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  Value Added Tax(VAT) Concept, Problems and Prospects RESEARCH PAPERBY DR. SANJEEV KUMAR PRESIDENTINDIA ECONOMIC FOUNDATIONNEW DELHI Published in `Tax & Corporate Referencer' Volume-29: Part-2  Value Added Tax (VAT): Concept, Problems and Prospects INTRODUCTION Value Added Tax (VAT) is the most important fiscal innovation of the 20th Century.France pioneered with the adoption of Taxe sur la Valeur Adjoutee  in 1954.Subsequently, other countries have adopted it. Recently, VAT has spread like a  prairie fire  through out the world bringing the total number of VAT countries to morethan 160 with acceptability of a large number of Latin American, Asian, African andPacific countries. Such increasing popularity of VAT has primarily been due to itstaxonomy and administrative expediency. However, USA and India, the two mostpopulous countries are yet behind.Every Member State of the European Union has a Value Added Tax (VAT). The FirstVAT Directive of April 11, 1967 required that Member States should replace their general indirect taxes by a common system of value added tax. EVOLUTION OF VAT IN INDIA India already has a system of tax collection wherein the tax is collected at one pointfrom the transactions involving the sale of goods. The single point tax may becollected either at the first stage or at the last stage.The system of collecting tax at first stage has following disadvantages:(a) Since sales tax has is levied and collected at the first stage of sale, the taxrate has to be higher. This encourages tax evasion and sales tax becomesa tax on honesty, which means more the honesty, more the tax liability;(b) In case somehow the goods escape the tax at the first stage, the goodsescape tax net altogether since there is no way by which it can be caughtat any subsequent stage;(c) There is ample scope for under-valuation of the value of the goods at firststage, since there is no tax payable at any subsequent stages, even if thegoods are subsequently sold at much higher prices.In the system of collection of tax at the last stage also, several weaknesses arewitnessed:(a) The tax evasion is maximum since the price level at the last point of saleincreases, which encourages evasion, even if the tax rates are low;  (b) It is difficult to track the goods evading tax since there is no record of their earlier movements and after the last point sale, the goods reach in thehands of the consumers;(c) This also encourages under-invoicing and involves generation of blackmoney due to cash dealings at the last point of sale.Since VAT is collected in stages in installments from one stage to another, all theabove disadvantages and weaknesses may be overcome, the cascading effect of taxes is eliminated. More transparent structure is made up and compliances areimproved.India has been slow in adoption of VAT. In domestic trade taxes, it adopted exciseduty at the central level and sales tax at the state level for this purpose.The Central Government attempted reforms in the central excise duty by introducingthe principles of VAT in 1986 through the introduction of MODVAT. Over the periodthe rates have been rationalized, exemptions have been reduced and the coveragehas been extended to almost all the commodities. MODVAT has now beenconverted into a central VAT, coined and called CENVAT.The state governments have been indifferent in undertaking any reforms in their sales tax system, although it accounts for approximately 60% of the states own taxrevenue. The existing sales tax system of the states is confronted with manydrawbacks and weaknesses.The Task Force known as Kelkar Committee observed that presently, each Statelevies multiple taxes on the same item in different names or at different stages e.g.Entry Tax, Luxury Tax, etc. However, it opined that it is necessary that State VATshould be the tax to unify all the State-level taxes i.e. Sales Tax, Purchase Tax,Turnover tax, Works Contract Tax, Entry Tax, Special Additional Tax, etc. should allbe covered under State VAT.The efforts were initiated towards introduction of VAT since last many years. TheCommittees of States’ Finance Ministers (in 1995 and 1998, respectively) and of theChief Ministers (in 1999) have put forth recommendations to replace sales tax byVAT. This was ratified by the Conference of the Chief Ministers and FinanceMinisters held on November 16, 1999 and introduction of State Vat in lieu of SalesTax was finally scheduled to be made with effect from 1 st  April 2003.However, the schedule had to be revised in view of agitative traders' community. TheEmpowered Committee of State Finance Ministers agreed upon 1 st  June 2003 as therevised date of implementation of VAT and it was expected that 16 States and 2Union Territories may implement VAT from 1 st  June, 2003. The list includesMaharashtra, Gujarat, West Bengal, Madhya Pradesh, Andhra Pradesh, Karnataka,Tamil Nadu, Kerala, Assam, Orissa, Bihar, Jharkhand, Tirupura, Goa, Meghayala,Pondicherry, Daman and Diu. Delhi, Rajasthan, Uttar Pradesh, Punjab, HimachalPradesh and Uttaranchal are expected to implement VAT before December 2003.  Later, the Finance Minister has deferred the implementation of VAT for some moretime so that more conducive environment may be created and agitative oppositionmay be set to peace. Besides consensus of all the states over the model law andintroduction of VAT on uniform basis was also necessary. On 30-4-2003 heannounced that unless all States conform to model draft law and agreed VAT rates,introducing VAT on 1-6-2003 will not be possible. He stated that VAT should beimplemented all over India. Patchwork will not serve the purpose. WHAT IS VAT? Value Added Tax (VAT) is multi-point tax with provision for set off (credit) of the taxpaid at the earlier stage. Thus, tax incidence at each stage is reduced and is basedon the amount of value added at each such stage.‘Value added’ means and denotes the difference between selling price and purchaseprice. The `value addition' would accordingly mean the difference (not just the profit)of sale and purchase value of all taxable supplies. VAT is not levied if purchases/sale of goods are not made in the course or furtherance of business. Example: The incidence of tax involving more than one transactions can be explained by the following example: Purchaser  First Buyer/TraderRetailerConsumer SellerManufacturerFirst Buyer./TraderRetailer Purchase Price (Rs.)---220308Input Cost (Rs.) [Excluding Tax]*--200280Cost incurred/Value Added (Rs.)2008020Selling Price (Rs.)200280300Tax Rate applicable (%)10%10%10%Tax Charged by seller (Rs.)202830Total Price Paid by the Buyer (Rs.)220308330Tax Credit Available to seller (Rs.)--2030Tax Payable by seller (Rs.)2082* Input Cost = Purchase Price - Tax PaidThus, on the Consumer price of Rs.300 with tax rate of 10%, the department gets same amount of taxof Rs. 30, though it is paid in three installments of Rs. 20, Rs. 8 and Rs. 2. Rs. 20 is charged bymanufacturer at the time of sell to first buyer/ trader. The trader charges Rs. 28 from retailer, takescredit of Rs. 2, paid to manufacturer and pays Rs. 8 towards tax. Similarly, the retailer, whileultimately selling to consumer, charges Rs. 30 on the selling price of Rs 300 and after taking credit of Rs. 28, which was charged as tax from him by the Trader, he pays Rs.2 to the Tax Department. TheConsumer shall, however, pay the same amount of tax of Rs. 30 VAT works on the principle that when raw material passes through variousmanufacturing stages and manufactured product passes through various distributionstages, tax should be levied on the ‘Value Added’ at each stage and not on the grosssales price. Therefore it is said that VAT works on the principle of ‘tax credit system’.In case of Vat, the tax burden is passed on when goods are sold and the processcontinues till the goods are finally consumed. Thus, it is borne ultimately by the finalconsumer. It is not a charge on companies. Hence, VAT is also termed as‘consumption tax'.

Cpr

Jul 23, 2017
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