CHAPTER II

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VALUE ADDED TAX–

A CONCEPTUAL FRAMEWORK

 

 

2.1 MEANING OF VAT 

2.2 ORIGIN 

2.3 VALUE ADDED TAXES (VAT) IN INDIA 

2.4 TAX REFORMS 

2.5 INTRODUCTION OF MODVAT 

2.6 INTRODUCTION OF MODVAT 

2.7 OPERATIONAL DEFINITIONS OF VAT 

2.8 SALIENT FEATURES OF VAT 

2.9 SIGNIFICANCE OF VAT IN TAXATION REGIME 

2.10 SHORT COMINGS OF VAT 

2.11 OPPOSITION TO VAT IN INDIA 

2.12 VAT AND CST DISTINGUISHED 

2.13 LEVY OF VAT 

2.14 METHODS OF COMPUTATION OF VAT 

2.15 VAT IN DIFFERENT COUNTRIES 

2.16 TRENDS IN EXPENDITURE 

2.17 VAT FRAUDS 

2.18 VAT AUDIT 

 

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Chapter–II VAT-A CONCEPTUAL FRAMEWORK

2.1  MEANING OF VAT 

VAT is defined by the Ministry of Finance as a tax on sale of a commodity at every

point in a series of sales by the registered dealers with the provision of credit of input

tax paid at the previous point of purchases thereon. Such credit would be available

regardless of whether the goods are sold to another dealer or to a customer.1

2.2  ORIGIN 

The origin of value added tax (VAT) can be traced as far back as the writings of

F. Von Siemens, who proposed it in 1918. VAT was first introduced in France in

1954. Initially VAT was applied only to transactions entered into by manufacturers

and wholesalers. Finally, in accordance with the sixth Directive of the European

Economic Commission (of May 17, 1977), the French law amended on December 29,

1978 and the scope of the tax was expanded to include services under VAT. The tax

base was broadened to include agriculture in its ambit in 1984.

Development of VAT in other countries has been gradual. Until the sixties

many countries did not adopt it. The subsequent switch over to VAT by Latin

American, Asian and African countries has brought the figure now to more than 150

countries. The Government of India had set up an Indirect Taxes Enquiry Committee

way back in 1976, under the Chairman of Shri. L.K. Jha, who strongly recommended,

the adoption of VAT in India. This committee recommended adoption of MANVAT,

a VAT at the manufacturing level. As a result of the MODVAT scheme was

introduced with effect from May 1, 1986. Initially it covered selected items in only 37

Chapters. Textile sector was brought under MODVAT in 1996 and the tobacco sector

in 2000. MODVAT was extended from March 1, 1994. MODVAT was renamed as

CENVAT (Central value Added Tax) with effect from April 1, 2000. All inputs used

directly or indirectly (except HSD, LDO and Petrol) are eligible for CENVAT.

                                                            

1 Dr. Avadhesh Ojha Satyadev Purohit Reena Garg, “VAT in India A Global View Law & Procedure”, The Tax Publishers, Jodhpur -2006.P.10.

55

During Post liberalization, it is said that Value Added Tax in India is one of

the most important constituent of tax reforms. VAT can also be referred to as a multi

point destination based system of taxation, such that tax is charged at every step of

transaction in the supply chain. VAT is actually a State subject in India, acquired from

Entry 54 of the State list, for which States are sovereign in making decisions. With the

help of tax department in their respective States, the governments ensure the levy of

VAT. The Central government is instrumental in guiding the State government with

respect to execution of tax.

The department of revenue under the Ministry of Finance is given the power

to have control with respect to direct and indirect taxes, through two statutory boards,

i.e. Central Board of Direct Taxes (CBDT) and the Central Board of Central Excise

and Customs (CBEC).The sales tax division of department of revenue is responsible

for levying VAT. India had a problem of double taxation. Goods were taxed before

the manufacturing process as an input and once again after manufacturing. To avoid

such double taxation, which had a negative impact on the economy, VAT was

introduced.

2.3  VALUE ADDED TAXES (VAT) IN INDIA 

VAT is the indirect tax on the consumption of the goods, paid by its original

producers upon the change in goods or upon the transfer of the goods to its ultimate

consumers. It is based on the value of the goods, added by the transferor. It is the tax

in relation to the difference of the value added by the transferor and not just a profit.

All over the world, VAT is payable on the goods and services as they form a part of

national GDP. It means every seller of goods and service providers charge the taxes

after availing the input tax credit. It is the form of collecting sales tax under which tax

is collected in each stage on the value added to the goods. In practice, the dealer

charges the tax on the full price of the goods, sold to the consumer and at every end of

the tax period reduces the tax collected on sales and tax charged to him by the dealers

from whom he purchased the goods and deposited such amount of tax in government

treasury.

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2.4  TAX REFORMS 

The reform process began with the Wanchoo Direct Taxes Enquiry Committee Report

of 1971,2 and gained impetus during the government headed by V.P. Singh

(December 1989–November 1990) who cut the top marginal rate for individuals to 50

per cent and overhauled indirect taxes by introducing MODVAT (modified value

added tax). Subsequently, the then finance minister Dr. Manmohan Singh took on the

mantle of tax reforms in 1991. Government since then has shown continued

commitment to the reform process, which is evident from the fact that many of the

recommendations of various committees have been or are being implemented.

The report published by the Tax Reforms Committee headed by Raja J.

Chelliah (1993)3 is widely acclaimed as the most comprehensive and analytical

treatment of Indian tax policy and reform issues, since independence. This was

followed by other reports, noteworthy of which are the Shome Committee report

(2001),4 which largely updated the Chelliah Committee’s recommendations, and the

Kelkar Task Force reports5. The underlying mandate of all these reports was to

simplify the tax system. All of them focus on the need to improve tax administration

and reduce exemptions. Quite a few of which are Kelkar Committee

recommendations such as e-filing, setting up of large taxpayer units and submission

of annual information reports by third parties have been implemented and the fruits

thereof are seen with increased revenue collections.

The implementation of VAT encountered with several postponements of the

cut-off date. The Government, the Empowered Committee and the Chief Ministers

conference decided to switch over to VAT after overcoming several hurdles. For its

implementation, the Finance Ministry resorted to a constitutional amendment to allow

States to tax services as recommended by the G.C. Srivastava Committee6. Earlier

                                                            

2 Wanchoo Direct Taxes Enquiry Committee Report of 1971. 3 Raja J. Chelliah, Report of Tax Reforms Committee- II, 1993 4 Parthasarathy Shome, Report of Advisory Group on Tax Planning & Tax Administration for the Tenth Plan, Govt. of India, May 2001 5 Vijay L. Kelkar, Report of the Task Force on Indirect taxes, Ministry of Finance & Company Affairs, Govt. of India, December 26, 2002 6 G.C. G.C. Srivastava, IAS Secretary committee report on finance commission 2004

57

G.C. Srivastava Committee on service tax had recommended either bringing services

in the concurrent list or allowing States to tax services on the lines of the Central

Sales Tax Act. Before the amendment, the power to levy tax on services is not

mentioned either in the Union List or State List contained in the Schedule VII of the

Constitution. With the then constitutional framework the only option is to invoke

entry 97 of the Union List which has been vested with residuary powers to levy any

tax not mentioned in the State List or the Concurrent List. The Central Government

had invoked the entry 97 and taxed various services. Entry 97 which reads as ‘Any

other matter not enumerated in List II or List III including any tax not mentioned in

either of those lists.’

The Tax Information Network (TIN) is new unique registration number that is

used for identification of dealers registered under VAT. It consists of 11 digit

numerals and will be unique throughout the country. First two characters will

represent the State Code as used by the Union Ministry of Home Affairs. The set-up

of the next nine characters may, however, be different indifferent States. TIN is being

used for identification of dealers in the same way like PAN is used for identification

of assesses under Income Tax Act. All the dealers seeking for new registration under

VAT or Central Sales Tax will be allotted new TIN as registration number. Every

State Commercial Tax Department has made provisions and has issued new TIN to

their existing dealers replacing old registration/CST number.

2.4.1  Major  Recommendations  of  the  Indirect  Taxation  Enquiry   Committee (ITEC), 1978 

There have been a number of important committees and commissions which have

examined excise taxation in India. All of them have emphasized the need to improve

long-term productivity in revenue and overall growth in the economy, removal of

cascading. Through tax rebate on inputs, reduction in the number of rates, exemptions

and incentives and overall simplification in the tax laws making compliance and tax

administration easier. Indirect Taxation Enquiry Committee, (ITEC) popularly known

as the Jha Committee, recommendations.

The ITEC was constituted under the chairmanship of Shri L K Jha in 1977,

after two decades a comprehensive report on taxation in India was brought out by

John Mathai Commission during 1953–54.The ITEC submitted its Interim Report in

58

1977, followed by the Final Report in 1978. The major objectives before the

committee in reforming the structure of excise duties were:

• To achieve a determine degree of progression; and

• To avoid cascading and distortions (GOI, 1978: pp.305).

The committee was in favor of replacement of the existing systems of excises, sales

tax, octroi and certain other indirect taxes by a comprehensive VAT in the long-term.

This Committee was of the view that VAT system should be introduced at the

manufacturing stage only, initially and named it MANVAT or manufacturing VAT.

The extractions of VAT to wholesale and retail stager were not considered to be

prudent. The Committee stated “the right course of action, in our view, is not to

pursue the theoretically best solution, namely, one integrated system based on the

VAT principle, but to adopt the second best solution of MANVAT combined with a

reformed system of sales taxation”.

This Committee commissioned a study of the implications of applying

MANVAT to the automobile industry, and came to the conclusion that significant

quantitative benefits would flow from adoption of VAT at the manufacturing stage,

despite higher compliance and administrative costs and concluded that the relative

price distortions in MANVAT because inputs are freed from taxation. John F Due,

stated “one of the most exhaustive studies of indirect taxation ever made in the

country”7. Its most significant recommendation was the introduction of a system of

MANVAT, under which input taxes could be partly refunded.

2.5  INTRODUCTION OF MODVAT 

Based on the recommendations of the committee MANVAT in the name of

MODVAT or a Modified Value-Added Tax was introduced to minimize the

cascading effects of excise taxation. Under this scheme, a manufacturer or an

intermediate manufacturer can take credit for excise duty paid on raw materials and

components used by him in his manufacture. MODVAT thus, helps to avoid double

taxation on inputs as well as on finished goods.

                                                            

7 Purohit Mahesh C and Purohit Vishnu Kanta, Commodity Taxes in India Directions for Reforms, Gayatri Publications, New Delhi, 1995, pp.3

59

2.5.1  Major Recommendations of Tax Reforms Committee (TRC), 1991–1993 

In pursuance of its commitment to reform the tax system, the Government of India

constituted the ‘Tax Reforms Committee’ on 29th August, 1991 under the

chairmanship of Professor Raja J Chelliah as part of the overall structural reforms

related to liberalization of the Indian economy. It submitted its Interim Report in

December 1991 followed by Final Report, Part–I in August 1992 and Final Report,

Part–II in January 1993. The recommendation of this committee is as follows:

The Committee emerged with contour of an ideal tax system with respect to

indirect taxes, and the extent to which the ideals have to be compromised for reasons

of practical difficulties and administrative limitations. As far as indirect taxes are

concerned, the Committee felt that it should “cover as many transactions as possible

and should be broadly neutral in relation to production and consumption; departures

from neutrality must be deliberate and for achieving a few major objectives”. Hence,

the taxes levied must have only a few rates and very few exemptions. The basic

indirect tax at the Central level should be broadly neutral and in course of time cover

commodities as well as services.

