How Does VAT Work?
Finance Minister P. Chidambaram released a White Paper on a valued added tax (VAT), envisaging the roadmap for implementing the new tax regime from April 1 this year.
How Does VAT Work?
VAT leads to avoidance of multiple taxation and lowering of taxes for manufacturers and traders. It lowers prices of final goods for consumers.
It provides set-off for tax paid at every stage of value-addition to goods.
VAT liability is calculated by deducting input tax credit from tax collected on sale during payment period.
Inputs of Rs 1,00,000 are now purchased for producing final goods worth Rs 2,00,000 in a month.
Input tax is paid at 4%, output tax at 10%. In this, input tax works out to Rs 4,000 and output tax on sales to Rs 20,000.
Under VAT, levy on sales of final goods worth Rs 2,00,000 will work out to Rs 16,000 (output tax of Rs 20,000 minus Rs 4,000 set off as input tax).
Input tax credit will be given to manufacturers, traders for purchase of inputs, supplies meant for sale within states as well as other states.
*the threshold limit for traders coming under VAT regime from Rs 5 lakh-Rs 50 lakh turnover from the previous limits of Rs 5 lakh-40 lakh. Traders within this limit can pay a composite VAT rate of 1 per cent but would not be entitled to input tax credit.
*In a way VAT is no different from excise duty and in course of time, it is our dream to move onto goods & services tax (GST) in future.
Under the VAT system covering about 550 goods, there would be only two basic VAT rates of 4 per cent and 12.5 per cent, plus a specific category of tax-exempted goods and a special VAT rate of 1 per cent only for gold and silver ornaments. This would do away with the multiplicity of rates in the existing structure.
There would be also a list of 46 commodities under the exempted category comprising natural and unprocessed products in unorganised sector, items, which were legally barred from taxation, and items that had social implications.
Included in this exempted category was a set of maximum of 10 commodities flexibly chosen by individual states from a list of goods, which were of local and social importance for the respective states and did not have any inter-state implications.
The rest of the commodities in the list would be common for all states.
About 270 items, including drugs and medicines, all agricultural and industrial inputs, capital goods and declared goods would attract 4 per cent VAT.
Under 4 per cent VAT rate category, there would 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 industrial inputs, capital goods and declared goods, the White Paper said.
The schedule of the commodities would be attached to the VAT Bill of every state. The remaining commodities, common for all states, would fall under the general VAT rate of 12.5 per cent.
West Bengal Finance Minister and Chairman of the Empowered Committee of State Finance Ministers Asim Dasgupta said that VAT on additional excise duty items- sugar, textile and tobacco-would not be imposed for one year because of initial organisational difficulties. “The existing arrangement will continue till then and the position will be reviewed after one year,” he said.
Petrol and diesel would be kept out of VAT regime, which covers only marketable items, Mr Dasgupta said. A view was yet to be taken on CNG.
Considering the difficulties faced by Tea industry, it was decided that tea-producing states would be given an option to levy 12.5 per cent or 4 per cent subject to review in 2006.
Mr Dasgupta said that most of the states had prepared the VAT Bill or were in the process of completing it. “There are some problems with one important state (Uttar Pradesh) and these are genuine ground level problems. While most of these problems have been sorted out, we are hopeful that the remaining will be sorted out after we hold discussions after Republic Day,” Mr Dasgupta said.
Releasing the White Paper, Mr Chidambaram termed the introduction of VAT as the single most important tax reforms ever to be undertaken in independent India. VAT, Mr Chidambaram said “We have formed a rainbow coalition to undertake one of the biggest tax reforms since Independence.” It was decided that states would have option to either levy 4 per cent or totally exempt food grains but it would be reviewed after one year.
Mr Chidambaram urged all states to implement the new tax regime assuring that the Centre would compensate the states and help in building a computer network system and resolve all problems.
States would get 100 per cent compensation for revenue loss, if any, in the first year, while 75 per cent of the loss would be compensated in the second year and 50 per cent in third year.
VAT will replace the sales tax regime in states with a two-tier tax regime of 4% and 12.5%. The document was drawn up after all states, barring UP, were prepared to implement VAT from April.
The move to implement VAT has been postponed five times in the past as several state governments had expressed concerns about losing precious revenue. VAT may not impact consumers as much as traders.
