The Hindu Business Line : The shape of VAT to come

THE release of the much-awaited White Paper on VAT on January 17 by the Finance Minister has cleared the decks for the introduction of State VAT from April 1, 2005.

The White Paper is an attempt to inform the public on the background and justification of VAT, the characteristics of the scheme that is proposed and a listing of related issues that need resolution. A clear enunciation of the country's attempt to streamline and simplify its indirect tax regime is to be found in the White Paper. Since the VAT that is proposed will quite radically alter the nature of sales taxation of goods in the States, it is imperative to understand the White Paper in some detail.

Coverage

A majority of the goods that are currently covered under sales tax will be covered under VAT as well. The exclusions are liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirits, sugar, textiles and tobacco. The last three items are at present charged to additional excise duties (which were imposed in lieu of sales tax) and will hence be kept out of VAT for the first year, that is, 2005-06. Clearly, the extension of VAT to all products, without exception, is a desirable objective and efforts need to be made to ensure that the benefits of VAT are extended to all product categories. There is work to be done in this regard.

VAT rates and classification

A list of 550 products has been drawn up on which the two primary VAT rates of 4 per cent and 12.5 per cent will be applicable. This list is expected to be released to the public soon. Besides these, a list of 46 commodities has been identified for the VAT exemption. States will be permitted to choose a maximum of 10 commodities from this list for the purpose of the exemption. Obviously, this will comprise essential commodities, agricultural produce and other items of mass consumption.

Registration

The VAT scheme has fairly significant thresholds in that dealers up to Rs 5 lakh turnover will be entirely outside of VAT and dealers with turnover between Rs 5 lakh and Rs 50 lakh will be required to pay a composition tax of 1 per cent and will have no further obligation to fulfil. Registration will be made compulsory for all dealers having turnover in excess of Rs 5 lakh. A related point is that all VAT dealers will be issued a 11-digit numerical Tax Payer Identification number and existing dealers will automatically be registered under VAT.

It is anticipated that these provisions will ensure that the compliance costs of VAT are minimised and that the small dealers are not put to any hardship. These thresholds are a welcome step and will go a long way in allaying the apprehension of the traders.

Input tax credits

The fundamental premise of VAT is availability of input tax credits as a set-off. Therefore, input tax credits will be available to offset the liability to VAT on final products, for both manufacturers and dealers. However, the continuation of Central Sales Tax does pose a problem and, as a result, no input tax credit will be admissible on inter-State procurement of goods. Similarly, no input tax credits will be admissible even if the goods are purchased from within the State, if the finished goods are not sold (either intra-State or inter-State) but are stock-transferred. The loss of credits on such stock transfers will, however, be restricted to 4 per cent, being the CST rate.

This is to ensure that the supplier base in a State is not adversely impacted. Credits will also be available on capital goods over a period of three years and States have been authorised to reduce this period. A negative list of capital goods on which no credits will be admissible is also intended to be published. Finally, stocks of sales tax paid goods as on April 1, 2005, will be eligible for tax credits of the sales taxes so paid provided appropriate evidence of payment of such taxes is available.

Invoices, returns and assessments

VAT registered dealers will be required to issue serially numbered invoices in duplicate. This will ensure a comprehensive documentation trail. Input tax credits will only be available on the basis of such invoices, evidencing the payment of VAT.

The periodicity of filing of sales tax returns will remain the same as now. However, the formats of such returns are proposed to be simplified.

There will be a revolutionary change in assessment procedures. A comprehensive self-assessment of VAT is proposed to be introduced and the audit process will be used to test check and carry out due diligence of the VAT returns.

Audit

An updated, computerised, risk-based audit of VAT assessees is proposed to be introduced. This is a distinguishing feature of the proposed VAT system.

The White Paper envisages a complete elimination of all declaration forms under the VAT regime. Also, it is envisaged that VAT will replace not just the sales tax but also turnover taxes, surcharges, additional surcharges and the special additional tax. Also, entry tax can only be continued in addition to VAT, if they are made VATable. The only exception is where entry taxes have been imposed in lieu of octroi.

States have also been given the flexibility to continue their existing incentive schemes in a manner that the VAT chain remains unaffected.

Action by States

The White Paper envisages that all States will modify their VAT Bills in line with the recommendations contained therein and finalise their Bills for Presidential assent at the earliest. Also, States will keep their VAT Rules as simple as possible. Finally, a comprehensive computerisation process will be initiated so that document-based verification and integration with the proposed all-India Taxation Information Exchange System is facilitated.

Part 3 of the White Paper envisages a compensation to be paid by the Central Government to those States which can demonstrate loss of revenue as a result of introduction of VAT. This is a welcome measure. It further States that the position with regard to the CST will be reviewed sometime in 2005-06 and a suitable decision on phasing out will be taken. In line with international practice, an import VAT is also proposed to be introduced in due course. The Empowered Committee will also initiate a dialogue with the Central Government on proposals for taxation of services by the States.

In sum, the White Paper lays downs the blueprint for the introduction of VAT and is a precursor to the ultimate goal of a unified countrywide goods and services tax in the form of a VAT. Fiscal reform in India has significantly accelerated as a result of the White Paper.

(The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd.)

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