ranging from industrial raw materials, machinery and equipment, to final goods like income tax, customs duties have been rationalized considerably in recent years. The numbers of rates have been reduced and the levels lowered in line with the liberal economic policy adopted since the early 1990s. It was recognized by the government that the dual objectives of protecting infant industries and raising revenues have, over time, led to a customs duty structure where import duties on certain items had reached as high as 300 per cent. It was proposed in 1991-92 to reduce the ad valorem rate of basic plus auxiliary duties of customs to a maximum of 150 percent. Rates of customs duties were reduced further over the years and as per the 1997-98 budget, the peak rate of import duties has been fixed at 40 per cent. In addition, the central government levies countervailing duties equivalent to the domestic excises on those goods that are subject to excise taxes if produced
20

domestically. These duties have also been rationalized over time as per changes in the central excise duties. . The union government also levies central excises on a wide range of commodities. These are levied on both inputs as well as final products when they are removed from factory premises, irrespective of whether they are immediately sold or stored for future use. Central excises have been rationalized considerably in the recent years and a movement towards a Modified Value Added Tax (MODVAT) is an important step in the reform of excise duties because it allows for the rebate of excises on inputs. The service tax is levied at the rate of 5 per cent on the service charges collected by the transporters of goods by road, consulting engineers, customs route agents, steamer agents, air travel agents, clearing and forwarding agents, outdoor caterers, manpower recruiting agencies/ consultants, tour operators including car rentals, advertising agencies, the telegraph authority and the courier services. The union government is empowered to levy a central sales tax on inter-state trade, with a maximum rate of 4 percent on the purchases by registered vendors and 10 percent by unregistered vendors. The revenue from this tax, however, goes to the state collecting this tax. Similarly, the union government is also authorized to collect additional excise duty in lieu of state sales tax on sugar, textiles and tobacco products. This was adopted mainly as a tax harmonizing measure. State level taxes The main taxes in the state list are sales tax, excises on liquor and drugs, agricultural income tax, land revenue and land registration fees. However, not all states or union territories levy all the taxes assigned to them under the Constitution. Sales tax is the most important tax at the state level. There is, however, no uniformity among the states and union territories regarding the structure and operation of the taxes they levy. This may be illustrated by comparing the tax systems adopted by the Uttar Pradesh and the West Bengal governments. The Uttar Pradesh government levies a single-point sales tax, called 'trade tax'. Tax points, however, differ depending upon the nature of the taxable commodity. The tax is largely levied at the first point on the sale of importers and manufacturers. However, in the case of a few items such as footwear, sweets,

21

confectionery, gold and silver ornaments, raw wool, tea and coffee, the trade tax is levied on the last sale. On the other hand, it is levied on the first purchase in the case of a few selected items, mainly agricultural products (food grains, cereals, pulses, ghee, butter, cheese, jute, khandsari sugar, oil seeds, oil cake and rice bran). All importers are required to register for the purpose of this tax, irrespective of the level of turnover. It is mandatory to register for manufacturers with annual turnover above Rs. 100,000 and traders with turnover above Rs. 150,000. Tax rates range from 1.5 per cent (light commercial vehicles) to 26 per cent. The general rate is 8 per cent, applicable to all items that are not specifically mentioned in the Schedule. There is a 25 per cent surcharge on the existing rates. The West Bengal government levies sales tax on the sale by manufacturers, processors or importers. It also levies a tax at the last point with multi-point taxation at low taxes on intermediate sale transactions. This means that the full rate of tax is not levied on the intermediate stages. Under this system, if the buyer gives the declaration form to the seller, then the seller may charge a reduced rate of 2 per cent for most of the items. This is meant to provide an incentive for registration and to minimize disadvantages of multiple taxation, including cascading. Vendors have to register for sales tax when their gross turnover exceeds the taxable quantum within an accounting year. The taxable quantum specified for different categories of dealers is as follows: Rs. 30,000 for importers, Rs. 100,000 for manufacturers or producers, and Rs. 500,000 for retailers. There are eight rates, ranging from 2 to 20 per cent (2, 3, 4, 5,7,12,15 and 20 per cent). The Uttar Pradesh government levies a sugar purchase tax on the purchase of sugarcane while the West Bengal government levies a coal cess. Uttar Pradesh levies a luxury tax on hotels and an entertainment tax on the entrance fees to cinema halls with permanent structure, subscription fees of cable TV and other means of entertainment, such as horse-riding, dance, singing, sailing, musical parks, amusement parks, video libraries, video game parlours, etc., West Bengal also levies a similar tax under the name of amusement tax. State governments also levy excise duties. These duties are levied on such items as liquor; spirit, opium, ganja, bhang, hashish, beer and tax rates vary from commodity to commodity. States are empowered to levy taxes on goods and passengers. The passenger tax, in its pure form, is to be levied .on passenger fares paid for commercial transport services. The goods tax is to be levied as a percentage of the freight paid by a consignor to the transport agency which, in turn, remits the tax collected to the concerned tax authorities. The rate is 10 per cent.

22

This tax can also be paid as a compounded levy at the option of the taxpayer. Taxes and duties are also levied on the sale and use of electricity. The electricity board collects the tax and passes it on to the state government. The rates are the highest on commercial use, lower on domestic consumption and the lowest on agricultural use. State governments also levy vehicle taxes on various types of vehicles, the tax rates depending upon the type, weight and capacity of the vehicles. State governments are also empowered to levy land revenue, stamp duty and registration fees land revenue has been the traditional source of revenue of the state governments in India. In general, land revenue rates have not been revised for a long time. Stamp duty is levied on the instruments of transactions, while registration fees are levied on transactions relating to movable and immovable property. Registration fees are on top of the stamp duty. Stamp duty is a tax and it comes under the sovereign power of the state, while registration fees are the charges for services rendered by the state. States are also empowered to levy a tax on agricultural income. This tax has' not been generally effective. A tax on professions, trades, vocations and employment is levied on persons engaged in employment and the employers deduct it from the salary or wages. Local-level taxes Local governments are also empowered to levy taxes. For example, Calcutta and Lucknow Municipal Corporations levy taxes on property, trades, professions and vocations, advertisement, carts, carriages and vehicles. Both these municipal corporations generate the bulk of their revenues from the property-based taxes. In Calcutta, property tax is known as the 'consolidated rate on lands and buildings, while in Lucknow it is known as the general tax. In Calcutta Municipal Corporation, this tax is levied on the annual value of the land and buildings, generally based on the rental values. The Lucknow Municipal Corporation also levies property tax on the annual rental value at the rate of 30 per cent. Both the Calcutta and the Lucknow Municipal Corporations levy taxes on advertisements and vehicles (cart and carriage). The Lucknow Municipal Corporation levies tax on hotels, lodges, restaurants, sweet shops, small teas hops, slaughterhouses and ponds while Calcutta Municipal Corporation, with the approval of the State Government, levies a toll on vehicles at rates fixed by the State Government.

23

3.3

Collection and sharing of revenues

The Indian Constitution has detailed provisions for the sharing and distribution of revenues generated from various taxes. Some taxes are collected by the union government and the revenues are used entirely by the union government itself (customs duties) while some taxes are levied and collected by the central government and tax proceeds are shared between the union and the states (personal income tax and union excises). There are some duties levied by the union but collected and appropriated by the states, such as central sales tax. Customs duties are an important source of revenues for the union government while sales tax is the major source of revenue of state governments. Of the other state level taxes, state excises, stamp duties and registration fees are more important from the point of view of revenue. As in many developing countries, the overall tax/GDP ratio for the country is comparatively low. It is important for India to enhance its resource mobilization and increase the tax/GDP ratio in the years to come. Additional revenues have to be generated in such a way that the industry and trade sectors do not become less competitive. While there may be some scope for the mobilization of additional resources through direct taxes, the country will have to depend more on indirect taxes. As there is a trend to lower the levels of customs duties in line with the liberal economic policies, the relative importance of customs duties as a source of revenue is likely to decline. This means that the major focus of tax reform in the country must be on domestic indirect taxation.

3.4

Domestic indirect taxes

Structure As outlined above, central excise duties are major form of domestic indirect taxes levied by the union government. Unlike many countries that levy excise duties on a few selected items, generally tobacco products and alcoholic beverages, India levies central excises on a wide range of commodities. Excise duties are levied on both inputs as well as final products. India has, perhaps, one of the most comprehensive excise tax systems in the world. The constitutional exclusion of sales tax from the federal tax base might have led to the proliferation of excises to a much wider base than originally envisaged. While the rates of the excises have been rationalized considerably in the recent years, their structure is still very
24

complex. In addition, the union government levies a service tax on specified services and a sales tax on inter-state trade. It is also empowered to collect sales tax in lieu of the additional excise duty on three commodities, namely sugar, textiles and tobacco products. Sales tax, including sales tax on motor spirit and purchase tax on such items as sugarcane, is the most important tax levied by the States and Union Territories. Sales tax Sales tax revenue accounts for about 60 per cent of the states' own tax revenue. The structure and operation of the sales tax varies considerably among the states regarding point of collection, coverage, tax incentives and rate structure. Point of levy Sales taxes are collected at various stages in different states. For example, Karnataka and Kerala levy multi-point tax on a few commodities. Gujarat has adopted a double-point sales tax. Under this system, the tax is levied both at the first sale as well as at a semi-wholesale stage of sale on some commodities. Maharashtra had adopted a similar sales tax system before it adopted a VAT in 1995. Under the previous system, the tax was levied at the manufacturing/import point on a large number of commodities and at the last point on a few commodities, such as precious stones, imported liquor and natural gas. The sales tax, however, is collected generally at a single point. The bulk of the revenue is collected at the first point, probably on administrative grounds, bearing in mind the large number of vendors who may not maintain proper accounts. Under the first point sales tax system, bulk of the revenues can be collected from a small number of large dealers and their records can be thoroughly scrutinized. On the other hand, the returns of the small dealers who make only a marginal contribution to revenues can be summarily assessed. Under this system, the costs of collection and compliance are lower and administration is easier and more effective. However, the first-point tax suffers from several theoretical limitations and practical problems. For example, since the first-point tax has a lower taxable base than the last-point tax, i.e. retail sales tax (RST) or VAT, it has to be levied at a higher rate for collecting the same amount of revenues. Higher rates make the tax system more costly to the economy. Such a tax system encourages taxpayers to change the methods of doing business and some firms have shown the tendency to push
25

functions and, thereby cost, beyond the point of impact of the tax. Also, there is a possibility of tax being levied upon tax under the first-point levy. When the tax is levied both on inputs and outputs it leads to cascading. In this case, even the cost of holding inventories may go up leading to higher interest payments and additional cascading. Furthermore, the first-point tax without the provision of set-off encourages vertical integration of firms. This works against the goal of promoting ancillaries in the economy. The first-point tax also leads to pyramiding of taxes wherein the application of percentage markups on tax-inclusive prices raises the prices paid by consumers by more than the amount of tax. The first-point levy is not desirable from the point of view of foreign trade as well since the export prices contain tax elements, thereby making these goods less competitive in the international market. The first-point tax is also not always easy from an administrative point of view. For example, it gives an incentive for under valuation and smuggling of goods. Beside, the first-point tax also has made tax administration more complex through the establishment of the checkpoints. In order to ensure that the tax has been paid on the first transaction, most states have established checkpoints on their borders with neighbouring states where vehicles are required to stop and provide evidence of payment of tax on commodities being carried. This often leads to delays, increase in costs, harassment and corruption. These checkpoints are sometimes justified on the ground that they serve the purpose of monitoring the flow of goods into the state. This is not necessarily true. A complete checking of all trucks is not practical and it is possible to avoid the check posts altogether. Also, rail shipments are usually not checked when they enter the State. Finally, the first point tax invites pressure from interested groups for the exemption of their products from the tax due to its high rates. The first-point levy also is criticized on equity grounds. Since the proportion of value added at later stages and at earlier stages of production differ from commodity to commodity, the first-point tax is biased against those commodities, which have larger value, added at the earlier stages of production. In particular, there is an unintended bias in favour of such commodities as consumer durables that generate a substantial value-added at stages beyond the tax impact point. Thus, the first-point sales tax may tend to encourage the consumption of luxury goods. Coverage of sales tax State governments levy sales taxes on a large number of commodities, including raw materials and other inputs. Input taxes, however, suffer from several
26

limitations. To begin with, input taxes are cascading in nature and promote vertical integration. They cause distortion in choice of inputs and thus lead to inefficiency. A tax element remains in the export prices, thereby making domestic products less competitive in the international markets. They also cause pyramiding of prices from application of percentage markups. Further, input taxes give rise to uncontrolled and unintended incidence of taxation on various goods. Taxes on inputs tend to be inequitable as well. On the other hand, a large number of goods are exempt from sales taxes in different states on various grounds, including social, cultural and religious. Exemptions, however, are not effective in achieving their objectives but bring several undesirable results. They narrow the tax base, thereby making it necessary to levy higher rates on taxable items. Higher rates, in turn, give an incentive for tax evasion. Exemptions also create loopholes for tax evasion. Since tax exemptions affect the choices of both the producers and consumers, they bring inefficiency both in production and consumption. A plethora of exemptions also complicates tax administration and increases both costs of collection and compliance costs. Tax competition There is a tendency among the states to lower their tax rates in order to lure businesses. Often, very generous concessions are provided to industrial units set up in backward areas or small industries in rural areas through tax holidays and deferral of tax payment This leads to loss of revenues, creates inequity and causes problems for both enforcement and compliance. As the base becomes narrow due to different kinds of concessions, the tax rates have to be higher in order to collect the same amount of revenue. This creates further incentive for evasion. On the other hand, tax incentives have not proved to be effective measures for promoting industries. Other means of encouragement, such as subsidies and sub-venation (a type of subsidy to support industry) rather than exemption from sales tax, may be more suitable. This has also been the finding of several committees appointed by the government of India from time to time. . Multiple Rates The state governments have usually applied multiple rates of sales tax on various grounds, including social justice in some cases. For example, there are eight different rates of sales tax in West Bengal. Maharashtra levied sales tax with over 20 rates before its replacement by VAT in 1995. Further, with each state having
27

different lists of exemptions, providing a variety of incentives and applying varying standards of enforcement of the tax, the effective tax rates are widely different among the states. Such rate differences cause resource misallocation. This leads to migration of capital from high-tax to low-tax regions over time. It may also result in cost escalation due to reallocation of resources among states contrary to their own endowments and involve avoidable transportation costs of raw materials and finished products. Further, multiple rates make tax administration more complicated since, under this system, goods are classified into different groups according to their rates. Taxpayers have to keep separate records and tax officials have to check them. It increases both administrative and compliance costs. It may also be inequitable since a dealer may charge different rates on the same goods sold to different categories of buyers. There is also the possibility of a dealer charging a higher rate for an item subject to lower rate and vice versa, either knowingly or out of ignorance. Thus, multiple rates tend to bring economic and administrative inefficiency and may result in considerable revenue loss. Central Sales-tax As stated earlier, the central government is empowered to levy sales tax on inter-state trade. This tax is levied on declared goods (goods of. importance to inter-state trade such as iron and steel, hide and skins, jute and coal) by the CST Act. According to a government report, the CST was initially intended to ensure that some revenue accrues to exporting states without raising unduly the burden on consumers in the importing state. Since this provision authorizes a given state to tax citizens of other states, it was considered necessary to keep the rate very low (1 per cent). However, the original purpose of CST was forgotten over the years. The rate has been raised in stages to 4 per cent on registered dealers and 10 per cent on unregistered dealers in order to generate more revenue from this source. CST suffers from several limitations. It is clearly a' hindrance to the free flow of trade across state borders. Also, when the goods are subsequently sold in the importing state, the tax of that state applies. As a result, the inter-state transactions are taxed more heavily compared to the transactions within the state. In effect, the operation of the domestic common market is disrupted.

28

CST also allows the manufacturing states to burden consumers in the less wealthy States, which means that resources are transferred 'from poor to rich States. Because of these disadvantages of CST, the Jha Committee recommended the reduction of CST from 4 per cent to 1 per cent. Something needs to be done about the CST to make the tax system neutral to trade and business decisions, externally and internally, by removing the distorting elements and moving towards a free-market regime. Traders discovered various means of escaping CST on inter-State sales by establishing distribution units in the importing States, and sending goods to them on consignment basis. Need to reform domestic indirect taxes The structure of the domestic indirect taxes is highly distortive and leads to cascading of tax, it has become confusing and complex. It is necessary to establish a tax system that is simple, transparent and neutral, and that facilitates free movement of goods. To this end, it would be necessary to evolve a tax system with minimum rate differentiation. Also, the point of levy should be moved closer to consumption rather than production. The tax burden on inputs should be reduced and eventually removed altogether.

3.5

Recommendations of various Committees on tax reforms

One option that has been considered for quite some time is the introduction of some form of a VAT in place of several indirect taxes. Many tax reform committees, institutions and individual researchers have recommended VAT in order to avoid the problems of multiple taxation and also to rationalize the whole domestic indirect tax system of India. Important views of various committees on domestic indirect taxes, including introduction of VAT, are briefly summarized below. Jha Committee The Indirect Taxation Enquiry Committee of 1976 (Jha Committee) examined the various aspects of VAT and the possibility of introducing this tax in India. While the committee recognized that a VAT in place of the existing systems would have several economic advantages, it also pointed out two main problems in its implementation first, there is a political problem. A general VAT in place of various commodity taxes (including the state level sales taxes) requires an amendment of the Constitution and would undermine the fiscal autonomy of the State governments. Second, there might be an administrative problem, as the
29

wholesalers and retailers would find it difficult to cope with the accounting requirements of VAT. The committee, therefore, recommended a manufacturing level VAT (MANVAT). According to the committee, the main advantage of MANVAT would be that it would altogether eliminate cascading on account of taxation of raw materials and other inputs. The tax levied on a final product would be the total tax on it and the tax on inputs at earlier stages will not affect its cost or price. Technical group A Technical Study Group on Central Excise Tariff was set up in 1985 in order to examine the cascading effect of indirect taxes and explore the measures to mitigate them. This group examined various schemes adopted to avoid multiple taxation and came to the conclusion that the general extension of the Proforma credit procedure to all excisable goods, including packing materials and consumables, would lead to a virtual adoption of VAT at the manufacturing level. The general extension of Proforma credit procedures would prepare the ground for the introduction of MANVAT. Long-term fiscal policy A long-term fiscal policy was announced in November 1985. This policy emphasized the simplification of the multitude of rates and exemptions under the excise system and undertaking of major strides in relieving the taxation of inputs in production through different measures, including the adoption of a MODVAT. Chelliah Committee The Tax Reforms Committee, 1991, set up under the chairmanship of Professor Raja J. Chelliah further examined VAT. This committee "underlined the need for making the system of indirect taxation broadly neutral in relation to production and consumption, widening the tax base by covering exempted commodities and making a beginning with the taxation of services. The ultimate objective of the reform of the central excise is to move towards a full-fledged VAT system at the central level covering almost all commodities other than raw produce of agriculture and many, if not most, services. In order to prepare the ground for introducing the genuine VAT system at the manufacturing level, the committee had suggested reduction in the multiplicity of rates of excise duties to two or three rates, say at 10, 15, or 20 per cent." This tax could be supplemented by a selective excise duty on non-essential commodities or commodities injurious to health.
30

According to the Chelliah Committee, the ideal solution would be to have a single VAT at the central level, reaching down to the retail stage in replacement of most indirect taxes like the state sales taxes, the municipal octroi, the goods and passengers tax and the electricity duty while sharing the proceeds of the VAT among the three levels of government. In the interim period the scope of MODVAT was to be extended in order to establish a genuine VAT at the manufacturing level. The committee recommended several measures, such as conversion of specific rates of excises into ad valorem rates, abolition of exemptions, and inclusion of selective services into the tax net for the successful implementation of a VAT. This committee went one step further than the Jha Committee by recommending an extension of VAT to the wholesale stage. The wholesale level VAT could be administered by the state, and the revenue collected could be retained by the state where it is collected.

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Chapter 4

VAT in Indian Federation

India's indirect tax system is unique in that under the Constitution, the Central government has the authority to impose a broad spectrum of excise duties on production or manufacture while the States are assigned the power to levy sales tax on consumption. In addition, States are empowered to levy tax on many other goods and services in the form of entry tax, octroi, entertainment tax, electricity duty, motor vehicles tax, passengers and goods tax and so on. Due to this dichotomy of authority under the Constitution, India has been rather slow in the adoption of VAT. Also, it has created an obstacle in introducing the European-style VAT in India, although over the years, tax reform committees have recommended that central excise duty, sales tax, and other' domestic trade taxes be replaced by a comprehensive VAT that could tax all commodities and services.

4.1

CENVAT

At the Central level, at the time of Independence, India inherited a system of commodity taxes in which Union excise duties (UEDs) were levied on about a dozen articles yielding a small proportion of total tax revenue to the Centre. Following Independence, the rates were raised, the base was enlarged, and more and more items were brought into' its net. Over time, there was a speedy extension of UEDs. It was not only levied on finished goods but also covered raw materials, intermediate goods and capital goods. Structure of CENVAT As of now, the Central Government levies basic UEDs on all goods manufactured or produced in the country. The prevailing structure includes (i) CENVAT (also called UEDs), (ii) special excise duty (SED), (iii) additional excise duty in lieu of sales tax [AD(ST)]; (iv) additional duty of excise on textiles and textile articles [AD (T&TA), and (v) cesses on specified commodities. The additional duty of excise in lieu of sales tax [AD(ST)] is levied on tobacco, textiles and sugar. This is a tax rental arrangement between the Centre and the States. According to this arrangement the central government levies additional excise duty in lieu of sales tax and the States refrain from levying sales tax on these items. The net proceeds of this duty were being distributed among the States
32

until the Report of the Eleventh Finance Commission, which has recommended its inclusion under the sharable taxes. Cesses on specified commodities and. additional excise duty on textiles and textile articles are primarily meant to raise resources for the development of concerned industries. The revenue department administers it but some other departments also contribute in this endeavour. With effect from March 1, 1986 MODVAT was introduced under the union excise duty as a system of giving credit for excise duty on inputs. Initially, it was introduced for a selected number of commodities. The coverage was limited to 37 chapters out of a total of 91. Over time, MODVAT was extended and finally replaced by Central VAT, known as CENVAT in the Budget 2000-01. CENVAT has in general a single rate of 16% with some variations for select commodities. The coverage of CENVAT has been extended to all commodities except high-speed diesel (HSD), motor spirit (petrol) and matches. In addition to general rate, there are three rates of special excise duty (SED) of 8%, 16% and 24% on specified products. Most of the items under SED are final products but some of the items also fall in the category of intermediate goods. The CENVAT Scheme allows instant credit for excise duty, special excise duty (SED), ADE and countervailing duty (CVD) paid on inputs and capital goods received in a factory for the manufacture of any dutiable final products (except matches). The credit could be utilised to pay excise duty on any final product. That is, all raw materials or inputs are covered except high-speed diesel and motor spirit. Similarly, credit could be availed of on capital goods including pollution control equipment, components, spares, accessories, moulds and dyes and paints, packaging material and greases/coolants. Through the introduction of CENVAT credit could be availed of by the manufacturer immediately on receipt of eligible and duty paid goods in the factory. There is no need for the manufacturer to file any declaration or obtain any permission. For capital goods, however, only 50% of the duty paid on the goods can be availed of in a financial year; the remaining credit can be availed of in the next financial year, provided the goods are still in use (except for spares and components). Further, no depreciation should be claimed by the manufacturer under section 32 of the Income-tax Act, 1961 on that part of the value of these capital goods, which is equal to the duty, paid on the goods. A manufacturer who
33

manufactures only exempt final products is not allowed to take this credit. However, the manufacturer producing both dutiable and exempted final products in the same factory is eligible to avail of its benefits. This is subject to certain conditions viz., maintenance of separate records in respect of inputs used to manufacture exempted products or payment of 8% of the total price (excluding taxes) of the exempted final products or in the case of a few specified items, on reversal of the credit availed. Similarly, credit can be availed of on capital goods if not used exclusively for the manufacture of exempted final products. The scheme of CENVAT, interalia, provides the following facilities: (i) (ii) Removal of inputs or capital goods as such on payment of excise duty as if such goods had been manufactured in the factory; Removal of goods to job-workers for processing, testing, reconditioning or for any other purpose provided that the goods are received back within 180 days or are removed from the premises of the job worker if permitted by the Commissioner of Central Excise; Refund of credit accumulated due to export under bond of the final products is also permissible; Unutilised CENVAT credit can be transferred on account of shifting of a factory to another site or due to change in ownership by sale, merger, amalgamation, lease or transfer to a joint venture wherein liabilities are also transferred; and A special dispensation has been made in the case of goods manufactured in specified areas of the North-East.

(iii) (iv)

(v)

The manufacturer should take reasonable steps to ensure that the appropriate duty has been paid on inputs or capital goods on which credit is availed, as indicated in the documents accompanying the goods. The structure and procedures under CENVAT, as given above, indicates that the new procedure results in transparency of the tax burden under the UEDs. In addition, it reduces cascading effect of input taxation as well as the pyramiding effect of the tax. Also, it generates a mechanism to check evasion of tax through self-policing. The empirical studies on impact of introduction of CENVAT show that there is a definite positive effect. In fact, the industrial units have been able to save on interest (ranging between 0.5 and 1 percent of the total duty paid). Also, the overall effect has been revenue neutral and has not caused any price effect.
34

In addition, the reforms implemented under UEDs during last ten years have simplified its structure especially through CENVAT. While previously there were large number of rates, over the years it has been brought down considerably. As of today, the general rate of CENVAT is 16%. However, in many cases the actual duty paid on inputs could be less than tariff rate through exemption notifications. In addition, there are three rates category (viz., 8, 16, and 24 percent) of special excises. These also are given credit for tax paid on inputs 13. Apart from rationalisation of rate structure, exemption notifications have also been curtailed and the specific rates are converted into ad volrem rates. Further, the rate structure of CENVAT is linked to the Harmonized System of Nomenclature (HSN), at present in vogue in more than 130 countries for providing help in international trade.

