VAT

VAT IS BEAUTIFUL IN ITSELF AS IT LENDS TO

SELF-CORRECTION FOR BUSINESS, ERASE THE
REVENUE ADMINISTRATION AND ENSURE STEADY
AND ASSURED REVENUE FOR THE GOVERNMENT

VAT - Value Added Tax

Value Added Tax is a general indirect tax assessed and

collected on the value added to goods in each business
transaction.

It is levied on all commercial activities involving manufacture

and trading of goods and services.

VAT is charged at uniform rate as percentage of price at which

goods are transacted and it is imposed at each stage of
transaction in the production and distribution chain.

VAT is a consumption tax because it is borne ultimately by the

final consumer. It is not a charge on companies.

VAT is levied at every point in the series of sales by the

registered dealers with the provision of credit of input tax paid
at the previous point of purchase there of.

VAT in India covers only tax on sale of goods within the state
and services are not included in India.

Necessity of VAT in India

Industry watchers say that the VAT system, if enforced

properly, lowers the fiscal deficit burden for the government.

Any globally accepted tax administrative system, will only help

India integrate better in the World Trade Organization regime.

IMF in its semi-annual World Economic Outlook released on

April 9th, expressed its concern over India's large fiscal deficit at 10 per cent of the GDP.

JUSTIFICATION OF VAT

In the existing sales structure , there are problems of double taxation of

commodities, resulting in cascading tax burden.

In several states sales tax structure is multiplicity of taxes such as turnover

tax, surcharge on sales tax, additional surcharge etc.

In the VAT a set off is given for input tax as well as tax paid on previous
purchases.

Introduction of VAT abolished other taxes.

Overall tax burden will be rationalized and prices in general will fall.

Improve tax compliance and also argument revenue growth.

VAT helps common people, traders, industrialists and also the Govt.

VAT is a built-in-self assessment by the dealers and auditing.

VAT is a modern, simple and transparent tax system that will replace the
existing sales tax and eliminate the cascading effect of sales tax.

VAT IN INDIA A STATUS NOTE

Implementation of minimum floor rate (MFR) of sales tax .

Implementation of VAT from April 1st 2001, subsequently

postponed and decided to implement throughout the country from
April 1st 2005.

550 goods are covered by VAT of which a large number of

commodities will fall in the 12.5% tax rate.

270 items will attract 4% duty.

Gold and silver ornaments attract 1% duty.

To exempt 46 natural and unprocessed products from the new tax.

Cont.

Turnover less than Rs.5 lakhs are outside the purview of VAT.

States have the option to either exempt or impose 4% VAT on

grain in the first year.

Units located in EOU and SEZ will be granted exemption from

payment of input tax.

22 Indian states have drafted the VAT Act for their states.
State loss will be calculated as the difference between the
average growth of sales tax in a state in the last three years and
what the state actually collects under the VAT

STATES IMPLEMENTED VAT

20 out of 29 states have switched over to Value Added Tax (VAT)

on Friday, April 1 2005.

The decision to introduce VAT was publicly discussed first at a

conference of state chief ministers and finance ministers in
November 1999.

A study by an industry lobby group, the Associated Chambers of

Commerce and Industry, has said that VAT should fetch additional
revenues of nearly 750 billion rupees ($17 billion) once it has bedded
down.

THE CUTS THAT STATES FEAR

Total tax revenue and sales tax revenue in the proportion to GSDP
STATES

TAXREVENUE/GSDP

SALES TAX/GSDP

Andhra Pradesh

7.28

3.16

Assam

4.33

2.62

Bihar

5.05

3.16

Gujarat

7.67

4.82

Haryana

7.29

4.08

Karnataka

8.15

4.93

Kerala

8.01

5.95

Madhya Pradesh

5.83

2.57

Maharastra

7.15

4.35

Orissa

4.70

3.05

Punjab

6.30

3.15

Rajasthan

6.04

3.23

Tamil Nadu

8.57

5.51

Uttar Pradesh

5.01

2.72

West Bengal

3.83

2.57

Source: Planning Commission 2004

Recommended Road Map Integrated National VAT

Replace multiple state taxes by state VAT as proposed from 1.4.05.

Extend the State VAT to the products currently taxed separately

under AED (e.g. textile, sugar & tobacco products).

Phase out non-vat able central sales-tax and entry taxes to integrate
Indian market.

Refine the current excise CENVAT regime into manufacturing VAT

for all products. The items for which the VAT chain is broken
such as, textiles, should be brought under the CENVAT structure.

Create a platform for comprehensive national VAT with the mutual

agreement between Center & States on tax sharing from a common
tax base.

Cont

A comprehensive legislation covering Excise & Service

tax needs to be introduced as Central VAT on goods &
services. Currently, the services are taxed under the
Finance Act, 1994, which is an interim taxation arrangement.
The inter- sectoral credit has been introduced last year but
requires several improvements.