vat and its implication in indian economy

7/29/2019 VAT and Its Implication in Indian Economy

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Indian Business Scenario - Opportunities and Challenges

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Archers & Elevators Publishing House www.aeph.in

VAT and its Implication in Indian Economy

*Ms. Kogila. N

*Ph.D Research Scholar in commerce, St.Josephs College (Autonomous),

Tiruchirappalli2

Abstract

Value added tax (VAT) is a type of indirect tax that is imposed on goods andservices. German was the first country in the world to introduce VAT in the year1954 and remains confined to handful of countries until the 1960s. Today VAT isthe key source of governments revenues in more than 132 countries and nearly 75percent of the worlds population now lives in countries with VAT. VAT is one of themost radical reforms that have been proposed for the Indian economy after years ofpolitical and economic debates. The reasons for advocating VAT is that it replacesthe complicated tax structure. From April1, 2005, 20 states have replaced the five

decades-old sales tax regime with the modern pro-reform.VAT can be classified intofive categories, under each of which a different rate is prescribed. The tax is leviednot only on products but services that is the source of revenue for the governmentto plan for development activities in the country. Since, India is a developingcountry, the main source for revenue is generated through tax levied on theindividual on the purchase of goods or services. The Indian consumer and theintermediaries involved in supply chain are suffered with financial crunch andprice inflation. The general public is affected by tax rates simultaneously, as richclass people are only able to bear the burden.

Introduction

Value Added Tax (VAT) is a multi-stage tax levied on the value added at each

stage as a proportion of the value added. The value added at each stage ofproduction and distribution is taxed. Value added tax in simple terms could bedefined as a tax on the value addition at different stages of manufacturing anddistribution of goods and services. It is a form of indirect tax in the nature of amulti-point sales tax with a set off or credit for tax paid on purchases / services.Each transaction of goods sold in the course of business is taxed, thus providingrevenue to the government on value addition at each stage. For computing thevalue of the tax, normally two approaches are added. The first approach is tocalculate the base of the tax by deducting the expenses on intermediate goodsincurred by a firm form its sales. In the second approach, a firm is permitted todeduct the tax paid by it in its purchases from other units. The primary objective is

in the forefront of the evolution of value added tax Law, the State must ensure thatbarriers to inter-state trade should be eliminated in order to create a unifiednational market. It will agree that the VAT process must be simple, transparent,and consistent in structure and approach (NCAER, 2009).

Concept of VAT

German was the first country in the world to introduce VAT in the year 1954and remains confined to handful of countries until the 1960s. Today VAT is thekey source of governments revenues in more than 132 countries and nearly 75percent of the worlds population now lives in countries with VAT. However VAT isthe value added sales tax. It is the excess of tax collected on total output or salesover the tax paid on total factors input. In other worlds VAT is the tax on the value

added by business firm through its own activity to the goods and services it buys


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from other business firms. The potential tax revenue of VAT is greatly dependent onthe number and level of rates, scope of the tax and the degree of tax compliance.

VAT in India

It is unfortunate that our country did not designed extent despite having

adequate resources and skilled work forces .To boost up the Indian economygovernment of India initiated economic reforms since July 1991. The governmentappointed a tax committee under the chairmanship of Dr Raja J Chelliah on 29 thAugust 1991. The committee has suggested for reform. The tax system to make itmore efficient and revenue yielding Dr Chelliah committee has recommended ValueAdded Tax (VAT) as the best option to the existing central exercise duty tax system.It can be aptly defined as one of the ideal forms of consumption tax taxation sincethe value added by the firm represents the difference between its receipts and costof purchase inputs. VAT is one of the most radical reforms that have been proposedfor the Indian economy after years of political and economic debates. The reasonsfor advocating VAT is that it replaces the complicated tax structure. From April1,2005, 20 states have replaced the five decades-old sales tax regime with the

modern pro-reform.VAT that faces strong resistance from traders. When VAT wasintroduced in India states like Uttar Pradesh, Tamil Nadu, Uttaranchal, and fiveBJP ruled states decided to continue with old tax regime but late Tamil Nadu andUttar Pradesh has agreed to implement VAT. The VAT panel had announcedbroadly the VAT rates for over 550 items, 46 natural and unprocessed localproducts would be exempt from VAT. It is important that the commentators areoptimistic that VAT will help increase revenue by getting more people in the tax net.