4.2

Administrative controls under CENVAT

The administrative controls under the UEDs (or the CENVAT) fall in some categories, described below: (a) Physical control:

This is the oldest form of control under the Union excise duty. Under this control, there is an assessment of tax by the Central Excise Officer, posted at the factory, before the removal of goods. Thereafter, the goods are moved under his supervision and under the cover of an invoice countersigned by him. This system is now restricted to cigarettes only. (b) Self-Assessment procedure:

This was previously known as self-removal procedure (SRP). Under this procedure; the assessee files a classification declaration for his goods in quadruplicate under Rule 173B to inform the department of the claimed rate of duty applicable to his goods. If the rate of duty is ad volrem and the assessee sells goods to a related person or he has factories manufacturing similar goods in different Central Excise Divisions or Commissionerates or he removes goods for captive consumption etc., he should also file before the Assistant Commissioner a price declaration under Rule 173C in the prescribed form in advance. The assessee himself assesses the duty due on the excisable goods intended to be removed and pays duty on a fortnightly basis.

35

(c)

The compounded levy scheme:

This procedure is meant for small scale decentralized sector and at present covers embroidery, marble slabs, stainless steel Pattis/Pattas and aluminium circles. Under this scheme the duty for a specified period is fixed on the basis of the number and the type of machines. Payment of tax under this procedure absolves the manufacturer from observing day-to-day formalities of CENVAT regarding maintenance of accounts and removal of goods etc. (d) Collection of duty at the point of consumption:

The duty under this system is confined to Khandsari Molasses going for manufacture of alcohol, whether for potable or industrial use. The duty is paid by the distilliers on the date of receipt of Khandsari Molasses. The CENVAT credit is admissible on Khandsari Molasses to the extent it is used for manufacture of dutiable excisable goods. (e) Levy of excise duty on the basis of capacity of production:

A new Section 3A introduced in the Central Excise Act through the Finance Act 1997 enables the Government to levy a duty at the notified rate on the notified commodity on the basis of production capacity as determined by an officer not below the rank of Assistant Commissioner of Central Excise, in place of actual production. The assessee has, however been given the right to represent on the basis of evidence of actual production being lower and in that case the proper office will determine the quantum of actual production to be taxed after observing the principles of natural justice. The scheme is at present applicable to independent textile processors only.

4.3

Obligations under CENVAT

As in the case of dealers under VAT in other countries, CENVAT has also introduced VAT procedures under the-new system. It has placed some obligations on the part of the dealers paying CENVAT. Declarative obligations The administration of CENVAT requires various declarative obligations as given below:

36

(a)

Tax payer registration:

Every manufacturer of excisable goods (except small-scale manufacturer) is required to get himself registered before the commencement of production. Registration is valid for the premises it is granted. That is, a manufacturer having more than one premises must obtain a separate registration for each of the premises from the respective Range Superintendent having jurisdiction over the premises, may it be a factory or a depot/branch office. If a manufacturer desires to start production of a new product he should get his registration duly endorsed to this effect. There is no fee for registration and there is no need for its renewal. In addition to the manufacturer, since 1994, even wholesalers (i.e. dealers who intend to pass CENVAT credit to its buyers), could be registered. This system has been introduced to help small manufacturers. (b) Issue of invoices:

With effect from 1st April 1994, invoice has replaced the gate pass (GP-I) as the clearance document. It is prescribed that an invoice must accompany the consignment, each time the goods are transported from the factory to the godown of the manufacturer. To keep track of the clearance of goods from the factory, each accompanying page of the invoice book should be pre-authenticated by an authorised officer of the assessee and be serially numbered in the book and the numbers intimated to the Assistant Commissioner in advance. Manufacturer paying duty exceeding Rs.10 crores have been exempted from intimation and authentication. Invoices are required to be issued in quadruplicate. In the case of petroleum products, there is a provision for removal of dutiable goods from the factory to warehouse without payment of tax. In such cases subsidiary gate pass (GP-2) is required to be issued. The subsidiary Gate Pass called certificate in lieu of GP-I is issued when the consignment of duty paid inputs moves first to another consignee or destination and thereafter a part of it is supplied to a manufacturer availing CENVAT. It is provided that the CENVAT credit could be taken through the invoices issued by the first and the second stage dealers of excisable goods only. The credit cannot be taken on the basis of the invoices that are issued by the third and the subsequent stage dealers. Thus, the scheme of invoices has the following features: (i) The first stage dealer is defined as one receiving the inputs directly from a manufacturer or his depot under the cover of an invoice issued under Rule 52A.

37

(ii) (iii)

The second stage dealer is one who purchases from the first stage dealer. No credit can be availed on the strength of an invoice issued by the second stage dealer unless the invoice is authenticated or countersigned by the proper officer having jurisdiction over the second stage dealer. Both the first stage and the second stage dealers should be registered with the central excise department.

(iv) (c)

Monthly return:

The manufacturer is required to pay CENVAT on fortnightly basis and submit a monthly return (RT12) to the Superintendent of the Central Excise by the 10th of the month following the month during which duty was paid. Manufacturers availing of the small-scale exemption, based on value or quantity of clearances during a financial year, need to file his return only on a quarterly basis. The return must contain: Particulars of goods manufactured and cleared and amount of excise duty paid; Particulars of inputs received during the month and the amount of duty taken as credit; and Information on total duty paid through PLA (account current) and CENVAT credit giving details of disposal of inputs and utilization of the credit.

(d)

Other documentary obligations:

In addition to the monthly return, at the time of clearance the manufacturer is required to submit the extracts of PLA and CENVAT accounts to the Superintendent of the Range.

Accounting obligations With the introduction of CENVAT, maintenance of statutory accounts has been done away with. That is, the manufacturer on his own shall 'maintain his records regarding receipt, disposal, consumption and inventory of the goods containing
38

relevant information If CENVAT credit is taken or utilised wrongly, the same, along with interest, will be recovered and, if the same involves fraud, willful miss-statement, collusion, suppression of facts or contravention of the provisions of the Act or the Rules, mandatory penalty and interest will also be attracted. For this purpose a Personal Ledger Account (PLA) is also maintained. The duty is paid fortnightly/monthly. The amount of duty payable is recorded in daily stock account under rule 53 before clearance. The manufacturers to pay duty on the final products cleared by them could use PLA account or the CENVAT credit. Special audit: In addition to the already existing powers under section 14 of the Central Excise Act (to summon persons to give evidence and to produce documents), the excise department is empowered to go into the cost structure of the goods manufactured through a cost audit so as to decide whether there is under-invoicing; The new sections 14A and 14AA make provision for special audit in certain cases. These sections envisage an audit within a limited period with some important conditions Stipulated. As far as the department IS concerned, the cost audit report would prevail to determine the assessable value, notwithstanding any cost audit done in the unit under any law viz. the Companies Act, 1956. The expenses including the fee for the cost accountant are borne by the department. It is important to note that the powers under section 14A is exercised by the Chief Commissioner of Central Excise and under 14M is exercised by the Commissioner of Central Excise. In other words, the provisions of these two sections are invoked only under extraordinary circumstances and not as a matter of routine.

4.4

Weaknesses of the system under CENVAT

The existing structure of CENVAT (i.e. UED) and the procedures for its administration calling for specified obligations are characterised by the following weaknesses: First, the existing procedures for physical controls are outmoded. In the context of the liberalized economy it is immaterial whether the tax is levied through UED or CENVAT, the physical control should have no place in the administrative system. It needs to be replaced by self-assessment procedure.

39

Second, the provision of registration of wholesalers has created plethora of loopholes in the system to avoid payment of tax. While it does help small dealers to claim set-off for the tax on their inputs, the practice has created additional work-load for the department to cross check their sales and purchases with the claim of set-off by the small manufacturers. The resulting cases of evasion are also large. Earlier, when MODVAT provisions were liberalized and dealers in excisable goods were also permitted to register themselves under Rule 174 of the Central Excise Rules, 1944, any dealer of excisable goods could register himself with the Superintendent of Central Excise in charge of the Range in which he had premises. Under the liberalized procedure there was no distinction between a manufacturer, a first stage dealer, second stage dealer or a subsequent stage dealer. This led to fraud at a large scale when fictitious dealers were issuing modvatable invoices said to cover duty paid excisable goods, on the basis of which MODVAT credit was being taken, fraudulently by various manufacturers. Detection of such fictitious invoices and fraudulent dealers became difficult, because cross verification could not be done either instantly through a computerized network or within a reasonable time through correspondence. As a result, a number of fictitious invoices said to cover duty paid excisable- goods were floating in the system resulting in enormous amount of loss of revenue. When this was detected, the MODVAT credit was restricted to the manufacturers, the first stage dealers and the second stage dealers. This has reduced fraud and issue of fictitious invoices to some extent. In fact, this could be further reduced if this facility is restricted to only the first-stage dealers and all the Central Excise Ranges and Divisions in the country are linked through a computer network. Third, the coverage of CENVAT, as noted above, has not been extended to all the commodities. Initially (under MODVAT), half the revenue was being derived through the commodities covered under it. Over the years the coverage has been expanded. Now it accounts for approximately 92% of the revenue through commodities under CENVAT. The time is ripe to incorporate other excises also into the ambit of CENVAT. Fourth, there is a special provision related to deemed credit. Under this facility, a manufacturer takes CENVAT credit at specified rates for certain inputs without producing documents related to the payment of duty. Deemed credit is available only in respect of commodities where chain of various processes is broken due to some exempted goods that are used. For example, there is no duty on grey fabrics but CENVAT credit on yam is allowed through deemed credit. Since in such cases, duty payment documents may not be available, it is felt that CENVAT credit at

40

specified rates may be allowed. The inputs so specified are deemed to be duty paid unless they are clearly recognizable as non-duty paid. The deemed credit facility which was initially (i.e. in March 1986) given to the small manufacturers was extended to all the units after a month. Later on, it was restricted to items under the category of steel, ingots and re-rollables, certain flat products of steel, unwrought aluminum, copper, lead and zinc and waste/scraps of copper. However, with effect from 1st April 1994 it is applicable to iron and steel roller only. Also, it has of late been withdrawn on ingots and re-rollable materials of iron and steel when the clearances of the re-rollers exceed Rs. 7.5 million in a financial year. In the context of extension of CENVAT scheme to processed textile fabrics, through the Budget 1996-97 the government has declared final products in respect of which the deemed credit for the duty paid on inputs is available on such notified outputs.

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Chapter 5

VAT in Indian States

In order to evolve a policy for the introduction of an integrated VAT system for India as a whole, in 1993 the National Institute of Public Finance and Policy (NIPFP) was entrusted with the job of preparing the design of a possible VAT system. Accordingly, a study team was set up. The team examined various aspects of VAT and came up with a feasible scheme of reform of VAT within the existing constitutional framework that could be implemented in the near future. Under the above mentioned scheme the following proposals were made: (i) Central excise duties should be converted into a full-fledged manufacturer-level VAT, covering all goods produced, manufactured or imported (and a few selected services), with immediate credit of input tax. There should be not more than three rates in the beginning, and eventually a uniform rate should be adopted. The State-level sales tax should be converted into a VAT based on the destination principle with tax credit mechanism. It should be broad-based, with not more than three rates, zero rate on exports, and a minimum exemption of such products as unprocessed food. The VAT should be introduced with an annual turnover threshold. A model law should be developed which the States can adopt with suitable changes while retaining the basic structure. There must be a persistent effort to harmonize VATs of different States. A VAT council of States may be set up, a massive taxpayer education programme may be launched and the tax should be introduced only after good preparation.

(ii) (iii)

(iv) (v)

5.1

Committee of State Finance Ministers

The Union Finance Minister called a meeting of the State finance ministers in May 1994 in order to discuss the various aspects of VAT and a committee of State finance ministers was constituted on sales tax reform following this meeting. The committee had to examine all aspects of sales tax reform, including the introduction of VAT.

42

The committee recommended several measures to rationalize the existing sales tax with the ultimate aim of introducing VAT at the State level. The major recommendations include simplification of the rate structure, minimization of the exemptions and enhancement of transparency. To this end, the committee recommended: (i) The adoption of four general floor rates (0, 4, 8, 12) and two special floor rates (1 and 20) in place of the existing multiple rates being levied in different States; Keeping the exemptions to a minimum; Preparing a list of exempt goods and fixing a target date beyond which no State/Union Territory should exempt goods other than those mentioned in the list, and; Doing away with sales tax incentives for industrialization. No new tax incentives should be given after 1 April, 1997, and the existing ones should be allowed to lapse in due course.

(ii) (iii)

(iv)

The committee also recommended several preparatory steps to be taken for the implementation of a full-fledged State-level VAT. They included a massive taxpayers education programme, computerization of sales tax administration, and preparation of model VAT legislation.

5.2

Expert group on taxation of inter-State sales

In the beginning of 1996, a group of experts and officials was set up by the government for studying the problem of taxation of Inter-State sales. This group submitted its report at the end of 1996. The main recommendations of this group were as follows: (i) (ii) (iii) The central sales tax rate should be reduced from 4 per cent to 2 per cent in three annual phases. The central sales tax should be extended to consignments and branch transfers. Half of the central sales tax revenue should be retained by the exporting State and the other half should be pooled for sharing among the States on an agreed formula. In the beginning, the importing State should allow a 50 per cent rebate of central sales tax paid by a registered vendor outside the State. It should ultimately be extended to 100 per cent.
43

(iv)

(v)

Local rates should be levied on Inter-State sales to unregistered dealers.

5.3

Committee on the draft model VAT Law

A committee was set up to draft a model VAT law for the States. This committee prepared the first draft of a Manual for Value Added Sales Tax in 1998. It is basically a Statute to provide State governments with a model for imposition and collection of VAT, which will replace the existing taxes on sales or purchases of goods levied by the States. The manual makes provisions relating to various structural and operational aspects of the State-level VAT including the list of goods subject to various rates. The Union Finance Minister convened a conference of all State Chief Ministers in November, 1999 and decided on the following course of domestic tax reforms : (i) Implementation of floor rates of sales tax by all States and Union Territories and discontinuation of grant of sales tax based incentives from 1st January, 2000. Implementation of VAT from 1 st April, 2001 which was first extended to 1 st April, 2002 and again postponed to 1st April, 2003.

(ii)

Empowered Committee comprising of nine State Finance Ministers was constituted on 17th July, 2000 to monitor the decisions taken in the Chief Ministers conference. Empowered Committee decided to rationalize the future rate structure under VAT to 5 rates i.e. : NIL for certain goods 1% for gold, silver and precious stones 4% for certain essential goods and industrial inputs 20% for liquor and some petroleum products, and A revenue neutral rate (RNR) of 10 to 12.5% for other goods.

Subsequent decision taken in February, 2003 is that all States should adopt a uniform RNR rate of 12.5%. The Finance Act, 2002, amended the Central Sales Tax Act, 1956 to allow the State Governments to impose tax on sale of declared goods at more than one
44

stage. This amendment is keeping in mind the proposed implementation of VAT being a multi point tax. One of the important concerns of the State Governments was the probable loss of revenue if VAT is implemented in the States. Perhaps this is the major obstacle in the implementation of VAT in States. The Central Government has agreed to compensate the States for loss due to implementation of VAT. The compensation package is 100% in the first year, 75% in the second year and 50% in the third year. However, the modalities of raising the resources for the purpose have yet to be worked out. The Constitution (Ninety Second Amendment) Act, 2003 has inserted a new Article 268A entitled Service tax levied by Union and collected and appropriated by the Union and the States. It provides that taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in accordance with such principles of collections and appropriations as may be formulated by Parliament by law. The Amendment Act has also inserted a new entry 92C. Taxes on Services in the Union List. Now the introduction of VAT has been postponed to 1st April, 2005. This postponement is due to various reasons such as divergent views on treatment of existing sales tax incentives already granted by the States, treatment of Central Sales Tax (CST) under VAT, lack of commitment by the Central Government at that time on compensating the States for loss in revenue etc. For example different States, for the progress of trade and the industry are extending various incentives like grant of loan equal to the liability of sales tax, deferment of tax liability for a particular period and full tax exemption. The industry is very much concerned that once VAT is implemented these incentives would be withdrawn by the State Governments and that would go against the principle of estoppel. The industry wants the incentives to continue side by side along with the facility of credit for VAT. Another reason for postponement is lack of preparedness by the States.

5.4

Various models of VAT

There are various models of VAT for a. country where the powers of indirect taxation are divided between different levels of government. Some of the models are briefly described below.

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Union VAT From an economic point of view, the ideal solution would be to levy a VAT at the central level in place of various domestic indirect taxes levied by different levels of governments. It simplifies the domestic indirect tax system considerably by avoiding the inter-state differentiation and multiple taxation. Such a tax may be accompanied by a few selective non-deductible excises. The revenue could be distributed to different levels of governments on the basis of a formula. In Germany, VAT is a central tax but collected by the State Governments, and revenue is distributed among the Centre and the State Governments. The federal VAT is fully harmonized across states. The federal VAT in place of various domestic indirect taxes levied at various levels, including the sales tax would, however, greatly reduce the fiscal autonomy of the states. It also requires a constitutional amendment, which may not be politically feasible. There will be less incentive to generate revenues at the central level since large part of the revenue will be distributed to the lower levels. State VAT The second option is to levy a VAT at the State level, supplemented by the non-deductible central excises on limited items. State VATs may be more or less harmonized with each other and look like the European VAT system. VAT at the State level in a federal context raises the basic issue of treatment of cross-border trade. If it is not treated properly, there is a possibility of multiple taxation, thereby interfering with free functioning of the domestic market. Burgess, Howes and Stern recommend three ways to handle inter-state trade problem. "In all three, interstate exports to non-VAT-registered agents would be taxed. Under the first proposal, all other interstate exports would be zero rated. Under the second, all other interstate exports would be taxed at the same rate as exports to non-VAT-registered agents, but would be rebatable by the importing state government. The second approach differs from the third one in that the exporting government would be made responsible for the payments of rebates via the establishment of a clearinghouse. The zero-rating of export arrangement would be particularly simple to implement, as its main requirement would be a single change in the CST for registered trade from its current 4 per cent to zero. In this case some compensation for the 'producing' states may be needed. The Finance Commission would achieve this. As a transitional measure the CST could be initially reduced to 2 per cent say, rather than being immediately abolished."
46

Dual VAT The third option would be a dual VAT both at the central and the state levels. Under this system, the central government is allowed to levy VA1 at the manufacturing level and state governments levy VAT at the distribution stages. In this context, it will be necessary to examine the following issues in a greater detail. Central VAT and State VAT on a common base or separate bases, Same rate or different rates, centrally or jointly controlled rates, One administration or separate administration, with credit or without credit, It will be necessary to have a close harmonization between the Union and State VATs. In the absence of such harmonization, a dual VAT would be complex to operate and comply with. It will also offer scope for game playing between governments and evasion among firms. However, harmonization would cause a reduction in states' autonomy.

5.5

Move towards VAT in States

With the objective to introduce State-Level VAT in India in 1992 the Government of India constituted a Tax Reform Committee headed by Dr. Raja J. Chelliah. In 1993, the committee recommended VAT in place of existing tax system. Thereafter, the Government appointed NIPFP (National Institute of Public Finance and Policy), New Delhi as the Nodal Agency to work out the modalities of VAT. The first preliminary discussion on State-Level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. In this meeting, the basic issues on VAT were discussed in general terms and this was followed up by periodic interactions of State Finance Ministers. Thereafter, in a significant meeting of all Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister the following important decisions were taken. (i) Before the introduction of State-Level VAT, the unhealthy sales-tax rate "war" among the States would have to end and sales-tax rates would need to be harmonized by implementing uniform floor rates of sales-tax for different categories of commodities with effect from January 1, 2000. In the interest of harmonization of incidence of sales- tax, the sales- tax related industrial incentive schemes would also have to be discontinued with effect from January 1, 2000.
47

(ii)

(iii)

On the basis of the achievement of the first two objectives, steps would be taken by the States for the introduction of State-level VAT after adequate preparation.

For implementing the above decisions, an Empowered Committee of State Finance Ministers was set-up. Thereafter, this Empowered Committee met regularly, attended by the State Finance Ministers, and also by the Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior officials of the Revenue Department of the Ministry of Finance, Government of India. Through repeated discussions and collective efforts of the Empowered Committee, it was possible within a period of about a year and a half to achieve remarkable success in the first two objectives on harmonization of sales-tax structure through implementation of uniform floor rates of sales-tax and discontinuation of sale-tax-related incentive schemes. As a part of regular monitoring, whenever any deviation was reported from the uniform floor rates of sales- tax, or from decision on incentives, the Empowered Committee took up the matter with the concerned State and also the Government of India for necessary rectification. After reaching this stage, steps were initiated for the systematic preparation for the introduction of State-Level VAT. In order to avoid any unhealthy competition among the States which may lead to distortions in manufacture and trade, attempts have been made from the very beginning to harmonize the VAT designs in the States, keeping also in view the distinctive features of each State and the need for federal flexibility. This has been done by the States collectively agreeing, through repeated discussions in the Empowered Committee, to certain common points of convergence regarding VAT, and allowing at the same time certain flexibility for the local characteristics of the States. Along with these measures at ensuring convergence on the basic issues on VAT, steps have also been taken for necessary training, computerization and interaction with trade and industry, particularly at the State levels. This interaction with trade and industry is being specially emphasized. The conference of State Chief Ministers presided over by Shri Atal Behari Vajpayee, the then Prime Minister, held on October 18, 2002 at which Shri Jaswant Singh, the then Finance Minister was also present confirmed the final decision that all the States and the Union Territories would introduce VAT from April 1, 2003. The Empowered Committee of State Finance Ministers on February 8, 2003 again endorsed the suggestion that all the State legislations on VAT should have a certain minimum set of common features. Most of the States came out with their draft legislations; Shri Jaswant Singh the then Union Finance Minister also announced the introduction of VAT from 1st April 2003 in his 2003-2004
48

budget speech made on February 28, 2003. An extract from his speech is reproduced below: "The coming year will be historic with the States switching over to a Value Added Tax (VAT). The Central Government has been a partner with the States, in the highest tradition of cooperative federalism, in this path-breaking reform. This will also involve an amendment to the Additional Excise Duty Act. Second, it is proposed to make 2003-04 the year when a long-overdue constitutional amendment to integrate services into the tax net in a comprehensive manner is enacted and implemented. This will give a boost to revenues, and help implement VAT" Owing to some unavoidable circumstances VAT could not be implemented w.e.f. April 1, 2003 or on the revised date June 1, 2003. Despite all obstacles, Haryana stood first to implement VAT w.e.f. April 1, 2003.

5.6

Dr. Vijay Kelkars views

The report submitted by Dr. Vijay Kelkar, Advisor to the Union Finance Minister, in the year, 2002 on direct and indirect taxes have far-reaching implications. He has made significant observations on the issue of VAT. At the very outset he stated that VAT eliminates the cascading effect of taxes; it promotes competitiveness of exports, it has a simple and transparent culture and it improves compliance. Economists have generally shared the view that VAT is best suited as a Federal or Central tax and not at the State level. However, States and provinces in a few large Federal countries like Brazil and to a lesser extent Canada, have adopted VAT with varying degrees of success. Dr. Vijay Kelkar has made the following recommendations in regard to State-Level VAT: (i) A publicity awareness programme should be started jointly with the Central Government and the State Governments and the former should extend financial support for this, if required. It is also necessary that the publicity awareness programme should be implemented at the earliest. An attempt should be made towards uniformity of all State legislations, procedures and documentation relating to VAT. The issue of compensation to States must be primarily tackled through mutually acceptable mechanism of additional resource mobilization through service tax and not through budgetary support.
49

(ii) (iii)

(iv)

With the introduction of VAT all other local taxes should be discontinued and the same should be taken into account in determining the Revenue Neutral Rate. Whereas additional duties of excise may continue for textiles up to 2005, it may continue even thereafter for cigarettes, which should not be subjected to VAT. The VAT schemes should provide for grant of credit of duty by the importing States for the duty paid in the exporting State, in the course of inter-State movement of goods. For the stability and continuity of VAT, the setting up of a VAT Council or a permanent suitable alternative vested with adequate powers to take steps against discriminatory taxes and practices and eliminate barriers to free flow of trade and commerce across the country should be explored.

(v)

(vi)

(vii)

In the meeting of the Empowered Committee on June 18, 2004 when Shri P. Chidambaram the Union Finance Minister, was present, all the States excepting one, once again categorically renewed their commitment to the introduction of VAT from April 1, 2005. Accordingly, the Ministry of Finance published a White Paper on State-Level VAT in January, 2005. This paper consists of three parts. In Part I the Committee considered the justification of VAT and the background. In the existing sales-tax structure there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. In the VAT, a set off is given for input tax as well as tax paid on previous purchases. With the introduction of VAT all other State taxes and the Central sales-tax will be gradually phased out. VAT encourages self-assessment by the dealers. Thus, under a system of VAT overall tax burden will be rationalized and prices will generally fall. Extensive as well as in-depth consultations were made among the State Finance Ministers. There were critical issues like re-imbursement of loss of revenue arising out of introduction of VAT, substitution of central sales-tax by another suitable system etc. The Union Finance Ministers and the Central Government played a supportive and understanding role in the whole process, which paved the way for the implementation of the system. The State-Level VAT has been worked out, striking a federal balance between the common points of convergence regarding VAT and flexibility for the local characteristics of the States. The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/ rebate.