2.5.2  Recommendations of the Final Report (Part–I) of TRC, 19928 

The Committee submitted the following suggestions to transform the then existing mixed system of MODVAT and excise on a gross value basis into a VAT at the manufacturing level:

• Extension of excise to cover manufactured goods which were exempted, and

some selected services mentioned in the Interim Report;

• Reduction in the level of unduly high rates on some commodities;

• Gradual reduction in the number of rates to three between 10 and 20 percent;

• Extension of MODVAT credit to inputs;

• Extension of MODVAT credit for machinery not fully at the time of purchase,

but in installments during a subsequent period of years as laid down in the

law; and

• Extension of VAT to the important services used by the productive enterprises

                                                            

8 Raja J. Chelliah, Recommendations of the Final Report of Tax Reforms Committee (Part-I), 1992

60

2.5.3  Recommendations of the Final Report (Part–II) of TRC, 19939 

Part–II of the TRC Final Report deals mainly with the restructuring of the import

duties in India. The Committee emphasized the need to have a simple, broad–based

and neutral tax system with moderate rates. It is against this background that the

Committee had designed a three rate MODVAT regime at the manufacturing level at

10, 15 and 20 percent, with sumptuary excise on non–essential commodities at 30, 40,

or 50 percent. It stressed on widening of tax base by bringing the exempted goods into

the ambit of tax.

2.5.4  Review of Chelliah’s (TRC) Recommendations on VAT 

The report of the tax reforms committee (1991, 1992 and 1993) paved the way for

far–reaching reforms that were undertaken in the field of central excise during the

nineties. According to Acharya, “Taken together, these three volumes of the Chelliah

committee report (GOI, 1991–93) constitute the finest treatment of tax policy and

reform issues in India in the past 30 years”10. As a follow-up on the recommendations

made by the TRC, the rates and number of levies of central excise were drastically

reduced, the coverage of MODVAT was extended, specific duties were replaced by

advalorem, a number of exemptions were abolished and rationalized, service taxation

was introduced in a limited way and several steps were taken to modernize the

indirect tax system of the country.

2.6  FISCAL REFORMS IN INDIA 

Ever since the introduction of new economic policies of liberalization, privatization

and globalization in India in early 1990s, the debate regarding the restructuring of

Indian fiscal system had also has been initiated. Though the Modified Value Added

Tax (MODVAT) was introduced in the Central Excise in 1987, a comprehensive

VAT system was put in place in the early 1990s. Rationalization of Income Tax, both

personal income and corporate income; downsizing the public sector through reducing

subsidies and various expenditure cuts were also initiated by the Union government

during the period. In the reform decade of 1990s, financial transfers (in real terms)

                                                            

9 Raja J. Chelliah, Recommendations of the Final Report of Tax Reforms Committee (Part-II), 1993 10 Review of Chelliah’s (TRC) Recommendations on VAT

61

from Union government to State governments declined, the debt burden of the State

governments grew, the committed expenditures of the States increased substantially

(particularly after the implementation of fifth pay commission awards for government

employers) contrasting with their inelastic revenue sources. These features of fiscal

crisis at the level of State governments show the need for reforming State fiscal

system. The major aspect of the State fiscal reform was the introduction of State level

VAT from April 1, 2005 in majority of States and Union Territories in India.

2.6.1  Reasons for Implementing State level VAT in India 

The States have the exclusive power to levy tax on intra-State trade (General Sales

Tax). The Union government levies the Central Sales Tax (CST) at the rate of 4% on

inter-State trade that can be collected and retained by the exporting State. The power

to levy sales tax, by several States allowed indulging in providing sales tax

concessions and in competitively reducing the sales tax rates to attract investments.

This resulted in undesirable offshoots for large federal economy. Firstly, some States

had failed to realize that the tax concessions could not be a permanent feature to

attract investment and failed to create infrastructure facilities, to attract and sustain

investments. Secondly, the investments should flow to regions that could help to reap

the economies of scale in production with the help of infrastructure facilities and

location. The sales tax concessions devoid of this economic rationale had induced

mal-allocation of investment and increased overall cost of production in the economy.

Thirdly, the tax competition between States prevented from exploiting full tax

potentials. Fourthly, the differential tax policies had not helped in creating a single

common market in India. The sales tax system in India has only resulted in creation of

a heterogeneous tax system, isolated regional markets and mal-allocation of

productive resources across States.

Coinciding with the introduction of the new economic policy in the early

1990s, the States had realized the need for a harmonious sub-national sales tax system

in India, and it was felt that the ultimate form of harmonized sales tax system could be

the State Level VAT with zero rating tax on exports, that is, with zero CST and

reimbursement of State Level VAT. As an intermediate step, Uniform Floor Sales Tax

Rates (UFSTR) was introduced in 2001. Further, the sales tax-related industrial

incentives were also discontinued from January 1, 2000. This was considered as a

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forerunner for the introduction to State Level VAT. The States initially introduced

truncated version of UFSTR, signaling an ideal State VAT in India. The removal of

differential sales tax systems between States are for two economic reasons is:

• The cascading effect of the non-VAT sales tax systems, that is, the tax on tax,

is clearly inflationary. On the contrary, the state governments realized a

portion of the ultimate price of a commodity as sales tax, which was smaller

than the actual sales tax rate levied. Therefore, it was an opaque sales tax

system; in other words, the consumer did not know the portion of the price

paid which was collected as tax, and the government did not realize the

intended proportion of prices as tax.

• The first- point sales tax in a State on a commodity, then the value addition

made in the subsequent transactions were not taxed. To overcome these

shortcomings of the non-VAT sales tax regime, States had decided to

implement State Level VAT.

2.6.2  Implementation of State Level VAT 

The Empowered Committee of State Finance Ministers released ‘A White Paper on

State Level-Added Tax’ in January 2005. It stated that almost all the States excluding

Uttar Pradesh had consented to implement State Level VAT from April 1, 2005. But,

only 21 States introduced it. Uttar Pradesh, Uttranchal, Tamil Nadu and five BJP-

ruled States implemented later for various reasons. The White Paper states, “The VAT

will not only provide full set-off for input tax as well as tax on previous purchases,

but also abolish the burden of several of the existing taxes, such as turnover tax,

surcharge on sales tax, additional surcharge, special additional tax, etc., In addition,

Central Sales Tax is also going to be phased out”. It is expected the State Level VAT

will be self-policing, improve tax compliance and reduce prices and all these will

increase tax buoyancy. Although the tax rates are the same across states under State

Level VAT, there is some flexibility- states are allowed to decide ten items that could

be exempted from State Level VAT, and to incorporate slight changes in the tax laws

and administration.11

                                                            

11 R Srinivasan, “VAT- An Indian Experience”- Effects of State level VAT: A Conceptual Analysis, ICFAI Edited book, 2006 p.12-14.

63

2.6.3  Nature of Indirect tax system in India 

The indirect taxes are commonly and collectively known as consumption taxes. The

nature of the taxes shown in the Table 2.1 below:

Table: 2.1

Nature of Indirect Tax

Tax Relevant Statute Taxable event

Customs Duty Customs Act,1962 Customs Tariff Act,1975

These duties are imposed by Central Government on goods imported into and Median rate 24.42%

Central Value Added Tax(CENVAT) or popularly known as Excise duty

Central Excise Act, 1944 Central Excise Tariff Act CENVAT Credit Rules, 2004

A tax on the manufacture or production of goods in India imposed by the Central Government Median rate 8.24%

Service Tax Finance Act,1994 CENVAT Credit Rules, 2004

A tax imposed by the Central Government on the identified services rendered by persons defined in the provisions Median rate 10.3%

Central sales tax Central Sales Tax Act, 1956

A tax on the inter- State sales of goods, imposed by the originating State Rate 2%

Research & development cess

Research & Development Cess Act, 1986

The Cess is imposed on the import of technology Rate 5%

Value Added Tax VAT Acts of respective State Governments

A tax on the Intra-State sales/purchases of goods, imposed by the States Rate generally at 4% and 12.5%

Entry tax Specific provisions laid down by State Governments

Entry tax is levied by the State Governments on entry of goods into the State and is payable by the purchaser.

Local levies such as octroi or local area taxes

Specific provisions laid down by State Governments

These could be imposed by municipal or local authorities.

Source: Abhishek A.Rastogi ACA, “Taxmann’s Guide to Goods & Services Tax”, A comprehensive & illustrated guide to Goods & Services Tax .Taxmannn Publications Pvt.Ltd. New Delhi -2010 P.6.

64

2.6.4  Economics of indirect taxes  

A global review of indirect tax systems substantiates that VAT and GST are emerging

as taxes of the future. The review also gives an insight that the shift from direct to

indirect taxation is a not a myth but a reality. A system adopted by approximately 150

countries in less than 50 years indicates that the introduction of VAT/GST has spread

very widely and rapidly. It has become the most widespread general tax on

consumption, demonstrating its potential to raise tax revenue in a neutral and

transparent manner.

2.6.5  Economic growth and tax to GDP ratios 

Indian always had a greater reliance on indirect taxes than on direct taxes. This trend

has been recently reversed in India as compared to other countries where there is shift

towards a higher proportion of indirect taxes. In India, it has historically been easier to

tax the consumption of goods and services indirectly rather than to tax incomes. A

significant proportion of economic activity, primarily in the agricultural sector,

continues to take place outside of the direct tax system.

India seeks to increase an overall tax of GDP ratio and is focused to raise the

proportionate contribution of direct taxes to overall tax revenues. The Economic

Survey of India for 2008–09 depicts the Taxes to GDP ratios which is shown in the

Table 2.2 below:12

                                                            

12 Abhishek A.Rastogi ACA,Aditya kumar, “Taxmann’s Guide to Goods & Services Tax”, New Face of Indirect Taxes in India.Taxmannn Publications Pvt.Ltd. New Delhi -2009, P.2-3.

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Table: 2.2 Share in Central Taxes

Statement: Share in Central Taxes Statement: Share in Central Taxes (Amount in Crore) (Amount in Crore)

State 2008–09 (Accounts)

2009–10 (Revised

Estimates)

2010–11 (Budget

Estimates)

Variation (Per cent) State 2008–09 (Accounts)

2009–10 (Revised

Estimates)

2010–11 (Budget

Estimates)

Variation (Per cent) Col.3/ Col.2

Col.4/ Col.3

Col.3/ Col.2

Col.4/ Col.3

1 2 3 4 5 6 I. Non- Special Category

II. Special Category

1. Andhra Pradesh 11.802 12,109 14,505 2.6 19.8 1. Arunachal Pradesh

462 475 686 2.9 44.4

2. Bihar 17.693 18,154 23,600 2.6 30.0 2. Assam 5,190 5,547 7,595 6.9 36.9

3. Chhattisgarh 4,258 4,369 4,806 2.6 10.0 3. Himachal Pradesh

837 859 1,635 2.6 90.2

4. Goa 415 427 557 2.7 30.4 4. Jammu and Kashmir(RE)

2,053 1,880 2,911 –8.4 54.8

5. Gujarat 5,726 6,176 6,600 7.9 6.9 5. Manipur 581 596 944 2.6 58.4

6. Haryana 1,725 1,922 2,194 11.4 14.2 6. Meghalaya 595 636 854 6.9 34.3

7. Jharkhand 6,024 5,763 6,340 –4.3 10.0 7. Mizoram 383 393 563 2.6 43.1

8. Karnataka 7,154 7,000 9,060 –2.1 29.4 8. Nagaland 422 433 657 2.6 51.8

9. Kerala 4,276 4,387 4,826 2.6 10.0 9. Sikkim 379 374 500 –1.3 33.9

10. Madhya Pradesh 10,767 11,047 11,047 2.6 0 10. Tripura 687 734 1,069 6.9 45.7

11. Maharashtra 8,018 8,248 10,883 2.9 31.9 11. Uttarakhand 1,507 1,546 2,345 2.6 51.7

12. Orissa 8,280 8,496 10,004 2.6 17.8 All States 1,61,052 1,65,477 2,00,466 2.7 21.1 13. Punjab 2,084 2,527 2,908 21.3 15.0

14. Rajasthan 8,999 9,258 12,252 2.9 32.3

15. Tamil Nadu 8,511 8,758 10,402 2.9 18.8

16. Uttar Pradesh 30,906 31,712 35,517 2.6 12.0

17. West Bengal 11,322 11,650 15,206 2.9 30.5

Source: RBI Bulletin 2010-11. State Finances: A study of Budget 2010-11 Pg: 65

66

Table: 2.3

Tax to GDP Ratio

Period Total Direct Tax

Indirect Tax

2001–02 8.1% 3.0% 5.1%

2002–03 8.7% 3.4% 5.3%

2003–04 9.1% 3.8% 5.3%

2004–05 9.7% 4.2% 5.4%

2005–06 10.2% 4.6% 5.6%

2006–07 11.5% 5.3% 5.8%

2007–08 12.6% 6.3% 5.9%

2008–09 (BE) 12.9% 6.9% 6.0%

2008–09 (RE) 11.8% 6.5% 5.3%

2009–10 (BE) 10.9% 6.3% 4.6%

Source: Analysis of Union Budget 2011–2012, Confederation of Indian Industry, Feb 2011.