Rate Structure and Classification of Commodity under VAT

The white paper on VAT has made a road map of levy of uniform state leveltax on more than 550 items would be covered under the new Indian VAT regime of

which 46 natural and unprocessed local products would be exempt from VAT theitems like petrol, Diesel, Liquor, Lottery, have been kept out of the VAT regime inIndia, which covers only marketable items.. About 270 items including drugs andmedicines, all agricultural and industrial inputs, capital goods and declared goodswould attract four per cent VAT in India. The remaining items would attract 12.5per cent VAT. Precious metals like gold and bullion would be taxed at one per cent.


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RATES OF VAT ITEMS

0%

550 Items,

Natural and un-processed produces in unorganizedsector

Good of social importance

Life saving drugs, Newspapers, National flag barredfrom taxation.

1% Gold, Silver,

Precious and semi-precious stones.

4%

270 Items,

Basic necessities, Industrial and agricultural inputs,

Declared goods, Medicines and drugs,

AED items, Capital goods.

12.50% RNR[revenue neutral rate] on other goods.

SPECIALADDITIONAL TAX

(>20%)Aviation turbine fuel (ATF), Petroleum products

Fuels, E-merit goods.

Traders with turnover of less than 500,000 rupees are exempt from the

new tax.Considering the difficulties faced by the tea industry, it was decided that tea-producing states would be given an option to levy 12.5 per cent or four per centsubject to review in 2006. Owing oppositions from few states, it was decided thatstates would have option to either levy four per cent or totally exempt food grainsbut it would be reviewed after one year. Three items - sugar, textile and tobacco -covered under Additional Excise Duties, will not be under VAT regime for one yearbut the existing arrangement would continue. The Indian VAT panel relaxed thethreshold limit for traders coming under VAT regime from Rs 5-50 lakh of turnoverfrom the previous stance of Rs 5-40 lakh. Traders within this limit can pay acomposite VAT rate of one per cent but would not be entitled to input tax credit.


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Computation Procedure of Sales tax under VAT Regime

VAT is most certainly a more transparent and accurate system of taxation.The existing sales tax structure allows for double taxation thereby cascading thetax burden. For example, before a commodity is produced, inputs are first taxed,the produced commodity is then taxed and finally at the time of sale, the entire

commodity is taxed once again. By taxing the commodity multiple times, it has ineffect increased the cost of the goods and therefore the price the end consumer willpay for it.

The transaction chain under VAT assuming that a profit of Rs 10 is retainedduring each sale.

SALE 'A' OF CHENNAI@ Rs. 100/-

'B' OFBANGALORE

SALE@ Rs. 114/-

'C' OFBANGALORE

SALE

@ Rs. 124/-

'D' OF

BANGALORE

SALE

@ Rs. 134/-

CONSUMER

INBANGALORE

Tax implication under Value Added Tax Act

Seller Buyer SellingPrice

(ExcludingTax)

TaxRate

Invoicevalue(InclTax)

TaxPayable

TaxCredit

NetTaxOutflow

A B 100 4%CST

104 4 0 4.00

B C 114 12.5%VAT

128.25 14.25 0* 14.25

C D 124 12.5%VAT

139.50 15.50 14.25 1.25

D Consumer 134 12.5%VAT

150.75 16.75 15.50 1.25

Total to Govt. VATCST

16.754.00

*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same

though it could to be reduced to 2% when VAT is introduced and eventually phasedout.

VAT can be considered as a multi-point sales tax with set-off for tax paid onpurchases (inputs) and capital goods. What this means is that dealers can actuallydeduct the amount of tax paid by him for purchase from the tax collected on sales,thereby paying just the balance amount to the Government.

