WEST BENGAL JULY 2006 29

The king should collect his taxes without hurting his

subjects, even as a bee collects honey without harming
the flowersVidur Niti
The concept of Value Added Tax (VAT) is
nothing but a revised and simplified form of
single-point sales tax. In 1918, F. Von Seemens
of Germany devised this concept in place of
Turnover Tax. But after a
long gap, the French
government came
forward and introduced
VAT in 1954. At present,
VAT is implemented in
more than 120 countries
around the world. It
covers 70% of the world
population and raises
nearly 27% total tax
revenue in those
countires. In India, VAT
commenced from April 1,
2005, with 21 states of
agreeing 29 states which
are ready to go ahead
with VAT in place of sales
tax. The tax levied on
each of the entities in the
supply chain with the
facility of set-off of input
tax i.e., the tax paid at
the stage of purchase of
goods by a trader and on purchase of raw
materials by a manufacturer. Only the value
addition in the hands of each of the entities is
subject to tax. It covers 550 items or goods
which have two basic rates and these are 4%
and 12.5% plus a specific category of tax
exempted goods and a special VAT rate of 1%
only for gold and silver ornaments etc. It is
meant to create a uniform system, curb rampant
tax evasion and increase revenues for the state
governments.
The VAT may be defined as consumption tax
assessed on the value added to goods and
services. The area of services is not yet covered
under VAT in India. It applies more or less to
all goods that are bought and sold for use or
consumption in the community. Thus, goods
which are sold for export or services which are
sold to customers abroad are beyond the
jurisdiction of VAT. In brief, VAT is:
* a revised form of sales tax;
* a multi-point sales tax;
* actually paid by the buyer to the seller as
part of the price;
*a general tax that
applies to all commercial
activities involving that
production and distri-
bution of goods and the
provision of services ;
*a consumption tax,
because it is borne
ultimately by the final
consumer, not a charge
on business;
*collected on value
addition only at each
stage;
* the amount of tax
paid by the dealer after
deducting the amount of
tax calculated at every
point of sale and tax
already paid.
The Central Sales Tax
Act, 1956 was enacted
by the Parliament and
received the assent of the President of India on
December 21, 1996, and finally this Act came
into force on and from July 1, 1957. From the
year 1957 till before the introduction of VAT, the
Central Sales Tax Act and different State Sales
Tax Acts, which were introduced in different
times, played a leading role for generating
revenues of the country as a whole. But
suddenly the introduction of VAT in India
creates a confusion among the nations.
Most of the people failed to understand
the logic that stands behind introduction of VAT
and hence to make a comparative study
Value Added Tax:
What and Why
The concept of Value
Added Tax ( VAT) is nothing
but a revised and
simplified form of
single- point sales Tax.
I n 1918, F. Von Seemens
of Germany devised this
concept in place of
Turnover Tax.
...At present, VAT is
implemented in more than
120 countries around
the world. I t covers 70%
of the world population
and raises nearly 27%
total tax revenue in
those countires.
NILAY KUMAR SAHA
30 WEST BENGAL JULY 2006
between Sates Tax Act and VAT Act is of
immense importance. In this connection a text
of the lecture which was delivered by the
Chairman of the Empowered Committee
of State Finance Ministers on VAT, Ashim
Dasgupla, for dedicating the Guidance Note
on Accounting for State-Level Value Added
Tax at the ! Istitute of
Chartered Accountants
of India undoubtedly
added value to this
discussion. According
to Dasgupta, At that
time when you were
manufacturing any
item, you were
required to purchase
inputs for which you
were required to pay
sales tax once with that
input tax load. When
the output was
producted, that output
was taxed again. So, in
a sense, it is input tax
loaded plus output tax
there was tax on tax.
He also added that,
There is another great
disadvantage in the
pre-existing sales tax
structures (under
which) when any dealer
or manufacturing dealer or trader dealer used
to submit, his/her Tax return with tax due for
assessment he/she had to go to the concerned
commercial tax officers, and there were
complaints of lack of transparency, and
harassment. In the VAT, the dealer is his own
assessor since he submits his simple return in
which he indicates the input tax paid by the
manufacturer and the level of purchase made
by him and the tax he has collected in the
relevant period and deduct the input tax on the
output tax. And he computes the figures and
pays the amount that is treated as deemed
assessment so that harassment part is
immediately lessened.
In general, an analytical comparative study
between Sales Tax Act and Value Added Tax Act
highlights the following:
1. Sales tax is a single-point system of tax
levy, the manufacturer or importer of goods into
a stale is liable to sales tax but there is no sales
tax on the further distribution channel On the
contrary, VAT levied and collected at every point
of transfer or sale with the facility of set-off of
input tax.