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The VAT is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period. This input tax credit will be given for both manufacturers and traders for purchase of input/ supplies meant for both sales within the State as well as to the other States irrespective of when these will be utilized/ sold. 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 next financial year. If there is any excess unadjusted input tax credit at the end of the second year then the same will be eligible for refund. For all exports made out of the country, tax paid within the State will be refunded in full. Tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit. All tax- paid goods purchased on or after April 1, 2004 and still in stock as on April 1,2005 will be eligible to receive input tax credit subject to submission of requisite documents. This entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Registration of dealers with gross annual turnover above Rs. five lakhs will be compulsory. There will be provision for voluntary registration. It is also proposed to give Tax Payers Identification Number. There will be simplified forms of returns. The VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting- off the tax credit. Correctness of self-assessment will be checked through a system of departmental audit. There will be no need for any provision for concessional sale under the VAT Act since the provision for set-off makes the input zero-rated. Hence, there will be no need for a declaration form, which will be a further relief for the dealers. In general, all the goods including declared goods will be covered under VAT and will get the benefit of input tax credit. There will be only two VAT rates of 4% and 12.5 % plus a specific category of tax exempted goods and a special VAT rate of 1 % only for gold and silver ornaments etc. VAT system will stop the unhealthy taxrate war and trade diversion among the States, which had adversely affected the interests of all the States in the past. The States will duly effect changes in their VAT Acts or draft VAT Acts and the relevant rules to align the position with the principles explained in the White Paper. The Finance Minister Shri P.Chidambaram in his Budget 2005-2006 speech made on February 28, 2005 submitted the VAT proposal as under: "In a remarkable display of the spirit of cooperative federalism, the States are poised to undertake the most important tax reform ever attempted in this country. All States have agreed to introduce the value added tax (VAT) with effect from April 1, 2005. VAT is a modern, simple and transparent tax system that will replace the existing sales-tax and eliminate the cascading effect of sales-tax. It is in force in more than 130

51

countries ranging from Sri Lanka to China. India too has a VAT at the Central level (CENVAT), but only for goods. In the medium to long term, it is my goal that the entire productiondistribution chain should be covered by a national VAT, or even better, a goods and services tax, encompassing both the Centre and the States. The Empowered Committee of State Finance Ministers, with the solid support of the Chief Ministers, has laboured through the last 7 years to arrive at a framework acceptable to all States. The Central Government has promised its full support and has also agreed to compensate the States, according to an agreed formula, in the event of any revenue loss. I take this opportunity to pay tribute to the Empowered Committee, and wish the States success on the introduction and implementation of VAT." The White Paper brought out on State-Level VAT was a result of collective efforts made by the Government of India, all the States and support from trade organizations, Chambers of Commerce and Industry and many other agencies.

5.7

White Paper on State-Level VAT in India

This White Paper on State-level Value Added Tax (VAT) is presented in three parts. To begin with, the justification of VAT and its background have been mentioned (Part 1). In Part 2, the main design of VAT, as evolved on the basis of a consensus among the States through repeated discussions in the Empowered Committee, has been elaborated. While doing so, it is recognized that this VAT is a State subject and therefore the States will have freedom for appropriate variations consistent with the basic design as agreed upon at the Empowered Committee. Finally, in Part 3, the other related issues have been discussed for effective implementation of VAT. 1. Justification of VAT and Background

1.1 In the existing sales-tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases. In the prevailing sales-tax structure, there is in several States also a multiplicity of taxes, such as turnover tax, surcharge on sales-tax, additional surcharge, etc. With introduction of VAT, these other taxes will be abolished. In addition, Central
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sales-tax is also going to be phased out. As a result, overall tax burden will be rationalized, and prices in general will also fall. Moreover, VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth. Thus, to repeat, with the introduction of VAT, benefits will be as follows: a set-off will be given for input tax as well as tax paid on previous purchases other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished overall tax burden will be rationalised prices will in general fall there will be self-assessment by dealers transparency will increase there will be higher revenue growth The VAT will therefore help common people, traders, industrialists and also the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system. 1.2 For these beneficial effects, a full-fledged VAT was initiated first in Brazil in mid 1960s, then in European countries in 1970s and subsequently introduced in about 130 countries, including several federal countries. In Asia, it has been introduced by a large number of countries from China to Sri Lanka. Even in India, there has been a VAT system introduced by the Government of India for about last ten years in respect of Central excise duties. At the State-level, the VAT system as decided by the State Governments, would now be introduced in terms of Entry 54 of the State List of the Constitution. 1.3 The first preliminary discussion on State-level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. In this meeting, the basic issues on VAT were discussed in general terms and this was followed up by periodic interactions of State Finance Ministers. Thereafter, in a significant meeting of all Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister, three important decisions were taken. First, before the introduction of State-level VAT, the unhealthy sales-tax rate war among the States would have to end and
53

sales-tax rates would need to be harmonized by implementing uniform floor rates of sales-tax for different categories of commodities with effect from January 1, 2000. Second, in the interest again of harmonization of incidence of sales-tax, the sales-tax-related industrial incentive schemes would also have to be discontinued with effect from January 1, 2000. Third, on the basis of achievement of the first two objectives, steps would be taken by the States for introduction of State-level VAT after adequate preparation. For implementing these decisions, an Empowered Committee of State Finance Ministers was set-up. 1.4 Thereafter, this Empowered Committee has met regularly, attended by the State Finance Ministers, and also by the Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior officials of the Revenue Department of the Ministry of Finance, Government of India. Through repeated discussions and collective efforts in the Empowered Committee, it was possible within a period of about a year and a half to achieve nearly 98 per cent success in the first two objectives on harmonization of sales-tax structure through implementation of uniform floor rates of sales-tax and discontinuation of sales-tax- related incentive schemes. As a part of regular monitoring, whenever any deviation is reported from the uniform floor rates of sales-tax, or from decision on incentives, the Empowered Committee takes up the matter with the concerned State and also the Government of India for necessary rectification. 1.5 After reaching this stage, steps were initiated for systematic preparation for the introduction of State-level VAT. In order again to avoid any unhealthy competition among the States which may lead to distortions in manufacturing and trade, attempts have been made from the very beginning to harmonize the VAT design in the States, keeping also in view the distinctive features of each State and the need for federal flexibility. This has been done by the States collectively agreeing, through repeated discussions in the Empowered Committee, to certain common points of convergence regarding VAT, and allowing at the same time certain flexibility for the local characteristics of the States. 1.6 Along with these measures at ensuring convergence on the basic issues on VAT, steps have also been taken for necessary training, computerization and interaction with trade and industry, particularly at the State levels. This interaction with trade and industry is being specially emphasized. 1.7 It may be noted that while such preparation was going on, the Chief Ministers of all the States in an important meeting on State-level VAT convened by the Prime Minister on October 18, 2002, when Shri Jaswant Singh, the then Union Finance Minister was present, clearly Stated their intention of introducing VAT from April 1, 2003. About 29 States and Union Territories had expeditiously sent their Bills to the Ministry of Finance, Government of India for prior vetting. The
54

Union Ministry of Finance had considered these Bills of States and Union Territories, and sent their comments/suggestions to the States and Union Territories in line with the decisions of the Empowered Committee of the State Finance Ministers for incorporating the same in VAT Bills to be placed in the State legislatures and subsequent transmission to the Government of India for Presidential Assent. At this stage, there were certain developments, which delayed the introduction of VAT. Despite these developments, most of the States remained positively interested in implementation of VAT. Madhya Pradesh VAT Bill had already been accorded Presidential Assent in November 2002. One State, namely, Haryana, has already introduced VAT on its own with good results on revenue growth. It is important to note that in the meeting of Empowered Committee on June 18, 2004 when Shri P. Chidambaram, the Union Finance Minister, was invited and was kindly present, all the States, excepting one, once again categorically renewed their commitment to the introduction of VAT from April 1, 2005. Even for this particular State with certain problems, a positive interaction has recently been organized with that State to resolve certain genuine ground-level problems. Now nearly all the States have either finalized their VAT Bills and are in the process of obtaining Presidential Assent, or will reach that stage very soon. 2. Design of State-Level VAT

2.1 As already mentioned, the design of State-level VAT has been worked out by the Empowered Committee through several rounds of discussion and striking a federal balance between the common points of convergence regarding VAT and flexibility for the local characteristics of the States. Since the State-level VAT is centred around the basic concept of set-off for the tax paid earlier, the needed common points of convergence also relate to this concept of set-off/input tax credit, its coverage and related issues as elaborated below. Concept of VAT and Set-off / Input Tax Credit 2.2 The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). If, for example, input worth Rs. 1,00,000/- is purchased and sales are worth Rs. 2,00,000/- in a month, and input tax rate and output tax rate are 4% and 10% respectively, then input tax credit/set-off and calculation of VAT will be as shown below:

55

(a) (b) (c) (d) (e)

Input purchased within the month : Output sold in the month Input tax paid Output tax payable VAT payable during the month after set-off/input tax credit [(d) (c)] : : : :

Rs. 1,00,000/Rs. 2,00,000/Rs. 4,000/Rs. 20,000/Rs. 16,000/-

Coverage of set-off / input tax credit 2.3 This input tax credit will be given for both manufacturers and traders for purchase of inputs/supplies meant for both sales within the State as well as to other States, irrespective of when these will be utilized/sold. This also reduces immediate tax liability. Even for stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit. Carrying over of tax credit 2.4 If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund. Input tax credit on capital goods will also be available for traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments. There will be a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit. Treatment of exports, etc. 2.5 For all exports made out of the country, tax paid within the State will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax paid within three months.

56

Inputs procured from other States 2.6 Tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit. However, a decision has been taken for duly phasing out of inter-State sales-tax or Central sales-tax. As a preparation for that, a comprehensive inter-State tax information exchange system is also being set up. Treatment of opening stock 2.7 All tax-paid goods purchased on or after April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input tax credit, subject to submission of requisite documents. Resellers holding tax-paid goods on April 1, 2005 will also be eligible. VAT will be levied on the goods when sold on and after April 1, 2005 and input tax credit will be given for the sales-tax already paid in the previous year. This tax credit will be available over a period of 6 months after an interval of 3 months needed for verification. Compulsory issue of tax invoice, cash memo or bill 2.8 This entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice will be signed and dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty. Registration, small dealers and composition scheme 2.9 Registration of dealers with gross annual turnover above Rs. 5 lakh will be compulsory. There will be provision for voluntary registration. All existing dealers will be automatically registered under the VAT Act. A new dealer will be allowed 30 days time from the date of liability to get registered. Small dealers with gross annual turnover not exceeding Rs. 5 lakh will not be liable to pay VAT. States will have flexibility to fix threshold limit within Rs. 5 lakh. Small dealers with annual gross turnover not exceeding Rs. 50 lakh who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.

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Tax Payers Identification Number (TIN) 2.10 The Tax Payers Identification Number will consist of 11 digit numerals throughout the country. First two characters will represent the State Code as used by the Union Ministry of Home Affairs. The set-up of the next nine characters may, however, be different in different States. Return 2.11 Under VAT, simplified form of returns will be notified. Returns are to be filed monthly/quarterly as specified in the State Acts/Rules, and will be accompanied with payment challans. Every return furnished by dealers will be scrutinised expeditiously within prescribed time limit from the date of filing the return. If any technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately. Procedure of self-assessment of VAT liability 2.12 The basic simplification in VAT is that VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting off the tax credit. Return forms as well as other procedures will be simple in all States. There will no longer be compulsory assessment at the end of each year as is existing now. If no specific notice is issued proposing departmental audit of the books of accounts of the dealer within the time limit specified in the Act, the dealer will be deemed to have been self-assessed on the basis of returns submitted by him. Because of the importance of the concept of self-assessment in VAT, provision for self-assessment will be Stated in the VAT Bills of the States. Audit 2.13 Correctness of self-assessment will be checked through a system of Departmental Audit. A certain percentage of the dealers will be taken up for audit every year on a scientific basis. If, however, evasion is detected on audit, the concerned dealer may be taken up for audit for previous periods. This Audit Wing will remain delinked from tax collection wing to remove any bias. The audit team will conduct its work in a time bound manner and audit will be completed within six months. The audit report will be transparently sent to the dealer also. Simultaneously, a cross-checking, computerised system is being worked out on the basis of coordination between the tax authorities of the State Governments and the authorities of Central Excise and Income Tax to compare constantly the tax returns and set-off documents of VAT system of the States and those of Central Excise and Income Tax. This comprehensive cross-checking system will help
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reduce tax evasion and also lead to significant growth of tax revenue. At the same time, by protecting transparently the interests of tax-complying dealers against the unfair practices of tax-evaders, the system will also bring in more equal competition in the sphere of trade and industry. Declaration form 2.14 There will be no need for any provision for concessional sale under the VAT Act since the provision for setoff makes the input zero-rated. Hence, there will be no need for declaration form, which will be a further relief for dealers. Incentives 2.15 Under the VAT system, the existing incentive schemes may be continued in the manner deemed appropriate by the States after ensuring that VAT chain is not affected. Other taxes 2.16 As mentioned earlier, all other existing taxes such as turnover tax, surcharge, additional surcharge and Special Additional Tax (SAT) would be abolished. There will not be any reference to these taxes in the VAT Bills. The States that have already introduced entry tax and intend to continue with this tax should make it vatable. If not made vatable, entry tax will need to be abolished. However, this will not apply to entry tax that may be levied in lieu of octroi. Penal Provisions 2.17 Penal provisions in the VAT Bills should not be more stringent than in the existing Sales-tax Act. Coverage of goods under VAT 2.18 In general, all the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit. The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the Sales-tax Act or any other State Act or even by making special provisions in the VAT Act itself, and with uniform floor rates decided by the Empowered Committee.

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VAT rates and classification of commodities 2.19 Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate of 1% only for gold and silver ornaments, etc. Thus the multiplicity of rates in the existing structure will be done away with under the VAT system. Under exempted category, there will be about 46 commodities comprising of natural and unprocessed products in unorganised sector, items which are legally barred from taxation and items which have social implications. Included in this exempted category is a set of maximum of 10 commodities flexibly chosen by individual States from a list of goods (finalised by the Empowered Committee) which are of local social importance for the individual States without having any inter-State implication. The rest of the commodities in the list will be common for all the States. Under 4% VAT rate category, there will be the largest number of goods (about 270), common for all the States, comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. The schedule of commodities will be attached to the VAT Bill of every State. The remaining commodities, common for all the States, will fall under the general VAT rate of 12.5%. In terms of decision of the Empowered Committee, VAT on AED items relating to sugar, textile and tobacco, because of initial organisational difficulties, will not be imposed for one year after the introduction of VAT, and till then the existing arrangement will continue. The position will be reviewed after one year. Effects of the VAT system 2.20 This design of the State-level VAT has been carefully worked out by the Empowered Committee after repeated interactions with the States and others concerned and striking a balance between the needed convergence and federal flexibility as well as ground-level reality. If now all the components of the VAT design are taken together, then it will be seen that the total effect of this VAT system will be to rationalise the tax burden and bring down, in general, the price level. This will also stop unhealthy tax-rate war and trade diversion among the States, which had adversely affected interests of all the States in the past. Moreover, this VAT design will also significantly bring in simplicity and transparency in the tax structure, thereby improving tax-compliance and eventually also the revenue growth, as mentioned in the beginning.

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3. Steps taken by the States 3.1 It is now of significance to note that most of the States, after collective interaction in the Empowered Committee, have either already modified or agreed to modify their VAT Bills by incorporating these common points of convergence including flexibility as mentioned in the VAT design above, and are also taking other preparatory steps towards introduction of VAT from April 1, 2005. 3.2 As a part of the preparatory steps, the States have started the process of preparing the draft of VAT Rules, including Books of Accounts to be maintained. The objective will be to keep these as simple as possible so that it becomes easy for a small trader to comply with the requirements. 3.3 Moreover, the States have initiated, and in many cases also completed, steps for computerisation upto the levels of assessing officers and also at the check posts. This process will continue since this is extremely important for document-based verification and integration with Taxation Information Exchange System as well as with information of the Central excise and income tax systems as indicated earlier. 3.4 It may be mentioned here that appropriate Central funds for VAT-related computerisation in the North-Eastern States are also being released by the Government of India. 4. Related issues

4.1 While the States have thus taken several steps towards introduction of VAT, certain supporting decisions were critically needed at the national level for more effective implementation of VAT from April 1, 2005. 4.2 It needs to be carefully noted that although introduction of VAT may, after a few years, lead to revenue growth, there may be a loss of revenue in some States in the initial years of transition. It is with this in view that the Government of India had agreed to compensate for 100 per cent of the loss in the first year, 75 per cent of the loss in the second year and 50 per cent of the loss in the third year of introduction of VAT, and the loss would be computed on the basis of an agreed formula. This position has not only been reaffirmed by the Union Finance Minister in his Budget Speech of 2004-05, but a concrete formula for this compensation has also now been worked out after interaction between the Union Finance Minister and the Empowered Committee. 4.3 As mentioned earlier, there is also a need, after introduction of VAT, for phasing out of Central Sales-tax (CST). However, the States are now collecting nearly Rs. 15 thousand crore every year from CST. There is accordingly a need of
61

compensation from the Government of India for this loss of revenue as CST is phased out. Moreover, while CST is phased out, there is also a critical need for putting in place a regulatory frame-work in terms of Taxation Information Exchange System to give a comprehensive picture of inter-State trade of all commodities. As already mentioned, this process of setting up of Taxation Information Exchange System has already been started by the Empowered Committee, and is expected to be completed within one year. The position regarding CST will be reviewed by the Empowered Committee during 2005-06, and suitable decision on the phasing out of CST will be taken. 4.4 It is also essential to bring imports into the VAT chain. Because of the set-off, this will not result in any tax cascading effect, but will only improve tax compliance. A proposal for VAT on imports, including the collection mechanism with adequate safeguards for the protection of interest of land-locked States, is being discussed with the Government of India. 4.5 Similarly, discussion between the Empowered Committee and the Government of India is going on for an early decision on the question of collection and appropriation of service tax by the Centre and the States. If decisions on VAT on imports and service tax are taken expeditiously at the national level, then these two important spheres of taxation can be integrated, along with the AED items as mentioned earlier, into the VAT system of the States from the second year of introduction of VAT. 4.6 It may be noted that this VAT design has been worked out carefully by the Empowered Committee to strike a balance not only between the common points of convergence and federal flexibility, but also a balance between what can be done to begin with and what should be incorporated subsequently for further perfection of the VAT system. 4.7 For successful implementation of State-level VAT, close interaction with trade and industry is specially important. The Empowered Committee has therefore also set up a Consultative Committee with one representative from each of the national level trade organisations and national level chambers of commerce and industry. This Committee has already started interacting with the Empowered Committee. This process of interaction will continue regularly to discuss issues and sort out problems of implementation of VAT. Such Consultative Committees will also be set up at the level of each State, and interaction with the State Government will take place in a similarly regular manner. 4.8 In course of discussion with representatives of trade and industry, reference has often been made to the earlier VAT Bills of some of the States. It should be clearly noted, as already mentioned before, that all the States have
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agreed to amend their earlier VAT Bills so as to conform broadly to the common design as elaborated in this White Paper. This process of amendment has also already started. The point of reference on VAT should therefore be this design of VAT as explained in this White Paper. It should also be mentioned that there are some important points on the ground-level implementation of VAT which have been raised by the representatives of trade and industry. Many of the points will be taken care of in the VAT rules of the States, with changes where necessary. 4.9 Finally, a comprehensive campaign on State-level will be launched to communicate in simple and transparent manner the benefit of VAT for common people, traders, industrialists and also the State Governments. This campaign will then be launched first at the national level on the basis of necessary coordination between the States and the Centre. This will then be simultaneously followed up at the level of every State and also in districts of the States. This campaign will be based on written materials as well as publicity through all media. 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. There is now only looking forward to the introduction of State-level VAT by all the States and Union Territories from April 1, 2005. We seek cooperation of all sections of people in the country.

5.8

Further developments and concerns

With effect from April1, 2005 a majority of the Indian States have introduced VAT legislations in their respective States. This is indeed a signal achievement of the Empowered Committee of State Finance Ministers, which brought around the States to agree on a minimum common denominator. The various State VAT Legislations are based on the fundamental principles of State Level VAT contained in the White Paper. However, there are significant variations in the list of goods, which are subject to varying rates of taxes. It is enough to say that this is only a beginning in the implementation of the State-Level VAT. There is a long way to go before an efficient system of State- Level VAT is put in to operation. There are several areas of contention and concern as between the Central and the State Governments. The following are the most significant among them: 1. Under the Constitution of India the Central Government and the State Governments have been allocated powers of taxation. While till now sales-tax was the major revenue earner for the States, there are other avenues of taxation like octroi, entertainment tax, luxury tax and a few other minor levies. While the States have accepted giving input tax credit by implementing State-Level VAT, they are fighting shy of giving up their

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other powers of taxation. Therefore, in several States these auxillary levies continue to exist side by side with State-Level VAT contributing to the cascading effect. 2. Computerization and maintenance of proper invoices is the bed rock upon which a successful VAT system has to be build. However, computerization particularly in the State Governments is extremely unsatisfactory and the various States are not geared up for this huge task. The traders and the business community do not appreciate the scientific basis of VAT. In a large section of the business particularly belonging to non-corporate sector proper books of accounts are not maintained reflecting purchases and sales. For them, to install computerized systems for maintenance of documents is a costly proposition. Further, a VAT system will require proper disclosure of purchases of various eligible inputs which will ultimately enable the Assessing Officer to arrive at the correct turnover of the trader. This is one more hindrance in the way of implementation of VAT. Central sales-tax which was introduced to prevent double taxation of the same transaction by two different States on the principle of nexus theory still continues to exist. The While Paper on State-Level VAT envisages a new system to tackle this issue. However, complex issues of allocation of tax between different States will arise while formulating the system. The intention of introduction of State-Level VAT is to remove all trade barriers to enable the smooth flow of trade and commerce throughout the country. In other words it should lead to the abolition of all check-posts and levy of octroi at different boarder points. In practice this is not happening. The continuance of CST is a contributory factor. Several States are of afraid of loosing the revenue because of the eligibility of the input credit. In fact the State of Maharashtra has already come out with a claim of loss. Compared to this in States like Haryana, VAT revenue has registered an increase and the number of units has shown a remarkable increase after the introduction of VAT. In some other States revenue increase has been recorded. However, knowledgeable observers feel that the euphoria of increased collection will fade away after a few months. The issue of incentives prevalent in several States in respect of deferments or waiver of sales-tax is another thorny issue to be resolved. The industry having enjoyed the incentives over a long period of time is
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3.

4.

5.

6.

7.

pressing for the continuance of the incentives in one form or another. This, if accepted and implemented, will complicate the State-Level VAT. 8. To ensure that the States realize the proper VAT revenue it is necessary to subject the accounts of the traders and business to proper scrutiny. This scrutiny or audit has been given to chartered accountants by several States. The ICAI on its parts has done pioneering work in State-Level VAT and there is a broad consensus that chartered accountants can contribute for streamlining the account keeping and for the proper realisation of the revenue by the Government. The various States Government have realized the difficulties of the traders and the business community in switching over to a VAT system by maintaining proper documentation. In order to help small traders, various States have come out with the composition schemes by which the traders will be freed from the hassles of record keeping. The Empowered Committee of States Finance Ministers is addressing huge task of bringing uniformity in the various States-Level VAT Legislations.

9.

10.

Conclusion The ultimate vision of the Indian policy planners is to bring an integrated VAT system comprising of excise, customs, service-tax and sales-tax. The natural result of this uniform VAT would be the abolition of all other taxes. Thus, an integrated tax on goods and services throughout the country will operate. However, given the federal structure of the Indian Union and the demands of the various States for more autonomy particularly in the finance area, this is going to be a big economic challenge for India.

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Chapter - 6

VAT in Nepal
6.1 Background
The framework of the Nepalese VAT system is specified in the VAT Act and Regulations. The VAT system is also governed to some extent by the Finance Act, 1999. Some procedural matters relating to VAT are also introduced through operating manual. The government also has introduced some notifications relating to the VAT system. Similarly, the VAT Department has issued several circulars on various procedural matters from time to time.

6.2

Basic Features

Type of VAT Nepal has adopted a consumption type VAT system. Under this system tax is levied on value added at each stage in the process of production and distribution. Practically speaking, however, value added is never calculated directly; but the same result is obtained indirectly through the input tax credit mechanism, i.e. VAT is levied on output and a credit is allowed for the full amount of the tax paid on the business input, including capital goods, at previous stages. The end result is that each and every VAT registrant pays VAT on its value added only. Scope VAT is based on the destination principle. It is levied on the goods and services where the place of supply is in Nepal and importation of goods and services into Nepal. Exports of goods and services are zero-rated. This means that the tax base is domestic consumption. VAT is a broad-based tax, which applies to all business turnovers through to the retail stages, with a few exceptions. It is levied on a large number of goods and services other than those specifically exempt by law, particularly on administrative and social grounds. Exempted goods and services are included in Schedule 1, which is given at the end of the VAT Act. This schedule can be changed by the government and does not require parliamentary approval.
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Currently, the following goods and services are exempted from VAT: Basic agricultural products such as paddy, rice, wheat, green and fresh vegetables, fresh fruits, fresh eggs, unprocessed cereals, oil seeds, unprocessed food, etc., but excluding food held out for sale by hotels; restaurants, cafes and similar establishments. Goods of basic needs such as piped water, fuel wood, coal and kerosene. Live animals and animal products. Agricultural inputs such as seeds, manure, fertilizer, soil conditioners, agriculture hand implements and pesticides Medicines, medical and health services. Educational services. Books, newspapers, etc. Artistic and cultural goods and services. Transportation services. Specified personal or professional services. Other goods or services such as postal services, financial and insurance services, bank notes, and cheque books, gold and silver, land and building, betting, casinos, lotteries.