Table 2.3 & Exhibit 2.1 shows Tax-GDP ratio for 2011–12 is estimated to be 10.4

percent which has an improvement over the revised estimate for 2010–11. The

finance ministry has kept a target of 10.8 percent for 2012–13.

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Exhibit: 2.1

Tax to GDP ratio

  Source: Analysis of Union Budget 2011–2012, Confederation of Indian Industry, Feb 2011.

68

Exhibit: 2.2

Growth of Indirect Tax

Source: Analysis of Union Budget 2011–2012, Confederation of Indian Industry, Feb 2011.

The above Exhibit 2.2 shows that the indirect tax collections for 2011–12 are

estimated at Rs. 397816 Crore registering a growth of 17.4 percent over the 2010–11

RE with excise, customs and service expecting to grow by 19.1, 15.1 and 18.2 percent

respectively over 2010–11 RE.

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Exhibit: 2.3

Gross Tax Revenue

 

Source: Analysis of Union Budget 2011–2012, Confederation of Indian Industry, Feb 2011.

The contribution of direct and indirect taxes in Gross Tax revenue over the years,

direct tax has always been the major contributor with the present share 57.12 percent

in the total gross tax collections. The increase in direct tax collections reflects

improvement in the equity of tax system is shown in Exhibit 2.3.

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Table: 2.4

Review of CST/VAT as on 01–April–2010

State Existing VAT Rates

Return Filing

State Existing VAT

Rates

Return Filing

Andhra Pradesh 4% / 14.5%

Monthly Maharashtra 5% / 12.5%

Monthly

Assam 5% / 13.5%

Monthly New Delhi 5% / 12.5%

Monthly

Bihar 4% / 12.5%

Quarterly Orissa 4% / 12.5%

Monthly

Chandigarh 4% / 12.5%

Quarterly Punjab 5% / 12.5%

(10% Addl Tax/Sur)

Quarterly

Chhattisgarh 4% / 12.5%

Quarterly Rajasthan 5% / 14% Quarterly

Goa 4% / 12.5%

Quarterly Tamil Nadu 4% / 12.5%

Monthly

Gujarat (4%+1%) / (12.5% + 2.5%)

Monthly Uttar Pradesh (4%+0.5%+0.5%) / (12.5% +1%)

Monthly

Haryana 5% / 12.5%

Quarterly Uttarakhand 4%+0.5%/ 12.5%+1%

Monthly

Jharkhand 4% / 12.5%

Monthly West Bengal 4% / 12.5%

Quarterly

Karnataka 5% / 13.5%

Monthly Pondicherry 4% / 12.5%

Monthly

Kerala (4%+1%) / (12.5% +1%)

Monthly Himachal Pradesh 5% / 12.5%

Monthly

Madhya Pradesh 5% / 12.5%

Quarterly

Source: http://www.caclubindia.com/forum/latest-VAT-rate-amendments-as-on-01-april-2010-76397.asp

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2.7  OPERATIONAL DEFINITIONS OF VAT 

Tax exemption may also refer to a personal allowance or specific monetary

exemption which may be claimed by an individual to reduce taxable income under

some systems. Tax exempt status may provide a potential taxpayer complete relief

from tax, tax at a reduced rate, or tax on only a portion of the items subject to tax

CBEC The Central Board of Excise and Customs is the national agency

responsible for administering customs and excise in India. The Customs & Excise

department was established in the year 1855 by the then British Governor General of

India, to administer customs laws in India and collection of import duties / land

revenue

Transfer of business: No registration certificate issued or renewed shall be sold or

transferred. Where a registered dealer transfers his business to another dealer, the

transferee shall apply for a fresh registration in the manner prescribed and the issue of

registration certificate shall be considered by the registering authority in the same

manner as prescribed

Returns & Assessment: Every dealer is required to file a monthly return under the

VAT Act in the prescribed manner and in the prescribed form for the prescribed

period. Such return shall be accompanied by the challans of the tax paid/computed

after taking rebate/setoff as provided in the Acts/Rules.

VAT payable: Credit will be given within the same month for entire VAT paid within

the State on purchase of inputs and goods. This credit received is deducted from tax

liability and the balance tax is paid

Refund: Excess credit will be carried forward to next year. In case the credit is not

utilized for certain period, it is refunded to the dealer. On account of set-off provisions

the refund of tax is a normal feature of the law and is expected to be paid within the

prescribed time from the end of month in which return is filed. In a Sales tax regime,

refund instances are by way of exceptions and are generally not paid by the

Government in time.

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Input Tax Credit: All registered dealers whether manufacturer or trader are eligible

to claim set-off of the tax paid on inputs i.e. Value added Tax paid on purchases of

raw material, other goods and packing materials. Even for stock transfer/consignment

sale of goods out of the State, input tax paid in excess of a certain percentage is

eligible for VAT credit. However no credit under VAT law is allowable in respect of

taxes paid on purchases made from other States.

Output tax: Output tax is the tax payable by a registered dealer on the sale of goods

effected.

Period: Period refers to the period for which the dealer is required to file returns. The

period under the VAT Act is likely to be monthly for VAT registered dealers and

quarterly for retail dealers with general registration

Self assessment: Self assessment is finalization of assessment by the department

based on the returns filed by the dealer without calling for and examining the books of

accounts. Since under VAT the tendency to evade tax is expected to be lower, the self

assessment turnover limit is expected to be higher.

RNR - revenue neutral rate: The revenue neutral rate is the rate of tax at which the

revenue accruing to the State Government under the present system of levy of tax and

VAT is neutral.

Tax credit: Credit will be given within the same period for entire tax paid within the

State on purchase of goods both for intra-State and inter-State sales, irrespective of

when those will be utilized or sold

Capital goods: Capital goods means plant, machinery and equipment used for the

purpose of manufacturing or processing of goods in the State for sale, where the

purchase thereof has been capitalized and includes purchase of right to use such

goods, whether such purchase is capitalized or not. This term does not include all the

capital assets of a dealer such as car, furniture and office equipments etc.

Exempted goods: Exempted goods means the goods specified in the list or the

schedule appended to the Act on the purchase or sale of which no tax is leviable. The

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exempted goods are common for all the State. No tax is leviable on the purchase or

sale of exempted goods

Zero rated sales: A Zero rated sales is one on which no output tax is payable but

input tax credit is eligible. The difference between an exempt sale and a Zero Rated

Sale should be properly understood. An exempt dealer pays VAT on his purchases,

but it is not entitled to claim input tax credit as he cannot charge VAT on his exempt

sales. A dealer effecting Zero Rated Sales claims refund of the VAT on his inputs but

pays no tax on his output. Eg. Exports.

Deemed sales in VAT: Deemed sales are those which are not really “sales” but have

been deemed as sales. For Instance, leasing and hire purchase transaction, work

contract, transfer of right to use goods are instances of deemed sales that are taxed

under the Sales Tax Act. The inclusion or otherwise of deemed sales under VAT

differs from State to State.

Casual trader: means a person who, whether a principal, agent or in any other

capacity, carries on occasional transactions of a business nature involving the buying,

selling, supplying or distribution of goods in the State, whether for cash or for

deferred payment, or for commission, remuneration or other valuable consideration.

2.8  SALIENT FEATURES OF VAT 

• VAT proposes to impose two types of rates of tax namely:

• 4% on declared goods or the goods commonly used.

• 10–12% on goods called Revenue Neutral Rates (RNR). There would

be no fall in such remaining goods.

• Two special rates will be imposed—1% on silver or gold and 20% on

liquor. Tax on petrol, diesel or aviation turbine fuel are proposed to be

kept out from the VAT system as they would be continued to be taxed,

as presently applicable by the CST Act.

• Uniform Rates in the VAT system, certain commodities are exempted from

tax. The taxable commodities are listed in the respective schedule with the

rates. VAT proposes to keep these rates uniform in all the States so the goods

sold or purchased across the country would suffer the same tax rate. Discretion

74

has been given to the States when it comes to finalizing the revenue neutral

rates (RNR) along with the restrictions. The rate must not be less than 10%.

This will ensure by doing this that there will be level playing fields to avoid

the trade diversion in connection with the different States, particularly in

neighboring States

• No Tax concession to new industries is done away with in the new VAT

system. This was done as it creates discrepancy in investment decision. Under

the new VAT system, the tax would be fair and equitable to all.

• Adjustment of the tax paid on the goods purchased from the tax payable on the

goods of sale All the tax, paid on the goods purchased within the State, would

be adjusted against the tax, payable on the sale, whether within the State or in

the course of interstate. In case of export, the tax, paid on purchase outside

India, would be refunded. In case of the branch transfer or consignment of sale

outside the State, no refund would be provided.

• Collection of tax by seller/dealer at each stage. The seller/dealer would collect

the tax on the full price of the goods sold and shows separately in the sales

invoice issued by him.

• VAT is not cascading or additive though the tax on the goods sold is collected

at each stage, because the net effect is as follows: - the tax, previously paid on

the sale of goods, would be fully adjusted. It will be like levying tax on goods,

sold in the last State or at retail stage.

2.9  SIGNIFICANCE OF VAT IN TAXATION REGIME 

• Simplification- Under the CST Act, there are 8 types of tax rates-1%, 2%,

4%, 8%, 10%, 12%, 20%, and 25%. But under VAT system, there are only 2

types of taxes 4% on declared goods and 10–12% on RNR. This will eliminate

any disputes that relate to rates of tax and classification of goods as this is the

most usual cause of litigation. It also helps to determine the relevant stage of

the tax. Under the VAT system, tax would be levied at each stage of the goods

of sale or purchase.

• Adjustment of tax paid on purchased goods-Under VAT systems, the tax

paid on the manufactured goods would be adjusted against the tax payable on

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the manufactured goods not necessarily the goods must be either be

manufactured or sold.

• Transparency – In the VAT system, the amount of tax at each and every

stage of goods of sale or purchase is transparent..

• Fair and Equitable- VAT introduces the uniform tax rates across the State so

that unfair advantages cannot be taken while levying the tax.

• Procedure of simplification- Procedures, relating to filing of returns,

payment of tax, furnishing declaration and assessment are simple..

• Minimize the discretion- The VAT system minimizes the discretion with the

assessing officer so that every person is treated alike.

• Computerization- The VAT system is purely based on computerization

which focuses on the tax evaders by generating Exception Report.. The

management information system, forms a part of integral computerization, and

makes the tax department more efficient and responsive.

2.10  SHORT COMINGS OF VAT 

The main advantages which have been identified in connection with the Value Added

Tax:

• VAT is regressive: The tax is regressive as its burden falls disproportionately

on the poor since the poor are likely to spend more of their income than the

relatively rich person. Further, there is now a tendency in most countries to

reduce this progressivity of taxes as has been done in Guyana where a flat rate

of income tax has been introduced.

