VAT: Shape of Things to Come

DQCI spoke to vendors and partners to find out whether they are
ready to face the new tax regime. Though the new tax system offers lot of
advantages, these will get nullified in the event of ineffective implementation
by the government.

Value Added Tax or VAT for short, is sales tax in another form. With the
difference being that it is collected in stages rather than at one point from
the sale of goods by the government of destination state i.e. state in which
final consumer is located on consumer expenditure. It is collected through
business transactions involving sale of goods within the state.

So no VAT is payable if the sale of goods are made in the course of
inter-state trade or commerce or are in the course of export outside India. So
this implies that the present Central Sales Tax or CST would remain on
inter-state sales, for no VAT is chargeable, and CST would be charged.

Under the new system, the first seller pays the first point tax, and
subsequent sellers pay tax only on the value addition done by them — leading
to a total tax burden exactly equal to the last point tax. The value addition is
therefore the difference and not just the profit, of the sale and purchase
values of all taxable supplies. VAT will however not be levied if purchase and
sale of goods are not made in the course of business.

VAT: Not too different

"But how the government will implement VAT is a question mark.
Especially, the inter-state business transactions are a gray area. One still
does not know what would CST be in VAT. What about tax on goods originated in
Maharashtra and sold in other states?" asks Umang Mehta, CEO, Roop
Technology and President, TAIT, Mumbai, a query that comes up often in
discussions revolving around VAT and a cause of much confusion.

VAT however draws on a number of similarities with the present sales tax
system. Under the present system, an inter-state trader is allowed to purchase
his inventory, without payment of tax, against ST-1 or ST-35 form. Under the VAT
system, the trader will have to pay the local tax, but this tax paid on
purchases can fully set off from his Central Sales Tax liability. And in case
his CST liability is less than the local tax already paid, the net can be
adjusted against his other VAT liability or can be claimed as refund.

However, there is lack of clarity precisely on this issue among the trading
circles. Says Sanjiv Krishen, Chairman, Iris Computers, "There is a lot of
confusion that there is no equivalent to ST 35 under VAT." Adds Sanjeev
Ahuja, Additional Commissioner, Sales Tax Department, Govt. of N.C.T. of Delhi,
"The CST does not stand abolished and therefore for cross state border
transactions, there are no changes."

The case is similar for a manufacturing firm too. Rather than purchasing
without payment of tax against ST-1 or ST-35 form, as is the case in the present
system, local tax is levied on purchases, but an equal amount is allowed to be
set off against the sales tax liability on finished goods.

In other words, the buyer will now not be able to "purchase tax free
against forms", but can purchase tax paid and avail the set-off facility.
While it may not make any difference to the taxpayer, this system will ensure
that all local sales are subject to tax.

"The new system will ensure that fewer cash transactions take
place", says Krishen of Iris, "because the set off facility cannot be
availed if there is no proof of sale." So one can add that the basic
advantage that the VAT system will bring to the table for the government is that
no leakage of sales tax. "VAT is ultimately good for the industry. Every
link in the business chain will pay the tax. As a result, the gray market
operations will take a hit", says Umang of Roop Technology.

VAT: The Advantages

VAT as a system of sales tax is an idea that the whole world is migrating to
and is flexible in solving a number of issues that the present system has not
been able to address. For instance, under the present system, many traders
dealing in goods that are distributed from Delhi are facing problem of double
taxation because of withdrawal of the footnote facility. VAT solves this problem
too. The entire local sales tax levied on the purchases of an inter-state trader
is allowed to be set off against their central sales tax liability, as mentioned
earlier, hence no double taxation. Says a tax consultant, "VAT is a
comprehensive system that will take care of such issues."

VAT comes with another advantage. Since all local sales will
attract VAT liability, there would be no difference whether one is selling to
another dealer, as is a common case in the IT industry, or to the consumer. The
same tax, equal to the rate of tax applied on the sale price, is to be charged.
In present system, whatever tax charged is to be paid to the sales tax
department, however, under the VAT system, the trader gets the facility to
deduct the tax he has already paid from the tax he collects from the customer
and pay the rest to the department.