Rate VAT for a fiscal year is levied at a single positive rate as specified in the Financial Act made for that year . A few transactions or goods and services are zero-rated, which are given in Schedule 2 of the VAT Act. Like Schedule 1, which is related to exemptions, the government, without a parliamentary approval, also can change Schedule 2. Zero-rating means some items are taxed at zero rate. This further means that no VAT is payable on them, but they are otherwise regarded as taxable. Therefore, a registered person making zero-rated sales may take full credit for the VAT paid on the taxable inputs to his business. At present, the following supplies are zero-rated: Export of goods.
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Goods or stores taken on board an aircraft, provided that the goods are taken on board an aircraft on flight to a destination outside Nepal for delivery to another country and fuel is used by the aircraft on a flight to a destination outside Nepal. Goods that have been shipped for use as stores on a flight to a destination outside Nepal. Imports of goods and services' by accredited diplomats. Goods or services purchased or imported by His Majesty the King, Her Majesty the Queen, His Majesty the Crown Prince, and other members of the royal family.

6.3

Taxable supply

VAT is levied on a 'taxable supply', which is defined as the process of selling, exchanging or delivering goods or services; or the grant of permission thereto or a contract thereof for a consideration. To be a taxable supply the consideration can be in money or money's worth.

6.4

Place and time of supply

Place of supply Under the Nepalese VAT system, the place of supply is defined as follows: For moveable goods, the place where the goods were sold or transferred. For immovable goods, the place where the goods are located. For imported goods, the customs point where the goods first enter Nepal. . For goods supplied by a vendor to himself, the place where the vendor or producer of the goods resides. For services, where the benefit of service is received.

Time of supply The time of supply is important under VAT in order to establish the tax liability. For most practical purposes, the time of supply will be the date of the invoice, but it is important to bear in mind that there may be an alternative date of supply. Under the
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Nepalese VAT, system the time of supply is defined as the earlier of the following: The time of supply of the goods or service; The time of issue of an invoice; or The time of receipt of payment for the goods or services.

In the case of supply of services, the time of supply is defined as the time when the services are performed. For certain goods and services, special provisions are made as follows: The time of supply for continuously provided services such as telephone is the time an invoice is issued for the part of the service provided; and Where partial payment is made for goods or services, the time of supply shall be the earliest day on which the payment is made.

6.5 Taxable value

VAT is levied on the taxable value of each transaction, which is the total price charged by the seller (including all- related charges). The taxable value does not include the VAT itself, and takes into account any price adjustments (such as discounts or rebates) in effect at that time of the sale. Adjustment that becomes necessary after the time of sale (such as for goods returned) is to be made in subsequent determination of the tax or credits. The taxable value of a transaction is the price paid, which is also consideration for the goods or services, by the recipient to the supplier, provided that the supplier and recipient are independent of each other. The price charged must include all related expenditure borne by the supplier, for example, transport costs, if the goods are delivered to the recipient, or any taxes other than VAT, chargeable on the goods or services. In the case of imported goods, the tax base is the sum of import value, freight, transport costs, insurance, commission, import duties plus any charges paid by the importer. In the case of a transaction taking place between associated persons, or goods being exchanged or bartered, or at any time when the value declared is lower than the prevailing market value, the taxable value of the transaction shall be the market value of the goods or services, which shall be taken as the consideration in money
69

agreed between independent sellers and buyers for the supply of goods or services. If a tax officer is satisfied that the declared value is substantially below the market value, he may determine the value of the disputed transaction to the best of his ability.

6.6

Tax credit

In case of taxable supply Tax credit is an important element of VAT. Under this system VAT registrants making taxable supplies, including the zero rated supplies, are entitled to claim input tax credit. It is, however, allowed to the extent that the purchased/imported goods and services are used for goods and services sold in taxable transactions, including exports. Since, only VAT registrants are allowed to claim input tax, small vendors falling below the registration threshold and not registered for VAT are required to pay VAT on their purchases but cannot claim an input tax credit. It is necessary to meet the following conditions for the entitlement of an input tax credit: The goods or services supplied to the VAT registrant must be solely for use in his business of making taxable sales; The registrant must hold and be able to produce a valid tax invoice for the goods or services for which credit is claimed; and The claim for deduction must be made within one year of the date of invoice.

In case of mixed supply A person involved in mixed transaction (i.e. making both taxable and tax-exempt transactions) is entitled to claim input tax credit on the purchases related to the making of taxable sales only, but not purchases related to his exempt sales. The VAT registrant is allowed to claim the tax on purchases which he can clearly identify as being for taxable sales. A VAT registrant will have overheads, such as diesel or telephone charges or stationary, which will be used by both his taxable and his exempt sales. A VAT registrant is authorized to claim a proportion of his input tax. The proportion to be claimed is the proportion that his taxable sales bear to his total sales.

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Partial credit Some goods are used for both the purpose of the business and for personal use. In such cases, it is very difficult to ascertain the proportion used in the taxable and tax-exempt transactions. These include such items as computers and cars. In these cases, only partial input tax credit can be taken. For example, 40 per cent of input tax credit may be claimed on aeroplanes and automobiles and 60 per cent may be claimed on computers. No credit With certain goods and services it is very difficult to ascertain whether they have been used for the purpose of the business or for personal use. These include such items as business entertainment, beverages, alcohol or alcohol mixed beverages, such as liquor and beer, and light petroleum (petrol) fuel for vehicles. In these cases no input credit can be taken.

6.7

Tax refund

Tax refund is another important element of the VAT system. It generally happens in the case of zero-rated supplies such as exports. This is because exporters of taxable goods do not have to collect tax on their exports but are entitled to claim tax paid on the inputs of exports. Tax refund may arise in other situations also. Refund to exporters The VAT Act provides immediate refund for exports. Since, exports sales are zero-rated there is no tax due on such sales. This means that exporters are most likely to have large excess credits. A person is defined as an exporter for any month if his export sales for that month are more than half of his total sales. An exporter may make application for refund of VAT to the concerned VAT office. This office will process the refund, claim and forward it to the VAT refund section of the VAT department for the final approval and issuance of the refund cheque. Refund to non-exporters There is also a situation where it will be necessary to refund in the case of a registrant who is not an exporter. A registrant may have excess credits even if he is not an exporter. In this case he can carry forward his excess credit. He can claim for a refund if he has excess credits for a continuous period of six months or more. Such a situation may arise in the case of a new business, an inventory building up or the purchase of large capital asset.
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If a registered person remains in credit for a period of six consecutive months, he may submit an application for refund of VAT to the concerned VAT office. After being processed, refund applications are to be forwarded to the VAT refund section of the VAT department that is responsible for approval. Refund to diplomats Refund is also provided to the accredited diplomats on a reciprocal basis. In the case of importation, they do not have to pay tax since their imports are zero-rated. In the case of domestic products, they have to pay VAT first and claim for refund. Other officials of international organizations that are accredited by the Ministry of Finance also are entitled to claim for refund. Similarly, the projects under bilateral or multilateral agreements also enjoy this facility. Other refunds There are also situations where VAT may be collected by mistake, for example on a product that is either zero-rated or exempt. There is a provision for the refund of this tax to the person who has paid the tax.

6.8

Administration

Registration Suppliers of taxable goods and services are required to register under the VAT Act and collect this tax. It is, however, not necessary for them to register if they deal with only tax exempt goods and services. Similarly, small vendors falling below the registration threshold are also not required to register for VAT. The existing level of threshold is Rs.2 million. In the case of imports, traders having annual commercial imports below Rs.200,000 are not required to resister. Traders dealing with the mixed supply also will have to register only when the transaction of taxable supply exceeds the registration threshold. However, vendors filling below the registration threshold can register voluntarily. There is no system of group registration under the Nepalese. VAT system. Similarly, the Nepalese VAT Act does not allow branch or divisional registration system. The registration process is as follows:

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Fill in VAT registration application form. In case of partnership, fill also another form designed for partnership firms. Attach copies of business and income tax registration certificates. Submit it to the concerned VAT office. On receipt, the VAT office gives a temporary certificate and allocates Taxpayer Identification Number (TPIN) and forwards the details to the VAT department. VAT department processes the information and prints out a VAT certificate with TPIN assigned by the VAT office to the taxpayer on it and forwards it to the concerned VAT office. The VAT office hands over the certificate to the concerned taxpayer. Taxpayer has to display the original certificate at his main place of business and certified copies at other places. Taxpayer has to furnish information within 15 days, in case of changes in the information mentioned in the VAT application form.

De-registration Apply for de-registration under the following conditions: In the case of an incorporated body, if the incorporated body is closed down, sold or transferred, or if the incorporated body otherwise ceases to exist. In the case of a partnership firm, if it is dissolved.

In the case of individual ownership, if the owner dies. If a registered person ceases to be engaged in taxable transactions. If person is registered in error.

Taxpayer Identification Number The VAT administration issues a unique registration number to the VAT registrants. It consists of nine digits with a cheque digit. No suffix or prefix is attached to it. The TPIN does not represent anything like geographical area, nature of transaction, ownership, etc. The VAT department allocates the blocks of TPINs to various VAT offices. If all TPINs assigned to a particular VAT office are used,
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this office demands for new block of TPINs. VAT department maintains records of allocated TPINs. Taxpayers are required to mention TPINs in the following documents: Tax invoice/abbreviated invoice; Purchase and sales books; Correspondence to the VAT office; Documents relating to income tax; Documents relating to customs duties; Documents relating to the exports/imports; and Documents relating to obtaining a loan from a bank or financial institution exceeding Rs. 100,000.

If a taxpayer is deregistered, his TPIN becomes ineffective. This number is not given to any other taxpayer. If he is reregistered, he is given this number (i.e. the original number) again.

6.9 Invoicing
VAT is an invoice-driven system. Under this system, each registrant is required to issue a tax invoice or an abbreviated invoice. Tax invoice A VAT registrant is required to issue a tax invoice in the prescribed form whenever a transaction takes place. The format is prescribed in the VAT regulations, which requires the following information: A sequential identifying number. The date of the transaction. The date of issue of the invoice, if different from the date of the transaction. The name, address and TPIN of the vendor. The name, address and, where applicable, TPIN of the buyer. The type of transaction (e.g. sale, hire, rental or exchange). A description to identify the goods or services supplied. The quantity of the goods or the extent of the service for each description.
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The rate of VAT and the amount payable, excluding VAT, for each description of goods or services. The value of any goods or services provided in part exchange. The total amount payable, excluding VAT. The rate and amount of any discount offered. The total tax charged. The total amount charged, inclusive of VAT.

A minimum of three copies of each invoice must be prepared. The first copy must be given to the buyer and the vendor must retain the remaining two copies. These must be made available at all reasonable times for inspection by a tax officer. The invoices must be issued in sequential numerical order. However, the invoices can be prepared with different serial numbers for branches or different sections (such as restaurants, bars, laundry, etc., in the case of hotels) with prior approval of the VAT office. Abbreviated invoice VAT registrants may make application to use an abbreviated invoice and the concerned tax officer may allow its use subject to the following conditions: The recipient of goods or services for which an abbreviated invoice is issued shall not be entitled to input tax credit on that purchase. The abbreviated invoice shall not be used for transactions exceeding Rs. 5000, including VAT. The registered person must keep a daily record of sales. Any till rolls or cash rolls used by the retailer must be totalled daily and retained for inspection at any reasonable time.

The following information must be recorded on the abbreviated invoice: An identifying number issued in sequential order. The name, address and registration number of the vendor. The date of the transaction. A description to identify the goods or services supplied. The total amount of money paid, including VAT.

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In the case of sales under the abbreviated invoice, VAT is calculated by multiplying the sales by the VAT quotient. The VAT quotient is found by dividing the rate of VAT by 100 plus the rate of VAT.

6.10 Accounting
VAT registrants are required to maintain purchase and sales books and list all sales and purchases in these books. They are also required to prepare a VAT account. Purchase book VAT registrants are required to maintain an account of their business purchases for VAT purpose. They have to record of purchases by invoice. At the end of each accounting period VAT registrant must total the amount of taxable purchase/ imports, tax exempt purchase/imports and the tax paid on purchases/imports. Sales book Similarly, VAT registrants are required to maintain account of their sales for VAT purpose. Like purchases, sales also are to be recorded per invoice basis. At the end of each accounting period VAT registrants are required to total the amount of taxable (standard-rated and zero-rated) and tax exempt sales they have made in the period and the tax collected on sales. If they make both taxable and exempt purchases and sales they are then required to calculate the proportion of input tax they are entitled to the tax period. VAT Account VAT registrants are also required to maintain the VAT account. It is a monthly summary of taxable purchase and sales and VAT paid on purchases and charged on sales. Others VAT registrants can maintain their business accounts on computer with prior approval of VAT administration. VAT registrants must make their accounts available at all reasonable times for inspection by the VAT officer. In most instances, they will be produced at the VAT

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registrants' premises, but their production can be demanded at any place. The VAT officer may take possession of accounts at any reasonable time and they may be removed, copied or taken possession of, as necessary. All documents and accounts relating to the business must be retained for a period of six years.

6.11 Submission of return

A VAT registrant must complete a VAT return and submit it to the concerned VAT office within 25 days of the month following the end of the accounting period. In the case of compulsory registrants, it is necessary to submit VAT return every month but the voluntary registrants have to submit returns on a trimester basis. The head office is required to submit tax returns for the transactions carried out by it and its branches and sub branches, if any. There are no special rules, for example for seasonal business or others. Even if there is no transaction, it is necessary to submit a zero return. Returns could be debit returns, credit returns or zero-returns. There is no need to attach purchase and sales invoices or any other documents relating to the tax with the returns. If a taxpayer does not submit return within stipulated time, he will be subject to a penalty of 0.05 per cent of payable tax per day or Rs. 500, whichever is higher.

6.12

Payment of tax

If a registrant's output tax liability is greater than his input tax credit, he is required to remit the difference to the government with 25 days from the close of the month in which the tax liability occurred. Compulsory registrants have to pay tax every month while voluntary registrants will have to pay tax on a trimester basis. There are some circumstances that are beyond the control of a taxpayer, which can prevent paying the tax .due within the prescribed time. Natural disasters such as floods, and unfortunate circumstances such as a fire or death in the family are-some of those incidents that could cause a delay. The law grants the authority to the Director General to waive the payment of the penalty under such circumstances.

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On the other hand, if the input tax credit is greater than the output tax liability, the balance of credit is to be carried forward for the next month. If a VAT registrant has more than 50 per cent of his sales as exports, he can apply for refund instead of carry forward of the excess credit. The VAT Act makes provision for the additional charges as late payment penalties. The rate of such penalty is 10 per cent of the VAT payable in the first month, an additional 10 per cent in the second month, and then no further action. There is also a provision for interest on non-payment. The current rate of interest is 15 per cent. Interest on overdue is charged on a calendar month basis.

6.13
General

Tax assessment

VAT is a self-assessed tax. Taxpayers determine their tax liability themselves and pay tax. Under this system, a taxpayer determines his tax liability and files his return to the VAT office. However, not all taxpayers may file their return and- pay tax within the specified time. Similarly, not a1l taxpayers may file the correct returns and pay correct amount of tax. There could be different situation as follows: Tax return is not filed; Tax return is late; Tax return contains incomplete information; or The tax administration has reason to believe the tax is otherwise than as declared.

In such cases, VAT officials may have to make a tax assessment. Such assessment could be computer assessment or management assessment, as described below. Computer assessment If a taxpayer does not assess his income himself and does not file his return within the specified time, he is termed as non-filer. Computer prints out the list of non-filers after 45 days of the expiry of the tax period. The VAT office gives the non-filers a notice. If they do not file returns within the specified period even after the issuance of the notice of non-filing, the computer makes a monthly or trimester assessment, depending upon the status of a particular taxpayer.
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The process regarding computer assessment is designed in the following way: (i) (ii) Find out highest amount declared by the taxpayer in his tax returns during the previous 12 months from the VAT payable. If a taxpayer has not filed any return, find the turnover figure stated on the registration application. Divide this by the number of filing periods in a year, and then multiply by the VAT rate. Pick the highest figure in (i) or (ii) above. Increase the number found in (iii) by 30 per cent to get the assessment amount.

(iii) (iv)

Subsequently: Such assessments are stored in an assessment verification file for review. The assessed tax is not recorded in the taxpayers' account at the time of computer assessment. Tax assessment notice is sent to the Collection Section of the VAT department for management review. The Collection Section makes a verification of the computer assessment; particularly to be sure whether or not the taxpayers have submitted their returns for the period for which the computer assessments have been made. The Collection Section cancels the computer assessments in the case of those taxpayers whose return have already been received and accepts other assessments. The Collection Section provides this information to the computer system without any delay. On the receipt of such information, the Computer Section posts the VAT in the taxpayer's account (Le. transfers data from assessment verification file to the taxpayers account). The Computer Section prints computer assessment. The VAT officer signs such computer assessments. If he does not agree with the computer assessment, he makes management assessment by correcting figures printed by the computer. Assessment orders are issued and distributed to the concerned parties.

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Management assessment The tax officers do management assessment when a taxpayer receives updated information after submitting his returns and informs it to the tax officer or in the case of those taxpayers where tax officers find errors during the tax audit. The management assessment process is explained below: The tax officer assesses tax, and determines interest and penalties. The tax officer creates management assessment on a trimester basis in the case of voluntary registrants and monthly basis in case of others. Management assessment must be batched and submitted to the Computer Section. . VAT assessments will only normally extend back four years from the time the taxpayer is given the notice of assessment.

6.14

Collection

VAT administration collects tax dues through the following methods: Tax officers are empowered to recover tax dues from the credit in a VAT debtor's account. . Tax officers also can issue to a third party who is indebted to the VAT debtor a demand for the payment of the money owed by the third party to the VAT debtor. Tax officers are also authorised to suspend the transaction of a VAT debtor. Tax officers also can withhold export/import of VAT debtor. Tax dues also can be realized by seizing and selling the property of the VAT debtor. Tax officers can collect tax arrears within six years of such arrears becoming due.

6.15

Penal provisions
Penal provisions have been made for any non-compliance. For example, a vendor will be required to pay liable tax plus up to Rs.10,000 or a 10 per cent of payable tax, whichever is higher, if he fails to register before the commencement of his business.
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Penalty for non-issuance of invoice is Rs.500 each time whereas the corresponding figure for failure to keep the required information in account is up to Rs. 10,000 each time. Similarly, a taxpayer who has committed fraud or tax evasion will be charged with a penalty not exceeding 100 per cent of the amount of tax, or six months jail, or both.

6.16

Appeals
A taxpayer may file an appeal to the Revenue Tribunal within 35 days against a tax assessment or a penalty order by a tax officer or an order by the Director General relating to the suspension of his place of transaction. Before filing an appeal, the taxpayer must deposit the, disputed amount of the assessed tax due; the rest of the amount of the tax due plus the whole amount of the fine shall have to be deposited or a bank guarantee of the same has to be provided.

6.17

Conclusion
Nepal has adopted a destination-based consumption-type VAT with tax credit mechanism extending right through the retail level. The rate of tax is 10 per cent combined with zero, rate on exports. The exemption list is rather long and the registration threshold is Rs. 2 million (Rs. 200,000 for imports). Taxpayers are required to issue invoices of their supplies and maintain purchase and sales books. The tax period is trimester for voluntary registrants, and one month for others. The VAT Act makes provision for the additional charges as the late payment penalties. The rate of such penalties is 10 per cent of the VAT payable in the first month, an additional 10 per cent in the second month, and then no further action. Late payment penalties are based on one calendar month from the due date. There is also a provision for interest on non-payment. The current rate of interest is 1 5 per cent. VAT is based on the principle of self-assessment. Tax officials, however, can assess VAT when a taxpayer does not submit a return, or submits an incorrect or fraudulent return; Tax officers are authorized to recover tax dues by various means, including retention of tax credit, deduction from debtors, closing the business, and seizing and selling property of the VAT debtors.
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Chapter 7

VAT in Sri Lanka

7.1 Introduction

The Value Added Tax Act (No.14 of 2002) as amended by the (hereinafter referred to as VAT Act) provides for the imposition and collection of a value added tax on goods and services supplied in Sri Lanka or imported into Sri Lanka. It also provides for the abolition of the national security levy and the goods and services tax. It was certified on 26th July, 2002 and came into operation on August 1, 2002

7.2

Imposition of Value Added Tax (VAT)

Chargeability of VAT Section 2 provides for the chargeability of VAT. Accordingly, VAT will be charged at the time of supply, on every taxable supply of goods or services, made in a taxable period, by a registered person in the course of the carrying on, or carrying out, of a taxable activity by such person in Sri Lanka or on the importation of goods into Sri Lanka, by any person. Rate of VAT VAT will be charged at the rate of 10% on the value of such goods or services referred to in the Second Schedule, which is given in the Annexure 1 of this Study. An increased rate of 20% is applicable on the value of all other taxable goods and services. However, the above rates are not applicable to zero rated supplies. Where the consideration is inclusive of VAT, the tax payable is to be calculated on the basis of a tax fraction. For example, if the consideration includes VAT collected at the rate of 10%, the tax fraction applicable would be 1/11. For VAT collected at the rate of 20% forming part of the consideration, the tax fraction would be 1/6. No VAT is collectible in respect of garments sold locally under certain circumstances. The collection of VAT will be deferred in case of tea supplied to a broker in a tea auction for export purposes.

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It is significant to note that VAT on importation of all goods will be treated on par with the customs duty. However, no VAT would be charged on any goods which entered into a customs bonded area, or on any fabric imported by any person for the purpose of manufacture of garments for export, or on any fabric imported by any person, who has registered with the Board of Investment of Sri Lanka as a Trading House for the purpose of manufacture of garments for export through other garment manufacturers, or on any fibre, yarn, grey cloth, finished cloth, chemicals and dyes used for the manufacture of fabric imported by any Fabric manufacturer or on any ship imported on or before 31.12.2002. VAT not to apply on certain wholesale or retail supply of goods Section 3 provides that VAT shall not be charged on the wholesale or retail supply of goods. However, if a manufacturer or an importer of such goods or a supplier who is unable to satisfy the Commissioner-General as to the source from which the goods supplied by him were acquired, supplies these goods on a wholesale or retail basis, VAT would apply. Time of supply of goods Section 4 provides that the supply of goods shall be deemed to have taken place at the time of the occurrence of anyone of the following whichever, occurs earlier :(a) (b) (c) (d) the issue of an invoice by the supplier in respect of the goods; or a payment for the goods including any advance payment received by the supplier; or a payment for the goods is due to the supplier in respect of such supply; or the delivery of the goods have been effected.

Time of supply of services The supply of services shall be deemed to have taken place, at the time, of the occurrence of any of the following whichever, occurs earlier :(a) (b) (c) (d) the service was performed; or a payment is received for the services rendered or for future services; or a payment is due for the services rendered or for future services; or an invoice is issued in respect of the services rendered.

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Supply in the case of instalments/hire purchase In the case of supply of goods on for which the consideration is payable in installments, the supply shall be deemed to take place when the payment is due or when the payment is received, whichever is earlier. Where goods are supplied under a hire purchase agreement, the supply shall be deemed to take place at the time the agreement is entered into. Value of taxable supply of goods or services Under section 5, the value of a taxable supply of goods or services would be determined as follows (a) where the supply is for a consideration in money, then the value would be such consideration less any tax chargeable under this Act. However, such value should not be less than the open market value; where the supply is not for a consideration in money or not wholly in consideration of money, the value would be the open market value of such supply. Where a supply of goods or services is made by an employer, to his employee as a benefit from employment, the consideration in money for the supply shall be the open market value of such supply. However, where the open market value of such supply cannot be ascertained, the consideration in money of such supply shall be the cost of a similar benefit enjoyed by any other employee, as may be determined by the Assessor. Where a supply of services is made under any lottery, or any taxable activity of entering into or negotiating a wagering contract or any business of like nature, the value of such supply shall be the total amount of money receivable in respect of such supply, less the consideration of the prizes or winnings awarded in such lottery, wagering contract, or any business of like nature, as the case may be. The value of the supply of goods under a hire purchase agreement shall be the cash price determined in accordance with the provisions of the Consumer Credit Act, No. 29 of 1982, and shall not be less than the open market value: The value of supply of land and improvements thereon, shall be the value of such supply less the value of land at the time of supply and the value of
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(b)

(c)

(d)

(e)

(f)

any improvements on the land as at March 31, 1998 which shall not be less than the open market value of such supply excluding the value of such land at the time of supply and the value of any improvements on such land as at March 31, 1998. (g) Where goods or services are supplied either on the issue of a ticket or by the deposit of money, the value of such supply shall be the amount paid for such ticket less the tax payable under this Act or the amount deposited less the tax payable under this Act, not being any amount which is refundable, as the case may be. Where any goods supplied under a lease agreement is subsequently transferred to the lessee at the termination of such agreement for a consideration not exceeding ten per centum of the total consideration of the lease agreement, such consideration shall be deemed to be a lease rental recovered under such agreement. Further, where such consideration is more than ten per centum of the total consideration of the lease agreement such supply shall be deemed to be a separate supply. Where the consideration in respect of a supply of goods or services relates to a taxable supply and a supply which is not taxable, the consideration for such taxable supply shall be deemed to be such part of the consideration as is attributable to such taxable supply and shall not be less than the open market value of such taxable supply. Goods may be manufactured or produced or a service may be provided by using other goods or services which may be provided by the supplier or any other person. Such other goods or services shall be deemed to be used in the manufacture or production of goods or the provision of service as the case may be. The value of the supply of the goods so manufactured or produced and the supply of services in connection with such manufacture or production or the supply of the service shall be the open market value or the sum received as consideration for such supply, whichever is higher:

(h)

(i)

(j)

However, where it is proved to the satisfaction of the Assessor that the supply of goods, and the supply of services are two separate supplies, each such supply shall be treated as a separate supply by such Assessor. Value of goods imported Under section 6, the value of goods imported, shall be the aggregate of the value of the goods determined for the purpose of customs duty; and the amount of any
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customs duty payable, in respect of such goods with the addition of any surcharge, cess and any excise duty payable under the Excise (Special Provisions) Act. No.13 of 1989 on such goods. Zero rated goods 1. 2. Under section 7, a supply of goods shall be zero rated where the supplier of such goods has exported such goods; and A supply of services shall be zero rated where the supply of such services are directly connected with (i) (ii) any movable or immovable property outside Sri Lanka; the repair of any foreign ship or aircraft, refurbishment of marine cargo containers or any other goods imported for the purpose of re-export ; a copyright, patent, licence, trade mark or similar intellectual property right, to the extent that such right is for use outside Sri Lanka; the international transportation (including transshipment) of goods or passengers as are specified by the Commissioner-General by a Notification published in the Gazette. computer software development, in respect of software developed by the developer for use wholly outside Sri Lanka, and for which payment is received in foreign currency through a bank if, and only if, documentary evidence is produced to the satisfaction of the Commissioner-General of the supply of such services; client support services provided, on or after April 1, 2001 over the internet or the telephone by an enterprise set up exclusively for the provision of such services to one or more identified clients outside Sri Lanka, for which payment is received in foreign currency, through a bank; any other services consumed outside Sri Lanka to the extent that the payment for such services is received in foreign currency, through a bank in Sri Lanka.