• VAT is inflationary - Some businessmen seize almost any opportunity to

raise prices, and the introduction of VAT certainly offers such an opportunity.

However, temporary price controls some careful setting of the rate of VAT

and the significance of the taxes they replace should generally ensure that

there is no increase if any in the cost of living. To the extent that they lead to a

reduction in income tax, any price increases may be offset by increases in

take-home pay.

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• VAT favors the capital intensive firm- It is also argued that VAT places a

heavy direct impact of tax on the labour - intensive firm compared to the

capital – intensive competitor, since the ratio of value added to selling price is

greater for the former. This is a real problem for labour – intensive economies

and industries.

2.11  OPPOSITION TO VAT IN INDIA 

There has been opposition to VAT on several grounds.

1. Firstly, the traders lobby is opposed to the introduction of VAT. The traders

lobby cites the possibility of harassment by the tax inspectors as the outward

reason for their opposition. Further, the trade lobbyists claim that VAT is good

for manufacturers, but bad for traders. The traders’ lobbyists contend that the

extensive procedural formalities that will have to be followed by traders’

under this regime which may result in increased transaction costs.

2. Secondly, some businessmen have expressed apprehensions that introduction

of VAT would lead to inflation.

3. Thirdly, some States in India have feared to introduce VAT because it would

reduce the revenue. The Central Government has acknowledged the possibility

of reduction in revenue following substitution of sales tax by VAT and had

offered to compensate the States for the revenue reduction for three years.

Initially there might be a fall in the revenue, after a period of time the revenue

would improve.

4. Further, politicians are opposed to VAT because it would be a negation of the

federal principle as it would concentrate more powers at the Central

Government and also because it is being introduced at the behest of the World

Trade Organization (“WTO“).

2.12  VAT AND CST DISTINGUISHED 

2.12.1 About CST 

The Central Sales Tax (CST) is a levy of tax on sales, which are effected in the course

of inter-State trade or commerce. According to the Constitution of India, no State can

levy sales tax on any sales or purchase of goods that takes place in the course of

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interstate trade or commerce. Only parliament can levy tax on such transaction. The

Central Sales Tax Act was enacted in 1956 to formulate principles for determining

when a sale or purchase of goods takes place in the course of interstate trade or

commerce. The Act also provides for the levy and collection of taxes on sales of

goods in the course of interstate trade and commerce and to declare certain goods to

be of special importance in the interstate commerce or trade. The central sales tax is

an indirect tax on consumers.

Though CST is central levy, however it is administered by the concerned State

in which the sale originates. The seller or a dealer of goods in a State has to collect

State Sales Tax on the sale of goods within the State as well as z central Sales Tax on

Sales that takes place in the course interstate trade or commerce. The objects of the

Central Sales Tax Act, 1956 are given in the preamble of the Act which Says that it is

an Act to formulate principles for determining when a sale or purchase of goods takes

place in the course of inter-state trade or commerce or outside the State or in the

course of import into or export from India, to provide for the levy, collection and

distribution of taxes on sales of goods in the course of inter-State trade or commerce

and to declare certain goods to be of special importance in inter-State trade or

commerce and specify the restrictions and conditions to which State laws imposing

taxes on the sale or purchase of such goods of special importance shall be subject.

VAT as already has been discussed, is not a new tax but a new system of

taxation, different from CST in concept, approach and procedure. Both VAT and CST

are tax levied on sale or purchase of goods/commodities. These are several points of

distinction between VAT and CST is presented here under in a tabular form

(Table 2.5).

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Table: 2.5 VAT vs CST

Sl. No.

Point of Distinction

VAT CST Sl. No.

Point of Distinction

VAT CST

1 Liability to tax Dealer Dealer 9 Classification of goods for determining tax rate

More or less similar in all the States

Classification Varies from State to State.

2 Administrative procedures

More or less remain similar to CST with some procedural changes

More or less similar to VAT with some procedural changes.

10 Tax on exempt goods

List of exempted goods reduced. Taxed at nil rate

Taxed at nil rate

3 Point of tax Multi-point taxation Single point taxation along with additional levies

11 Tax on declared goods

4 per cent 4 per cent

4 Tax credit Entire tax credit available on inputs

Concessional rate of tax is permitted against declaration.

12 Tax on essential goods

4 per cent. However, there is difference in list of essential goods under VAT and CST

4 per cent. List of essential goods is different to VAT

5 Tax on value Tax only value addition

No such concept tax only on sale or purchase of goods

13 Tax on other goods Single rate in all States (likely to be 12.5%)

Rates vary from State to State (5% to 30%)

6 Tax rates Only 2–3 rates Numerous rates varying from State to State.

14 Tax on gold, jewellery, etc.,

Single rate Rates vary from ½ per cent to 4 per cent

7 Additional levies No Numerous, varying from State to State

15 Tax on lease contracts

At notified rate or at rate applicable to goods under contract

Rates vary from State to State

8 Resale tax No Yes

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Table: 2.5 VAT vs CST (Continued)

Sl. No.

Point of Distinction

VAT CST Sl. No.

Point of Distinction

VAT CST

16 Tax on works contract

At notified rate or at rate applicable to goods under contract

Rates vary from State to State

19 Goods exported out of country

Input tax credit or refund available

Full set off permissible upon furnishing prescribed declaration

17 Tax on packing material

Same rate as applicable to goods packed

Same rate as applicable to goods packed

20 Effect on cash flow Comparatively less as tax is required to be paid first and credit is available later on

Comparatively more as concessional rate is levied on furnishing relevant form.

18 Set-off of tax paid on raw material, packing material, stock transfers, finished good for resale

Full set-off available Usually not permitted. However permitted by some States.

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2.13  LEVY OF VAT 

VAT could be levied with three specific variants, viz., (a) Gross Product Variant, (b)

Income Type Variant, and (c) Consumption Type variant. It is further distinguished

through their methods of calculation, viz., addition method and subtraction method13.

2.13.1 Gross product variant: 

This variant allows deductions for all purchases of raw materials and components but

no deduction is allowed for business inputs. The, capital goods such as plant and

machinery are not deductible from the tax base in the year of purchase and

depreciation on the plant and machinery is not deductible in the subsequent years. The

economic base of gross product variant is equivalent to Gross National Product. In

this variant of VAT, capital goods carry a heavier tax burden as they are taxed twice.

Modernization and upgrading of plant and machinery is delayed due to this dual tax

treatment.

2.13.2 Income variant 

This variant of VAT, allows deduction for purchases of new materials and

components as well as depreciation on capital goods. It provides incentives to classify

purchases as current expenditures to claim set-off. Net investment (i.e. gross

investment minus depreciation) is taxed. The economic base of the income variant is

equivalent to net national product. In practice, there are difficulties connected with

specification of any method of measuring depreciation, which basically depend on the

life of an asset as well as on the rate of inflation.

2.13.3 Consumption Variant 

This variant allows deduction for all business purchases including capital assets.

Gross investment is deducted in calculation of value added. The economic base of the

tax, therefore, is equivalent to total private consumption. It neither distinguishes

between capital and current expenditures nor specifies the life of asset of depreciation

allowances for different assets. This form is neutral between different methods of

                                                            

13 Mahesh C.Purohit , “Value Added Tax”- Experiences of India and other Countries, Gayathri Publications , Delhi 2001.P.4

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production; there would be no effect on tax liability due to the method of production

(i.e. substituting capital for labour or vice versa). The tax is also neutral between the

decision to save or consume.

Exhibit: 2.4

Different Stages of VAT

 

Source: Mahesh C. Purohit, Value Added Tax – Experience of India and Other Countries, Gayathri Publications, New Delhi, 2001, pg. 5

Note: Total VAT collected at four point; Rs.10+10+10+10 = Rs.40.0

Among the three variants of VAT the consumption variant is widely used. Most

countries of Europe and other continents have adopted this variant. The reason for

preference of this variant is that it does not affect decision regarding investment

because the tax on capital goods is also set-off against VAT liability. The tax is

neutral in respect of techniques of production (labour or capital –intensive). The

consumption variant is more in harmony with the destination principle. In the foreign-

trade sector, this variant relieves all exports from taxation while imports are taxed.

Finally, this variant is convenient from the point of administrative expediency as it

simplifies tax administration by obviating the need to distinguish between purchases

of intermediate and capital goods on the one hand and consumption goods on the

other.

D Retailer Sale Value Rs.400.00 Gross VAT 10%; Rs.40 Net VAT Rs.40-30=10.00

C Wholesaler Sale Value Rs.300.00 Gross VAT 10%; Rs.30.0 Net VAT Rs.30-20=10.00

A Raw Material Producer Sale Value Rs.100.00 Gross VAT 10%; Rs.10.0 Net VAT Rs.10.00

B Manufacturer Sale Value Rs.200.00 Gross VAT 10%; Rs.20.0 Net VAT Rs.20-10=10.00

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Exhibit: 2.5

Different Variants of VAT

Gross Product Income Consumption Consumption Variant Variant

Addition method Subtraction method

Direct subtraction Intermediate Indirect

Source: Mahesh C.Purohit , “Value Added Tax”- Experiences of India and other Countries, Gayathri Publications , Delhi 2001.P.4

2.14  METHODS OF COMPUTATION OF VAT 

VAT can be computed by adopting three different methods. They are:

• Addition method

• Subtraction method

• Tax-credit method

The methods calculated the VAT liability, which shown in Exhibit 2.2.

Tax levied on all sales with no deduction for business inputs

Tax levied on all sales with set-off. For depreciation on goods inputs

Tax levied on all sales with deduction for business inputs

Deducting tax on inputs from tax on sales for each tax paid

Deducting tax inclusive value of purchases from sales and taxing difference between them

Deducting aggregate tax (exclusive value of purchase) from the tax-exclusive value of sales.

Identification of value added by the summation of wages, profit, rent and interest

Estimating value added by taking difference between output and input

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2.14.1 Addition method: 

This method is based on the identification of value-added which can be estimated by

summation of all the elements of value-added (i.e.wages, profits, rent and interest).

This method is known as addition method or income approach. This is in line with the

income method of calculating national income.

2.14.2 Subtraction method: 

The subtraction method estimates value-added by means of difference between

outputs and inputs [i.e. T =t (output-input)]. This is also known as product approach

and has further variants in the way subtraction is attempted from among

• Direct subtraction method

• Intermediate subtraction method

• Indirect subtraction method

Direct subtraction method is equivalent to a business transfer tax whereby tax is

levied on the difference between the aggregate tax-exclusive value of sales and

aggregate tax-exclusive value of purchases. Intermediate subtraction method is based

on deduction of the aggregate tax-inclusive value of purchases from the aggregate tax-

inclusive value of sales and taxing the difference between them.

2.14.3 Tax‐credit method 

The indirect subtraction method entails deduction of tax on inputs from tax on sales

for each tax period, [i.e., t(output)- t(input)]. This method is also known as tax credit

method or invoice method. In practice, most countries use this method and employ

net- consumption VAT. A comparative picture of the three methods of calculating

VAT is presented in Table 2.6.

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Table: 2.6

Different Methods of Calculating Liability of Value Added Tax: A Comparative study

SL. No

Methods Stage of production

Manufacturer Wholesaler Retailer Total Economy

1 2 3 4

1. Addition method

Wages 150 300 200 650

Rent 50 100 20 170

Interest 25 75 20 120

Profit 25 25 10 60

Value Added (a+b+c+d)

250 500 250 1000

VAT 25 50 25 100

2. Subtraction method

Sales 350 850 1100 2300

Purchases 100 350 850 1300

Value added (a–b) 250 500 250 1000

VAT 25 50 25 100

3. Invoice method

Sales 350 850 1100 2300

Tax on sales 35 85 110 230

Purchases 100 350 850 1300

Tax on purchases 10 35 85 130

VAT (B–D) 25 50 25 100

Source: Mahesh C. Purohit, “Value Added Tax” – Experience of India and Other Countries, Gayathri Publications, Delhi 2001.P.5–10.