Also the present system does not allow capital goods, such as
machinery and equipment, to be purchased against local forms. However in VAT,
tax paid even on machinery is allowed to be set off.

Computing VAT

There are two methods of computing Value Added Tax - the Invoice Credit
Method and the Subtraction Method. Delhi shall be adopting the Invoice Credit
Method, as it is simple for administration and compliance.

In this method, a bill or invoice issued during a transaction
of purchase or sale that separately mentions the value of the goods and the tax.
The purchasing dealer, using the aforementioned invoice can deduct the tax paid
by him on his purchases, from the tax liability on his sale made during the
quarter. An advantage of the method is that the trader does not have to wait for
his sale to materialize, to avail the credit facility. He can avail the tax
credit in the same quarter in which he makes the purchase and take the goods in
his inventory, irrespective of the fact that he may be selling it later in the
next quarter or even net year.

For example, if a reseller makes a sale of item at Rs 1000 +
Rs 40 at 4 percent tax and a purchase of another for Rs 500 + Rs 20 at 4 percent
tax in the same quarter, then the net tax payable would be Rs 20 only. So the
net tax payable is the difference of his liability (Rs 40) and the credit (Rs
20) earned by him. In case the credit earned is greater than the reseller’s
outstanding liability, the reseller can claim refund. Says a tax consultant,
"The mechanism of the refund will be an issue, for speed will be
critical." The advanatges of VAT will stand to lose their sheen if the
government does not implement a mechanism of faster, smoother refunds.
"Delay in refunds will lead to a lot of dissatisfaction", says Krishen
voicing his concern.

Another advantage that comes with the system is the
simplicity of book keeping. While the present system requires the dealers to
maintain account of sales and purchases, calculation of VAT also requires
maintenance of such accounts only and nothing more and can be kept even by
enterprises that do not maintain full books of accounts or do not use double
entry accounting. Taxpayers are essentially required to keep two books a
purchase book and a sales book. These books are a record of purchases and sales
respectively and are specifically designed for easy calculation of VAT. "An
inherent advantage of the system is the simplicity of its book keeping and
documentation processes", adds the tax consultant.

Tax Rate Structure

The Government of NCT of Delhi is aiming at revenue neutrality or overall the
same amount of tax shall be expected to be collected under VAT as is being
collected under the present system. Since tax incidence under VAT is exactly
same as in the present system, theoretically, there is no requirement of
changing the present tax rate structure of 4 percent, 8 percent and 12 percent.
However it has been seen that the administration of VAT requires a simpler tax
structure implying even fewer slabs. Says Pankaj Mohindroo, CEO, Agrani
Convergence Limited, "The concept of Revenue Neutrality Rate is not very
clear to the concerned bodies at present. It may lead to unhealthy competition
between the states, resulting in negative impact on the revenue of respective
states." States have been debating before the high-powered committee that
the RNR should also have a maximum limit so that it provides an objective
platform for calculating the potential loss to state governments. The states
have divergent views on RNR and so far no uniformity has been achieved.

One of the major reasons for introduction of VAT by the
states is to develop a common market in the country. It can have a positive
influence on the states’ economic activity in the long run. The short-term
negative fallout would be the additional tax burden on domestic consumption to
maintain current revenue flow that would get reduced on account of input
rebating of goods sold interstate and exported outside the country.

VAT therefore would need a rate that would be acceptable to
the domestic stakeholders and would not cause trade diversion but which would
not be revenue neutral. Introduc-tion of VAT with a rate within a band of 10 to
12.5 percent uniformly by all the states would certainly make it acceptable to
the stakeholders, though some highly taxed states like Karnataka, Maharashtra,
Bihar, Delhi etc. would certainly suffer revenue loss. Adds Krishen,
"Individual states implementing VAT will mess things up and the there is a
need to have a central body to collect it across the country, like it is in
Singapore."