2. In contrast with sales tax, one tiling is to
be mentioned here clearly that though VAT
invites multi-point sales tax, it does not increase
the tax burden of the ultimate consumer
because the amount of
tax collected at every
point of sale and the tax
already paid by the
dealer at the time of
purchase will be
deducted from the
amount of tax paid at
the point of next sale.
Therefore, double
taxation is avoided and
tax is paid only on the
value added at each
stage of production and
distribution.
3. Application of
sales tax was restricted
only for goods but VAT
is applied for both
goods and services. So,
confidently we may say
that VAT must increase
the revenue of the
country.
4. Dealers of re-
selling goods have no
responsibility to collect tax and to file return if
sales tax has already been paid on re-selling
goods. But VAT Act forces every dealer to
collect and pay taxes on value addtion at every
stage of sale. Under VAT file, return is
mandatory for all involved concern and it
ensures a clear picture about the performance
of all persons acted in any process of sale or
resale.
5. Sales tax is not levied at the time of
purchases against statutory forms and as a
result there is an ample scope of tax evasion.
In this phase, VAT dispenses with such forms
and set off all tax paid at the time of purchase
from the amount of tax payable on sale.
6. Computation of sales tax is too much
complicated in consideration with VAT. Sales lax
deals with six different tax rates whereas VAT
deals with two basic rates only.
7. Sales tax returns are filed separately and
in returns the dealers have to give numerous
details which invite scrutiny in detail. In case
The VAT may be defined as
consumption tax assessed
on the value added to
goods and services.
The area of services is not
yet covered under VAT in
I ndia. I t applies more or
less to all goods that ate
bought and sold for use or
consumption in the
community. Thus, goods
which are sold for expoit
or services which are sold
to customers abroad
are beyond the
j urisdiction of VAT.
WEST BENGAL JULY 2006 31
of VAT, the returns will be filed together in
a simple way.
8. Assessment of sales tax is entrusted
to the sales tax department. On the other
hand, VAT is to be assessed by the dealer
himself or herself. So VAT is not only simple
but friendly also.
9. Sales tax is applicable for all dealers
but VAT is applicable only for those dealers
whose annual turnover exceeds Rs. 5 lakhs.
Therefore, VAT eliminates the tax burden of
small and medium dealers.
10. Sales tax penal provisions for defaulters
and evaders of tax are not very strict and
these loopholes invite various crises. On the
other hand, penalties will be stricter in case
of VAT and this attitude helps to maintain
law and order.
From the above comparative study between
Sales Tax Act and Value Added Tax Act we
may conclude that VAT is neutral regardless
of how many transactions are involved. So,
VAT is more scientificin approach than existing
sales tax, because VAT is :
* more equitable shares tax burden
among all involved dealers.
* more transparentdeals with only two
basic rates.
* more si mpl e ensures si mpl e
computation and easy compliance.
* more consistent avoids distortions
in trade and economy through uniform tax
rates.
* more authenticprevents cascading
effects of tax through input rebate.
* more convenient assist self-assessment.
Now, certain points in this regard are to be
analysed:
1. VAT rates : As per recommendations
of the VAT Advisory Committee the rates of
VAT depend on the nature of goods and
services. They classified goods into various
schedules and the rate of VAT as applicable
on net turnover of sales under section 16(2)
of the Act is based on schedules which are
shown in the Table.
2. Parties responsible or payment of VAT:
Under VAT, a taxable person may be an
individual, a partnership firm, a company
or anything else which supplies taxable goods
and services and who are belonging to any
of the following categories: all dealers
registered under VAT, all dealers with an
annual turnover of more than Rs. 5 lakhs,
and all dealers having annual turnover between
Rs. 5 lakhs and Rs. 25 lakhs may opt for a
simple composition tax at a nominal rate in
place of VAT. One thing is to be mentioned
here clearly that only for the last categoiy
of dealers no input tax credit shall be available
in respect of any VAT paid on purchases.
Evety registered VAT trader is given a number,
Rates of VAT
Nil (exempted goods)
0% (zero-rated sale)
1%
4%
12.5%
As may be notified by
the state government,
not exceeding 30%
called TIN (Tax Payers Identification Number),
and has to show the amount of VAT charged
to customers on invoices. In this way, the
customer, if he is a registered dealer, knows
how much he can deduct in turn and the
customer knows how much tax he has paid
on the final product. With the help of this
mechanism the correct amount of VAT is to
be paid in different stages and for this reason
it is to be recognised as self-policing.
