Whats%20VAT - MBA Education & Careers LEARNING...

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Unformatted text preview: MBA Education & Careers LEARNING CORNER What’s VAT? What’s VAT? Successive Indian budgets have focussed on four elements of tax reforms: growth in revenue, simplification of process, rationalisation of the tax regime, and effective tax compliance. In the case of indirect taxes, reforms have remained focussed on gradual rate reduction in custom and excise duty, rationalisation of structure, simplification of procedures, and promotion of information technology and communication technology in tax administration. What is VAT? Value Added Tax (VAT) is an indirect tax levied by the government on the value added to a good. The tax is based on the difference between the values of the output over the value of the inputs used to produce it. The final amount of tax is added on to the selling price of the good and is paid by the buyer. In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For example, today before a commodity is produced (final good), inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This results in double taxation with cascading effects. In a VAT regime, a set-off is given for input tax as well as tax paid on previous purchases. At the same time, the introduction of VAT will remove the multiplicity of taxes like sales tax and turnover tax. The basic premise of VAT lies in providing a set-off for the tax paid earlier, and this is given effect through the concept of input tax rebate / credit. This input tax rebate in relation to any period means setting off the amount of input tax paid by a registered dealer against the output tax amount. The VAT liability is calculated by deducting input tax credit from tax collected on sales during a specific period. For example, trader X sells output for Rs 100 per unit, the value of his inputs being Rs 80 per unit. If VAT is set at 10%, the selling price of the good is Rs 110, with Rs 10 being the amount of tax paid by the final buyer. Trader X would then offset against the Rs 10 VAT output tax collected from the final buyer the Rs 8 input tax which he has paid on his Rs 80 inputs bought, and remit the difference of Rs 2 to the Government. In the same way, trader Y (who supplied trader X with his input for Rs 80) would have collected Rs 8 VAT output tax from trader X, against which he will offset any VAT input tax which he paid on his inputs and remit the difference to government. The total of all these sums remitted by traders X, Y to the government will equal the Rs 10 charged on the final sale to the consumer. So, the tax is divided into parts and therefore the incentive to evade tax by any one firm is reduced. Moreover, it is in the interest of a firm to account for the taxes paid by earlier firms through which the inputs have come otherwise this firm pays the tax itself. If any firm, therefore, understates its output, it will be caught by the disclosures of the firms ‘buying inputs from it’. This type of cross-auditing enables the authorities to plug the tax leakage. Lets take another example. A firm buys input worth Rs 2,000 and sales are worth Rs 4,000 in a April 2005 37 MBA Education & Careers LEARNING CORNER specific period (lets say, a month). If input tax rate is 4% and output tax rate is 10%, then input tax set off and calculation of VAT will be as follows: • Cascading effect of costs is avoided because (A) Input purchased during the month: Rs 2, 000 on value added (not on profit, turnover, etc.). (B) Output sold: Rs 4,000 inputs no longer get taxed twice or more. • It promotes efficiency because taxes are paid • Easy to separate the tax from the cost of production, hence used for promoting exports (because taxes can be refunded to exporters). (C) Input tax paid: Rs 80 (D) Output tax payable: Rs 400 • Greater flexibility towards applying multiple VAT rates (including Zero) can be taken up for achieving different policy objectives. From the above, we can deduce that the VAT payable during the month is Rs 320 i.e. after setting-off input tax {VAT= (D)-(C)}. Prerequisites for VAT implementation Disadvantages of VAT Before the implementation of VAT, the government (both Central and State) should ensure adequate economic, financial, and technical infrastructure. It should meet the following conditions: • VAT is a complicated system. Hence it needs • Enactment of VAT legislation and framing of • States may realise smaller tax revenues. • Computerisation of details of dealers falling • Small firms find book-keeping uneconomical. rules and regulations. within the ambit of VAT. • Training of tax officials, traders, and an honest and efficient government machinery along with sound financial and economic infrastructure at macro and micro levels. • Multiple rates further lead to the development of vested interests that put pressure for exemptions and concessions. consumer associations. • Publicity campaign to promote consumer awareness. • Assigning VAT identification number to tax-payers. The Government of India, in consultation with the State Governments, has now decided to introduce VAT from April 1, 2005. Advantages of VAT The following are the recommendations made by the White Paper on State Level VAT brought out by the E mpowered Committee of State Finance Ministers in January 2005. • Easy to administer because tax liability of a • • Implementing transitional measures for introduction of VAT. firm can be assessed by using the credit method. Cross–checking of returns submitted by firms can be made as well (cross audit). April 2005 38 The proposed State level VAT would replace the sales tax regime in States with a two-tier tax regime of 4 and 12.5 per cent. MBA Education & Careers LEARNING CORNER • Over 550 items would be covered under the new tax regime, of which 46 natural and unprocessed local products, which have some social implications, would be exempt from VAT. • About 270 items, including drugs and medicines, all agricultural and industrial inputs, and capital goods would attract 4 per cent VAT. The remaining items would attract 12.5 per cent VAT. • Petrol and diesel would be kept out of the new tax regime, which covers only marketable items. • States have been given the option of either levy 4 per cent or totally exempt food grains. This decision is subject to review after one year. The threshold limit for traders coming under VAT regime has been relaxed from Rs 5 lakh - Rs 40 lakh to Rs 5 lakh - Rs 50 lakh. Traders within this limit can pay a composite VAT rate of 1 per cent of their gross turnover but they would not be entitled to input tax credit. • Precious metals like gold would be taxed at 1 per cent. • States would get 100 per cent compensation for any revenue loss in the first year; 75 per cent in the second year, and 50 per cent of any revenue loss would be compensated in the third year. • The Central Sales tax (CST) of 4 per cent, which yields about Rs 15,000 crore to States, would be phased out after April 2006. Three items (sugar, tobacco, and textile) covered under additional excise duty, will not be covered under VAT for one year. • • Do you know? Companies that changed names Old Name New Name French Connection Andersen Consulting Enron Philip Morris Time-O-Stat Controls Price Waterhouse Coopers Consulting Himani Union Carbide Indian Shaving Products Vam Organics L&T Cement Baba Business Services Wockhardt Life Sciences DSQ Biotech Fujitsu ICIM FCUK Accenture Prisma Altria Honeywell Inc Monday Emami Eveready industries Gillette India Jubilant Organosys Ultratech Vatsa Music Carol Info Services Origin Agrostar Zenzar Technologies Source: Business India April 2005 39 ...
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