(iii)

(iv)

(v)

(vi)

(vii)

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3.

Where a registered person supplies any goods or services which is zero rated (a) (b) no tax shall be charged in respect of such supply; the supply shall in all other respects be treated as a taxable supply and accordingly the rate at which tax is charged on the supply shall be zero.

Exemption in respect of entries in First Schedule Under section 8, no tax shall be charged on the supply of goods or services and the importation of goods specified in the First Schedule to this Act as such supplies and imports are not taxable unless zero-rated under section 7. Place of supply of goods or services Under section 9, goods or services shall be deemed to be supplied in Sri Lanka where the supplier carries on or carries out a taxable activity in Sri Lanka and the goods are in Sri Lanka at the time of supply or the services are performed in Sri Lanka by the supplier or his agent.

7.3

Registration

Who should register? Under section 10, every person who, on or after August I, 2002 carries on or carries out any taxable activity in Sri Lanka shall be required to be registered under this Act. Conditions (a) Threshold limit for taxable period -

If at the end of any taxable period of one month or three months, as the case may be, the total value of his taxable supplies of goods or services or goods and services made in Sri Lanka in that taxable period has exceeded rupees five hundred thousand (Rs.5 lakhs); or (b) Threshold limit for a year -

If in the twelve months period then ending, the total value of his taxable supplies of goods or services or goods and services made in Sri Lanka has exceeded one

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million and eight hundred thousand rupees (Rs.18 lakhs); or (c) Threshold limit for the next taxable period/year -

If at any time, there are reasonable grounds to believe that the total value of his taxable supplies in Sri Lanka of goods or services or goods and services in the succeeding one month or three months taxable period, as the case may be, is likely to exceed five hundred thousand rupees (Rs.5 lakhs) or in the succeeding twelve months period is likely to exceed one million and eight hundred thousand rupees (Rs.18 lakhs). (d) Exclusion of single isolated transaction -

Where the Commissioner-General is of the opinion that the supply of goods relates to a single isolated transaction, the value of such supply may be excluded in calculating the total value of taxable supplies for the purposes of this section. (e) Application for registration -

Every person who is required to be registered under should make an application for registration in the specified form to the Commissioner-General not later than fifteen days from the date on which he is so liable to be registered. (f) Exclusion of wholesale or retail trade -

For the purpose of this section the total value of taxable supplies shall not include the supplies of any wholesale or retail trading activity excluded from the payment of tax under section 3. Importers of goods to notify Commissioner-General Section 11 provides that every person who is an importer of goods into Sri Lanka should notify the Commissioner-General not later than fourteen days prior to the clearing of such goods that he has imported such goods. He should obtain from the Commissioner General an identification number for the clearing of such goods. However, certain specified categories of persons are exempted from this requirement. Voluntary registration Under section 12, any person who supplies goods or services and carries on or carries out a taxable activity or imports any taxable goods may make an
88

application in the specified form to the Commissioner-General for registration under this Act. The Commissioner-General may refuse registration (i) (ii) after affording the applicant an opportunity of being heard; and having regard to (a) (b) (c) the nature of the business carried on or carried out by such applicant, the value of the taxable supplies made by such applicant in the two preceding taxable periods and the probability that the value of his taxable supplies will not exceed the value referred to in section 10.

Power to call for information For the purpose of registering a person under section 14, Section 13 confers power to the Commissioner-General to call for any information from such person at any time relating to any taxable activity carried on or carried out by such person. Procedure for registration Under section 14, the Commissioner-General shall register a person under the following circumstances (a) (b) (c) where an application has been made by any person for registration under section 10 ; where an application for registration under section 12 has been made and such application has not been refused by the Commissioner-General; or where an application for registration, has not been made but the Commissioner-General is of opinion having regard to the nature of the activities carried on or carried out by such person, that such person is required to be registered under this Act. Such person should be afforded an opportunity of being heard.

Certificate of registration (a) Section 15 provides that the Commissioner-General shall issue to a person registered under this Act upon such registration under section 14 89

(i) (ii) (b)

a tax registration number; and a certificate of registration.

The Certificate of registration shall set out the name and other relevant details of the registered person, the date on which registration comes into effect, and the tax registration number of such person. The person to whom a certificate of registration is issued should display such certificate at a conspicuous place in the place where he carries on or carries out the taxable activity. Copies of such certificate may be displayed in the event of there being more than one place of business. Every registered person who makes an exempt supply specified in the First Schedule shall display the categories of such goods and services supplied by him as given in the First Schedule at each such place of supply. Where any person fails to comply with the above provisions the Commissioner-General may (i) impose on such person a penalty of a sum not exceeding fifty thousand rupees and give notice in writing to such person of the imposition of such penalty; by notice in writing require such person- (a) (b) to pay such penalty; and to comply with the said provisions within such period as may be specified in such notice.

(c)

(d)

(e)

(ii)

(f)

The Commissioner-General may reduce or annul any penalty imposed on any person if such person proves to the satisfaction of the Commissioner-General that his failure to comply with the provisions of subsection (3) or (4) was due to circumstances beyond his control and that he has subsequently complied with such provisions.

Cancellation of registration (a) Under section 16, where a registered person has ceased to carry on or carry out a taxable activity or the total value of his supplies during any taxable period has not exceeded the value set out in section 10, he may make an application to have his registration cancelled at any time after the lapse of a period of twelve months following the date of registration, either under this Act or under the Goods and Services Tax Act No. 34 or 1996.

90

(b)

The Commissioner-General, on receipt of an application made under subsection (1), may at any time, cancel the registration subject to satisfaction of any of the following conditions (i) (ii) (iii) (iv) the applicant or any registered person, as the case may be, has ceased to carry on or carry out a taxable activity; or that the total value of his taxable supplies does not exceed the value referred to in section 10; or the facilities under the Customs Ordinance in respect of him have been suspended by the Director-General of Customs; or that the continuation of such registration may impede the protection of revenue.

(c)

The Commissioner-General may refuse to cancel the registration of any person where he is of the opinion that such person has not ceased to carry on or carry out a taxable activity or that it is necessary and expedient to continue with his registration for the protection of revenue. Where the Commissioner-General cancels the registration of a registered person he shall inform such person of the date of cancellation of the registration by registered post. With effect from the date of cancellation of the registration, any goods or services then forming part of the assets of a taxable activity carried on or carried out by that person shall be, deemed to be supplied by that person in the course of carrying on or carrying out a taxable activity at a time immediately prior to the date of cancellation, unless the taxable activity (inclusive of all such assets) is carried on or carried out by another person, who is a registered person.

(d)

(e)

Registered person to return certificate of cancellation (a) Under section 17, where the registration of a registered person has been cancelled by the Commissioner-General, such person shall return to the Commissioner-General the certificate of registration issued to him not later than fourteen days from the last day of the last taxable period during which the registration was valid. Such person should not display in any place where such taxable activities were carried on or carried out, the certificate of registration or a copy thereof.

(b)

91

(c) (d)

Such person should not issue any tax invoice, tax debit note or tax credit note as the case may be. Where any person fails to comply with the above provisions, the Commissioner-General may (i) impose on such person a penalty of a sum not exceeding fifty thousand rupees, and give notice in writing to such person of the imposition of such penalty; by notice in writing require such person to pay such penalty and comply with the provisions of this section within such period as may be specified in such notice.

(ii)

(e)

The Commissioner-General may reduce, or annul any penalty imposed on any person under this section if such person proves to the satisfaction of the Commissioner-General that his failure to comply with the provisions was due to circumstances beyond his control and that he has subsequently complied with such provisions.

Liability of a registered person Under section 18, notwithstanding the cancellation of registration under section 16, a registered person shall be liable for any act done or omitted to be done while he remained a registered person in respect of the taxable supplies made by such person under this Act or under the Goods and Services Tax Act, No. 34 of 1996. Notification of change Every registered person shall notify the Commissioner-General in writing of any change (a) (b) (c) (d) in the name, address and place at which any taxable activity is carried on or carried out by such person; in the nature of the taxable activity carried on or carried out by such person; in the person authorized to sign returns and other documents; and in ownership of the taxable activity,

not later than fourteen days after the occurrence of the change.

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Tax invoice (Section 20) Issuance of tax invoice - A registered person who makes a taxable supply shall issue to the person to whom such supply is made, a tax invoice within twenty eight days after the time of such supply. However, the person to whom the supply is made has to make a written request for issuance of a tax invoice within fourteen days from the time of supply stating that he is a registered person under this Act or is deemed to be a registered person under this Act. Contents of tax invoice - The tax invoice should set out the following (a) (b) (c) (d) (e) (f) (g) the name, address and the registration number of the supplier; the name and address of the person to whom the supply was made; the date on which the tax invoice was issued and its serial number; the date of supply and the description of the goods or services; the quantity or volume of the supply; the value of the supply, the tax charged and the consideration for the supply; and the words "TAX INVOICE" at a conspicuous place in such invoice.

Customs goods declaration to be treated as tax invoice - Where goods have been imported into Sri Lanka, the customs goods declaration or any other document authenticated by the Director-General of Customs shall he treated as a tax invoice under this Act. Any customs goods declaration or any other document authenticated by the Director-General of Customs and issued under the Goods and Services Tax Act, No. 34 of 1996 prior to August 1, 2002 shall also be treated as a tax invoice. Copy of tax invoice to be retained by supplier- The original of the tax invoice shall be issued to the person to whom the supply was made and the duplicate of such invoice shall be retained by the person who makes such supply for a period of five years after the expiry of the taxable period in which such invoice was issued. Issue of duplicate tax invoice - It shall not be lawful to issue more than one tax invoice for each supply. If a registered person claims to have lost the original tax invoice the person who makes the supply may issue to such registered person a copy clearly marked "copy only". Where recipient is an unregistered person - Where a registered person makes a taxable supply and the recipient of such supply is not a registered person such supplier shall issue an invoice giving the total consideration of such supply
93

including the tax charged. Where the supplier has not kept adequate records on such supplies covered by such invoices all such supplies shall be considered as supplies made under the standard rate or tax. An invoice issued under this subsection shall not be considered as a tax invoice for the purposes of this Act. Exception Supply to Government agencies etc. However, a tax invoice shall be issued by such registered person who makes such taxable supply to any Government institution, Provincial Council, Local Government institution, or any public corporation, for any taxable supply made to such institution, Council or such corporation, as the case may be, whether or not such institution, Council or corporation is registered under this Act. Consequences of contravention Any person who contravenes the provisions of sub-section (1) shall be guilty of an offence and shall be liable on conviction, after summary trial before a Magistrate, to a fine not less than Rs.25,000 and not exceeding Rs.2,50,000. In case of continuing offence after conviction, to a fine of Rs.500 for each day thereof. Closure of business Where any person convicted of an offence continues to commit such offence beyond a period of fourteen days from the date of his conviction, the court may order the closure of such business upon an application for closure of the business being made by the Commissioner-General or any authorized officer. Non-compliance with the order for closure Where a person fails to comply with the closure order issued under sub-section (8), the Magistrate shall forthwith order the fiscal of the court or any police officer authorized by him to close the business. Such order shall be sufficient authority for the said fiscal or any police officer authorized by him in that behalf to enter the premises in which the business is carried on or carried out with such assistants as the fiscal or such police officer shall deem necessary to close such business.

7.4

Returns and calculation of tax

Return (Section 21) Time limit for furnishing of return Every registered person shall furnish to the Commissioner-General not later than the last day of the month after the expiry of each taxable period, a return of his
94

supplies during that taxable period, Every such return should be in the specified form and should contain all such particulars as may be required to be set out in such form. Notice to an unregistered person An Assessor may, by notice in writing, require any person who is not a registered person but in his judgment is a person chargeable with tax, to furnish, a return in the specified form within the time specified in such notice. Notice to get information The Assessor can issue notice to any person for obtaining full and relevant information in respect of the supply of goods or services made by any person and also to ensure attendance for the purpose of being examined regarding the taxable activity carried on or carried out by that person. Under section 21(5), for the purposes of this Act, a Deputy Commissioner may also issue similar notice. Retention of documents A Deputy Commissioner or an Assessor with the approval of a Deputy commissioner can retain books of accounts, documents in order to very the entries therein. Inadequate return/information The Assessor, in case he feels that the return or information furnished is inadequate, can issue a notice to get comprehensive information or return. Consequences of non-compliance Where any person fails to file a return or furnish the relevant information either by himself or in response to a notice issued to him he is liable to pay a penalty not exceeding Rs.50,000 as imposed by the Commissioner-General. He may also be required to furnish the relevant return. Condoning payment of penalty The Commissioner-General can reduce or annul any penalty imposed on any person if such person proves to the satisfaction of the Commissioner-General that his failure to comply with the relevant provisions was due to circumstances beyond
95

his control and that he has subsequently complied with such provisions or directions. Prosecution In cases where the Commissioner-General does not impose a penalty, every person who has contravened the relevant provisions would be guilty of an offence under this Act and would be liable to a fine not exceeding Rs.50,000 or an imprisonment of either description for a term not exceeding six months or both. Credit for input tax against output tax (Section 22) A registered person shall, in respect of any taxable supply made by him, account for and pay the tax by reference to such taxable period at such time and in such manner as may be specified in this Act. A registered person shall be entitled, at end of each such period, to the credit for so much of his input tax as is allowable under this Act. This input tax can be deducted from any output tax that is due from him. However, any person adopting a payment basis of accounting shall be entitled to claim credit on so much of his input tax as is allowable under this Act, only in respect of a supply for which the payment of the tax has been made by such person. Where a supply of goods or services received by a registered person, or goods imported by such person are used or are to be used partly for the purposes of a taxable activity and partly for other purposes, only so much of the tax on such supplies or importation as is referable to his taxable activity shall be counted as his input tax. However, in the case of a person providing leasing facilities under the Finance Leasing Act. No. 56 of 2000, the input tax on goods supplied under a leasing agreement for a period less than three years shall be counted at the rate of ten per centum or less, even if the tax charged on such goods is more than ten per centum. Where any return is furnished and if at the end of any taxable period to which the return relates, the amount of the input tax exceeds the amount of the output tax, the excess of the input tax shall, subject to the provisions of section 58 be refunded.

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Where such excess is not so refunded, the Commissioner-General shall pay interest at the rates prescribed under section 59 on such amount, for the period commencing on the expiration of two months from the end of the taxable period in which such refund became due and ending on the date of the refund. Where an unregistered person leases out his land and buildings in terms of a tenancy agreement, to a registered person, such registered person would be entitled to claim input tax for the expenses incurred by him in connection with the services provided on such land for the duration of such tenancy agreement on providing sufficient evidence to the satisfaction of the Commissioner-General. Such evidence should establish the existence of a tenancy agreement in respect of such land and building. It is significant to note that this benefit is available to the lessee, being a registered person, even if the lessor, being an unregistered person (i.e. lessor) is not entitled to claim any input tax. Any input tax attributable to the supply: of goods or services received shall not be deducted under sub-section (2) in respect of the following:(i) if the supply is in respect of motor vehicles other than motor cycles, bicycles, motor coaches provided by an employer for the transportation of his employees, motor vehicles used for excursion tours, or for the transportation of tourists or transportation of goods or hiring cars, or motor vehicle forming part of any stock in trade of any taxable, activity; if the supply of goods or services received is not connected with the taxable activity; if the supply of goods or services received is not supported by (a) (b) a valid tax invoice; or a custom's goods declaration or other authenticated document issued by the Director-General of Customs' under this Act or under the Goods and Services Tax Act, No. 34 of 1996,

(ii) (iii)

and received within twelve months from the end of the relevant taxable period in respect of which such tax invoice was issued or from the date of importation goods, as the case may be; (iv) if the input tax on such tax invoice or customs goods declaration, as the case may be, has not been deducted from the output tax for any taxable period ending before the lapse of six months from the last day of the taxable period in which such tax invoice or customs goods declaration was received;
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However, any registered person who has obtained a licence under the Electricity Act and engages in the distribution of electricity may be allowed input tax on the purchase of electricity for such distribution. Where input tax disallowed in respect of any motor vehicle referred to in paragraph (i) may be allowed up to a limit of fifty percent of such input tax for any taxable period commencing on or after January 1, 2003, subject to the provisions of subsection (3), where such vehicle is partly or wholly used in any taxable activity. Any refund in excess of the amount due, or any excess amount or input tax claimed under this Act or the Goods or Services Tax Act No. 34 of 1996 shall be assessed by an Assessor on the registered person to whom the refund has been made or making such claim, as the case may be, and such amount shall be deemed to be a tax in default on the first day of the taxable period in which the excess of input tax first arose. For this purpose, input tax claimed in a return by the persons mentioned hereunder shall be deemed to be an excess amount of input tax claimed by such person. (a) (b) Any person who has not commenced any commercial operation within or on completion of the project implementation period Any person who has obtained approval under subsection (7) or sub-section (6) of section 22 of the Goods and Services Tax Act, No.34 of 1996 and has not commenced business of making taxable supplies as stated in the undertaking given by such person prior to obtaining such approval,

Accounting basis (Section 23) Section 23 provides that every registered person shall account for tax on an invoice basis. However, the Commissioner-General may direct such person to account for tax on a payment basis on such conditions as may be specified by him on an application made in that behalf by a registered person. Bad debts (Section 24) In ascertaining the amount of tax payable in any taxable period, there shall be deducted an amount of tax corresponding to any bad debt incurred in the taxable activity of a registered person on a debt created on or after April 1, 1998 and which has become bad during such taxable period. The amount of tax deductible shall

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not exceed the amount paid as tax in a previous taxable period in respect of the bad debt, which is to be written off: However, where any amount written off as bad debt before or after the commencement of this Act is received in any taxable period by that person, then, notwithstanding the provisions of section 33, the amount received shall be treated as a taxable supply during the taxable period under this Act or the Goods and Services Tax Act, No. 34 of 1996 in which it was received and shall be liable to tax: Further, where any amount of tax corresponding to a bad debt has been deducted by any person, the amount so deducted shall be an output tax for the corresponding period of the person in respect of whom the bad debt was incurred, if he is a registered person. Adjustment of tax by credit or debit note (Section 25) Where a registered person has issued a tax invoice and accounted for an incorrect amount of tax by undercharging or overcharging tax on a supply made to another person, he shall be entitled to issue to such other person, a tax debit note or a tax credit note, as the case may be, for the purpose of adjusting the amount of tax so undercharged or overcharged. Upon the issue of the tax debit note or tax credit note, as the case may be, in respect of a supply and in relation to the period in which such note was issued (a) the supplier should (i) pay as output tax, such amount of the tax chargeable in respect of the supply as is in excess of the amount that was accounted for; or deduct as input tax, such amount accounted for as output tax as exceeds the amount of tax chargeable; and

(ii) (b)

the person, being a registered person, to whom the supply was made should (i) pay as output tax, such amount of the tax deducted by him as input tax, as exceeds the proper amount that should have been deducted; or deduct as input tax, such amount deductible as exceeds the actual amount deducted by him.

(ii)

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Imposition of Value Added Tax on the supply of financial services by specified institutions Charge of VAT on the supply of the financial services by specified institutions (Section 25A) A Value Added Tax would be charged with effect from January I, 2003, on the supply of financial services in Sri Lanka, made by any specified institution, which carries on a business of supplying such financial services. Every specified institution, carrying on the business of supplying any financial service in Sri Lanka, should be registered if the value of such supply for a period of three months exceeds Rs.5,00,000 or for a period of twelve months exceeds Rs.18,00,000, as the case may be. Every specified institution required to be registered shall make an application for registration in the specified form to the Commissioner-General not later than ten days from the date of commencement of this Act. However any institution registered under this Act and which is a specified institution within the meaning of this Chapter, shall be deemed for all purposes to be a registered specified institution. The Commissioner General can issue, upon registration, to such registered specified institution (a) (b) a tax registration number; and a certificate of registration:

Monthly taxable period (Section 25B) The taxable period of every registered specified institution shall be one month and a return in the form specified shall be furnished for each month before the end of the following month. Calculation of tax (Section 25C) Every registered specified institution under this Chapter shall be liable to tax for each taxable period on its total value addition of such institution which includes the net profit or loss, as the case may be, before payment of income tax on such profit computed in accordance with the accepted accounting standards, subject to an adjustment for economic depreciation, determined by the Minister having regard to
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the interest of the economy by order published in the Gazette, and the emoluments payable to all the employees of such institution: However, where the amount of profits for each taxable period cannot be accurately ascertained, such amount may be estimated on the basis of available information. The estimated amounts shall be adjusted to reflect the actual amount on half yearly basis. Emoluments paid to all the employees shall include(a) in the case of "specified employees" under Chapter XIV of the Inland Revenue Act, No.38 ,of 2000, the gross remuneration payable to such employees and reflected in the pay sheet maintained under the Inland Revenue Act; and in the case of an employee other than a "specified employee", the gross remuneration paid to such employee reflected in the pay sheet maintained under sub-section (2).

(b)

Every registered specified institution shall maintain a pay sheet in respect every employee, other than a specified employee, in the manner set out by the Commissioner General under section 110 of the Inland Revenue Act, No. 38 of 2000. The amount of tax payable for each month shall be ten per centum of the value additions specified in subsection (1). Tax credit (Section 25D) Section 25D provides that where any registered specified institution has paid any tax under any other provision of this Act, other than this Chapter, a tax credit shall be allowed on an amount equal to such tax paid against the tax payable under this Chapter. This provision is applicable where in the opinion of the Commissioner-General there is no material difference in the recognition of receipts of such institution for the calculation of profits for the purposes of this Chapter and for the purposes of the calculation of taxable supplies under any other provisions of this Act: However, only fifty per centum of any such tax paid under any other provision of this Act other than under this Chapter, in relation to tax calculated as provided in section 22 at the standard rate shall be deducted against the tax payable under this Chapter.

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Meaning of Supply of financial services According to section 25F supply of financial services means (a) (b) (c) (d) the operation of any current, deposit or savings account; the exchange of currency; the issue, payment, collection or transfer of ownership of any note, order for payment, cheque or letter of credit; the issue, allotment, transfer of ownership, drawing, acceptance or endorsement of any debt, security, being any interest in or right to be paid money owing by any person;(???) the issue, allotment, transfer of ownership of any equity security or a participatory security; underwriting or sub-underwriting the issue of any equity security, debt security or participatory security; the provision of any loan, advance or credit; the provision (i) of the facility of installment credit finance in a hire purchase conditional sale or credit sale agreement for which facility a separate charge is made and disclosed to the person to whom the supply is made; of goods under any hire purchase agreement or conditional sale which have been used in Sri Lanka for a-period not less than twelve months as at the date of such agreement;

(e) (f) (g) (h)

(ii)

Specified institution means(a) (b) (c) a licenced commercial bank within the meaning of the Banking Act, No. 30 of 1988; a finance company registered under the No. 78 of 1988 ; Finance Companies Act,

a licenced specialized bank within the meaning of the Banking Act, No. 30 of 1988.

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Payment of tax (Section 26) The tax in respect of any taxable period should be paid not later than the last day of the month following the end of that taxable period. Any tax not so paid shall be deemed to be in default and the person by whom such tax is payable or where any tax is payable by more then one person, each such person shall be deemed to be a defaulter for the purposes of this Act. The Commissioner-General has powers to defer the due date for the payment of tax in certain cases, under an appeal against such assessment where (a) (b) a request in writing has been made to the Commissioner-General for a deferment; and it has been proved to the satisfaction of the Commissioner-General that the tax due on the alleged supplies on which the assessment has been made has not been charged by such person:

However, such deferred tax or part thereof shall become payable on the settlement of the appeal or withdrawal of the deferment by the Commissioner-General, and shall be deemed to be tax in default from the original due date of such tax. Penalty for default (Section 27) Section 27(1) provides that where any tax is in default, the defaulter shall, in addition to such tax in default pay as penalty (a) (b) a sum equivalent to ten per centum of the amount in default; and where the amount in default is not paid before the last day of the month succeeding the first month in which such tax was in default, a further sum, equivalent to two per centum of the amount in default in respect of each period ending on the last day of each succeeding month or part of such period during which it is in default.

However, the total amount payable as penalty under this sub-section shall in no case exceed one hundred per centum of the tax in default and any such amount may be waived or reduced if the Commissioner-General is satisfied that the reasons for default are just and equitable. If there is any change in the amount of tax due on determination of an appeal, the penalty has to be calculated on the revised amount.

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7.6

Assessment of tax

Power of Assessor to make an assessment (Section 28) The Assessor shall assess the amount of the tax which, in the judgment of the Assessor, ought to have paid for that taxable period and shall, by notice in writing, require the persons mentioned hereunder in the circumstances mentioned therein, to pay such amount forthwith (a) (b) (c) any registered person, who, in the opinion of the Assessor is chargeable to tax, but fails to furnish a return for any taxable period; or any registered person chargeable to tax, who furnishes a return in respect of any taxable period but fails to pay tax for that taxable period; or any person requesting the Commissioner-General in writing to make any alteration or addition to any return furnished by such person for any taxable period.

