VAT: Shape of Things to Come

DQCI spoke to vendors and partners to find out whether they are

ready to face the new tax regime. Though the new tax system offers lot of

advantages, these will get nullified in the event of ineffective implementation

by the government.

Value Added Tax or VAT for short, is sales tax in another form. With the

difference being that it is collected in stages rather than at one point from

the sale of goods by the government of destination state i.e. state in which

final consumer is located on consumer expenditure. It is collected through

business transactions involving sale of goods within the state.

So no VAT is payable if the sale of goods are made in the course of

inter-state trade or commerce or are in the course of export outside India. So

this implies that the present Central Sales Tax or CST would remain on

inter-state sales, for no VAT is chargeable, and CST would be charged.

Under the new system, the first seller pays the first point tax, and

subsequent sellers pay tax only on the value addition done by them — leading

to a total tax burden exactly equal to the last point tax. The value addition is

therefore the difference and not just the profit, of the sale and purchase

values of all taxable supplies. VAT will however not be levied if purchase and

sale of goods are not made in the course of business.

VAT: Not too different



"But how the government will implement VAT is a question mark.

Especially, the inter-state business transactions are a gray area. One still

does not know what would CST be in VAT. What about tax on goods originated in

Maharashtra and sold in other states?" asks Umang Mehta, CEO, Roop

Technology and President, TAIT, Mumbai, a query that comes up often in

discussions revolving around VAT and a cause of much confusion.

VAT however draws on a number of similarities with the present sales tax

system. Under the present system, an inter-state trader is allowed to purchase

his inventory, without payment of tax, against ST-1 or ST-35 form. Under the VAT

system, the trader will have to pay the local tax, but this tax paid on

purchases can fully set off from his Central Sales Tax liability. And in case

his CST liability is less than the local tax already paid, the net can be

adjusted against his other VAT liability or can be claimed as refund.

However, there is lack of clarity precisely on this issue among the trading

circles. Says Sanjiv Krishen, Chairman, Iris Computers, "There is a lot of

confusion that there is no equivalent to ST 35 under VAT." Adds Sanjeev

Ahuja, Additional Commissioner, Sales Tax Department, Govt. of N.C.T. of Delhi,

"The CST does not stand abolished and therefore for cross state border

transactions, there are no changes."

The case is similar for a manufacturing firm too. Rather than purchasing

without payment of tax against ST-1 or ST-35 form, as is the case in the present

system, local tax is levied on purchases, but an equal amount is allowed to be

set off against the sales tax liability on finished goods.

In other words, the buyer will now not be able to "purchase tax free

against forms", but can purchase tax paid and avail the set-off facility.

While it may not make any difference to the taxpayer, this system will ensure

that all local sales are subject to tax.

"The new system will ensure that fewer cash transactions take

place", says Krishen of Iris, "because the set off facility cannot be

availed if there is no proof of sale." So one can add that the basic

advantage that the VAT system will bring to the table for the government is that

no leakage of sales tax. "VAT is ultimately good for the industry. Every

link in the business chain will pay the tax. As a result, the gray market

operations will take a hit", says Umang of Roop Technology.

VAT: The Advantages



VAT as a system of sales tax is an idea that the whole world is migrating to

and is flexible in solving a number of issues that the present system has not

been able to address. For instance, under the present system, many traders

dealing in goods that are distributed from Delhi are facing problem of double

taxation because of withdrawal of the footnote facility. VAT solves this problem

too. The entire local sales tax levied on the purchases of an inter-state trader

is allowed to be set off against their central sales tax liability, as mentioned

earlier, hence no double taxation. Says a tax consultant, "VAT is a

comprehensive system that will take care of such issues."

VAT comes with another advantage. Since all local sales will

attract VAT liability, there would be no difference whether one is selling to

another dealer, as is a common case in the IT industry, or to the consumer. The

same tax, equal to the rate of tax applied on the sale price, is to be charged.

In present system, whatever tax charged is to be paid to the sales tax

department, however, under the VAT system, the trader gets the facility to

deduct the tax he has already paid from the tax he collects from the customer

and pay the rest to the department.

