The Hindu Business Line : The ABC of VAT

WHILE the Central Government is all set to introduce value added tax (VAT) from the next fiscal, there are certain issues that need to be addressed. VAT is being justified on the grounds that it would enhance the competitive strength of domestic trade and industry, simplify and rationalise the sales tax system and push up the economic reform process further.

India is using VAT to streamline and rationalise its indirect taxes so far as they relate to sales tax and service tax. VAT is also expected to achieve unification of State level sales tax. But doubts whether all States will comply or whether they will levy special additional taxes along with VAT remain. It is imperative that Central Sales Tax (CST), entry tax, octroi and other local taxes are scrapped for proper implementation of VAT.

What is VAT?

VAT means a tax on sale of a commodity at every point in the series of sales by the registered dealers with the provision of credit of input tax paid at the previous point of purchase thereof.

VAT presupposes homogeneity and, as such, it would be essential for the Government to ensure that the rules and procedures are made uniform across States, besides common date and rates of levy. This is essential for moving towards a VAT regime.

VAT is levied at prescribed rates on taxable turnover, that is, that part of turnover which remains after deducting from such turnover the aggregate amount of the proceeds of sale of goods on which no tax is leviable and which have been exempted from tax under the VAT Act. Turnover for this purpose would mean the aggregate amount received or receivable by a dealer for sales, including the purchase price of goods which are subject to purchase tax. Tax charged or collected and shown separately in bill/ invoice would not be included in amount of turnover.

VAT and CST

The Central Government has agreed to reduce CST from 4 per cent to 2 per cent from April 2004, a year after the proposed VAT implementation, and scrap it from April 2006 on a gradual basis. The existing CST rate of 4 per cent would, therefore, continue in fiscal 2003-2004. The impost will be cut to 2 per cent in 2004-02, brought down further to 1 per cent in 2005-06 and scrapped altogether in 2006-07. The phase-out would reduce the burden on Indian industry. The Centre has already given an assurance to States that it would provide a safety net in the form a compensation mechanism to offset any revenue losses on account of switchover to VAT. The domestic industry has been opposing the continuation of CST once VAT is implemented, as it reckons that CST without a set-off in the VAT system could create distortions, given that several industrial units source their inputs from outside their State.

Service tax

While it seems to be the plan to compensate States for expected revenue losses through VAT, States may be given the right to tax services. If this happens, the matter will get complicated as service is taxed on turnover, which is not vatable. The VAT regime should ensure integration of service sector taxes with VAT principles. It is expected that services will be integrated into the VAT system only after April 2004 — a year after VAT implementation.

Service tax is likely to witness a major change in the VAT regime. The Centre has indicated more than once that it is willing to transfer service tax revenues to States in order to compensate them for possible revenue losses on account of VAT implementation. The Karnataka Tax Reforms Commission has suggested that "economic distortions and administrative anomalies created by continuance of the present inadequate service tax system at the State level indicate that it is essential to integrate, as quickly as possible, general service tax with VAT on goods, subject services to the same range of VAT rates and administer the tax alongside VAT on commodities." It also states that there is no escape from formulation of a comprehensive statute for an integrated VAT on goods ad services at the Central and State levels. The power to tax services should be enjoyed concurrently by the Centre and the States. Service tax offers the best solution to the compensatory tax source issue, which is a major obstacle in implementing State VAT.

VAT and IT

Since it is going to be a new law, the Government should, even at the inception stage, presuppose computerised tax collection and administration so that it works smoothly.

India has already developed a VAT software framework for administrating the new VAT regime. The software is to be based on the tax- invoice method and in conformance with best global practices. This Web-enabled application has been developed using "Java to Enterprise Edition" development framework. It has a powerful workflow mechanism and an automated assessment system, where the system proactively facilitates tax administration and allows the tax administration's focus to shift from routine tasks (processing, assessing, notifying, account balancing, and so on) to efficient monitoring of revenue collection and deploying resources in audit activities. It will also help in revenue and business trend analysis and in plugging revenue leakages. It has a check-post information system for monitoring intra-State and inter-State goods management as also turnover tax and CST functions. The software built is aimed at facilitating easier adoption in the prevailing conditions. This is essential because the VAT regime is to be adopted across the country in one go. The software is being implemented and tested in Assam and Andhra Pradesh. It should be appreciated that information technology is an important tool to address the implementation nuances of VAT. It aids in computerising the functions of all the departments concerned and helps pave the way for an efficient, transparent and smooth taxpaying regime.

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