Note: The Calculations are based on a uniform rate of 10 percent tax on value added.

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2.15  VAT IN DIFFERENT COUNTRIES 

Russia

VAT in Russia is charged on the realization of goods, works and services on the

territory of Russia and on the import of goods into Russia. For VAT purposes,

"realization" is deemed to include barter operations and the free of charge transfer of

ownership of goods, of the results of work performed, or the rendering of services.

VAT is payable by all legal entities and individual entrepreneurs. Legal entities and

individual entrepreneurs agree exempted from VAT when the taxable revenues or less

than RUR 1 million during the three preceding months. VAT is levied on revenues

(including advance payments) received on the sale of goods, works and services. In

some cases, in accordance with Russian transfer pricing regulations, the tax

authorities may adjust the prices for tax purposes. With regard to imports, the taxable

base is defined as the customs value of the goods, plus customs duty and excise tax

when applicable. Russia currently has the following VAT rates: 20% - the standard

rate for goods, works and services; 10% - for certain non-excisable food products and

children's goods, in accordance with a number of lists endorsed by the government;

medicines and medical products; newspapers and magazines, and books related to

education, science and culture (provided they are not of an erotic or advertising

nature) and also certain services related to their production. Zero rate for export

goods.

Netherlands

Value added tax (VAT, in Dutch ‘BTW’) is levied in the Netherlands at each stage in

the chain of production and distribution of goods and services. The tax base is the

total amount charged for the transaction excluding VAT, with certain exceptions.

Because of deductions in previous stages of the chain, VAT is not cumulative. Every

taxable person is liable for VAT on his or her turnover (the output tax), from which

the VAT charged on expenses and investments (the input tax) may be deducted. If the

balance is positive, tax must be paid to the tax authorities. If the balance is negative, a

refund is received. The tax paid by the ultimate consumers of the goods or services is

not tax-deductible. The tax is based on the VAT rate applicable to the price of the

goods or services received; exclusive VAT. There is four taxable activities: supplying

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goods; rendering services; acquisition of goods by businesses (since 1 January 1993);

importing goods. The general rate is 19%. A reduced rate of 6% is applicable to the

supply, import, and acquisition of goods and services mentioned in Annex 1 to the

VAT Act. The reduced rate is mainly applicable to foodstuffs and medicines. Other

goods and services subject to the lower rate include water, art, books, newspapers and

magazines, materials required by the visually handicapped, artificial limbs, certain

goods and services for agricultural use, passenger transport, hotel accommodation and

entrance fees for museums, cinemas, sports events, amusement parks, zoos and

circuses and some labour-intensive services. The zero rates is intended primarily for

exported goods, seagoing vessels and aircraft used for international transport, gold

destined for central banks, and any activities which may take place within bonded

warehouses or their equivalent. There is also a zero rate for goods that are transported

to another EU Member State on which VAT is levied because of the acquisition in

that Member State.

China

Value Added Tax (VAT) was implemented in China in 1984. Initially, the tax was

levied on 24 specified items. The need for constructing a socialist market economy

system in China resulted in the proclamation of 'The Provisional Regulation of the

People's Republic of China or Value Added Tax' on January 1, 1994. As a type of

turnover tax, value-added tax (VAT) is levied on the increased value of commodities

at different stages of production or circulation, i.e. the value-added on the

commodities throughout the supply chain until the final customer bears the burden of

the tax for the whole production process. All enterprises or individuals engaged in the

sale of or import of goods or the provision of processing, repair or maintenance

services in China have to pay VAT In China, the VAT system is separated into two

taxpayer divisions: Small-scale taxpayers and Ordinary Tax payers VAT is divided

into three categories: Input VAT is defined as the VAT paid on the purchase value of

goods. Output VAT is defined as the VAT paid on the sales value of goods. Payable

VAT is the deduction of the Input VAT from the Output VAT. For general Tax

payers, there are two VAT tax rates, the basic rate of 17% and a lower rate of 13%

which is for the import or sales.

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Germany

VAT is paid by the end user of a product or service. Companies transfer the VAT

received to the tax authorities on a monthly, quarterly, or annual basis. The frequency

generally depends on the level of company turnover.The normal VAT rate of 19

percent is just below the European average. A lower rate of seven percent is charged

for convenience goods and services needed on a day-to-day basis (such as food,

newspapers or public transport). Some services (including banking, healthcare, and

non-profit work) . The official German term for VAT is Umsatzsteuer, but it was

originally called Mehrwertsteuer and is often still referred to by this name.

Ireland

Ireland comes under the EU VAT regime, and is part of the European single market

economy. VAT Directives are issued by the EU which lay out the principles of the

VAT regime to be adopted by the member states. These Directives take precedent

over local VAT legislation. The Irish VAT law is contained within the Value Added

Tax Act 1972, which has been amended many times, including the move to the

European Union single market. It is administered by the Revenue Commissioners.

Foreign companies may register in Ireland for VAT without the need to form a local

company – known as non-resident VAT trading. There is no VAT threshold in Ireland

for the registration of non-resident traders – a VAT number must be in place before

the commencement of taxable supplies. There are strict rules on the situations where a

registration is permitted. Common scenarios which require an Irish VAT registration

include: Importing goods into Ireland; Buying and selling goods within Ireland; The

standard rate of tax is 9%;

South Africa

VAT was born as a tax for business enterprise in South Africa in 1991. All taxable

supplies of goods or services are liable to VAT – with some exemptions. There is an

annual VAT registration threshold of 1 million South African Rand (approx

€104,000) per annum. It is not compulsory to register if the annual sales turnover is

below this amount. The standard rate of VAT is 14%. Exports, certain foodstuffs and

other supplies are zero-rated, and certain supplies are exempt (mainly certain financial

88

services, residential accommodation and public transport).Periodic VAT returns must

be submitted by all companies with a South African VAT number, detailing all

taxable supplies (sales) and inputs.

Taiwan

VAT applies to goods and services used for production, trading and consumption in

Vietnam (including goods and services purchased by organizations and individuals

from abroad). When supplying goods and/or services subject to VAT, enterprises

must charge VAT on the value of supplied goods or services. In addition, VAT

applies to the duty paid value of imported goods. The importer must pay VAT to

Customs at the same time of paying import duties. Applicable VAT rates are 0%, 5%,

and 10%, respectively. The 0% rate is applied to exported goods and services. VAT

is calculated by adding the taxable price (net of tax) to the applicable VAT rate. With

respect to imported goods, VAT is calculated by adding the import price to the import

duty and the special sales tax (if applicable). The VAT system of Vietnam is also

characterized by two types of VAT payers: deduction method VAT payers and direct

method VAT payers. Most of companies and business organizations are deduction

method VAT payers, i.e. the businesses will have to pay the output tax after

deducting the input tax. Businesses must report VAT returns monthly to the tax

authorities. The tax authorities, in turn, will check the tax return and issue a tax

assessment notice to the tax payer. The payable VAT must be paid to the State

budget in the following month.

Austria

The Austrian VAT law in its present form was enacted by the Value Added Tax Act

of August 23, 1994, effective from January 1, 1995 (Federal Law as of August 19,

2005). Due to Austria’s accession to the European Community effective from January

1, 1995, the VAT law was substantially amended. In particular, the 6th EC VAT

Directive and the Single Market Regulations were implemented. The VAT Act of

1994 consists of two parts: The first part mainly provides the VAT rules on domestic

transactions and transactions involving non-EC Member States. The second part

contains the “Single Market Regulations”, which are an appendix to Section 29 of the

VAT Act of 1994 and contain specific rules for the taxation of intra-Community

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transactions. VAT applies to the supply of goods or services which are carried out

within the territory of the country, the self supply by businesses and the importation

of goods from non-EC Member States as well as to intra-Community acquisition of

goods. The rate of tax is 20%.The standard VAT rate in Austria is 20% - since

January 1984. There are reduced rates of 19%, 12% and 10% for food, books,

accommodation rental and other goods and services.

Italy

Italy, comes under the EU VAT regime, and is part of the European Union single

market economy. VAT Directives are issued by the EU which lay out the principles of

the VAT regime to be adopted by the member’s states. These Directives take

precedent over the local legislation. The Italian VAT law is contained within the

specific VAT legislation and is backed up by case law from the Italian Tax

Commission (Commissione Tributaria Provinciale). It is administered by the Ministry

of Finance and the local tax offices. The standard VAT rate in Italy is 21% since

September 2011. There is a reduced rate of 10% and 4%.

Ukraine

Value Added Tax (VAT) was introduced in Ukraine in 1993. Since January 1, 2011 it

has been administrated by the Ukrainian State Tax Administration in accordance with

Chapter I and Chapter V of the Tax Code of Ukraine. Mandatory registration is must

be when the aggregate amount from transactions relating to supply of goods/services,

which are subject to VAT, accrued (paid) to such entity during the last 12 calendar

months exceeds UAH 300,000 (excluding the value added tax). Voluntary

registration can be made by the tax payer if at least 50% of the goods or services

produced are supplied to counter parties that are VAT payers. The law distinguishes

between the following major types of transactions which are subject to VAT and are

taxed at the standard rate of 20%. This applies to all turnovers from the sale of goods

and services in Ukraine apart from the exceptions. Zero–rate (0%) VAT for export of

goods and services .Non-VAT able transactions applies, to emission of stocks,

transfer of property for operational leasing, insurance and reinsurance transactions,

social and pension insurance, consulting, engineering, legal, accounting, audit,

actuarial, IT services and software development, supply and testing services, etc.

90

VAT-exempt transactions are allowed to education services, healthcare services,

certain mass media services, religious services, charity, etc.

  Mexico

Value added tax is a tax applied in Mexico and other countries of Latin America.

In Chile it is also called Impuesto al Valor Agregado and in Peru it is called Impuesto

General a las Ventas (IGV).

Prior to the IVA (Spanish: impuesto a las ventas), a sales tax had been applied

in Mexico. In September 1966, the first attempt to apply the IVA took place when

revenue experts declared that the IVA should be a modern equivalent of the sales tax

as it occurred in France. At the convention of the Inter-American Center of Revenue

Administrators in April and May 1967, the Mexican representation declared that the

application of a value added tax would not be possible in Mexico at the time. In

November 1967, other experts declared that although this is one of the most equitable

indirect taxes, its application in Mexico could not take place.

In response to these statements, direct sampling of members in the private

sector took place as well as field trips to European countries where this tax was

applied or soon to be applied. In 1969, the first attempt to substitute the mercantile-

revenue tax for the value added tax took place. On December 29, 1978 the Federal

government published the official application of the tax beginning on January 1, 1980

in the Official Journal of the Federation.

As of 2010, the general VAT rate is 16%. This rate is applied all over Mexico

except for the region bordering the United States, where the rate is 11%. The main

exemptions are for books, food, and medicines on a 0% basis. Also some services are

exempt like a doctor’s medicine attention.

United States

Most States have a retail sales tax charged to the end buyer only. Unlike in the VAT,

wholesale sales and sales of raw materials or unfinished goods are not taxed. A

common misconception is that sales to businesses are untaxed. Sales to

businesses are taxed if the businesses (or its workers) are the end users of a consumer

good.

91

State sales taxes range from 0%–13% and municipalities often add an

additional tax in the form of a local sales tax. In most stores, the price tags and/or

advertised prices do not include the taxes, and the taxes are added at the cash register

before the customer pays. In some States, no sales tax is charged for services. (In

many States, a use tax is imposed on items ordered online or purchased in a State with

lower or no sales tax, and brought into the taxpayer's home State.) This is a key

difference between most sales taxes levied throughout the United States and the value

added tax system in many other countries.