Also the present system does not allow capital goods, such as

machinery and equipment, to be purchased against local forms. However in VAT,

tax paid even on machinery is allowed to be set off.

Computing VAT



There are two methods of computing Value Added Tax - the Invoice Credit

Method and the Subtraction Method. Delhi shall be adopting the Invoice Credit

Method, as it is simple for administration and compliance.

In this method, a bill or invoice issued during a transaction

of purchase or sale that separately mentions the value of the goods and the tax.

The purchasing dealer, using the aforementioned invoice can deduct the tax paid

by him on his purchases, from the tax liability on his sale made during the

quarter. An advantage of the method is that the trader does not have to wait for

his sale to materialize, to avail the credit facility. He can avail the tax

credit in the same quarter in which he makes the purchase and take the goods in

his inventory, irrespective of the fact that he may be selling it later in the

next quarter or even net year.

For example, if a reseller makes a sale of item at Rs 1000 +

Rs 40 at 4 percent tax and a purchase of another for Rs 500 + Rs 20 at 4 percent

tax in the same quarter, then the net tax payable would be Rs 20 only. So the

net tax payable is the difference of his liability (Rs 40) and the credit (Rs

20) earned by him. In case the credit earned is greater than the reseller’s

outstanding liability, the reseller can claim refund. Says a tax consultant,

"The mechanism of the refund will be an issue, for speed will be

critical." The advanatges of VAT will stand to lose their sheen if the

government does not implement a mechanism of faster, smoother refunds.

"Delay in refunds will lead to a lot of dissatisfaction", says Krishen

voicing his concern.

Another advantage that comes with the system is the

simplicity of book keeping. While the present system requires the dealers to

maintain account of sales and purchases, calculation of VAT also requires

maintenance of such accounts only and nothing more and can be kept even by

enterprises that do not maintain full books of accounts or do not use double

entry accounting. Taxpayers are essentially required to keep two books a

purchase book and a sales book. These books are a record of purchases and sales

respectively and are specifically designed for easy calculation of VAT. "An

inherent advantage of the system is the simplicity of its book keeping and

documentation processes", adds the tax consultant.

Tax Rate Structure



The Government of NCT of Delhi is aiming at revenue neutrality or overall the
same amount of tax shall be expected to be collected under VAT as is being

collected under the present system. Since tax incidence under VAT is exactly

same as in the present system, theoretically, there is no requirement of

changing the present tax rate structure of 4 percent, 8 percent and 12 percent.

However it has been seen that the administration of VAT requires a simpler tax

structure implying even fewer slabs. Says Pankaj Mohindroo, CEO, Agrani

Convergence Limited, "The concept of Revenue Neutrality Rate is not very

clear to the concerned bodies at present. It may lead to unhealthy competition

between the states, resulting in negative impact on the revenue of respective

states." States have been debating before the high-powered committee that

the RNR should also have a maximum limit so that it provides an objective

platform for calculating the potential loss to state governments. The states

have divergent views on RNR and so far no uniformity has been achieved.

One of the major reasons for introduction of VAT by the

states is to develop a common market in the country. It can have a positive

influence on the states’ economic activity in the long run. The short-term

negative fallout would be the additional tax burden on domestic consumption to

maintain current revenue flow that would get reduced on account of input

rebating of goods sold interstate and exported outside the country.

VAT therefore would need a rate that would be acceptable to

the domestic stakeholders and would not cause trade diversion but which would

not be revenue neutral. Introduc-tion of VAT with a rate within a band of 10 to

12.5 percent uniformly by all the states would certainly make it acceptable to

the stakeholders, though some highly taxed states like Karnataka, Maharashtra,

Bihar, Delhi etc. would certainly suffer revenue loss. Adds Krishen,

"Individual states implementing VAT will mess things up and the there is a

need to have a central body to collect it across the country, like it is in

Singapore."