The amount so assessed in respect of any person for a taxable period shall be deemed to be the amount of the tax payable by him for that taxable period. Assessor to state reason for non-acceptance of a return (Section 29) Where an Assessor does not accept a return furnished by any person under section 21 for any taxable period and makes an assessment or an additional assessment on such person for such taxable period under section 28 or under section 31, as the case may be, the Assessor shall communicate to such person by registered letter sent through the post as to why he is not accepting the return. Power of assessor to determine open market value (Section 30) The Assessor can determine the open market value of a taxable supply, if is of the opinion (a) (b) that a registered person has made a taxable supply for a value less than the open market value of such supply or for no value; or the transaction, in respect of which the taxable supply has been made, is between two associated persons,

The Assessor should determine the open market value of such supply having regard to the circumstance of the transaction and the time of supply.
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Additional assessment (Section 31) Where it appears to an Assessor that a person chargeable with tax has paid tax which is lower than the tax payable by him for that taxable period, or chargeable from him for that taxable period, he may assess such person at the additional amount at which, according to the judgment of such Assessor, tax ought to have been paid by such person. The Assessor shall give such person notice of the assessment. The amount so assessed shall be deemed to be tax in default for that taxable period and accordingly such person shall, from the date on which such person ought to have paid the tax for that taxable period be liable to the penalty in respect of such amount. Evidence of returns and assessment (Section 32) The production of any document under the hand of the Commissioner-General purporting to be a copy of or extract from any return or assessment made under this Act shall be admissible in all courts and shall be sufficient evidence of the original. Limitation of time for assessment or additional assessment (Section 33) Section 33 provides that where any registered person has furnished a return under section 21(1) in respect of a taxable period or has been assessed for tax in respect of any period, it shall not be lawful for the Assessor to make an assessment or additional assessment, after the expiry of three years from the end of the taxable period in respect of which the return is furnished, or the assessment is made, as the case may be. However, where the Assessor is of the opinion that a person has willfully or fraudulently failed to make a full and true disclosure of all the material facts necessary to determine the amount of tax payable by him for any taxable period, it shall be lawful for the Assessor to make an assessment or additional assessment, within a period of five years from the end of the taxable period to which the assessment relates. Definitions The definitions of the terms used in the Act is given in section 83 of the Act (i) "Associated persons" means

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(a)

any two or more companies which consist of the same shareholders or are managed and controlled by the same Directors; or any company and any shareholder, where such shareholder or the spouse or child of such shareholder or any trustee of such shareholder or any trustee of the spouse or the child of such shareholder hold jointly or severally twenty- five per centum or more of the paid up capital or twenty -five per centum or more of the nominal value of the allotted shares of that company; or any two individuals one of whom is the spouse or child of the other or is a trustee for such spouse or child; or a partnership and an individual where such individual is related to any partner of such partnership; or a joint venture and any person who is related to a member of such joint venture; or any two persons one of whom is a trustee for the other; any two individuals related to each other; or any two or more persons carrying on any activity separately or jointly which has resulted in the supply of identical goods or services which cannot be produced by any other person or persons.

(b)

(c) (d) (e) (f) (g) (h)

(ii)

"body of persons" means any body corporate or unincorporate, provincial Council, local authority, any fraternity, fellowship, association or society of persons, whether corporate or unincorporate, any partnership, and includes any Government department or any undertaking of the Government of Sri Lanka or any co-ownership of immovable property. "books" shall not include diaries, cheque books, exercise books or ledger books; "Commissioner-General" means the Commissioner-General of Inland Revenue appointed under the Inland Revenue Act, No. 38 of 2000 and includes a Commissioner and a Deputy Commissioner specially authorized by the Commissioner-General either generally or for a specific purpose to act on behalf of the Commissioner-General; "Company" means any company incorporated or registered under any

(iii) (iv)

(v)

106

law in force in Sri Lanka or elsewhere; "customs bonded area" means (a) (b) (c) a bonded warehouse approved under section 69 of Customs Ordinance; a bonded warehouse approved under section 84A of Customs Ordinance; a warehouse of the Republic as defined in section 167 of Customs Ordinance;

(d) a Free Trade Zone declared 'by the Board of Investment of Sri Lanka which is subject to monitoring by the Department of Customs. (vi) "Construction contractor or sub contractor" means any person who has entered into a contract with another person and provides services in Sri Lanka in constructing of a building, road, bridge, water supply systems, drainage systems, sewerage systems, electricity generation or transmission system or any other infrastructure for that other person. "Director" means a director as defined in the Companies Act, No. 17 of 1982 and includes a working director; "Educational establishment" means (a) a higher educational institution established under the Universities Act No.16 of 1978 or the Buddhist and Pali University Act No. 74 of 1981 ; any recognized institution providing vocational training or training for persons engaged in any trade, profession, or employment and includes an incorporated examination body;

(vii) (viii)

(b)

(ix)

"Educational services" means the provision of services by any educational establishment in relation to education, vocational training or retraining; "executor" includes an administrator; "goods" means all kinds of movable or immovable property but does not include (a) (b) money; computer software made to customers special requirements either as unique programme or adaptation for standard
107

(x) (xi)

programme, inter company information data and accounts, enhancement and update of existing specific programmes, enhancement and update of existing normalized programmes supplied under contractual obligation lo customers who have bought the original programme or where the value of contents separately identifiable in a software such vale of contents; (xii) (xiii) "incapacitated person" means any minor, lunatic, idiot or person of unsound mind; "importation" includes the bringing into Sri Lanka of goods from outside Sri Lanka by any person or goods received from a custom bonded area the purchase of goods on a sale by the Director-General of Customs, the Sri Lanka Ports Authority or the Commissioner-General, for the levy of the tax and other dues; "input tax" in relation to a registered person, means (a) the tax charged by another registered person on any goods or services to be used by such registered person in carrying on or carrying out a taxable activity; the tax paid by him or tax deferred under the proviso to subsection (3) of section 2, on the importation or purchase of goods or purchase of services which arc used by such person for the purpose of making taxable supplies under this Act or Goods and Services Tax Act, No. 34 of 1996.

(xiv)

(b)

(xv)

"international transportation" means any service directly related to the transportation of goods or passengers (a) (b) from a place in Sri Lanka to a place out side Sri Lanka; from a place outside Sri Lanka to a place in Sri Lanka up to the point of landing unless such services are carried out under a specified carriage contract according to the Documents of carriage issued by a freight forwarder who is registered with the Central Bank of Sri Lanka. from a place outside Sri Lanka to another place outside Sri Lanka.

(c) (xvi)

"manufacture" means the making of an article, the assembling or joining of an article by whatever process, adapting for sale any article, packaging, bottling, putting into boxes, cutting, cleaning, polishing,
108

wrapping, labeling or in any other way preparing an article for sale other than in a wholesale or retail activity; (xvii) "output tax", in relation to any registered person, means the tax chargeable in respect of the supply of goods and services made or deemed to be made by such person under this Act or Goods and Services Tax Act ,No. 34 of 1996. "open market value" in relation to the value of a supply of goods or services at any date means, the consideration in money less any tax charged under this Act, which a similar supply would generally fetch if supplied in similar circumstance at that date in Sri Lanka, being a supply freely offered and made between persons who are not associated persons. "person" includes a company, or body of persons; "standard rate" means the rate specified under subsection (I) of section 2, applicable to the supply of taxable goods and services other than such supplies of goods and services and imports specified in the Second Schedule; "supply of goods" means the passing of exclusive ownership of goods to another as the owner of such goods or under the authority of any written law and includes the sale of goods by public auction, the transfer of goods under a hire purchase agreement, the sale of goods in satisfaction of a debt and the transfer of goods from a taxable activity to a non-taxable activity. "supply of services" means any supply which is not a supply of goods but includes any loss incurred in taxable activity for which an indemnity is due. "supplier", in relation to any supply of goods and services, means the person making the supply; "taxable period" means (a) a period of one month. (i) where the value of taxable supplies of any person has exceeded thirty million rupees during the preceding twelve months; or where the value of taxable supplies of any person for the period of the succeeding twelve months is estimated to exceed thirty million rupees; or
109

(xviii)

(xix) (xx)

(xxi)

(xxii)

(xxiii) (xxiv)

(ii) (iii)

where any person makes zero rated supplies; where any person has entered into an agreement with the Board of Investment of Sri Lanka referred to in items (XXVII) or (XXVIII) of the Schedule to the Goods and Services Tax Act No. 34 of 1996 prior to April 1, 2001, during the project implementation period; where any person has commenced a business or started a project and undertakes to comply with the requirements of sub-section (7) of section 22 under this Act or subsection (6) of section 22 under this Act or Goods and Services tax Act, No. 34 of 1996. where any person has entered into any such agreement with the Board of Investment of Sri Lanka, as referred to in item (XXVIII) of the Schedule to the Goods and Services Tax Act, No. 34 of ] 996 and such person could not commence making taxable supplies under the project to which the agreement relates, by March 31, 2001.

(iv)

(v)

(b)

a period of three months commencing respectively on the first day of January, the first day of April, the first day of July and the first day of October of each year in respect of a registered person who is not referred to in paragraph (a) or who opts to submit quarterly returns on the approval by the Commissioner-General,

(xxv)

"Taxable activity" means (a) any activity carried on as a business, trade, profession or vocation other than in the course of employment or every adventure or concern in the nature of a trade; the provision of facilities to its members or others for a consideration and the payment of subscription in the case of a club, association or organization; anything done in connection with the commencement or cessation of any activity or provision of facilities referred to in (a) or (b); the hiring, or leasing of any movable property or the renting or

(b)

(c)

(d)

110

leasing of immovable property or the administration of any property; (e) the exploitation of any intangible property such as patents, copyrights or other similar assets where such asset is registered in Sri Lanka or the owner of such asset is domiciled in Sri Lanka.

(xxvi)

"Taxable supply" means any supply of goods or services made or deemed to be made in Sri Lanka which is chargeable with tax under this Act and includes a supply charged at the rate of zero percent other than an exempt supply.

111

ANNEXURE I
First Schedule (i) The supply or import of (a) unprocessed agricultural products other than, potatoes, onions, chillies, all other grains (other than rice and paddy) and planting material; unprocessed horticultural products; unprocessed animal husbandry products other (than any variety of meat and live birds. including day old chicks; unprocessed fishing products; unprocessed forestry products other than timber, (i) (ii) (iii) (iv) Cardamom, cinnamon, cloves, nutmeg, pepper, desiccated coconuts, rubber, paddy and seed paddy; The supply or import of rice, rice flour, wheat, wheat flour and eggs The supply or import of bread of any description; The supply or import of liquid milk (not made out of powdered milk or any grain) and infants powdered milk; The-supply or import of air crafts, helicopters and temporary import of any plant, machinery, equipment which are re-exported with twelve months from the date of such import; The supply of educational services by an educational establishment or government schools or schools funded by the government; The supply or import of any books other than chequebooks, periodicals, magazines, news papers, diaries, ledger books or exercise books; The supply or import of kerosene, bunkerfuel and aviation fuel;
112

(b) (c) (d) (e)

(v)

(vi)

(vii)

(viii)

(ix) (x) (xi)

The supply of public library services by the Government, a Provincial Councilor a local authority; The supply or import of crude petroleum oil; The supply of the following financial services : (a) (b) (c) the operation of any current, deposit or savings account; the exchange of currency; the issue, payment, collection or transfer of ownership of any note, order for payment, cheque or letter of credit; . the issue, allotment, transfer of ownership, drawing, acceptance or endorsement of any debt security, being any interest in or right to be paid money owing by any person; the issue, allotment, transfer of' ownership of any equity security or a participatory security; underwriting or sub -underwriting the issue of an equity security, debt security or participatory security; the provision of' any loan, advance or credit; the provision (a) of the facility of instalment credit finance in a hire purchase conditional sale or credit sale agreement for which facility a separate charge is made and disclosed to the person to whom the supply is made; (b) of goods under any hire purchase agreement or conditional sale agreement which have been used in Sri Lanka for a period not less than twelve months as at the date of such agreement; (i) life insurance, 'Agrahara' Insurance and crop and livestock insurance;

(d)

(e) (f)

(g) (h)

113

(xii)

The import or supply of goods and services to the mission of any State or any organization to which the provisions of the Diplomatic Privileges Act, No.9 of 1996 applies, or to any diplomatic personnel of such mission or organization, or entitled to these benefits provided that reciprocal benefits are available to their counterparts from Sri Lanka and identified as such by the Commissioner - General, including the import under a temporary admission carnet for re-export. Such identifications under Goods and Services Tax Act, No. 34 of 1996 will be remained valid under this Act. The import and supply of goods at duty free shops for payment in foreign currency; The import or supply of unused postage or revenue stamps of the Government of the Democratic Socialist Republic of Sri Lanka or of a Provincial Council; The import of any article entitled to duty free clearance under the Passenger's Baggage (Exemptions) Regulations made under section 107 of the Customs Ordinance, or any article cleared duty free re-importation certificate as provided in Schedule A under the Customs Ordinance, or any article cleared ex-bond for use as ship stores; The import of goods by any organisation approved by the Minister, where he is satisfied that such goods are gifts from persons or organisaitons abroad or the supply of goods directly funded by any foreign organisaiton for the relief of sudden distress caused by natural or human disasters. The supply of public passenger transport services (other than air or water transport or transport of tourists by way of excursion tours or taxi services) or the provision of leasing facilities for such motor coaches with seating capacity not less than twenty eight passenger scats and used for such public passenger transport. The supply of electricity no exceeding 30 kwh per consumer as defined under the Electricity Act (Chapter 205) per month; The import by any person who has entered into an agreement (a) prior to May 16. ] 996; or
114

(xiii) (xiv)

(xv)

(xvi)

(xvii)

(xviii) (xix)

(b)

prior to April 1, 1998 in respect of a project the total cost of which is not less than Rs.500 Million.

with the Board of Investment of Sri Lanka under section 17 of Board of Investment of Sri Lanka Law. No.4 of 1978, of any article which is prescribed as a project related article to be utilized in the project specified in the agreement during the project implementation period of such project as specified in such agreement or up to the date of completion of such project, which ever is earlier; (xx) The import by any person who has entered into an agreement with the Board of investment of Sri Lanka under section 17 of Board of Investment of Sri Lanka Law No.4 of 1978 of any article which is prescribed as a project related article to be utilized in the project specified in the agreement, who will be making only exempt supplies after completion of the project (a) (b) (xxi) (xxii) for a period of two years from August 1, 2002 ; or until the completion of the project which ever is earlier.

The supply of services at a restaurant situated beyond the immigration counter at the Bandaranaike International Air Port; The supply of services by a person in Sri Lanka to another person to be consumed or utilized by such other person outside Sri Lanka, where the payment is made in rupees; The supply, lease or rent of residential accommodation other than the supply, lease or rent of residential accommodation by an enterprise which has entered into an agreement with the Board of Investment of Sri Lanka, under section 17 of the Board of Investment of Sri Lanka Law, No 4 of 1978, on or after April I, 2001 and the total cost of the projects which such agreement relates is not less than ten million United States of America dollars or its equivalent in any other currency and the project relates exclusively to the aforesaid supply, lease or rental; The supply of all health care services provided by medical institutions or professionally qualified persons providing such care, other than the supply of health care services by a medical institution which has entered in to an agreement with the Board of Investment of Sri Lanka under section 17 of the Board of
115

(xxiii)

(xxiv)

Investment of Sri Lanka Law No.4 of 1978, on or after April J.. 200 I and the total cost of the project to which such agreement relates is not less than ten million United States of America dollars or its equivalent in any other currency; (xxv) The supply or import of pearls, diamonds, natural or synthetic precious or semi-precious stones, diamond powder, precious metals or metals clad with precious metal, and gold coins; The supply or import of artificial limbs, crutches, hearing aids, accessories for such aids or other appliances which are worn or carried or implanted in the human body to compensate for a defect or disability;

(xxvii)

(xxviii) The supply or import of wheel chairs, prepared culture media for development of micro organisms, diagnostic or laboratory reagents, surgical gloves, contact lenses, X-ray tubes, white canes for the blind and Braille typewriters and parts; (xxix) The supply of services in relation to burials and cremations by the government, a Provincial Council, a local authority or any other person; The supply of free or subsidized meals by an employer to his employees at their places of work; The supply of transport free or at a subsidized rate by an employer to his employees using a vehicle on which the input tax has been disallowed or a motor coach provided by such employer to transport employees to and from their homes and their place of work; The import of personal items and samples in relation to business worth not more than Rupees 10,000/- through parcel post or courier.

(xxx) (xxxi)

(xxxii)

(xxxiii) The supply or import of pharmaceutical products (other than cosmetics) and raw materials for such products; (xxxiv) The supply or import of ayurvedic preparations which belong to the Ayurveda pharmacopoeia or Ayurveda preparations (other than cosmetic preparations) or unani, siddha or homeopathic preparations (other than cosmetic preparations) and raw materials for such preparations.

116

(xxxv)

The supply or import of agriculture tractors;

(xxxvi) The supply or import of agricultural machinery.

117

ANNEXURE II
Second Schedule (i) The supply of electricity exceeding 30 kwh per consumer as defined under the Electricity Act, (Chapter 205) per month, and the supply of electricity in bulk to the national grid; The supply of services by construction contractors sub-contractors; or

(ii) (iii) (iv)

The supply of services by hotels, guest houses, restaurants or similar institutions and travel agents in relation to inbound tours; The supply of cinematic films, other than video films, other produced in Sri Lanka or imported into Sri Lanka import of such films, exhibition of such films and theatrical productions; The supply of educational services other than services referred to in item (vi) of the First Schedule; The supply or import of coconut poonac, prawn feed, and poultry feed. The supply or import of tea, coconut oil, potatoes, onions, chillies, copra, vegetable seeds (other than seed paddy), planting materials, live birds, day old chicks, dressed chicken including chicken parts and any other variety of unprocessed meat; The supply or import of magazines and journals; The supply or import of powdered milk (other than infants powdered milk), condensed milk and dhall; The supply or import of sugar, jaggery and sakkara; The supply or import of dried fish, maldive fish, fertilizer including rock phosphate and water; The supply or import of petrol, diesel and liquefied petroleum gas; The supply or import of motor coaches and chassis or bodies of motor coaches with twenty eight or more seating capacity, used for public passenger transport as described under item (xvii) of the First Schedule; The supply or import of photo voltaic, solar batteries, energy, efficient compact fluorescent lamps and spare parts for such lamps and Solar Home Systems;
118

(v) (vi) (vii)

(viii) (ix) (x) (xi) (xii) (xiii)

(xiv)

(xvi) (xvi)

The supply of services in relations to the fees collected by the Sri Lanka Bureau of Foreign Employment from prospective migrants; The supply or import of industrial machinery other than fans and parts, air conditioners, refrigerators, cabinets for refrigerators, dish washing machines (house hold type), personal weighing machines, lawn or sports ground rollers and spares, lawn movers and parts, household washing machines, household type sewing machines, but including electric motors and generators, electric generating sets and rotary converters and parts for such motors, generators, generating sets and converters; The supply of services in the course of carrying on a profession or vocation either singly or jointly with another person or persons, if all such persons are qualified members of a recognized professional body or carrying on a vocation in the fields of literature, art, music or any other fine art; Supply of finance leasing facilities by a person registered under the Finance leasing Act. No. 560 of 2000, other than any receipt of an advance payment on account of the asset to he given on lease or in relation to such leasing transaction or any payment for the early settlement of the amount payable under the lease agreement which exceeds ten per centum of the total agreement value; The supply of land transport services to transport goods; The collection of membership fee or similar charges from the members of a society, club or association; The supply or import of bicycles and motor bicycles; The supply of services by professional conference organizers, registered with the Sri Lanka Convention Burau in organizing seminars or other events; The supply or import of textiles and handloom products; The supply or import of ships; The supply or import of any jewellery; the supply or import or maize; the supply or import or machinery; medical and surgical instruments, apparatus or accessories including medical and dental equipment, ambulances for the provision. Health services and surgical dressings;
119

(xvii)

(xviii)

(xix) (xx) (xxi) (xxii)

(xxiii) (xxiv) (xxv) (xxvi) (xxvii)

(xxviii) the supply, lease or rent of residential accommodation other than supplies specified in the First Schedule; (xxix) (xxx) the supply of all health care services provided by medical institutions other than supplies specified in the First Schedule; the supply of land and improvements.

120

Chapter 8

VAT in Pakistan
8.1 Introduction

Pakistan is a country with population of Rs.149.03 million and GDP of Rs.40,18,112 million. The per capital income in that country is Rs.28,933. The total revenue from both tax and non-tax sources is Rs.701.60 million. The total tax revenue is Rs.458.90 million, out of which the revenue from collection of direct taxes is Rs.145 million and from collection of indirect taxes is Rs.313.90 million. Thus, indirect taxes contribute 68.40% of total tax revenue as against the contribution of 31.60% by way of direct taxes. The pattern of sectoral contribution to GDP shows that the service sector contributes over a half (50.7%) of the GDP, and the remaining half is contributed almost equally by agriculture (23.6%) and industry (25.7%). The types of indirect taxes in Pakistan are customs duty, central excise duty and sales tax. The apex authority for levy and collection of indirect taxes is the Central Board of Revenue. The customs duty is levied by the Customs Act, 1969. The excise duty is regulated by the Central Excise Act, 1944. The Sales Act, 1990 is the relevant legislation governing the levy of imposition of sales tax in the country and incorporates in itself a system of Value Added Tax. This is an act to consolidate and amend the law relating to the levy of a tax on the sale, importation, exportation, production, manufacture or consumption of goods.

8.2

General history of sales-tax in Pakistan

Under the Government of India Act, 1935 the sales tax was a Provincial subject. After Independence the Government of Pakistan adapted the Government of India Act. 1935. The Federal Government decided to take over the sales tax, enacted a law to this effect on 31st March, 1948 viz. the Pakistan General Sales Tax Act, 1948 which came into force on the 1st day of April, 1948. The standard rate under this Act was six pies per rupee. This tax was leviable at every stage whenever a sale was effected. However the dealers having annual turnover upto Rs.5,000/were exempt from this levy. Later, on the representations of the trade against the multiple point tax system, the Government appointed a Sales Tax Committee to study the whole situation and
121

make suggestions. On the recommendations of the said Committee, the Government enacted the present Sales Tax Act. This Act was assented by the Governor General of Pakistan on 20th April, 1951 but put into force on 1st July, by Notification No.5, dated 27th June, 1951. The administration of the Sales Tax, as regards final assessment, remained with the Income Tax Department upto 24th April, 1981. The administration of the Sales Tax was transferred to the Central Excise and Customs Department on 25th April, 1981 when necessary amendments were made in the Sales Tax Act, 1951 by the Sales Tax (Amendment) Ordinance, 1981. Since then the administration of the Sales Tax is with the Central Excise and Customs Department. Sales tax, under the Act as it stood before its amendment made in 1960, could not be charged on importation and exportation of goods but on consumption. The lacuna was however removed by the Taxation of Goods (Sales and Purchase) Order, 1960 dated 30th June, 1960, by virtue of which the power to impose taxes on the sales, purchase, consumption, importation, manufacture and production of goods, was conferred since 31st March, 1948. The enactment was made retrospective ever since the sales tax became a Federal subject.

8.3

Move towards VAT

Lastly in order to achieve the higher role of revenue generation, the Federal Government drafted a new Sales Tax Act the draft of which was circulated among the public for seeking their opinions and suggestions. There was resistance against the proposed draft by the trade which also threatened the Government of general strikes as they were of the view that the draft which the Government was going to enact was leading towards value added system that is to say a tax on each stage of transactions. The Government brought the enactment relating to value added tax in a very novel way which is a unique exercise in Pakistan's legislative history where a completely new enactment except the "Preamble" of the old Act No. III of 1951 has been legislated as a part of the Finance Act, 1990. The Finance Act received the assent of the President on 30th June, 1990 enforcing the Finance Act, 1990 with effect from 1st July, 1990 subject to the declaration under the Provisional Collection of Taxes Act, 1931 as appended to the Finance Bill presented in the National Assembly on 7th June, 1990. By virtue of the provisions of section 13 of the Finance Act, 1990, the Sales Tax (Amendment) Act,
122

1990 did not come into force from first day of July, 1990 when the Finance Act, 1990 itself came into force as provisions have been made for bringing into force the Sales Tax (Amendment) Act, 1990 (Third Schedule of the Finance Act, 1990) from such date as may be notified by the Federal Government under section 1(3) of the said Act. The Federal Government through its Notification No.S.R.O. 1100(I)/90, dated 28th October, 1990, appointed the 1st day of November, 1990 as the date on which the Sales Tax (Amendment) Act, 1990 came into force. After enforcement of the Sales Tax (Amendment) Act, 1990, its name was changed as Sales Tax Act, 1990 by the Finance Act, 1991.

8.4

Sales tax is a value added tax

Sales tax is charged, levied and paid only when taxable supply is made in the course or furtherance of taxable activity. Definition of taxation activity lays down in clear and unambiguous terms that it involves in whole or in part the supply of goods to any other person, which is the condition precedent for the levy of sales tax. Provisions of sales Tax Act, 1990 showed that it was a value added tax, which was levied at every stage, the value addition took place at the time of supply, it was, therefore, no more a one point levy.

8.5

Excise duty and Sales Tax Distinction

Duty of excise is a tax on goods produced or manufactured in the taxing country and intended for home consumption which is levied upon a manufacturer or producer in respect of his goods. The sales tax on the other hand is levied upon a vendor in respect of sales. Both the taxes seem to overlap each other, but in law there is no overlapping. The taxes are of separate and distinct imposts. If in fact they overlap that may be because the taxing authorities imposing a duty of excise find it convenient to impose that duty at the moment when the excisable goods leave the factory, for the first time upon the occasion of its sale. But that method of collecting the tax is an accident of administration, it is not of the essence of the duty of excise which is attracted by the manufacture itself. All that can be said is that subject to the provisions of the statute a duty of excise is a tax on goods produced or manufactured in the taxing country, and it ought normally not to be confused with a tax which is a turnover or sales tax. In Pakistan the sales tax is levied on the value of supply of taxable goods and on value of imported, exported goods. The value for sales tax purpose is duty paid value that is to say value of the goods plus duty, if any, whether excise or customs.

