VAT: Value Added Tax



The value added tax is similar to the national sales tax, however, instead of implementing one tax of a certain percentage at the time of retail sale, there is a smaller tax, proposed at 5%, added each time the product is resold or when value has been added. For example a tax is added when a product is passed from a manufacturer to a wholesaler, and again from the wholesaler to the retailer. Most products would be priced higher than they are today because the cost of goods would include this built in tax. The Value added tax proposal is sponsored by Representative Sam Gibbons of Florida and Senator Ernest Hollings of South Carolina.

(VAT), levy imposed on business at all levels of the manufacture and production of a good or service and based on the increase in price, or value, provided by each level. Because the consumer ultimately pays a higher price for the taxed commodity, a VAT is essentially a hidden sales tax. Originally introduced in France (1954), it is now a major part of the tax structure of most Western European nations. In the early! 1990s the U.S. government considered instituting a VAT to fund national health care programs.

India began the biggest overhaul of its tax system in more than half a century yesterday when most of its 28 states introduced value-added tax in an effort to cut borrowing and spur economic growth. VAT, a charge on the value that producers, wholesalers and retailers add to goo! ds at each stage of their production and distribution, is intended to replace sales tax and some other levies that together contribute 60 per cent of states' income. The states will charge VAT at 12.5 per cent on most goods.



Reasons: why government proposes to impose VAT?

Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of Service Tax and stated that '' There is no sound reason for exempting services from taxation, therefore, I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers.''

Service Tax had been levied on the recommendations made in early 1990's by the Tax Reforms Committee headed by Dr.Raja Chelliah. The Committee pointed out that the indirect taxes at the Central level should be broadly neutral in relation to production and consumption of goods and should, in course of time cover commodities and services. The Committee felt that we should move towards full-fledged Value Added Tax (VAT) system covering services and commodities. Service tax must be a part of VAT at the central level. It was envisaged that as the central excise duties on goods would get gradually transformed into a value added tax at the manufacturing level, service tax would get woven into that system. Therefore, a tax could be levied on services that enter into the productive process. The Comm! ittee emphasized the importance of moving towards VAT, for making the system of indirect taxation broadly revenue neutral in relation to production and consumption and widening the tax base by covering exempted commodities. It is felt that VAT mechanism would mitigate the burden of service tax and take care of the cascading effect on the ultimate customers.



VAT aims to cut multiple layers of state and federal taxes and impose uniform tax rates across the country.



120 countries had adopted the system, some of them almost 30 years ago. Most countries which have adopted VAT have seen their revenues increase. India needs more revenues to plug its deficit. In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing developmental needs of the country and its people by way of public expenditure.

The Government said that the introduction of a Value-Added Tax (VAT) regime replacing the existing complex sales tax structure would "on the whole" result in lower prices for the consumer.

"Under the proposed VAT system, all States will have to align their sales tax/VAT rates towards a revenue neutral band of 10 to 12.5 percent. Since there are many States whose corresponding revenue neutral levels will work out to over 15 per cent at existing sales tax rates, the effective duty incidence will come down and benefit consumers," Mr Anupam Dasgupta, Additional Secretary, Department of Revenue, told presspersons here.

According to him, the global experience with regard to VAT was that it promoted efficiency in production by allowing tax credit for inputs and reducing the cascading impact of multiple levies. "In the process, it is not only the consumer but even the producer who benefits. Moreover, the Government does not lose revenues since the lowering of tax rates are more than offset by increased economic activity," he pointed out.

Further, the compensation will factor in the additional revenues accruing to States from their being empowered to tax services as well sugar, textiles and tobacco products.





Reasons: why traders opposed VAT in India?



The power to enhance the rate of tax will rest with the finance department of the states. The industry feels that this will be largely misused, and rates could be increased at the wishes of the bureaucrats, ignoring the stipulations.

7 The bureaucracy will have full control over every dealer and trader, and will have the authority to inspect not only the books of accounts, but verify case or stock too. This is absurd feels the industry.

7 The department will have the power to attach provisionally, any money which is due or which may become due in the course of any enquiry, inspection or proceedings. The revocation of such an attachment is possible only after the submission of a bank guarantee. Though it is provided that such an attachment will cease to have effect after the expiry of one year, the commissioner has the power to extend this period up to t! wo years.

7 Getting refunds of the VAT would be a cumbersome procedure.

7 The sales tax commissioner has the power to declare any transaction null and void. According to the industry, it would be almost impossible to get the commissioners clearance to make a contract, and would give rise to various malpractices.

7 Even as the dealers will be heavily penalized for any mistake they may make, the authorities will go scot-free for any mistakes they may make. Moreover, the interest charged for late payment is 24 per cent, whereas late refund would attract only a nine per cent interest.

7 There will be no set-off on inter-state sales.

7 The new VAT provisions give power to the authorities to create check nakas at their discretions.

7 No redressal system of recheck .

7 Audit requirement under VAT on a turnover of Rs 40 lakh is required to be audited and assessed. When there is already an audit of accounts for income tax purposes, a separate audit requirement for VAT is a duplication of the work.

7 Penal provision for a lapse of even a single day in filing return is very high, to the extent of 50 per cent of the tax payable.

7 Traders dealing in products with brand names will be required to pay additional taxes of brand name and not set-off on these is provided.

According to the trading community, VAT specifies taxation of only addition to the products value, but the enactment seems to cover even the difference between the cost and selling price.

Traders have pointed out that maintaining books of accounts is an almost impossible task, especially for the very small textile traders that are spread across the country and in the interiors of the country too. The present rules give the sales tax department, finance department, etc sweeping powers, and will lead to a lot of malpractices and harassment. Even as traders are not opposed to paying tax, this should be done in a non-draconian manner, and without harassing the traders.





VAT: Pros & Cons

Advantages:

A 5% tax is levied at each stage of production of goods.
The total tax is built into the cost of goods
Exports are not taxed.
All imports are taxed.
It allows multiple rates and exemptions on goods from other countries.
This form of tax is used by many other industrialized countries currently.
No tax forms or tax returns will be needed for individuals.
It would eliminate the need for the IRS.
The cost of compliance is estimated at nearly $5 billion per year, about a hundred times less than the current system.
Disadvantages:

It would be similar to the National Sales tax, but it would be more complicated to administer and collect.
It would also tax food and medicine as does the national sales tax.
The tax will increase costs and push up prices.