In the United States, the State of Michigan used a form of VAT known as the

"Single Business Tax" (SBT) as its form of general business taxation. It is the only

State in the United States to have used a VAT. When it was adopted in 1975, it

replaced seven business taxes, including a corporate income tax. On August 9, 2006,

the Michigan Legislature approved voter-initiated legislation to repeal the Single

Business Tax, which became effective from January 1, 2009.

To conclude about 150 countries across the world have introduced GST in one

form or the other. The GST rate in various countries ranges from 5 per cent in Taiwan

to 25 per cent in Denmark. GST, consumption based destination tax, would be a

major deviation in the area of the indirect tax administration. The Table 2.7 below

shows the tax rates in different countries of the world.

92

Table: 2.7

Tax Rates around the world

Country Income Tax VAT Country Income Tax VAT Corporate Individual Corporate Individual

Argentina 35% 9–35% 21% Greece 25% 0–40% 21% Australia 30% 17–45% 10%(GST) Hong kong 16.5% 2–17% – Austria 25% 21%–50% 20% Hungary 19% 17% and 32% 25% Belarus 26.28% 12% 20% India 30–40% 10–30% 12.5% Belgium 33.99% 25–50% 21% Indonesia 28% 5–30% 10% Brazil 34% 7.5–27.5% 17–25% Ireland 12.5% 20–41% 21% Bulgaria 10% 10% 20% Israel 25% 10–45% 16% Canada 19.5%(federal) 15–29%(Federal) 5%(GST) Italy 31.4% 23%–43% 20% China 25% 5–45% 17% Japan 30% 5–50% 5%(Consump) Croatia 20% 15–45% 23% Latvia 15% 23% 21% Cyprus 10% 20–30% 15% Lithuania 15% 15%/20% 21% Czech Rep. 20% 15% 20% Luxemburg 21% 0–38% 15% Denmark 25% 38–59% 25% Malta 35% 15–35% 18% Egypt 20% 10–20% 10%gst Mexico 28% 0–28% 15% Estonia 21% 20% 20% Monaco 33.33% 0% 19.6% Finland 26% 7.0–30.5% 22% Morocco 35% 0–41.5% 20% France 33.33% 5.5–40% 19.6% Montenegro 9% 12% 17% Germany 30–33%(effective) 14–45% 19% Netherlands 20–25.5% 0–52% 19% Gibraltar 27% 0–40% – New Zealand 30% 0–39% 12.5%(GST)

93

Table: 2.7

Tax Rates around the world (Continued)

Country Income Tax VAT Country Income Tax VAT Corporate Individual Corporate Individual

Norway 28% 28–49% 25% South Africa 28% 0–40% 14% Pakistan 35% 0–25% 15% Spain 30% 24–43% 16% Panama 27.5% 15–25% 7% Sweden 26.3% 0–57% 25% Philippines 30% 5–32% 12% Taiwan 17% 6–40% 5% Poland 19% 18%/32% 22% Thailand 30% 5–37% 7% Portugal 12.5/25% 0–42% 20% Tunisia 30% 15–35% 18% Romania 16% 16% 19% Turkey 20% 15–35% 18% Russia 20% 13% 18% U.K. 28% 0–40% 17.5% Saudi Arabia 20% 20% – Ukraine 25% 15% 20% Serbia 10% 10–20% 18% U.S.A. 15–35% 15–35% – Singapore 17% 3.5%–20% 7% (GST) Vietnam 25% 5–35% 10% Slovakia 19% 19% 19% Zambia 35% 0–35% 16% Slovenia 20% 16%–41% 20%

Source: http://www.laowee.com/index.php/2010/08/tax–rates–vat–rates–around–the–world/

94

Table: 2.8

VAT Compensation (Rs. in crore)

Sr. No.

Name of State Government

Compensation paid in

2005-06

Compensation paid in

2006-07

Compensation paid in

2007-08

Compensation paid in

2008-09

Compensation paid in

2009-10

Compensation paid in

2010-11

Total Compensation

Pending claims as on 31.12.2011

1. Andhra Pradesh 404.06 0 1.88 0 0 0 405.94 0

2. Assam 0 0 30.06 38.73 150.10 0 218.89 78.12

3. Bihar 165.87 78.23 0 0 0 0 244.10 0

4. Chhattisgarh 0 0 75.00 281.59 31.91 0 388.50 0

5. Haryana 0 0 0 27.84 59.85 0 87.69 0

6. Karnataka 1038.92 625.36 354.71 369.05 180.3 0 0 2568.34

7. Kerala 456.47 426.23 123.19 243.46 0 0 1249.35 0

8. Madhya Pradesh 0 0 46.24 0 0 0 46.24 40.74

9. Maharashtra 259.89 2814.72 1203.83 1895.00 1475.00 0 7648.44 277.40

10. Sikkim 1.84 4.03 0 0 0 10.92 16.79 0

11. Tripura 5.12 3.81 5.57 19.81 0 0 34.31 0

12. West Bengal 139.10 139.75 0 0 0 0 278.85 0

13. Tamil Nadu 0 0 2040.00 1000.00 0 0 3040.00 321.36

14. Delhi 0 0 0 362.81 855.07 37.70 1255.58 0

15. Orissa 0 0 0 18.93 163.32 0 182.25 0

16. Jharkhand - - - 104.73 86.450 0 191.18 0

Total 2471.27 4092.13 3880.48 4361.95 3002.00 48.62 17856.45 717.62

Source: Department of Revenue, Govt. of India, At a glance Budget 2011–2012.

95

Table: 2.9

CST Compensation (Rs. in crore)

Sl. No.

Name of State Government

Compensation paid in

2007-08

Compensation paid in

2008-09

Compensation paid in

2009-10

Compensation paid in

2010-11

Total Compensation

Pending claims as on 31.12.2011

1. Andhra Pradesh 0  905.24  1095.50  1540.86  3541.60  0 

2. Assam 70.89 0 228.79 150.90  450.58 0

3. Chhattisgarh 101.37 48.64 794.95 463.97  1408.93 0

4. Delhi 183.70 154.76 1052.00 1200.80  2591.46 0

5. Gujarat 338.14 156.57 796.04 661.21  1951.96 0

6. Haryana 150.00 400.00 1177.12 552.30  2279.42 689.60

7. Jharkhand 69.47 35.55 394.58 418.76  918.36 0

8. Karnataka 350.00 155.00 710.30 1098.87  2314.17 0

9. Orissa 131.53 5.49 483.90 425.99  1046.91 0

10. Punjab 0  24.32 9.95 324.55  358.82 0

11. Rajasthan 126.24 18.56 311.78 373.39  829.97 0

12. Tamil Nadu 647.54 0 759.00 469.61  1876.15 579.47

13. Uttarakhand 0  0 131.00 0  131.00 9.46

14. West Bengal 0  45.87 464.77 464.81  975.45 0

15. Maharashtra 0  0 123.00 0  123.00 83.67

16. Madhya Pradesh 0  0 110.96 106.06  217.02 55.96

17. Nagaland 0  0 4.43 0  4.43 1.63

18. Puducherry 0  0 86.91 143.78  230.69 0

19. Uttar Pradesh 0  0 0 0  0 118.87

Total 2168.88 1950.00 8735.18 8395.86 21249.92 1538.66

Source: Department of Revenue, Govt. of India, At a glance Budget 2011–2012.

96

2.16  TRENDS IN EXPENDITURE 

Salary expenditure increased in 2009–10 by 30.38% over 2008–09 due to

implementation of the recommendations of the 6th Central Pay Commission and

payment of arrears whereas non-salary expenditure increased by 85.53% during the

same period mainly on account of VAT/CST related expenditure. During 2009–10,

the VAT/CST related expenditure & grants to States towards VAT/CST compensation

constituted the very major portion of expenditure i.e. 96.25% of total expenditure

under Grant No.41 – Department of Revenue. In 2010–11, CST Compensation of

8396.24 crores has been released to various State Governments till 31st December

2010 whereas an amount of 179.25 crores has been released towards VAT and VAT

related expenditure till 31st December 2010. As on 31st December 2010, total VAT

Compensation of 17,856.45 crore has been provided to State Governments and CST

Compensation amounting to 21,249.92 crore has been provided, as detailed above in

Table 2.8 & 2.9.

2.16.1 Tax Evasion under the VAT system 

• Outright suppression of purchases and sales.

• Sales to Fictitious dealers.

• Maintenance of duplicate or multiple sets of account books.

• Changing the Place of business without prior permission or proper intimation

to the registration authority.

• Showing the sales below the taxable quantum.

• Fictitious place of business in other States and effecting consignments sales.

The below Exhibit 2.3 shows how tax evasion occurs.

97

Exhibit: 2.6

Evasion of Tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Source: Dr. A. Jayakumar & Su. Sabanayagam the management accountant journal, November, 2009 pg.866 titled Audit & Inspection under VAT Act

Opening Stock Goods taxable at 12.5 p.c=Rs.7 lakh & 4 p.c = Rs. 3 lakh. Total value Rs. 10 lakh (shown in the returns)

Purchase Goods taxable at 12.5 p.c = Rs.10 lakh & 4 p.c = Rs.5 lakh Total value Rs. 15 lakh (shown in the returns)

Total stock Goods taxable at 12.5 p.c = Rs.17 lakh & 4 p.c = Rs.8 lakh Total value Rs. 25 lakh

Sale Goods taxable at 12.5 p.c = Rs.15 lakh & 4 p.c = Rs. 3 lakh Total value Rs. 1.88 lakh on Rs. 15 lakh taxable at 12.5 p.c & Rs. 0.12 lakh on Rs. 3 lakh taxable at 4 p.c. Total tax collected = Rs. 2 lakh

Discloses Total value Rs. 18 lakh (No difference in total

turnover)

Tax paid (break up)

Rs. 1.25 lakh on Rs. 10 lakh taxable at 12.5 p.c. & Rs. 0.32 lakh on Rs. 8 lakh taxable at 4 p.c. Total tax paid = Rs. 1.57 lakh

Impact • No difference in the overall turnover sold and

disclosed. • Collects tax of Rs. 2 lakh • Deposits tax of Rs. 1.57 lakh • Retains tax of Rs. 43, 000 In absence of breakup of taxability of goods, details of goods lying in stock could not be ascertained.

98

2.17  VAT FRAUDS  

VAT (Value-Added Tax) fraud is a scheme through which businesses avoid paying

VAT and even claim refunds for VAT they never pay. Such businesses actualize their

criminal intents using different established methods. Thus, different types of VAT

fraud can be identified, which governments of VAT-administering countries have

spent huge amounts of money to investigate and checkmate.

2.17.1 Inflated Refund Claims 

This is a VAT fraud scheme through which traders acquire invoices for purchases

they never make. Their intention is to claim more refunds from tax-collecting

authorities than they deserve. Such traders acquire fake invoices because invoices are

needed to claim refunds. (Invoices give evidence of merchandise purchases which

traders have made and on which they have paid refundable VAT.) There is an

established crime network dealing in such fabricated invoices, which business people

purchase to defraud government.

2.17.2 Underreported Sales 

Traders conceal their actual amount of sales from domestic markets in order to evade

their obligation to charge VAT on these sales. Such a fraud is designed to enable them

to claim more refunds (credits) than they deserve. In addition, this scheme has the

natural potential of boosting the business of such traders because it will encourage

patronage on account of the relatively cheap goods and services the traders offer to

buyers.

2.17.3 Fictitious Traders 

Traders set up unreal enterprises and register them for VAT, thus creating fictitious

traders of themselves. They make fake commodity purchases and sales, and defraud

the authorities by the registration of their non-existent business transactions. Their

aim is to have grounds for VAT-refund claims. In addition to setting up fake

enterprises, they make fake export invoices. To avoid being exposed, they try to make

fast profits and to disappear quickly.