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8.6

Definitions

The following definitions are worth noting. (1) "associated persons" means any two or more persons who are close relatives to each other or who are interconnected with each other in the following way, namely:(i) if the persons, being companies or undertakings, are under common management or control or one is the subsidiary of the other; if a person who is the owner or partner or director of a company or undertaking, or who, directly or indirectly, holds or controls twenty per cent shares in such company or undertaking, is also the owner, partner or director of another company or undertaking, or, directly or indirectly, holds or controls twenty per cent shares in that company or undertaking; Explanation.- For the purpose of this clause, the expression "close relatives" mean the family, parents, brothers, sisters and dependents of registered person; (2) "distributor" means a person appointed by a manufacturer, importer or any other person for a specified area to purchase goods from him for the further supply and includes a person who in addition to being a distributor is also engaged in the supply of goods as a wholesaler or a retailer; "input tax" in relation to a registered person, means the tax(i) (ii) levied under this Act on the supply of goods received by that person; levied under this Act on the goods imported, entered and cleared under section 79 or section 104 of the Customs. Act, by that person; levied under the Sales Tax Act, 1990 of Pakistan as adapted in the State of Azad Jammu and Kashmir, on the supply of goods received by that person; and chargeable as duties of excise under section 3 of the Central Excises Act, 1944 (I of 1944), on such excisable goods or services as are notified by the Federal Government under the third proviso to subsection (1) thereof and on which such duties
124

(ii)

(3)

(iii)

(iv)

are charged, levied and paid as if it were a tax payable under section 3 of this Act; (4) "manufacture" or "produce" includes(i) any process in which an article singly or in combination with other articles, materials, components, is either converted into another distinct article or product or is so changed, transformed or reshaped that it becomes capable of being put to use differently or distinctly and includes any process incidental or ancillary to the completion of a manufactured product; process of printing, publishing, lithography and engraving; and process and operations of assembling, mixing, cutting, diluting, bottling, packaging, repacking or preparation of goods in any other manner.

(ii) (iii)

(5) (6)

"open market price" means the consideration in money which that supply or a similar supply would generally fetch in an open market; "output tax" in relation to any registered person means the tax charged under this Act in respect of a supply of goods made by that person and shall include duties of excise chargeable under section 3 of the Central Excises Act, 1944 (I of 1944) on such excisable goods or services as are notified by the Federal Government under the third proviso to subsection (1) thereof and on which such duties are charged, levied and paid as if it were a tax payable under section 3 of this Act; "retail price", with reference to the Third Schedule, means the price fixed by the manufacturer or the importer, inclusive of all charges and taxes (other than sales tax at which any particular brand or variety of any article should be sold to the general body of consumers or, if more than one such price is so fixed for the same brand or variety, the highest of such price; "retail tax" means tax levied under section 3AA; "supply" includes sale, lease (excluding financial or operating lease) or other disposition of goods carried out for consideration and also includes(i) putting to private, business or non-business use of goods acquired or produced or manufactured in the course of business;
125

(7)

(8) (9)

(ii) (iii)

auction or disposal of goods to satisfy a debt owed by a person; and possession of taxable goods held immediately before a person ceases to be a registered person. Provided that the Federal Government, may by notification in the official Gazette specify such other transactions which shall or shall not constitute supply.

(10)

"tax" means the sales tax, retail tax or enlistment tax, and includes additional tax or any other sum payable under any of the provisions of this Act or the rules made thereunder; "taxable activity" means any activity which is carried on by any person, whether or not for a pecuniary profit, and involves in whole or in part, the supply of goods or rendering of services on which sales tax has been levied under the respective Ordinance and use of goods acquired for private purposes or for the manufacture of exempt goods without making supply to any other person, whether for any consideration or otherwise, and includes any activity carried on in the form of a business, trade or manufacture; "tax fraction" means the amount worked out in accordance with the following formula:a 100 + a ('a' is the rate of tax specified in section 3);

(11)

(12)

(13) (14) (15)

"taxable goods" means all goods other than those which have been exempted under section 13; "tax invoice" means a document required to be issued under section 23; "taxable supply" means a supply of taxable goods made by an importer, manufacturer, wholesaler (including dealer), distributor or retailer other than a supply of goods which is exempt under section 13 and includes a supply of goods chargeable to tax at the rate of zero per cent under section 4; "time of supply" a supply shall be deemed to have taken place at the earlier of the time of delivery of goods or the time when any payment is received by the supplier in respect of that supply;
126

(16)

Provided that where any part payment is received(i) (ii) for a supply in a tax period, it shall be accounted for in the return for that tax period; and in respect of an exempt supply, it shall be accounted for in the return for the tax period during which the exemption is withdrawn from such supply:

Provided further that (a) where any goods are supplied by a registered person to an associated person and the goods are not to be removed, the time of supply shall be the time at which these goods are made available to the recipient; and (b) where the goods are supplied under hire purchase agreement, the time of supply shall be the time at which the agreement is entered into;

(17)

"value of supply" means,(a) in respect of a taxable supply, the consideration in money including all Federal and Provincial duties and taxes, if any, which the supplier receives from the recipient for that supply but excluding the amount of tax: Provided that (i) in case the consideration for a supply is in kind or is partly in kind and partly in money, the value of the supply shall mean the open market price of the supply excluding the amount of tax; in case the supplier and recipient are associated persons and the supply is made for no consideration or for a consideration which is lower than the open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax; and in case a taxable supply is made to a consumer from general public on installment basis on a price inclusive of mark up of surcharge rendering it higher than open market price, the value of supply shall mean the open market price of the supply excluding the amount of tax.

(ii)

(iii)

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(b)

in case of trade discounts, the discounted price excluding the amount of tax; provided that the tax invoice shows the discounted price and the related tax and the discount allowed is in conformity with the normal business practices; in case where for any special nature of a transaction it is difficult to ascertain the value of a supply, the open market price; in case of imported goods, the value determined under section 25 of the Customs Act, including the amount of customs-duties and central excise duty levied thereon; in case where there is sufficient reason to believe that the value of a supply has not been correctly declared in the invoice, the value determined by the Valuation Committee comprising representatives of trade and the Sales Tax Department constituted by the Collector and in case the goods other than taxable goods are supplied to a registered person for processing, the value of supply of such processed goods shall mean the price excluding the amount of sales tax which such goods will fetch on sale in the market: in case of a taxable supply, with reference to retail tax, the price of taxable goods excluding the amount of retail tax, which a supplier will charge at the time of making taxable supply by him, or such other price as the Board may, by a notification in the Official Gazette, specify. Provided that, where the Central Board of Revenue deems it necessary, it may, by notification in the official Gazette, fix the value of any taxable supplies or class of supplies and for that purpose fix different values for different classes or description of same type of supplies: Provided further that where the value at which the supply is made is higher than the value fixed by the Central Board of Revenue, the value of goods shall (unless otherwise directed by the Board) be the value at which the supply is made.

(c) (d)

(e)

(f)

(g)

(18)

"wholesaler includes a dealer and" means any person who carries on, whether regularly or otherwise, the business of buying and selling goods by wholesale or of supplying or distributing goods, directly or indirectly, by wholesale for cash or deferred payment or for commission or other
128

valuable consideration or stores such goods belonging to others as an agent for the purpose of sale; and includes [a person supplying taxable goods to a person whose income is not liable to tax under the Income Tax Ordinance, 2001 (XLIX of 2001) but has deducted income tax at source under section 153 of the said Ordinance and a person who in addition to making retail supplies is engaged in wholesale business; and (19) "zero-rated supply" means a taxable supply which is charged to tax at the rate of zero per cent under section 4.

8.7

Scope of tax

Section 3 is the charging section which creates a charge on all taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him and on all goods imported. In other words under section 3 of the Sales Tax Act, 1990 sales tax is chargeable on value of:(1) (2) Taxable supplies Imports.

8.8

Chargeability of sale tax

Chargeability of sale tax is provided under section 3 of the Act which enunciate that there shall be charge levied and paid a tax known as sale tax at the rate of 15% of the value of taxable supplies made in Pakistan by a registered person in the course or furtherance of any taxable activity carried on by him and goods imported into Pakistan.

8.9

Conditions to levy sales tax under Section 3(1)(a)

Section 3(1)(a) reveals that as per clause (a) of sub-section (1) of section 3 of the Act two conditions are essential to levy sales tax 'namely the taxable supplies and taxable activities. In order to create the charge of sales tax, inter alia, two conditions must be fulfilled independently, i.e. the transaction of sale must constitute a "taxable activity" and it should also be a taxable supply". Even if one condition is missing the charge of sales tax would not be leviable.

8.10

Sales tax is a tax on consumption

It will be seen that charging provisions of section 3 of the Act provided for the charge and levy of a tax known as Sales Tax. This charge is "subject to the
129

provisions of this Act". Sub-section (3) of section 3 goes to state that liability to pay tax shall be, in the case of supply of goods in Pakistan, of the person making the supply. These provisions are to be seen in the perspective of over all scheme and the definition of word "input tax" as given in section 2(14), the word "output tax" as given in section 2(20) and the "taxable activity" and "taxable supply" as defined in section 2(35) and 2(41) of the Act respectively. If nothing else, sub-section (1) and sub-section (3) of section 3-B make it clear that the incidence of tax charged under section 3 has to pass on to the consumer ultimately. The provisions regarding input as well as out put tax as defined in the definition clause of the Act read with sections 7 and 8 thereof are only the modalities prescribed to protect the interest of the exchequer against any pilferage, evasion or fraud. Every maker of a taxable supply is an agent of the exchequer to receive the amount on its behalf and then to pass it on to the next supplier till finally the consumer bears the brunt.

8.11

Sales tax a Value Added Tax

Provisions of Sales Tax Act, 1990 show that it is a value added tax, which was levied at every stage, the value addition took place at the time of supply, it is therefore, no more a one point levy. Sales tax payable under Sales Tax Act, 1990 is a value added tax as distinguished from the Sales Tax Act, 1951, where it was a one point levy this distinction, however, does not necessarily lead to the inference that only such activities as may amount to sale of goods in common parlance would fall within the tax net.

8.12

Rate of sales tax

Sub-section (1) prescribes the rates of Sales Tax @ 15%. This rate of sales tax is also called standard rate of sales tax.

8.13

Retail tax

Section 3AA provides that there shall be charged, levied and paid retail tax at the rates specified in section 3 by a retailer who is making taxable supplies in the course or furtherance of any taxable activity carried on by him. All the provisions of this Act shall apply to the charge, levy, deduction of input tax, payment, collection and enforcement of the retail tax as if it were sales tax under section 3. The application for registration as tax payer of retail tax shall be made to the Collector in such form and manner as may be specified by the Board.

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8.14

Collection of excess tax

Under section 3B any person who has collected or collects any tax or charge, whether under misapprehension of any provision of this Act or otherwise, which was not payable as tax or charge or which is in excess of the tax or charge actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax or charge so collected to the Federal Government. Any amount payable to the Federal Government under sub-section (1) shall be deemed to be an arrear of tax or charge payable under this Act and shall be recoverable accordingly and no claim for refund in respect of such amount shall be admissible. The burden of proof that the incidence of tax or charge has been or has not been passed to the consumer shall be on the person collecting the tax or charge.

8.15
(a) (b)

Zero rating (Section 4)

goods exported, or the goods specified in the Fifth Schedule; supply of stores and provisions for consumption aboard a conveyance proceeding to a destination outside Pakistan as specified in section 24 of the Customs Act, 1969 (IV of 1969); such other goods as the Federal Government may, by Notification in the Official Gazette, specify; Zero rating shall not apply in respect of a supply of goods which (i) (ii) (iii) are exported, but have been or are intended to be re-imported into Pakistan; or have been entered for export under section 131 of the Customs Act, 1969 (IV of 1969), but are not exported; or have been exported to a country specified by the Federal Government, by Notification in the Official Gazette.

The following goods shall be charged to tax at the rate of zero per cent:-

(c)

The Federal Government has the power to restrict the amount of credit for input tax actually paid and claimed by a person making a zero rated supply of goods otherwise chargeable to sales tax. It may be noted that goods which are exempt from sales tax under section 13 cannot be zero rated under section 4 on their export.
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8.16

Change in the rate of tax (Section 5)

If there is a change in the rate of tax (a) (b) a taxable supply made by a registered person shall be charged to tax at such rate as is in force at the time of supply; imported goods shall be charged to tax at such rate as is in force,(i) (ii) in case the goods are entered for home consumption, on the date on which a bill of entry is presented; in case the goods are cleared from warehouse, on the date on which a bill of entry for clearance of such goods is presented. Where a bill of entry is presented in advance of the arrival of the conveyance by which the goods are imported, the tax shall be charged as is in force on the date on which the manifest of the conveyance is delivered. If the tax is not paid within seven days of the presenting of the bill of entry the tax shall be charged at the rate as is in force on the date on which tax is actually paid.

8.17

Time and manner of payment (Section 6)

The tax in respect of goods imported into Pakistan shall be charged and paid in the same manner and at the same time as if it were a duty of customs payable under the Customs Act, 1969 [and the provisions of the said Act. The tax in respect of taxable supplies made during a tax period shall be paid by the registered person at the time of filing the return in respect of that period. The tax due on taxable supplies shall paid by any of the following modes, namely: (i) (ii) through deposit in a bank designated by the Board and through such other mode and manner as may be specified by the Board.

8.18

Determination of tax liability (Section 7)

For the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be

132

made, by him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in section 9. The taxpayer may adjust input tax paid on the purchases in the immediate three preceding tax periods from the output tax subject to the condition that the taxpayer specifies the reasons for such delayed input tax adjustment in the revised sales tax return for such period or in the return for the immediately succeeding tax period. A registered person shall not be entitled to deduct input tax from output tax unless,(i) in case of a claim for input tax in. respect of a taxable supply made, he holds a tax invoice in his name and bearing his registration number, in respect of such supply for which a return is furnished; in case of goods imported into Pakistan, he holds bill of entry or goods declaration in his name and showing his sales tax registration number, duly cleared by the customs under section 79 or section 104 of the Customs Act, 1969 (IV of 1969); in case of goods purchased in auction, he holds a treasury challan in his name and bearing his registration number, showing payment of sales tax

(ii)

(iii)

The Federal Government has power to allow a registered person to deduct input tax paid by him from the output tax determined or to be determined as due from him under this Act. 8.19 Levy and collection of tax on specified goods on value addition (Section 7A)

The Federal Government may specify, by notification in the official Gazette, that sales tax chargeable on the supply of goods of such description or class shall, with such limitations or restrictions as may be prescribed, be levied and collected on the difference between the value of supply for which the goods are acquired and the value of supply for which the goods, either in the same state or on further manufacture, are supplied. The Federal Government may, by notification in the official Gazette, and subject to the conditions, limitations, restrictions and procedure mentioned therein, specify the minimum value addition required to be declared by certain persons or categories of persons, for supply of goods of such description, or class as may be prescribed, and to waive the requirement of audit or scrutiny of records if such minimum value addition is declared.
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8.20
(a)

Tax credit not allowed (Section 8)

the goods used or to be used for any purpose other than for the manufacture or production of taxable goods or for taxable supplies made or to be made by him; any other goods which the Federal Government may, by a notification in the official Gazette, specify; the goods under sub-section (5) of section 3; fake invoices; and purchases made by such registered person, in case he fails to furnish the information required by the Board notification issued under subsection (5) of section 26.

A registered person shall not be entitled to reclaim or deduct input tax paid on -

(b) (c) (d) (e)

If a registered person deals in taxable and non-taxable supplies, he can reclaim only such proportion of the input tax as is attributable to taxable supplies in such manner as may be specified by the Board. No person other than a registered person shall make any deduction or reclaim input tax in respect of taxable supplies made or to be made by him.

8.21

Debit and credit note (Section 9)

Where a registered person has issued a tax invoice in respect of a supply made by him and as a result of cancellation of supply or return of goods or a change in the nature of supply or change in the value of the supply or some such event the amount shown in the tax invoice or the return needs to be modified, the registered person may, subject to such conditions and limitations as the Board may impose issue a debit or credit note and make corresponding adjustment against output tax in the return.

8.22

Excess amount to be carried forward or refunded (Section 10)

If in relation to a tax period, the total deduction of input tax and other adjustments as specified in section 9 exceed the output tax, the excess amount shall be carried forward by the registered manufacturer, importer, wholesaler or retailer to the next tax period and shall be treated as input tax for that tax period:
134

Such excess amount of tax carried forward, from the previous tax period may be refunded to the registered person subject to such conditions, restrictions and limitations as the Board, may by notification in the official Gazette, specify. The refund of tax charged on the acquisition of plant and 'machinery shall also be admissible to the registered person who, at the time of taking delivery of taxable plant and machinery, its components and spare parts is not making taxable supplies, subject to the condition that he shall, within the period specified by the Board, by notification in the official - Gazette, commence taxable supplies and complies with such other conditions as are specified therein. The input tax incurred in connection with a zero-rated supply shall be refunded not later than thirty days of filling of return in such manner and subject to such conditions as the Board may, by notification in the Official Gazette, specify. If a registered person is liable to pay any tax, additional tax or penalty payable under any law administered by the Board the refund of input tax shall be made after adjustment of unpaid outstanding amount of tax or, as the case may, additional tax and penalty. Where there is reason to believe that a person has claimed input tax credit or refund which was not admissible to him, the provisions regarding time limit shall not apply till the investigation, including the verification of the deposit of tax claimed as refund, is completed and the claim is either accepted or rejected.

8.23

Assessment of tax (Section 11)

Where a person who is required to file a tax return fails to file the return for a tax period by the due date or pays an amount which, for some miscalculation is less than the amount of tax actually payable, an officer of Sales Tax shall, after a notice to show cause to such person, make an order for assessment of tax, including imposition of penalty and additional tax in accordance with sections 33 and 34. Where a person required to file a tax return files the return after the due date and pays the amount of tax payable in accordance with the tax return alongwith additional tax and penalty, the notice to show cause and the order of assessment shall abate. Where a person has not paid the tax due on supplies made by him or has made short payment or has claimed input tax credit or refund which is not admissible
135

under this Act, an officer of Sales Tax shall make an assessment of sales tax actually payable by that' person or determine the amount of tax credit or tax refund which he has unlawfully claimed and shall impose a penalty and charge additional tax in accordance with sections 33 and 34. No order under this section shall be made by an officer of Sales Tax unless a notice to show cause is given to the person in default specifying the grounds on which it is intended to proceed against him and the officer of Sales Tax shall take into consideration the representation made by such person and provide him with an opportunity of being heard. An order under this section shall be made within ninety days of issuance of show cause notice or within such extended period as the Collector or, as the case may be, Collector (Adjudication) may, for reasons to be recorded in writing, fix provided that such extended period shall in no case exceed ninety days. Where a registered person fails to file a return, an officer of Sales Tax Department, not below the rank of Assistant. Collector, shall subject to such conditions as specified by the Central Board of Revenue, determine the minimum tax liability of the registered person.

8.24

Short-paid amounts (Section 11A)

recoverable

without

notice

Where a registered or enrolled person pays the amount of tax less than the due tax as indicated in his return, the short-paid amount of tax shall be recovered without giving a show cause notice to such person provided that no additional tax or penalty shall be charged unless a show cause notice is given to such person.

8.25. Exemption (Section 13)

Supply of goods or import of goods specified in the Sixth Schedule shall, subject to such conditions as may be specified by the Federal Government, be exempt from tax under this Act. Where a person does not desire to avail any tax exemption, he may, after voluntary registration, opt to pay sales tax at the rate applicable to such supplies under the provisions of section 3 subject to condition that he shall not thereafter be deregistered till the expiry of two years from the date of such registration.

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Chapter 9

VAT in Bangladesh
The levy of VAT in Bangladesh is governed by the Value Added Tax Act, 1991.

9.1 Definitions
Section 2 of the said Act contains the definitions. Following definitions are relevant for the purpose of our study: (a) (b) (c) Exempted means any exempted goods or services under this Act. Output tax means VAT imposed under this Act. Input means. (i) all sorts of raw materials, fuel, packages, service, machinery and its parts but does not includes labor, land, building, office equipment and vehicles. imported, purchased, acquired or collected goods by any means for the purpose of conducting business, sales, exchange or hand over of that goods.

(ii)

(d) (e) (f) (g) (h)

Input tax: means Vat paid or payable on input, which is purchased or imported by/from any registered person. Tax period: means the duration of one month or any duration as determined by the Government, by Notification in Official gazette. Taxable goods: means any goods not included in the first schedule. Taxable services: means any service not included in the Second Schedule. Turnover : means all money received or receivable by a person in a particular period from the supply of taxable goods or services produced by him. Prescribed Date: means 10th of the month after the tax period for the purpose of submission of return.

(i)

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(j) (k) (l)

Price: means total money or measurable with money received or receivable against supply of goods or services. Goods: all movable goods except share, stock, coin, security and collectable demand. Manufacturer/Producer: means a person who undertakes(i) (ii) (iii) (iv) (v) (vi) any process by combining different materials or components so that the product produced is identically usable; to carry on any auxiliary process to produce the same; to carry on any process of printing, publishing etc,; to carry on any process of packaging or repackaging, assembling, mixing, cutting, liquidating etc,. any act done by the Official Assignee or Receiver on behalf of a manufacturer who have become insolvent; and to carry on any process by using the material and component of another person as a subcontract by utilizing his own plant and machinery.

(m)

Commercial Importer: means such person who sells or otherwise transfers goods except those mentioned in the First Schedule to other person without changing the shape, nature, characteristics or quality after importation of the goods by him. Commercial Document: means books of accounts or records or papers maintained by any person for keeping records of his business transactions or financial position and it also includes other documents such as debit voucher, credit voucher, cash memo, purchase-sales day book, cash book, journal book, document for bank account & related records, trail balance, ledger, financial statements & analysis, profit & loss account, profit & loss appropriation account, bank reconciliation, balance sheet and audit reports. Trader: any person who sells or transfers by any means to any person without changing the shape, nature or quality of the goods which is imported, purchased, acquired or collected by any means. Large Taxpayer Unit or LTU: means Large Taxpayer Unit established under section 8D.

(n)

(o)

(p)

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(q) (r)

Person: includes any business organization, association of persons and cooperative society. Zero taxable goods or services: means goods or services exported or deemed to be exported goods or services or food or other goods mentioned under section 3(2) on which no VAT and Supplementary Duty, as applicable, shall no be imposed and all taxes and duty paid on input used in making the above goods, shall be refunded, except advance tax and duty specified in Official Gazette. Gross Receipt: is the money received or receivable [with commission or charge] excluding VAT or Advance Tax by service provider in consideration of service provided. Supply: means sales, handover, lease or settlement by any other means of goods in consideration of price by producer for his produced goods (or by business person for imported, purchased, acquired or collected goods and the following are also considered as supply: (i) Usage of goods acquired while conducting business or produced. In respect of personal, business related or non-business related purpose, Auction or settlement of goods for repayment of loan.; Possession of taxable goods immediately before cancellation of registration; Remove or release of goods from production place thereof; Any other transaction which is determined by SRO.

(s)

(t)

(ii) (iii) (iv) (v) 9.2

Imposition of VAT

Section 3 deals with the imposition of VAT. As per the said section VAT is determined and payable at 15% on the value as mentioned in Sec. 5 of all goods or services except the goods as specified in Section 1 and services as specified in Section 2. VAT will be charged at zero rate on the following: (i) Goods or services exported or deemed to be exported from Bangladesh and

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(ii)

Foods and other goods exported for consumption abroad as per the section 24 of the Customs Act. However, in the following situations VAT will be imposed normally and not at zero rate (a) (b) goods those are exported with an intention of re-import; and goods are not exported within 30 days of submission of bill of export or within such date extended by the commissioner. the importer in case of import; supplier in case of goods manufactured in Bangladesh; The person rendering services; and in any other case; the supplier.

As per Subsection (3) of section 3 VAT shall be payable by (a) (b) (c) (d)

In case of any imported or other goods the classification of goods under the Customs Act will apply for the calculation of payment of VAT. For the purpose of achieving the goals of this section the Board for public interest, by notification in the Government gazette may (a) (b) declare any taxable goods as taxable services or any taxable services as taxable goods; and explain to determine the scope of any taxable services.

9.3

Application of tax rate

Section 4 of the Value Added Tax Act of Bangladesh provides for the application of tax rates. The said section requires that the tax shall be payable at the time specified in section 6(2) or (3). Sub-section (2) of section 4 provides that the tax shall be charged at existing rate: (a) In case of import on the date of placing the bill of entry under the Custom Act for releasing goods for consumption in the country; or if the bill of entry is submitted before arriving of the vehicle carrying the goods then on the date of submission of manifest, or When the said goods is delivered from warehouse under section 104 of the Custom Act.