VAT will lead to abolition of local taxes like turnover tax, surcharge, additional surcharge and special additional taxes.
Following opposition from some states, it was decided that states would have option to either levy 4% or totally exempt food grains from VAT but it would be reviewed after one year.
Three items – sugar, textile, tobacco – under additional excise duties will not be under VAT regime for one year but existing arrangement would continue.
The central sales tax of 4 per cent, which yields Rs 15,000 crore to states, would be phased out after April 2006.
India Inc wants CST phased out
An optimistic corporate India commended government’s commitment to introduce VAT from April 1, 2005. Industry bodies said VAT would integrate domestic trade across India into a single market and end unhealthy competition among various states. However, industry leaders lobbied for an announcement to phase out CST.
CII president Sunil Kant Munjal said this is first step towards tax rationalisation. “We hope VAT implementation will make India a unified market and enhance industry’s competitiveness.'’
Munjal said there is an urgent need for a simple, predictable VAT regime to promote efficiency, competition and growth of common market. “This will replace existing system of inspection by a system of built-in self-assessment by traders and manufacturers. This, we feel, will improve tax compliance and revenue collection,'’ he added.
PHDCCI president K N Memani said VAT must be accompanied by roadmap to phase out CST at the earliest as VAT and CST are incompatible. He emphasised that to make India a common market, VAT should be implemented simultaneously across all 28 states and 7 Union territories without exception.
“Tax slab of 12.5% VAT is on higher side. This, with excise duty and other local levies, will mean tax incidence of over 30%, which would continue to adversely affect Indian industry,'’ said Memani. “Endeavour should be to bring it down to maximum 8% and subsequently integrate it with Cenvat.'’
Confederation of All-India Traders (CAIT) dubbed white paper as lacking fundamentals. “Prices of many commodities, including those of daily use, would increase. Flexibility given to states in certain matters would lead to disparities among various state VAT laws. This is against basic fundamentals of VAT,'’ said P Khandelwal, S-G, CAIT.
Ficci said units located in SEZs and EoUs should be granted exemption from payment of input tax or refund of input tax paid within three months. Assocham president M Sanghi said plan exempting 46 commodities, comprising natural, unprocessed products in unorganised sector is a good move.
Govt to hardsell VAT with ad blitz
Building trust can never be easy. But Delhi’s sales tax department has decided to take the issue head on. The department will be introducing the value added tax (VAT) regime with an aggressive advertising campaign that is designed to create trust amongst the city’s traders and dealers.
VAT is a system of selfassessment that experts hope will lead to transparency in tax collection and boost government revenue. It is expected to be implemented by April 1. The publicity campaign, with a budget of Rs 1.5 crore, will extend till June and introduce the new “architecture'’. “The campaign represents replacing of an architecture of apprehension and doubt with that of trust and self-assessment,'’ R K Verma, sales tax commissioner, said.
The campaign includes print ads, some of which have already been released, explaining the taxation system, self-assessment and other details about who is eligible. “This is the first part of the campaign. We have already introduced a help line and the response has been tremendous,'’ Verma added. In the next phase, the department will be writing to the traders asking them to clarify any doubts regarding their case. “If they do not come to the department, our officers will go to them,'’ an official said.
Interactions have been planned with traders and dealers. “We will visit market and trader’s associations to ensure that they do not feel as if the tax is being thrust on them,'’ said A K Walia, Delhi finance minister.
The department hopes that these new initiatives will be successful. VAT is likely to be profitable for government coffers at any rate. “We expect a growth of 20% if VAT is implemented,'’ a senior Delhi government official said. The sales tax department this year notched Rs 4,900 crore in collections for 2003-04.
Putting reforms in top gear, Union finance minister P Chidambaram presented a white paper on VAT to the empowered committee on Monday. The statelevel VAT has several advantages over the existing sales tax structure. It will not only abolish the burden of several existing taxes such as turnover tax, surcharge on sales tax, additional surcharge and special additional tax but also pha-se out central sales tax. The overall tax burden, officials say will be rationalised and prices in general will fall.
MATTER OF TRUST
*Sales tax department will introduce ad blitzkrieg for VAT
*It will have a budget of Rs 1.5 crore and will extend till June
*The campaign is aimed to remove apprehensions and doubts of traders