Classification of Goods



There may not be uniformity among the States in classification of goods
vis-à-vis the rates. This may impact trade flows across state borders. The

uniformed sales tax policy announced in January 2000 brought to the floor rates

of sales tax on specified commodities and many states amended their local sales

tax laws accordingly. This was expected to help states to achieve stable source

of revenue without eroding tax base of other states as was done earlier by ‘rate

wars’ with each state trying to have its sales tax rates lower than the other

states that enabled movement of goods at a reduced levy. Disparate tax rates

encouraged diversion of trade from one state to another merely to take advantage

of lower tax rates adversely affecting local trade and industry and also revenue

of the importing state. Says Mohindroo, "The essence of success of VAT in a

country like India is the identical classification of goods and the application

of similar tax rates by all the states. If it is not done, VAT will not achieve

the desired results." He adds, "Central Government should ensure that

all states adopt uniform commodity classification because of the different tax

rates are applicable to different commodities. Classification of commodities in

VAT would become much more important."

Need of the hour: A proactive government



The government needs to step up efforts to spread awareness about VAT for many
are still confused as to how it is different from sales tax already being levied

by the states. The Delhi government has been regularly holding seminars to

dispel any misconceptions on the subject. Says Ahuja, "Our efforts to

educate will continue."

Government should make data from other revenue departments

like central excise, customs etc. to the state sales tax departments. This would

complement data available in the check posts. Such data would only be relevant

if the classification of commodities in VAT is identical to the classification

of goods under Customs and Excise. This would also help the Government of India

in bringing single VAT unit in future.

The Channel Perspective



The channel is not too excited about the shift that will soon affect them

all. And there are areas of concern too. Says Gagan Gupta of Computers Infinite,

"A little knowledge is a dangerous thing", about what is state of the

channel partners about VAT. He also attributes it to lack of interest on behalf

of the trader community, without excluding himself, to keep themselves abreast.

While the state government has held a seminar even in Nehru

Place, the apprehen-sions keep popping up. Says Neelesh Arora, CEO, Total Info,

"Our apprehension is that if it leads to an increase in price, then the

industry will suffer." And that is a likely scenario in any multi-tiered

industry. He further adds, "The hardware community should get together on a

common platform to voice their collec-tive opinion." Trade bodies need to

address and lobby on the issue more proactively.

Adds Arora, "What we are worried about is the potential

loopholes that local small-time assemblers and dealers may find to stay out of

the VAT net — this may make companies who do abide by the legalities

pertaining to the VAT system uncom-petitive and are hoping that the VAT

mechanism will have an in-built policing system that ensures that all concerned

are effectively covered under it."

Says Anil Sachdeva, CEO Kadam Marketing and President, DCTA,

"We have had seminars conducted and with actively lobby to ensure Sales Tax

Inspectors don’t get that undue authority." Adds Mehta of Roop

Technology, "The implementation of the VAT rules need to be transparent

without giving any scope for the misuse of the authority."

The channel is also quite perturbed about the way the VAT

implementation will go. The channel is confused about the issuance of invoices

in transacting. Some of them feel that every transaction will need to be

accompanied by two invoices, the tax and the retail invoice. But that is not the

case. If the sale is being made to another registered dealer of Delhi, a tax

invoice can be issued, which should specifically mention, the identity of the

seller and the buyer and the amount charged with the amount of tax charged in

the transaction indicated separately.

This will help the purchasing party to claim the benefit of

tax credit on the VAT paid on his purchases. In retail sales, which are much

more numerous and of smaller amounts, simplified sale invoices or retail sale

invoices can be issued. Although retail invoice should always identify the

seller, indication of buyer’s name is optional and tax charged can be included

in the sale price. No tax credit can be availed by the purchaser on the strength

of retail invoice for the transaction has been carried out with the end

customer.

Says Bharat Bhushan, Director, RR Systems, "There is

utter confusion and we although have done nothing to gear up for the change, but

will have to adopt it if it is implemented." He echoes the voice of the

hardware community in saying that nothing, but compliance is what will have to

done.

Mohit Chhabra in New Delhi