Value Added Tax, being practised in over 110 countries, will finally be introduced in India by the Unified Progressive Alliance government. It is learnt that the finance minister has called a meeting of all the chief ministers in Delhi next week to take the final call on VAT and decide whether it would be effective from April 1 or October 1, 2005.
In India, all the state governments collect over Rs 85,000 crore (Rs 850 billion) by way of sales tax and further over 20,000 crore (Rs 200 billion) by way of Central Sales Tax. This is what officially comes mostly from petroleum, liquor, iron and steel and cement companies.
Rough estimates suggest that these industries account for over 50 per cent sales tax for the states and the Centre. Majority of the officials in sales tax departments believe that what they actually collect is less than 50 per cent of the revenue that should otherwise accrue to them if all transactions are accounted for by the businessmen.
India has a large unorganised market, especially agro-based industries and here a large number of transactions go unrecorded. The menace of stock transfers adds to the problem of tax evasion.
In India, introduction of VAT will only change the collection methods for sales tax rather than reform the indirect tax system. VAT is nothing but sales tax at source.
Instead of collecting it after five months or so, the state governments would collect the same in advance and then allow set-offs to the businessmen. All tax paid on inputs, subject to rules made, shall be allowed to set-off against the tax on output.
There would be exceptions like CST not allowed to be set off if sales are made locally in some other state; octroi not to be set off against output tax, etc.
What about Central Sales Tax Act, 1956? Well, this will remain and might be the biggest stumbling block for successful introduction of VAT in India.
Double taxation under the Central Sales Tax Act, even for declared goods under Section 14, has been permitted. But the biggest problem is that the central sales tax paid by the businessmen will not be allowed to be set off against local output tax payable. A city like Delhi will suffer the most.
State governments have agreed not to start new incentive schemes giving sales tax exemptions. 'C' forms have been made mandatory even when the local sales tax is less than 4 per cent. 'C' forms are required even when sales are made from sales tax free zones. Therefore, the power given to the state government under Section 8(5) of the Central Sales Tax Act is now virtually redundant as even if the sales tax is reduced to zero, the 'C' forms would still be required.
It would be a difficult scenario for local VAT and CST to co-exist.
Single VAT, which should be a combination of sales tax, service tax and excise duty is what we should have aimed for. But this seems to be a far cry.
High compliance cost
The compliance cost of the VAT regime will erode net profits of businessmen at least by 0.5 to one per cent.
Monthly returns need to be filed (12, instead of the earlier 4). Accounting requirements are bound to go up. Paperwork and lawyers involvement will also be northward bound.
Experts feel the transition period -- from conventional sales tax to VAT -- which may take 2 to 3 years it would be difficult to manage the situation.
On an average 40 per cent of the VAT collected by the state governments will have to be refunded. This would be done on a monthly basis. This is unlike CENVAT/Modvat where the adjustment can be made by the manufacturers, at source, while filing their return.
Here the businessmen will have to apply for refund, go around to the sales tax officer in person or through their lawyers, apply for refund and then subject to satisfaction of the sales tax officer, get refund by depositing a surety for the equivalent amount till the assessment is completed.
There is a power given to the sales tax officer to even assess you for a part of the year if he thinks this to be necessary. What this means for the industry and trade hardly needs to be emphasized.
Exporters will have to face an uphill task in getting refunds from the sales tax department.
If for their failure to properly enforce the VAT mechanism the revenue of the state government declines, the developmental process of that state will stop and relations between the Centre and state would be hit. This is what has been happening in the last five years or so.
Compulsory audit
The provision of compulsory audit by a Chartered Accountant will hurt the industry. Under no circumstances should such a provision be introduced. Under income tax there is a requirement of compulsory audit and the same should be incorporated here. It is important that compliance cost of new laws should be kept at minimum along. Sales Tax departments keep record for years and if paper stsrts ti pile up it will be extremely difficult to manage.
The search and seizure provisions, the penalty provisions and the scrutiny provisions should be kept transparent. The rules of natural justice must be embodied firmly in all such provisions. VAT laws must not be implemented by the bureaucracy. The Penalty Provisions should be minimal but effective. Penalty should not be imposed for every violation; it should be reserved for serious violations of law.
VAT Enforcement Authorities should be well trained. The VAT Tribunals should be headed by trained Judges and not by Administrative Tribunals Officers.
Last, the "Education Spread" through the state government and the central government should be very large through FAQs, advertisements, through Bar Associations and Trade Associations.
Existing conventional sales tax schedules of the states are too confusing. The VAT Schedules should be identical for all states, the rates should be the same and even the classification should be the same. This would save future litigation on such topics and inter-state competition through gray market operators would stop.
VAT Regime in India should be forward-looking. We need to bring in a tax system that can withstand the test in times to come when the single rate VAT regime may be introduced in India. The key sectors like information technology, infrastructure, construction and media etc. should be taxed reasonably; otherwise exports may become uncompetitive.
All appeal disposal mechanism must be time-bound. For first appeals a time of not more than 6 months should be allowed to authorities and for Tribunal a maximum of one year. There must be a Settlement Commission, on the lines of income tax, introduced in to the VAT regime to mitigate litigation.
Above all, the powers of the Commissioner must be kept a minimum so that the VAT Regime gets transformed into a wonderful experience for all affected people.
In fine, introduce VAT based on confidence and trust and not to create fear and panic. The fear of penalties, prosecutions etc. must not be overdone. The state governments remain taxpayer-friendly and use their tax collection mechanism very usefully and effectively. Let the people understand VAT Regime before it is imposed on them.