The Hindu Business Line : VAT: Implementation at short notice is one more challenge

With the quick passing of the VAT (Value Added Tax) Bill, the coming New Year's Day is slated to usher in VAT, in Tamil Nadu. Business Line contacted Mr S. Sridharan, a Madurai-based chartered accountant, who specialises in VAT. Here is his take on a few questions:

How has the legislation been designed?

Considering the distortions in the design of VAT due to the continuance of Central Sales Tax (CST), the VAT implemented across India is only an `input tax credit'-enabled sales tax legislation. The Tamil Nadu VAT Act follows the same structure and sequence of sections as in the TNGST (Tamil Nadu General Sales Tax) Act. The TNGST provisions have been adapted to address input tax credit. While this could be useful to those familiar with the sales tax law, the design does not explicitly consider certain essential requisites, such as specific provision for enabling set-off of input tax credit against output tax payable by a manufacturer, or for set-off of input tax credit against tax payable under the CST Act.

Input tax credit is a basic tenet in VAT.

True, which is why it is inexplicable that the Act has a provision denying input tax credit on inter-state sale not covered by Form C. Where an inter-state sale is not covered by Form C, the rate of tax assessed under the CST Act would be higher than 4 per cent, and there would be no loss of revenue to the Government. Besides, this provision is against the basic tenet of VAT that input tax credit is eligible for set-off against a taxable sale.

What is the law on capital goods?

Input tax credit on capital goods is eligible only to a manufacturer and not a trader. The wordings of the definition, if strictly interpreted, may not permit input tax credit on capital goods used in R&D (research and development) activity and in the tool room for manufacture of tools for captive use or for machinery fabricated in-house.

Are there stipulations governing capital goods?

Yes, input tax credit on capital goods is allowed over a period of three years after the "commencement of commercial production." The phrase is ambiguous as to whether existing units can benefit. Better, if the phrase had been "after the asset is put to use." Also, the stipulation of availment over three years can be difficult to monitor, both for the manufacturer and the tax administration.

Does the law have a mechanism for clarifying issues?

Unlike other States that have either set up an Authority for Advance Ruling (AAR), or vested the Commissioner with power to issue clarifications on issues raised by the dealers, there is no provision in our law for the issue of clarifications on application by the dealers. Considering the implementation of VAT without holding proper training programme/interaction sessions for the dealers, a provision similar to Section 28A of the TNGST Act is absolutely essential.

How is the VAT law vis-à-vis the small dealers?

Retail dealers who effect sale of goods procured from within the State from registered dealers may opt for payment of composition tax at a rate not exceeding 1 per cent, if their annual turnover does not exceed Rs 50 lakh. If the rate of tax were lower, say 0.5 per cent, more dealers would opt for composition, as the experience in other States has shown. Keeping the population of VAT-registered dealers as low as possible in the initial years would be a more efficient strategy to monitor VAT compliance.

Is there sufficient time for the industry to prepare for VAT transition?

With only three weeks away from 2007, it will be difficult for the industry to fine-tune software for VAT compliance and modify long-term contracts for purchase or sale. While postponement to April 2007 may be a convenient option, it is also to be appreciated that it is difficult to foresee all contingencies even if implementation were so postponed. Implementation at short notice is one more challenge, and it is "get, set, go!" for all stakeholders including the tax administration.

More Stories on : Interview | Taxation | Tamil Nadu

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