99

2.17.4 Domestic Sales Disguised As Exports 

Under this scheme, traders sell goods and services on a domestic market but claim to

have sold them on an export market. For this purpose, they acquire fake export

invoices. Fake export invoices contain claims about the amount of purchases greater

than the actual amount such traders made. Such fabricated invoices apparently justify

their claims to greater VAT payments and therefore to greater VAT refunds.

2.17.5 Missing Trader Intra‐EU Fraud or Carousel Fraud 

This is the one of the biggest problem EU member nations faces and loses money.

This fraud allows traders to evade their VAT obligations in two different EU

countries by capitalizing on goods or services that are in high demand in a particular

EU country. For instance, after registering for VAT in one EU country, say, France,

they can purchase goods and services that are in high demand in Ireland on which

they cleverly avoid paying VAT. They then return to France to quickly sell such

goods or services at VAT-inclusive prices (having registered for VAT there).

Thereafter, they quickly disappear without paying their VAT. In its simplest form, a

fraudster obtains a VAT registration to acquire goods tax-free from a trader in another

country within the European Union. Typically, these goods are small, high-value,

easily transportable items, such as computer chips or mobile phones. The goods are

then sold on at a higher, VAT-inclusive price, but the seller disappears without paying

the tax to Tax Authorities. Officially, this type of crime is known as “missing trader

intra-community” fraud. This kind of fraud differs from straight tax evasion because

there’s a double-whammy loss to the authorities. Not only does the original importer

of the goods abscond with the VAT money, but the re-exporter fraudulently

‘reclaims’ the (never-paid) VAT.

As taxpayers start filing invoice level returns, the common GST portal can

start analyzing the data for tax evasion and fraud. Common formats for returns and

payments, combined with electronic filing and electronic payments, and a

standardized PAN-based registration makes the data consistent, and amenable to

mining. The common frauds and how they may be combated is shown in Table 2.10.

Assuming VAT collections of Rs.1,50,000 crores across all States, and a potential for

a 20% increase in collections, the common GST portal can lead to additional revenues

of up to Rs.30,000 crores.

100

Table: 2.10

Detection of Frauds

Type of Fraud Common GST Portal: Intelligence based Deterrence

Fraudulent bills Matching

Improper Input Tax Credit Matching

Fraudulent use of ‘exempt’ rules Electronic returns

False payment proofs Electronic challans

Unrecorded sales Data mining

Misuse of composition method Data mining

Wrongful application of lower tax Data mining

Under-invoicing Data mining

Non-existent dealers Data mining

Non-existent dealers Data mining

Source: Ministry of Finance, The IT Strategy for GST, July 2010

2.18  VAT AUDIT 

The assumption while introducing VAT was that the efficiency processing the returns

would enhance revenue and compliance. The self-checking mechanism reduces the

scope for evasion and improves the revenue. But it has been found that the evaders

have resorted to innovative methods like bogus invoicing, suppressing of turnover and

faking of refund claims. New auditing methods are required to detect such advanced

modes of evasion and to short – list habitual offenders.

It is true that under VAT the auditing system is more accurate and reliable.

But only in some countries all returns and firms are audited comprehensively. The

resource constraints do not permit cross-checking of all invoices and transactions.

Some countries concentrate on sensitive commodities and sectors to avoid

unnecessary wastage. Only selected units are audited thoroughly by scrutinizing the

101

stock, private documents, correspondents and competitors’ price. Income tax returns

are also verified to ascertain weather they reflected undisclosed income accrued

through evasion.

In India, tax returns are audited mainly by collecting agency. An independent

authority working under the comptroller and Auditor General of India also audits

them. But over a period of time, audit tends to become a routine check of returns and

registers. They do not yield any significant results other than pointing out some

arithmetical inaccuracies or deficiencies in documentation. Under the VAT scheme,

audit has to be more sensitive to the possibilities of manipulation. It has to use data

base of the system to unearth suspect firms and sales. Since audit is done on post

clearance basis, regular processing wings should be separate from the audit. The

concept of third party audit by the comptroller and Auditor General of India will

become redundant when automated system for audit is installed. The recommendation

of KTF to abolish AG’s audit is a sensible step towards reducing duplication of work.

Frequent visits of audit practice belonging to different agencies for scrutinizing the

same document over and over again is a major irritant to taxpayers. It can be

dispensed with if electronic database is used by all agencies for any kind of enquiry.

A typical audit modal is presented here to indicate the broad outline of VAT audit.

102

Exhibit: 2.7 A VAT Audit Model

Source: Dr. G.K. Pillai,VAT A way out of the Indian Tax Muddle- Problems and Prospects of Adopting Value Added Tax, JAICO PUBLISHING HOUSE,Mumbai,2005.P.113.

VAT Purchase worksheet

VAT RETURNS

PURCHASES Sales Taxed goods Taxable goods Imported goods Exempt Goods Exempted Goods Exported Goods

VAT Sale worksheet

Import documents

Export documents

Credit Note

Debit Note

Purchase invoices

Sales invoices

Adjustment Summary

Adjustment Summary

External information

Despatch document (Inward)

Despatch document (Outward)

Raw material register Production register

Financial Books of accounts

103

2.18  SNAPSHOTS ON PUDUCHERRY 

Puducherry is a Union Territory with legislature extending over an area of 479 Sq.

Kms. Comprising, four regions viz., Puducherry, Karaikal, Mahe and Yanam. The

U.T of Puducherry consists of two districts viz., Puducherry District comprising of

Puducherry, Mahe and Yanam regions and Karaikal District comprising of Karaikal

region. There are 5 Municipalities and 10 Commune Panchayats. Total population of

the U.T is 12,44,464 as per 2010 Census. Average literacy rate of Puducherry

(Pondicherry) district is 86.13 percent. Total literates in Puducherry district are

733,075 people.

Under Revenue Account, the total expenditure incurred during 2008–09

(Actual) has been Rs.2570.48 Crores. During 2009–10 (RE) an amount of Rs.3302.55

Crores has been incurred. The Quick Estimates of the Gross State Domestic Product

of Puducherry in 2009–10 with base year 2004–2005 has been worked out to

Rs.11255.23 Crores (QE) at current prices. The Per Capita income for the year 2009–

10 (QE) has been estimated at Rs.82,767 and Rs.69704 at current and constant prices

respectively. The Consumer Price Index for Industrial workers of the Union Territory

of Puducherry stands at 171 during July 2010 revealing that there exist increasing

trend of prices in the Union Territory.

104

Table: 2.11

Population – 2010 Census

 

Source: Directorate of Census Operations, Puducherry, 2010.

105

Table: 2.12

State Finance and Banking Expenditure on Sales Tax

(Rs. In lakhs) Sl. No Particulars 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

Puducherry (Total Revenue)

16755.66 19619.83 23967.48 28316.39 45131.51 46683.77 51051.99

1 Total expenditure on the Department

174.56 180.25 175.13 220.84 273.69 323.01 368.13

2 Percentage distribution to Revenue collections

1.04 0.92 0.73 0.78 0.37 0.69 0.72

Karaikal (Total Revenue)

856.25 1318.77 1677.17 2201.32 2506.00 3255.00 3933.00

1 Total expenditure on the Department

11.42 12.48 13.07 17.32 15.29 24.58 29.95

2 Percentage distribution to Revenue collections

1.33 0.95 0.78 0.79 1.60 0.75 0.76

Mahe(Total Revenue)

2467.66 3182.76 3885.22 4574.71 4347.85 4585.07 5851.29

1 Total expenditure on the Department

6.66 6.91 7.49 8.51 7.48 13.79 17.27

2 Percentage distribution to Revenue collections

0.27 0.22 0.19 0.19 0.17 0.30 0.29

Yanam(Total Revenue)

577.24 812.93 1127.47 1373.07 1559.59 1817.14 2842.03

1 Total expenditure on the Department

5.12 4.88 5.18 7.33 6.49 9.88 11.42

2 Percentage distribution to Revenue collections

0.89 0.60 0.46 0.53 0.42 0.54 0.40

Source: Commercial Taxes Department, Puducherry, 2011

106

Table 2.12 shows the relationship between the revenue and expenditure on sales tax.

It is highest during 2008-2009 when compared to all the other years.

Table 2.13 shows the performance of Commercial Taxes department,

Puducherry pertaining to the assessment the aggregate cases. It has combined

assessment cases into an aggregate total, without having any distinction between

different regions. The total number of cases due for disposal was highest during the

year 2006–07, compared to all the other years. The number of cases disposed during

the 2009–10 is 520, which is the lowest in all the other years. This department has to

be more vibrant in settling of cases in a speedier manner.

Table: 2.13

State Finance and Banking - Assessment Cases

Sl. No

Particulars Unit 2003–04

2004–05

2005–06

2006-07

2007-08

2008-09

2009-10

1 2 3 4 5 6 7 8 9 10 Puducherry,

Karikal, Mahe and Yanam

Nos.

1 Due for disposal

” 19665 20749 24466 28235 29412 23202 20558

2 Disposal ’’ 7015 4649 8678 9697 12053 2644 520 3 Pending at the

end of the year ’’ 12650 16040 15888 18541 17359 20558 20038

Source: Commercial Taxes Department, Puducherry, 2011

107

Exhibit: 2.8

State Finance and Banking

 

 

 

Source: Commercial Taxes Department, Puducherry, 2011

108

Table: 2.14

State Finance and Banking Sales Tax Collection

(Rs. in Lakh)

Sl. No Particulars 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10

1 2 3 4 5 6 7 8 9 PUDUCHERRY 1 Under PGST 16143.45 19315.31 23715.31 28316.39 27480.87 29420.58 33326.22 2 Under CST 7227.50 10336.63 11719.69 16014.13 17650.64 17263.19 17725.77 3 Total 23640.95 29651.94 35434.96 44330.52 45131.51 46683.77 51051.99 4 Percentage

variation over previous year

23.23 25.42 19.50 25.10 1.81 3.43 9.35

KARAIKAL 1 Under PGST 867.94 1329.33 1687.27 2201.92 2174.00 2803.00 3541.00 2 Under CST 154.79 130.02 133.56 284.89 332.00 452.00 392.00 3 Total 1022.73 1459.35 1820.83 2486.81 2506.00 3255.00 3933.00 4 Percentage

variation over previous year

46.61 42.69 24.76 36.57 0.77 29.88 20.83

MAHE 1 Under PGST 2478.51 3188.44 3889.87 4574.71 4342.58 4580.89 5845.78 2 Under CST 9.44 6.43 10.08 12.20 5.27 4.18 5.51 3 Total 2487.95 3194.87 3899.95 4586.91 4347.85 4585.07 5851.29 4 Percentage

variation over previous year

43.17 28.41 22.06 17.61 –5.21 5.46 27.62

YANAM 1 Under PGST 559.05 814.71 1129.41 1373.07 1502.63 1632.10 2598.11 2 Under CST 308.84 287.19 185.26 132.22 56.96 185.03 243.92 3 Total 867.89 1101.90 1314.67 1505.29 1559.59 1817.14 2842.03 4 Percentage

variation over previous year

61.80 26.96 19.30 14.49 3.61 16.51 56.4

Source: Commercial Taxes Department, Puducherry, 2011

Table 2.14 shows that the Sales Tax Collection has increased during 2009–10 for Puducherry, Mahe and Yanam. It has come down in Karaikal, the highest percentage variations is with reference to Yanam where it is 56.4%. The trend of all the other years shows a mixture of both increasing and decreasing trend.