Classification of Goods

There may not be uniformity among the States in classification of goods
vis-à-vis the rates. This may impact trade flows across state borders. The
uniformed sales tax policy announced in January 2000 brought to the floor rates
of sales tax on specified commodities and many states amended their local sales
tax laws accordingly. This was expected to help states to achieve stable source
of revenue without eroding tax base of other states as was done earlier by ‘rate
wars’ with each state trying to have its sales tax rates lower than the other
states that enabled movement of goods at a reduced levy. Disparate tax rates
encouraged diversion of trade from one state to another merely to take advantage
of lower tax rates adversely affecting local trade and industry and also revenue
of the importing state. Says Mohindroo, "The essence of success of VAT in a
country like India is the identical classification of goods and the application
of similar tax rates by all the states. If it is not done, VAT will not achieve
the desired results." He adds, "Central Government should ensure that
all states adopt uniform commodity classification because of the different tax
rates are applicable to different commodities. Classification of commodities in
VAT would become much more important."

Need of the hour: A proactive government

The government needs to step up efforts to spread awareness about VAT for many
are still confused as to how it is different from sales tax already being levied
by the states. The Delhi government has been regularly holding seminars to
dispel any misconceptions on the subject. Says Ahuja, "Our efforts to
educate will continue."

Government should make data from other revenue departments
like central excise, customs etc. to the state sales tax departments. This would
complement data available in the check posts. Such data would only be relevant
if the classification of commodities in VAT is identical to the classification
of goods under Customs and Excise. This would also help the Government of India
in bringing single VAT unit in future.

The Channel Perspective

The channel is not too excited about the shift that will soon affect them
all. And there are areas of concern too. Says Gagan Gupta of Computers Infinite,
"A little knowledge is a dangerous thing", about what is state of the
channel partners about VAT. He also attributes it to lack of interest on behalf
of the trader community, without excluding himself, to keep themselves abreast.

While the state government has held a seminar even in Nehru
Place, the apprehen-sions keep popping up. Says Neelesh Arora, CEO, Total Info,
"Our apprehension is that if it leads to an increase in price, then the
industry will suffer." And that is a likely scenario in any multi-tiered
industry. He further adds, "The hardware community should get together on a
common platform to voice their collec-tive opinion." Trade bodies need to
address and lobby on the issue more proactively.

Adds Arora, "What we are worried about is the potential
loopholes that local small-time assemblers and dealers may find to stay out of
the VAT net — this may make companies who do abide by the legalities
pertaining to the VAT system uncom-petitive and are hoping that the VAT
mechanism will have an in-built policing system that ensures that all concerned
are effectively covered under it."

Says Anil Sachdeva, CEO Kadam Marketing and President, DCTA,
"We have had seminars conducted and with actively lobby to ensure Sales Tax
Inspectors don’t get that undue authority." Adds Mehta of Roop
Technology, "The implementation of the VAT rules need to be transparent
without giving any scope for the misuse of the authority."

The channel is also quite perturbed about the way the VAT
implementation will go. The channel is confused about the issuance of invoices
in transacting. Some of them feel that every transaction will need to be
accompanied by two invoices, the tax and the retail invoice. But that is not the
case. If the sale is being made to another registered dealer of Delhi, a tax
invoice can be issued, which should specifically mention, the identity of the
seller and the buyer and the amount charged with the amount of tax charged in
the transaction indicated separately.

This will help the purchasing party to claim the benefit of
tax credit on the VAT paid on his purchases. In retail sales, which are much
more numerous and of smaller amounts, simplified sale invoices or retail sale
invoices can be issued. Although retail invoice should always identify the
seller, indication of buyer’s name is optional and tax charged can be included
in the sale price. No tax credit can be availed by the purchaser on the strength
of retail invoice for the transaction has been carried out with the end
customer.

Says Bharat Bhushan, Director, RR Systems, "There is
utter confusion and we although have done nothing to gear up for the change, but
will have to adopt it if it is implemented." He echoes the voice of the
hardware community in saying that nothing, but compliance is what will have to
done.

Mohit Chhabra in New Delhi