VAT and its Implication in Indian Economy

In the VAT System of taxation a set-off is given for input tax as well as taxpaid on previous purchases, whereas the existing sales tax structure faces theproblems of double taxation of commodities and multiplicity of taxes. For example,

in the existing tax system, before a commodity is produced, inputs are first taxedand then after commodity is produced with input tax load, the output is taxed


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again. Thus, resulting in unfair double taxation with cascading effects but withVAT coming into action it will be different ball game all together. There will besignificant change in tax collections as well as prices in the long run. Nada opines,The immediate on the states and their citizens will be in terms of significantchanges in the indirect tax collections taking place. For the citizens, the prices are

expected to decline on the whole as the tax regime will be doing away withcascading effect of the VAT, other taxes, surcharge on sales tax additionalsurcharge and special additional tax (SAT) will be abolished. And going by theclaims of the government, CST will also be phased out very soon which will finallyreduced the tax burden and cause prices to decrease significantly. According to thewhite paper, VAT will also replace the existing system of simpler and transparenttax structure that will improve tax compliance and increase revenue growth.

The Indian consumer is more burdened with financial crunch and priceinflation. The poor are the most sufferers and their purchasing power is low. It hasbeen identified that rural people are charged more tax than urban people due tosubsidized rate provided to them in food products, transportation, electricity, water

etc. for these facilities they are charged indirectly from their source of income likeagricultural and allied activities. Its not only the consumer who are hit hard by thevalue added tax charges but the intermediaries involved in the chain, fromproducer to retailers have to pay taxes to the government and meet the legal andaccounting standards to present a fair picture of their businesses (Hossain,2003).The general public is affected by tax rates simultaneously, as rich classpeople are only able to bear the burden.

Experts View on VAT Implication in Indian

The following are the experts view on implication of VAT in India,Prof. D S Hegde who emphasized that the present system of taxation was

complex and posed several hurdles to the development of the manufacturing sectorin India due to the multiple taxation scenarios. He said that VAT would ensure abigger cake of GDP for tomorrows India.

Mr. Arif Siddiqui, Business Head Logistics, AFL highlighted VAT will lead tofar reaching changes in almost all organizations since remodeling supply chains,and he predicted reduction in distribution system layer and evaluation of newlogistics models in the post-VAT scenario.

Mr. Vivek Bhimankar, Deputy Commissioner, Sales Tax, said, Earlier, taxsystem rewarded dishonesty. Now there is an incentive for being honest. VAT hasnot only refilled the treasuries but has also ensured better social life by decreasingthe corruption levels.

Ms. Renu Narvekar, Head Finance, P&G; Ltd. said that VAT puts FMCG

companies in a spot of bother regarding decisions on who should bear the brunt ofthe additional tax which the distributors and retailers are forced to pay.

Conclusion

Value added tax would change the nature of trade in the coming years, butthe medium level of trade would face problems as the companies would reduced thetier of marketing. The present provision of central sales tax and Value added taxcannot go together.

After the abolition of central sales tax the direct marketing concept may gainground and the necessity of having warehouse, go downs etc. in all states maydecrease or finish. Value added tax in India has been introduced in modified

variants over the past two decades. However, value added tax in its original form isyet to be introduced in India, at Central or State level. After the negative and


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positive impact on the Indian consumers, Value added tax has been identified asthe real goal maker by the Indian government in the coming years to foster growthand prosperity in the country. The change in the standard of livings has increasedthe purchasing power of the high class society but the medium and the poor classsociety has to work hard in order to achieve their living and meet extravagances.

References

http://www.indiastudychannel.com/resources/140523-Types-taxes-India-advantages.aspxhttp://finance.indiamart.com/taxation/items_covered_in_indian_vat.htmlhttp://www.academicjournals.org/jat/pdf/pdf2011/june/Tripathi%20et%20al.pdfhttp://www.pagalguy.com/news/vat-its-implications-india-inc-a-panel-discussion-organized-pgdie-nitie-a-308http://finance.indiamart.com/taxation/impact_of_vat_in_india.htmlHossain SM (2003). Poverty and social impact analysis: A suggestedframework.IMF Working Paper, WP/03/195, October.http://www.pagalguy.com/news/vat-its-implications-india-inc-a-panel-discussion-

organized-pgdie-nitie-a-308http://www.slideshare.net/horizon8586/value-added-tax/Government of India (2005).A white paper on State level.Value added tax Ministryof Finance, Empowered Committee of State Finance Ministers, January.

vat and its implication in indian economy

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