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The most comprehensive and theoretically appealing way of domestic indirect
taxation is the Value Added Tax. It was originally introduced in France in 1954.
Now over 120 countries accounting for 70 % of the world's population have the
VAT systems in place. Only USA and India are amongst the more populous countries
that do not have a fully established VAT regime till now.
BASIC CONCEPT OF VAT:- VAT is a simple transparent
tax collected on the sale of goods. A full fledged VAT is, in essence, an
ad-valorem tax in domestic final consumption. It is levied and collected at all
stages between production and point of final sale. At each stage the tax is
confined to value additions.
Value Addition = Market Value of Sales -
Purchases. The invoice method of value addition tax is usually adopted. Under
this system the producer therefore pays to the Government only the net amount of
tax on value added, as verified from purchase and sale invoices. Thus VAT
simultaneously achieves two objectives:-
- Taxing sales at very stage of production.
- Allowing full deduction of taxes paid in purchases (inputs. raw material).
ADVANTAGE OF VAT:- In the recent times, more and
more countries have been adopting VAT for taxation of commodities and service
due to its various advantages listed below:-
Simple Structure - VAT has a simple and transparent structure. Uniformity of tax
rates would boost four trade and help in establishing "a single Indian market".
VAT will also broaden the tax bas & thereby generate large reserves for
governments.
- Check Tax Evasion - VAT will dramatically reduce
tax evasion as records will be kept of tax paid at every stage of the process,
if the due tax has not been charged on any of the purchased inputs, there would
be no invoice for it and a deduction would be unavailable. Therefore the missed
tax can be recaptured at later stage.
- Promotion of Experts: - Under VAT, the rate of tax
on export goods will be zero. Yet credit will be given on tax paid on inputs
need in manufacturing the export goods. This will promote the competitiveness of
the exports
- Elimination Of Cascading Effect Of Taxes :- under
the old taxing system, there is a heavy reliance on taxing the raw materials
used in production of goods, leading to rise in price of final product. VAT
checks the cascading effect of taxes with a provision for set off for tax paid
at the proceeding stage.
- Self assessment:- enforcement of VAT system calls
for maintenance of adequate documentation such as invoices, purchase memos etc.
If proper accounts are kept then each trader can calculate his tax liability
himself. 100% self assessment will reduce the taxpayer's need to visit lawyer &
taxation departments.
VAT SYSTEM IN INDIA
In India there are four rates of taxes under VAT:
- Zero Rate: unprocessed agricultural goods and export items;
- One Percent Rate: gold, silver, precious and semiprecious stones;
- Four Percent Rate: basic necessities, capital goods, industrial and agricultural
inputs, AED (Additional Duties of Excise) items like sugar, textiles and tobacco
products.
- A uniform median rate of 12.5 % would be applied to all commodities (about 425
items).
Certain items like Aviation Turbine Fuel (ATF), certain petroleum products etc.
will be kept outside the VAT regime. Rates applicable to scrap and obsolete
items will be the same as for the original item, at the time of disposal. Most
essential commodities are exempt from VAT or fall under the four percent
category.
The VAT rates will be uniform in all states across the country. The same set of
goods will be charged at the same rates in all the states. All business
transaction carried on within a state by individual, partnerships, companies
etc. will be covered by VAT.
There would be a level of turnover above which registration would be compulsory
under VAT. Only registered sellers and buyers would be able to claim tax
set-offs for inputs.
Unification of all taxes under VAT may result in revenue losses for the states.
To ensure least disruption in the process of transition from current system to
VAT, the central government has assured the states of 100% compensation for
possible revenue loss in the first year, and the rate of 75% and 50% for the
next two years respectively. To smoothen the road to VAT, the government
established an Empowered Committee of state finance ministers to monitor and
decide the policy guidelines for VAT.A Task Force was also constituted for early
implementation of VAT. A model VAT Law was also prepared and circulated among
all the states . This was done to ensure that VAT legislation of all the states
and all the U.T.'s have common policies and procedures.
The original dateline for implementation for VAT in India was 1 st April , 2003
. But this could not be met since the states had not brought the required
legislation. So finally VAT was implemented in 22 states from 1 st April 2005.
The various problems being faced in implementation of VAT are :-
- Opposition from small traders :- Under VAT , small
traders will have to register themselves and arrange to collect and deposit
taxes to the Government . To keep complex records , traders will have to engage
services of an Accountant , Sales Tax Lawyer to file the return and A Chartered
Accountant for Auditing . This would prove to be a substantial burden on their
income.
- Rise in Costs :- Since VAT will bring the entire
distribution channel - including all categories of wholesalers , retailers and
other intermediaries into the tax net , so sectors with relatively long
distribution channels would witness a rise in overall costs. Such sectors
include most fast moving consumer goods , pharmaceuticals , certain consumer
durables and cement . VAT could spur inflation in the short run in the economy .
- Inter-state coordination :- A VAT regime is
theoretically meant for a unified market in which tax levied can always be
set-off against tax already paid , irrespective of state wise location of
trading entities . However , these inter-state adjustments are proving to be
difficult to implement since there is no mechanism for set-off between state
governments due to lack of coordination and uniformity .
- Continuance of CST:- Central Sales Tax ( CST )
divides the country into several tariff zones , constricting internal trade .
The sudden phasing out of CST has frightened several states as they foresee a
revenue shortfall . So until VAT is fully in place , CST would continue along
with VAT .This would place an additional tax burden on the state industry ,
which would be passed on to the consumers .
Weak Publicity Programme:- An unpleasant
controversy has surrounded this indirect tax , mainly due to lack of clarity
about its purpose and mechanism of collection. The informed traders are
objecting since they fear harassment from revenue officials . Small and
uneducated traders have no knowledge about the working system and effects of VAT
due to Governments weak publicity programme.
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