(b)

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9.4

Computation of value for charge of VAT

Section 5 of the Act provides for the method of computation of value for the purpose of section 2 dealing with imposition of tax, which is laid as under: Imports: In case of imports, the value shall be the transaction value as determined under section 25 or 25A of the Custom Act plus import duty, supplementary duty except advance tax. Goods supplied: Sub- Section (2) provides that in case of goods supplied, the price shall be the consideration receivable from buyer by the producer or business person, which will include purchase price of materials and all expenditure incurred by the manufacturer and also commission, charges, fees and all supplementary duty excluding VAT and profit. Provided that in case of imported input used for producing taxable goods or selling, exchanging, the value shall be based on the amount as determined under section 25 or 25A of the Custom Act, for taking VAT credit under section 9 of the VAT Act. Further provided that in order to determine base for computing VAT, the Board can fix through notification in official gazette VAT rate and amount/quantity in respect of certain goods or class of goods. Sub section (2A) provides that if any registered person sells goods directly in his own brand name of from own sales center or through distributor or commission agent after collecting the same by way of contract or sub-contract from other producer VAT will be determined on the price received by the owner from the buyer and the price will be equal to amount as mentioned in sub-section (2). Sub-section (2B) further provides that if any producer or importer wants to supply goods at uniform price in the form of printing on the body or container or packet of the goods, he can do that in the procedure prescribed through the rule on production level by the producer and at import level by the importer. Rule relevant for supply of goods is as follows: Rule-3B: Procedure of supply of goods at uniform price by producer or importer: In case of supply of goods by any producer at production level or importer at import level at uniform price in the form of printing on the body or container or packet of the goods, following procedure is to be followed, namely141

(a)

Before the supply of taxable goods, the producer or importer shall declare the price according to the method stated in rule 3 for the purpose of imposition of value added tax or, where applicable, value added tax and supplementary duty: Provided that in case of the above price declaration, he shall show separately in Form VAT-1 the declaration at production level and all the costs, profit and commission at the level of final supply of the goods;

(b)

The producer or importer shall submit such undertaking that the declared uniform price shall be printed on the body or container or packet of the goods with the indelible ink in a visible part and the goods shall be supplied at the said uniform price throughout the country; All the required supporting documents are to be submitted with the undertaking mentioned in clause (b) while submitting it in the Board; A specimen of the good containing the imprint of Mushak paid or where applicable VAT paid by the said or below or above the price printed on the body or container or packet of the goods, shall be submitted at the time of submitting documents under clause(c); On receipt of the approval of the Board, the Divisional Officer will intimate the concerned producer or importer and the stated goods can be supplied from the date specified by him; During the supply or sale through own sales center or distributor or dealer or agent, goods shall be supplied or sold after giving a seal containing the words Total VAT at source in the VAT-11 Challan As per sub-section (3) of section 5 the Government shall, through Official Gazette determine price of the goods, which is sold at retail price. Here the manufacturer/producer shall determine the retail price with the approval of the concerned authority. Such retail price shall include all expenses, commission, charges, duty and taxes. The selling price and brand or symbol has to be printed on each packet or bag noticeably.

(c) (d)

(e)

(f)

Services: Sub-section 4 provides for the valuation in case of service. VAT shall be charged on total money receipts. The Board may also determine value or rate for this purpose by notification in official gazette. This notification allows another truncated basis VAT collection. Goods supplied by a registered dealer: In case of goods supplied by a registered person or person eligible to be registered, VAT shall be charged on the
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total money received/receivable on the goods in a specific period as determined by the rule. Rule 3(6) lays down the provision in respect of transactions involving trade discounts. It is reproduced as under: Rule 3(6) - The person giving trade discount has to give advertise in national daily and inform related divisional officer of VAT regarding original price, discounted price and discount period. Rate of discount cannot be more than 15% and discount period cannot be more than 30 days within 12 months.

9.5

Time and method of payment (Section 6)

In case of imported goods the method of payment of VAT and supplementary duty, as the case may be, will be same as customs duty as per the Customs Act. Section 4 of the Value added tax Act of Bangladesh requires that the tax shall be payable at the time specified in section 6(2) or (3). Section 6(2) requires that in case of goods produced by a registered person, VAT shall be payable on the happening of the following events, which occurs first; (a) (b) (c) (d) when the goods are delivered; issuance of invoice, relating to the goods supplied; at the time when goods are transferred for personal or the use of others; receipt of part or full payment.

Section 6(3) provides that in case of services rendered by registered person, VAT shall be payable on the happening of the following events, which occurs first(a) (b) (c) services rendered; issuance of invoice; receipt of post or full payment.

However, the Board may, in accordance with the prescribed rules, direct any method and time for payment and system for VAT, supplementary duty including advance payment in respect of any goods, class of goods or service.

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9.6

Attachment of Stamp or banderol

Notwithstanding anything contained in section 4, the Board may, by Official Gazette, attach any stamp or banderol of specific price with security system on any goods or any class of goods from the time mentioned in the gazette in order to collect VAT and supplementary duty. The Board will also determine the mark or design of the stamp and banderol and also the procedure of its uses, distribution, reservation, supervision, observation, record keeping and packaging, etc. Stamp and Banderol means security instrument with specific colour, design, size.

9.7

Collection of VAT at source

Notwithstanding anything contained in this Act, payable Value Added Tax for services which is ascertained by Government notification in official gazette for this purpose will deduce or collect at source according prescribed manner by order of the Board, at the time of payment of service value or commission by concerned service receiver or commission payer. Provided that, where a service renderer being foreign aided project have already paid all above mentioned VAT and deposited it properly to Government Treasury, the any sub-contractor, agent or any other person employed to perform the purposes of the project, will not have to pay the VAT again and so on. Here it is notable that, in this ground, the project (main service provider) or its sub-contractor or its agent will have to submit all necessary documents regarding payment of such VAT at primary stage and its deposition to Government Treasury.]. A certificate, mentioning the following, of deduction or collection of VAT shall be given by the person collecting or deducting VAT to the person rendering services:(a) (b) (c) (d) (e) Registration number of VAT payer; total amount of payment for service; the value of service/commission on which VAT is impossible; the amount of VAT deducted or collected ; and any other information warranted by rules.

As per sub-section (4c) if the person concerned fails to deduct VAT (a) he shall pay interest @ 2% per month with the original amount due as VAT.
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(b) (c)

the amount deducted and paid shall be deemed to be paid by the party from which deduction has been made. Notwithstanding in clause (a) if VAT is not deposited within 2 months from the date of its collection/deduction the person responsible shall be penalized up to Rs. 25,000/- by the Commissioner. Sub-section (5) of section 6 provides that VAT payable for goods supplied or services rendered (except payable at import stage) will be paid through return and current account in accordance with the methods prescribed by Rules.

9.8

Imposition of supplementary duty

As per section 7 supplementary duty shall be charged @ 2.50% to 3.50% on the goods or services. Such duty is charged for sake of public interest by discouraging import and production of luxury, non-essential, socially undesirable and other goods or services listed in the third schedule. For the purpose of calculating supplementary duty, the value of goods and services shall be(a) In case of import The value on which the import duty is imposed under section 25 or 25A of the Custom Act and after adding the import duty with the said value. (b) In case of goods produced in Bangladesh The value received by the producer. The Supplementary Duty and VAT will be excluded from the value received. (c) In case of service The total bill which will exclude VAT & Supplementary Duty. (d) In case of goods sold in retail price The price fixed under section 5(c). Sub-section (3) of the said section provides that the method and time of payment of supplementary Duty shall be same as VAT specified in Section 6.

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9.9

Turnover tax (TOT)

As per section 8 every producer or businessperson or service renderer for taxable products or services, who is not required to be registered under section 15 shall pay turnover Tax @4%. Relevant rules are laid down as under: Rule-4 : Payment of Turnover Tax Rule 4(1) If annual turnover is below 20 lakhs then the above persons will pay turnover tax @ 4% on his annual turnover. All proceedings relating to the turnover tax shall be prescribed by the Rules. Rules 4(2) The persons liable to pay TOT shall be enlisted with Superintendent for payment of TOT. For such enlisting application to Superintendent in the form VAT-6 shall be made. If satisfied, Superintendent will enlist him within 7 days and provide a certificate thereon. Rule 4(2a) After enlistment, a declaration has to be given about estimated turnover and system of payment of tax in the form of VAT Mushok-2B for approval of Superintendent. If declared turnover is not accepted to Superintendent on specific and logical ground he may determine the turnover within 30 working days after giving opportunity of being heard. Rules 4(3) TOT has to be paid from the date immediately after the enlistment. Rule 4(4) TOT can be paid in one installment by the enlisted persons. However, such payment will be subject to fulfillment of certain conditions. Rule 4(5) TOT can also be paid in monthly or quarterly installment subject to fulfillment of certain conditions.
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Rule 4(8) Enlisted person can appeal to Commission for determining his turnover. Rule 4(9) After considering appeal and hearing, as applicable, the commission can determine turnover and TOT and inform him in writing. The commission will also send the copy of the order to the local commissioner and divisional officer within 7 working days for implementation. Rule 4(10) Commission can reassess turnover if different information comes to the hand of commissioner and divisional officer. Reassessment of turnover can also be done even if the taxpayer wishes to change amount of turnover. Rule 4(11) Annual payable TOT determined by commission will be payable as per rule 4(4). Rule 4(12) After submission of application of declaration or investigation by the commission if turnover is found excess over the minimum amount which is determinant factor for being registered, the commission will send the application to commissioner or divisional officer for registering the person under VAT. Rule 4(13A) On default of payment as per rules (4) or (5) of determined TOT, enlisted person will be fined by superintendent for not more than Tk. 5,000 and additional monthly interest @ 2% on uppaid amount. Rule 4(14) Any dues to Government on account of TOT will be collected following the procedures under section 56. Rule 4(15) Excess paid TOT will be refunded in same procedures as mentioned under section 67.

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Rule 4(16) Form VAT-17A has to be filled in for maintaining accounts of goods or service transferred and enlisted number must be mentioned clearly in cash memo. Rule 4(17) This rule is applicable for the person registered under section 17 and for the goods and services mentioned in and order under section 8(4). Rule 4(18) If actual turnover of the person is excess over the amount as mentioned under 4(1) after elapse of one year from enlistment then he has to apply for canceling enlistment and apply in the form VAT-6 for registration under section 15. Rule 4(19) Superintendent will send a copy of information on enlistment and collection of TOT. Rule 4(20) Divisional officer can examine information of TOT of enlisted person at any time and order superintendent necessary directions. As per section 8 (3) the Board may for public interest exempt any item from turnover tax. However such exemption will be subject to prescribed conditions and limitations specified by the order. The Board may in public interest and after proper investigation, order any person who is engaged in supplying goods or rendering services to get registered under section 15 irrespective of amount of turnover and pay VAT.

9.10

Large taxpayer unit (LTU)

As per section 8D the Board, through notification in the official Gazette, can establish required number of Large Taxpayer Unit or LTU for the purpose of collection and supervision of value added tax from whole areas of the country or any fixed outer limits of a prescribed area or a stated class of taxpayers.

9.11

Credit of taxes

Sub-section (1) of section 9 provides that the supplier, traders of taxable goods or services shall get tax credit on output tax. However, no tax credit on output tax will
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be available in respect of the following: (a) (b) (c) (d) (e) Raw Materials used for producing exempted products; Raw Materials purchased from Turnover Tax units; Supplementary Duties; Multiple usable packing materials except for the first time; Tax paid on (f) BMRE of any building, infrastructure or establishment, Repairs & purchase of furniture, stationeries, air-conditioner, fan, lighting, generators etc. Payments for architecture, designing and other products associated with such products and services.

Value added tax paid in addition to value added tax prescribed by rules on production or supply of taxable goods or provision of taxable services and paid on various goods and services.

Previous provision under clause (f) above, now under new sub-rule (1A) of rule 19 in a revised way [see below]: The following services on which 60% of the Total VAT paid will be allowed as credit: Telephone Fax Tele printer Internet, Freight forwards, clearing & forwarding agent, WASA Insurance, Audit & Accounting Firm, Procurement provider, Security services, Legal advisor,
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 (g) (gg)

Transport contractor L/C service and Electricity distributor. VAT paid on Traveling, Entertainment, Employee Welfare etc; VAT paid on that input which not fulfill the taxable base of amount as per section 5(2) and input tax paid on purchased input according to second proviso of section 5(2). Service provider paying VAT on a Truncated Base under section 5(4); Input tax paid on that input which purchased by business holder according to the section 5(4a).] Supplier paying VAT on Tariff Value under section 5(7); Input tax mentioned in the bill of entry or Chalan containing registration number except the registration number of the supplier of goods, trader or provider of services; VAT paid on materials still under someone elses control or custody. Provided that credit must be taken within 30 days from the entry of input at the production, supply or service rendering place.

(h) (hh) (i) (j)

(k)

Rule-19: System of VAT Credit Rule 19 lays down the provisions relating to VAT credit. Rule 19(1): Any registered person can take credit under section 9 & 13 for the VAT, other tax and excise duty paid on the input against the output tax on taxable goods or services within the tax period. Rule 19(1A): Notwithstanding contained anything in sub-rule (1), credit can be taken at the following rate on the following services used in any place, establishment or premises related to production or supply of goods or provision of services: (a) 80% of VAT paid on: Insurance Gas and Electricity distribution,
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(b)

60% of VAT paid on: Telephone Teleprinter Fax Internet Freight forwards, clearing and forwarding agent, WASA Insurance Audit and Accounting Firm Procurement provider, Security Services, Legal advisor, Transport contractor, and Letter of credit (L/C) service]

Rule 19(2): In case if supply of taxable goods, the registered person will write down input tax paid on inputs in Credit column shown in the Current Account in the Form VAT-18 after entering the whole amount of inputs into the production or business place including the bill of entry or Chalan containing the inputs purchased, the registration number. Rule 19(2A) & (5): In case of taxable goods and service the input tax can be adjusted by writing down in the current A/C with output tax of the period in which the related output entered in the production or business place. If the output tax exceeds input tax the excess amount has to be deposited to Government Treasury in cash and if the input tax exceeds output tax then the excess will be carried forward in the balance column of current A/C for adjusting with output tax of the next month. Rule 19(3): The registered person, who supplies both taxable and tax exempted goods, will take credit of the input tax (VAT) on the purchased input by recording and adjusting in credit column of the current account. At the end of the related tax period, the input tax paid on the input used for tax exempted goods will be shown in the payable column of the current account.
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Rule 19 (4) & (5A): The registered person, who supplies both taxable goods and services and also exports the same for which input tax and other taxes and excise duties have been paid, can take tax credit of input tax (VAT) paid on the input with the supply of taxable of goods or services rendered by recording and adjusting in Credit column of the current A/C. At end of the period supplementary duty, import duty, excise duty and all other duties and taxes paid except advance income taxes will be recorded recording in Credit column of the current A/C. Rule 19(6): The registered person, who renders both taxable and tax exempted services, will take credit of the those input tax (VAT) on the purchased input which has been used to render taxable services. Sub-section (1A) of section 9 provides that tax credit shall be determined on the basis of tax rules in case of capital equipment. Rule 20: Credit Input VAT in respect of Capital Machinery (1) After importing any machinery, any registered person producing taxable goods or rendering taxable services can release the same without paying any VAT from excise station on submission of bond in the form of VAT-14. The Divisional Officer will give order to Commissioner of excise station to annul the aforesaid bond if the registered person is able to erect the machine within 6 months form date of aforesaid release, failing to do so the person can apply to the Commissioner to extend the period for another 3 months. After procuring machinery from Bangladeshi producer any registered person producing taxable goods or rendering taxable services or engaged in export can get the supply the machinery without paying any VAT on submission of bond in the form of VAT14A. Upon satisfactory findings after the due investigation of erection of the machine within 6 months from date of aforesaid supply the Divisional Officer will give order to annul the aforesaid bond. If the person fails to do so then he can apply to the Commissioner to extend the period for another 3 months. If the capital machinery as mentioned in (i) & (ii) is sold by the registered person to another registered person, then seller has to refund or adjust with current A/C or return the credit received to the Government Treasury in the following way:

(2)

(3)

(4)

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1 year 100% 2nd year- 65% 3rd year- 45% 4th year 15% (5)

of the VAT credit of the VAT credit of the VAT credit of the VAT credit

If a registered person purchase any capital machinery according sub-rule (1) and (3), he will gain credit as per following schedule: 1 year 100% 2nd year- 65% 3rd year- 45% 4th year 15% of the VAT to bill of entry of the VAT to bill of entry. of the VAT to bill of entry. of the VAT to bill of entry.

Section 9(2) states that any person who has obtained tax credit without having the eligibility as stated in sub-section (1), notwithstanding anything in section 37 the concerned Officer will be able to cancel the credit. The concerned officer can also order to adjust the same with the current account or tax return. Section 9(2a) was inserted by the Finance Act, 2003. The said section overrules other provisions of the Act and states that, if any person who is aggrieved by any order served by concerned officer according to sub-section (2), he may furnish a written complain before any VAT officer whose designation is not below than aforesaid concerned officer. According to the sub-section (2a), the officer can dispose off the submitted written complain, if any, by giving a reasonable opportunity of being heard to the applicant within seven working days from the date of application. The order passed by that officer in this regard is final. (3) If the supplier uses the inputs for both taxable and tax exempted products and services he shall be allowed tax credit proportionately.] (4). Where within the duration of preserved taxable goods become damage at the place of input at the production, service or business, in that case the concerned suppliers or renderer of services or business holder shall pay the input tax of those in the manner prescribed by the rule.]

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9.12

Correction of accounts after payment of tax

As per section 10 if goods sold by a registered person are subsequently cancelled or returned, the VAT and Supplementary Duty paid, as the case may be, relating to the said goods can be adjusted through the next return and the current account.

9.13

Settlement of excess input tax

Section 11 provides that if tax paid on input entitled for credit is in excess of payable output tax in any tax period then the registered person will be given credit for the next tax period in the current account for the amount paid in excess and that amount will be determined as input tax of the following period.

9.14

Credit on input stored at the time of commencement of Act (Section 12)

Any registered person will get input tax credit against output tax payable at the rate and procedure mentioned in rules, with the permission of concerned officers for the following cases: Input stored in hand before the commencement of this Act when it is purchased Under the Excises and Salt Act, 1944 (1 of 1944) on which excise duty is imposable, and Under the Sales Tax Ordinance, 1982 (XVIII of 1982) where sales tax is impossible on input or, Input stored in hand after the commencement of this Act, which will be used to produce or manufacture and goods, on which VAT is paid under newly included in VAT Act.

9.15 Drawback of tax paid on inputs used to produce or manufacture of exported goods (Section 13)
(1) Notwithstanding any thing contained in chapter VI of the Custom Act, 1969 any person will get drawback if he paid VAT, Supplementary Duty, Import Duty, other Excises Duty and taxes except Advance Taxes and such Supplementary Duties as mentioned by SRO in Government gazette if these are paid on inputs which

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Is used to produce or manufacture exported goods or services, or Is deemed as exported goods or services, or Is used in foods or any goods mentioned in section 3(2).

Provided that the above drawback will not be allowed if it is not claimed within six months from the date of export or deemed to be exported and at the date of last export in case of partial on the condition of confirm and irrevocable L/C or local back to back to L/C or local or international tender. For the purpose of this sub-section date of export means date of submission of bill of export of goods or services by owner thereof under section 131 of the Custom Act. (2) (3) Any exporter can adjust output tax on goods or service, which is supplied in Bangladesh by the exporter. The Board, by an order in official gazette can allow drawback of input tax paid as mentioned in sub-section (1) on the basis of invoice for actual export or on the basis of flat rate after determining of input-output co-efficient of exported goods. The Board, by an order in official gazette can allow drawback of VAT and supplementary duty paid on the goods or services produced locally which is used for implementing any international contract on conditions as mentioned in the order.

(4)

9.16
(1)

Exemption
Government by notification in official gazette, from time to time, may subject to the prescribed limitations and conditions, exempt any import or supply goods or class of goods or services from VAT and Supplementary Duty. The Board by special order may, exempt any goods imported or supplied or services for the implementation of any international or bilateral Contract on the reciprocal basis, subject to the limitation & condition mentioned in that order. Board by special order, specifying the causes for each case, exempt any taxable goods or services from VAT and Supplementary Duty.

Section 14 contains the provisions relating to exemptions.

(1A)

(2)

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9.17

Books of account

As per the provisions of section 31 every registered person has to maintain the following books and records in the manner mentioned in the rules for the tax period in order to facilitate in determination tax liability in respect of goods purchase or supplied or service rendered: (a) (b) Statement of purchases together with the invoices of taxable or exempted goods or services. Statement of taxable or exempted goods or services supplied or statement of such goods or services exported and copies of the related invoices, Current Account, Statement of money deposited in the Treasury or in any approved bank of the Government for this purpose in payment of any Value Added Tax through Chalan, Statement of stocks of inputs and produced and manufactured goods, commercial documents of taxable and exempted goods and services:

(c) (d)

(e) (ee)

Provided that Board through Government Gazette notification reserves the right to determine the methods and kinds of books and records to be preserved by any registered person.

9.18

Tax invoices

Section 32 requires that every registered person shall, at the time of supply of taxable goods or services or export of goods or services or sale of taxable imported goods, give an renumbered invoice in the prescribed form or any other form approved for this purpose by the Board by the notification of the official gazette subject to the following conditions: (a) (b) Not more than one invoice can be issued for each transaction; and If the original invoice of a customer is lost he can issue a duplicate copy marked as only duplicate.

9.19

Period of keeping records

Section 33 deals with the provisions relating to the period of record keeping. It states that every registered person who is required to keep records under section
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31 shall keep these records and commercial papers, etc. in Bangladesh for not less than 4 years after the end of the related tax period. Where any case is pending under this law against a registered person, then he has to keep records of related tax period until settlement of that case.

9.20

Submission of files/records etc.

Section 34 deals with provisions relating to submission of records etc. A registered person shall at any time on a requisition by a tax officer, submit the records, commercial documents possessed or controlled by him.

9.21

Power of release of goods without payment of VAT and drawback of VAT on some goods

Section 66 provides that the Board subject to imposition of suitable condition, limitation or commandment and prohibition for general matter determined under the provision or special matter under special order in line with the section 21 of the Custom Act may allow release of goods without payment of VAT and drawback of VAT on some goods.

9.22

Refund

Section 67 deals with the provisions relating to refund. (1) The tax payer can claim a refund of excess VAT or Supplementary Duty or Turnover Tax paid due to carelessness or wrong explanation and the above excess tax will be refunded in line with the method as mentioned in the rules. Provided that the claim has to be made within six months of such payment otherwise no claim will be allowed. (2) According to section 81 of the Customs Act the said 4 months period shall be calculated from the date of adjustment after final assessment.

9.23

Drawback in case of exported or imported goods

Section 68 provides that subject to the provision of Chapter-VI of the Custom Act the person shall get a drawback of VAT or supplementary Duty paid on imported goods identifiable easily at the time of exporting the same for consumption abroad.

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9.24

Drawback in case of goods used in the mean time of import and export

As per section 69 notwithstanding anything contained under section 68, VAT or Supplementary Duty paid on the goods during time of import and export, drawback will be made under the drawback rule.

9.25

Drawback not allowed under certain cases

As per section 70 without prejudice the section 13 and notwithstanding anything contained in the section 68 and 69, drawback is not allowed in the case where section 39 of the Custom Act is applicable.

9.26

Other Provisions

The following is a brief summary of the provisions dealing with other relevant matters relating to the imposition of VAT and the procedures for registration, Assessment and collection:

9.27

The Value Added Tax Act, 1991

Registration Sec.-15: Registration Rule-11A: Registration of Commercial Importer Sec.-16: Exemption from Registration Sec.-17: Self Registration Rule-9: Procedure of Registration Sec.-18: Change of Information Relating to Registration Sec.-19: Cancellation of Registration Rule 15: Cancellation of Registration VAT Authorities Sec.-20: Appointment of Value Added Tax Officers Sec.-21: Power Sec.-22: Assignment of Power
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Sec.-23: Duties imposed on other Government Officers of VAT Officers Sec.-24: Assistance of VAT Authority Sec.-24A: Assistance given by VAT Officer Powers of VAT Authorities Sec.-25: Power to serve Summon Sec.-26: Officers Power to Enter into Place of Production, Place of Providing Services, Place of Business to Inspect Stocks, Services and Inputs and to Examine Accounts and Files Sec.-26A: Giving Order of Audit by Empowered Official or Appointment of Auditor by the Board Sec.-26B: Provision regarding Supervised Supply, Inspection and Monitoring Sec.-27: Seizure of Forfeitable Goods Sec.-28: Management of Seized Goods Sec.-29: Settlement of Money of Receipt of Sale and Sale of Goods Sec.-30: Management of Forfeited Goods Return Sec.-35: Submission of Return Rule-24: Procedure Relating to Return How to Submit Sec.-36: Examination of Return Misc. Provisions Sec.-37: Offences and Penalties Sec.-38: Forfeiture Sec.-39: Limitation of Forfeiture (Extent) Sec.-40: Power of Adjudication Sec.-41: Imposition of Penalty Instead of Forfeiture Sec.-42: Appeal Sec.-43: Power of the Board to Call for the Records and Initiate Proceedings Sec.-44: Boards Power to Rectify Mistakes, etc.
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Sec.-45: Revisional Power of Government Sec.-46: Presence by Empowered Representative and VAT Counselor etc. Sec.-47: Power of the Government for Calling for the Records and Examination Thereof Sec.-48: Power to Search Sec.-48A: Delegate the Power of Magistrate VAT Officer Sec.-49: Power of Arrest Sec.-50: Arrest is Prohibited Without any Warrant for Certain Crimes Sec.-51: Procedure for Search and Arrest Sec.-52: Management for Arrested Person Sec.-53: Method of Procedures to be Followed of Officer in Charge of a Thana Sec.-54: Method of Investigation of the Person Sent Under Section 52 by a VAT Officer Sec.-55: Recovery of Other Duty-Tax Including Un-recovered and Deficit VAT Sec.-56: Recovery of Dues by Government Sec.-57: Circulation of Order, Decision etc. Sec.-58: No Claim of Damage Otherwise Negligence or Whimsical Sec.-59: Transfer of Ownership Sec.-60: Applications of Other Laws on VAT Sec.-61: Prohibition of Jurisdiction of the Court Sec.-62: Protection of Activity Done Believing in Good Faith Sec.-63: Asset of Deceased Person Sec.-64: Liability of Insolvent Person Sec.-65: Elimination of Problem Sec.-71A: Power to Write off Arrear to Government Sec.-71AA: Reward for Revelation of Tax Evasion, Violation of Law etc. Sec.-72: Power to Make Rules Sec.-73: Repeal and Preservation

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