109

Table: 2.15

State Finance and Banking Registered Dealers under the Sales Tax Act

Sl. No Particulars Unit 2003–

04 2004–

05 2005–

06 2006–

07 2007–

08 2008–

09 2009–

10 1 2 3 4 5 6 7 8 9 10 Puducherry 1 Under PGST alone Nos 141 205 156 59 377 185 154 2 Same dealer both

under CST & PGST ’’ 590 593 470 613 985 798 772

3 Total New Registration ’’ 731 798 626 672 1362 983 926 4 Cumulative Total

Registration ’’ 4758 5556 6182 6854 8216 9199 10125

Karaikal 1 Under PGST alone ’’ 10 7 19 8 86 98 49 2 Same dealer both

under CST & PGST ’’ 73 50 112 69 146 91 121

3 Total New Registration ’’ 83 57 131 77 232 189 170 4 Cumulative Total

Registration ’’ 975 1032 1163 1240 1472 1661 1831

MAHE 1 Under PGST alone ’’ 3 1 1 0 02 2 Same dealer both

under CST & PGST ’’ 60 63 39 52 89 60 31

3 Total New Registration ’’ 63 63 40 53 89 60 33 4 Cumulative Total

Registration ’’ 554 617 657 710 799 859 892

YANAM 1 Under PGST alone ’’ 3 1 1 1 2 09 18 2 Same dealer both

under CST & PGST ’’ 56 56 41 40 129 61 41

3 Total New Registration ’’ 59 57 42 41 131 70 59 4 Cumulative Total

Registration ’’ 460 517 559 600 731 801 860

Source: Commercial Taxes Department , Puducherry, 2011  

The cumulative total registration of dealers has shown an increasing trend for all the

regions in Puducherry during 2009–10. As in the case of total new registration of

dealers under sales Act has reduced tremendously in 2008–09, 2009–10, when

compared to 2007–08 for Puducherry region, Karaikal, Mahe except Yanam region,

and it is shown in Table 2.15.

110

Table: 2.16 State Finance - The State Budget - Revenue Receipts from Taxes and Duties

(Rs. In lakhs) State Finance and Banking

The State Budget-Revenue Receipts from Taxes and duties

Sl. No.

Items Actuals Actuals Actuals Actuals Actuals Actuals Actuals Revised Budget

2002–03 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 Estimates Estimates 2009–10 2010–11 1 2 3 4 5 6 7 8 9 10 11 I. Taxes on

Property and Capital

1 Land Revenue

23.58 29.56 28.88 31.70 91.41 53.85 38.28 79.00 111.50

2 Stamps and registration fees

1,619.76 2,027.12 2,352.62 2,396.52 3,100.83 4,136.89 3,079.78 7,000 1,0200

II. Taxes on Commodities

3 State Excise 8,769.68 10,566.48 11,029.19 12,517.49 14,349.44 22,402.31 27,959.63 32,500 47,500 4 Sales Tax 15,009.36 20,318.96 24,647.63 30,421.75 36,489.22 35,497.69 38,186.40 47,000 68,078

5 Taxes on Vehicles

2,194.56 2,318.73 2,387.24 2,556.43 2,901.02 3,160.49 3,245.66 4,000 5,800

6 Other Taxes and duties

21.37 15.90 13.04 16.55 23.08 33.59 25.15 21.00 22.00

Total 27,638.31 35,276.75 40,458.60 47,939.91 56,955.00 65,284.82 72,534.90 NA NA

Source: Department of Statistics, Puducherry, 2011

111

Based on State Finance Budget documents of Puducherry State, it is evident that the

taxes on land revenue and stamps and registration fees have been less in during 2008–

09, when compared to the previous five years. Taxes on commodities have shown an

increasing trend except other taxes and duties.

The data pertaining to 2007–08, 2008–09 and 2009–10, reveals that the

percentage variation of sales tax collection when compared to each previous year is

tremendously increasing for Puducherry and Yanam and shows a slight decrease in

case of Karaikal. Mahe shows a very sharp increase in collection of Sales Tax.

2.18.2 Procedure for Registration under Vat Act of Dealers Registered   Under the PGST Act14 

Dealers already registered under the PGST Act are deemed to be provisionally

registered and required to submit their application for registration within one month

under the proposed VAT Act. (Section 6(1)) Briefly the procedure are:

• The application in Form A with a fee of

• Rs.10000 in respect of medium and large-scale industries;

• Rs.5000 in respect of dealers in Indian Made Foreign Liquor; and

• Rs.100 in respect of other cases

• Form A to be accompanied with a tax return of estimated turnover for twelve

months (Rule 3(2)).

• Additional fee of Rs.100 for copy of registration certificate for every

additional place of business is also payable at the time of submission of

application for registration.

• The completed application form is to be submitted affixing the photograph(s)

of the applicant(s) and shall be signed by -

• in the case of a proprietary concern, by the proprietor or proprietor as

the case may be,

• in the case of a Hindu Undivided family, by the Karta,

                                                            

14 Source: http://www.tnvat.com/pdyindex.asp 

112

• in the case of a company, by all the Directors or any officer so

authorized by the Board of Directors with the Common Seal of the

Company,

• in the case of a local authority, by its principal officer ,

• in the case of a firm, by all partners thereof not being a minor and for a

minor partner by the guardian, ( Form – B, furnishing details regarding

the partners of the firm, along with application form to be submitted to

the registering authority for the registration of partnership firm )

• in case of any other dealer, by a person so authorised to act in his

behalf.

• in case of existing dealers under the repealed Pondicherry General

Sales Tax Act, 1967, there is no requirement to file estimated turnover

return

• The applications may be made within one month business.

• Within 30 from the date of receipt of the application from a dealer, the

registering authority shall, issue a certificate of registration in Form - D

allotting a tax payer identification number (TIN). (Rule 7(1))

113

Table: 2.17

Report of the Comptroller and Auditor General of India for the 31st March 2009 Govt. of the Union Territory of Pondicherry

(Rs. In lakhs)

Year Amount collected at Pre-assessment stage

Amount collected after register assessment (additional demand)

Penalities for delay in payment of taxes and duties

Amount Refunded

Net collection

% of column 2 to 6

1 2 3 4 5 6 7

2006–07 364.31 1.07 0.35 0.84 364.89 99.84

2007–08 35.30 4.43 0.37 0.12 354.98 98.68

2008–09 PGST/ VAT

382.23 1.11 0.47 1.95 381.86 100.10

Source: DTTE. Economics and Statistics, Puducherry.

114

2.18.3 Analysis of the Collection  

The table 2.17 shows the break-up of the total collection at pre-assessment stage and

after register assessment i.e., additional demand of sales tax under the PGST Act and

VAT for the year 2008–09 and the corresponding figures for the preceding two years

as furnished by the concerned department are mentioned in the above table. This

shows that the collection of revenue at the pre-assessment stage ranged between 98.68

and 100.10% during 2006–07 to 2008–09. This reveals that the Commercial Taxes

Department is prudent in Tax collection.

2.18.4 Administrative set up of the Commercial Taxes Department 

The Commercial Taxes Department is headed by the Commissioner (CT) and is

assisted by one Deputy Commissioner and two Assistant Commissioners. The Deputy

Commissioner normally assists the Commissioner (CT) in the overall administration

of the Department. Out of two Assistant Commissioners, one Assistant commissioner

looks after Audit & Intelligence and the other Assistant Commissioner serves as the

First Appellate Authority. For filing of returns and collection of tax, there are four

Assessment Divisions in Puducherry region and one each in three outlying regions of

Karaikal, Mahe and Yanam. In all the divisions in Puducherry the Commercial Tax

Officer is assisted by two Deputy Commercial Tax Officers and one Assistant

Commercial Tax officer. In Karaikal and Mahe the Commercial Tax Officer is

assisted by only one Assistant Commercial Tax Officer. In Yanam, the Deputy

Commercial Tax Officer is the incharge for assessment, audit and collection of tax.

The officers are Assessing Officers. All the registered dealers are assigned to a

particular Assessing Officer to report on turnover and pay tax. VAT Audits will

normally be conducted by a team headed by the Assessing Officer. The Assessment

Divisions of Puducherry regions are called as Division - I, Division - II, Intelligence

Wing and Industrial Assessment Circle. The registration of dealers is centralized in

Puducherry. The Deputy Commercial Tax Officer has been appointed as Registering

Authority for Puducherry region and is known as Deputy Commercial Tax Officer

(Registration Cell). In Karaikal and Mahe, the Assistant Commercial Tax Officer and

Commercial Tax Officer respectively are appointed as Registering Authorities. At

Yanam, the Deputy Commercial Tax Officer is the Registering Authority. In the

Office of the Commissioner, the Commercial Tax Officer (Headquarters) is

115

nominated as Public Relations Officer. The dealers may contact the said Officer for

any information, but clarifications in writing are issued only by the 'Authority for

Clarifications and Advance Rulings' consisting of, a chairman in the rank of the

Deputy Commissioner or Assistant Commissioner and two other members not below

the rank of the Commercial Tax Officer. For the purposes of the Right to Information

Act, 2005, the following officers are appointed as the Public Information Officers for

the respective offices and the Commissioner (CT) is appointed as the First Appellate

Authority for RTI appeal.

116

Exhibit: 2. 9 Organization Chart of the Commercial Taxes Department, Puducherry

SECRETARY TO GOVERNMENT. (CT)

COMMISSIONER (CT)

Deputy Commissioner (CT) Assistant Commissioner (Audit & Intelligence) Appellate Assistant Commissioner (CT)

Administrative CTO-I CTO-II CTO-IW CTO-IAC CTO-Karaikal CTO-Mahe CTO-Yanam Appellate Wing Wing

Commissioner’s Office

Source: Commercial Taxes Department Puducherry

AAC

ACTO

Steno Gr.III

Assistant

L.D.C 

DCTO

U.D.C 

CTO

ACTO

U.D.C

CTO

ACTO

Assistant

U.D.C

L.D.C 

CTO

Addl.CTO

DCTO

ADCTO

ACTO

Assistant

U.D.C

L.D.C 

CTO

DCTO

ADCTO

ACTO

Assistant

U.D.C

L.D.C 

CTO

DCTO

ADCTO

ACTO

Assistant

U.D.C

L.D.C 

CTO

DCTO

ADCTO

ACTO

Assistant

U.D.C

L.D.C 

Commissioner 

Dy. Commissioner 

Asst. Commissioner 

CTO (HQ) 

U.D.C

Law Officer 

Superintendent. 

DCTO 

ACTO 

Right to Information Appeal

Sl. No.

Designation of Public Information Officer

Concerned Office in the Commercial Taxes Department of the

Union Territory

Designation of the First Appellate Authority

1 Appellate Assistant Commissioner (CT), Puducherry

Office of the Appellate Assistant Commissioner

(CT)

Commissioner (CT),

Commercial Taxes

Department, Puducherry

2 Commercial Tax Officer, Division-I, Puducherry

Office of the Commercial Tax Officer, Division-I,

Puducherry 3 Commercial Tax Officer, Division-

II, Puducherry Office of the Commercial Tax Officer, Division-II,

Puducherry 4 Commercial Tax Officer, Division-

Intelligence Wing. Puducherry Office of the Commercial

Tax Officer, Division-Intelligence Wing,

Puducherry 5 Commercial Tax Officer, Division-

Industrial Assessment Circle, Puducherry

Office of the Commercial Tax Officer, Division-Industrial Assessment

Circle, Puducherry 6 Commercial Tax Officer (Head

Quarters), Puducherry Office of the

Commissioner (CT), Puducherry (For matters other than Establishment

& Accounts) 7 Superintendent (Establishment),

Commercial Taxes Department, Puducherry

Office of the Commissioner (CT),

Puducherry (For matters relating to Establishment

& Accounts) 8 Commercial Tax Officer, Karaikal Office of the Commercial

Tax Officer, Karaikal 9 Commercial Tax Officer, Mahe Office of the Commercial

Tax Officer, Mahe 10 Deputy Commercial Tax Officer,

Yanam Office of the Commercial

Taxes Department, Yanam

Source: Commercial Taxes Department Puducherry