3. VAT calculation procedure: VAT levy
will be administered by the Value Added
Tax Act and this Act directs three methods
for the purpose of computation of VAT and
these are :
* Subtraction Method: Tax rate is to be
applied on the difference of value of output
and cost of input.
* Addition Method : Value added is to be
computed by adding all the payments which
are payable to the factors of production.
* Tax Credit Method : This method entails
set-off of the tax paid on inputs from collected
tax on sales.
(India opted for Tax Credit Method
and we can explain easily the calculation
procedure of VAT if we cite an example
as : Purchase price Rs. 100; Sales price
Rs. 150; Rate of tax is assumed 10%.
In this situation Rs. 10 (10% of purchase)
price, i.e., Rs. 100) is to be paid as tax
on purchase and it is to be considered
as input tax. At the time of sale Rs. 15
(10% of sales price i.e., Rs. 150) is to be
cal cul at ed as t ax payabl e on sal es
price and this amount is recognised as output
tax. Hence, Rs. 5 (Rs. 15 - Rs. 10) is to
Description of goods
Schedule A goods
Schedule AA goods
Schedule B goods
Schedule C goods
Schedule CA goods
Schedule D goods
32 WEST BENGAL JULY 2006
be the amount of VAT. Under the system of VAT
the total revenue of the government will be Rs.
15 (10% of Rs. 150) but out of Rs. 15 Rs. 10 is
to be paid by the dealer on purchase and Rs. 5
is also to be paid by the dealer as net VAT on
the added value of Rs. 50 (Rs. 150-Rs. 100).
4. Legal Status of input tax in VAT : Input
taxes in VAT are the summarised amount of tax
levied on purchase,
resale or any type of
transfer in dfferent
phases just preceeding
the final sale or transfer.
Without ascertaining the
amount of input tax,
computation of VAT is
quite absurd. For this
reason emphasis should
be given on what types
of input tax are eligible
for VAT credit. Usually,
input tax is given for
entire VAT paid within
the state on purchases of
taxable goods including
resale and manufacture
of taxable goods. In this
connection it is very
much essential to
mention under what
circumstances input tax
should not be credited
in VAT. Input credit
excludes from purchases
of goods when it is:
* purchased from
unregistered dealers
* purchased from other states/countries
* used in manufacture of exempted goods
* capital in nature.
* used as fuel in power generation
* to be despatched as branch transfers
outside states
* used in manufacture of goods which are
to be despatched outside any state as branch
transfer/consignment
* purchased against which the dealer does
not have invoices showing amounts of tax
charged separately by the selling dealer.
5. VAT payment schedule: VAT will be paid
along with monthly returns. Credit will be given
within the same month for entire VAT paid within
the state on purchase of goods and services.
Credit thus accumulated over any month will be
The author is coordinator, department of management,
Mrinalini Datta Mahavidyapith, Birati.
utilised to deduct from the tax collected by the
dealer during the month. If the tax credit
exceeds the tax collected during a month on sale
witliin the state, the excess credit will be carried
forward to the next month.
There is no denying of the fact that the entire
society of consumers is confused after the
interoduction of VAT Act in place of Sales Tax
Act. Ignorance about
VAT is the main
reason behind this
confusion. In this
phase it is the
responsibility of the
government, both
central and state, to
make the society
aware of VAT. Most of
the consumers and
small traders are
believing that VAT will
put additional burden
on them but the
actual picture is
totally contrary with
this view. VAT
introduces one selling
price for similar goods
and services and as a
result no seller can
charge different
prices to different
customers for a
particular product or
service. Small and
middle level traders
whose annual turnover is below Rs. 5 lakhs is
totally exempted from VAT and traders whose
annual turnover lies between Rs. 5 lakhs and
Rs. 25 lakhs may opt for a simple composition
tax at a nominal rate in place of VAT. Not only
this, to protect the interest of the traders the
government announced that Sales Tax Act
should be continued for all pending
assessments, appeals and recoveries as well
as it should be continued for certain
commodities as government may decide.
Lastly, we can conclude that the introduction
of VAT will obviously increase the revenue of
the country, if it is implemented and followed
properly, because it minimises the scope of tax
evasion. n
Most of the consumers
and small traders are
believing that VAT will
put additional burden
on them but the actual
picture is totally
contrary with this view.
VAT introduces one
selling price for similar
goods and services and
as a result no seller can
charge different prices
to different customers
for a particular product
or service.