Beruflich Dokumente
Kultur Dokumente
ON
In
Submitted By
KAVYA.B USN.4PS09MBA26
Of
2010-2011
i
CERTIFICATE
ii
DECLARATION
iii
PREFACE
The Value Added Tax (VAT) that has been introduced in a majority of the Indian
States with effect from April 1, 2005, in lieu of the erstwhile Sales Tax, has been the single
most significant fiscal reform in the past fifty years. The stated intent of both the Government
of India and the Empowered Committee of the State Finance Ministers, in introducing this
measure, has been the reduction in aggregate taxes, introduction of a common market and the
facilitation of bringing into being of an integrated Goods and Services Tax.
On the eve of completion of one year under the VAT regime, it was felt necessary to
take stock of the implications of VAT on trade and industry, as perceived by them.
in order to document the experience of businesses across various industrial sectors, on both
the policy and operational aspects of the VAT. The Survey was intended to assess the
experience of businesses inswitching over to the VAT regime and to identify their continuing
concerns with regard there to.
The Survey was conducted by using a focused and structured questionnaire which
was administered to more than a whole saler, retailer and staff of VAT office having all India
operations. We take this opportunity to thank each one of the respondents for having spared
their valuable time to provide their viewpoints on the aforesaid aspects of their VAT
experience.
We are happy to present this report summarizing the key findings of the Survey. The
results provide useful insights on how the VAT has come about and how it has impacted
prices in general and business efficiencies in particular. It also highlights the manner in
which both industryand the State Governments have handled the transition.We are confident
that the findings of the Survey will enable the State Governments to better understand the
issues and concerns of trade and industry, especially in view of the recent introduction of
VAT in several additional States, and to consequently further refine the VAT legislation and
rules so as to bring about a simplified, uniform and tax payer friendly VAT.
iv
Executive Summary
Value Added Tax – This much awaited tax reform finally happened in April 2005.
Each of the stakeholders viz. State Governments, Trade and Industry and Consumers had
different experiences to share. The survey was designed to document the experience of the
respondent retailer and wholesaler to identify the unfinished agenda for making the VAT
regime more industry friendly.
It was heartening to note that fully 84% of the respondents believed that the overall
experience of transitioning from the sales tax regime to the VAT regime was smooth.
As to the preparedness of the State Governments in addressing the transition, only a small
percentage of the respondents felt that the State Governments were fully prepared for the
switchover to VAT. The survey respondents also indicated the areas where further
improvements in the VAT regime were required. These were as follows:-
· Introduction of uniform product classifications
· Extension of input tax credits to Central Sales Taxes paid on procurement
· Adoption of a practical approach to VAT audits of assesses
· Introduction of single window assessment processes for all State taxes
· Change in the mindset of VAT administrators
Only 25% of the respondents felt that the VAT had a significant impact on their
business model. The impact of VAT on prices was more or less neutral insofar as industry as
a whole was concerned. The self assessment system, which is the highlight of the VAT, in
contrast to the erstwhile sales tax, has cast a huge responsibility on businesses since 100%
compliance with the VAT rules and regulations is a pre-requisite for self assessment.
The results of the survey are expected to be very revealing for the State Governments
and other stakeholders to gain an insight as to where we are on VAT implementation today,
the further changes that are required in the VAT regime and the manner of realization of the
integrated GST, in line with the statement made by the Finance Minister in his Budget
Speech.
v
ACKNOWLEGMENT
vi
TABLE OF CONTENTS
CONTENTS PAGES
Certification … … … … … … … … … … … … … … … … … … … … … … .. i
Declaration … … … … … … … … … … … … … … … … … … … … … … … ii
Preface … … … … … … … … … … … … … … … … … … … … … … … .. .iii
Executive summary… … … … … … … … … … … … … … … … … … … … .. v
Acknowledgement… … .. .. … … … … … … … … … … … … … … … … … ..
Table of Content … … … … … … … … … … …. … … … … …. …. … … …. .vii
List of Figures … … … … … … … … … … … … … … … … … … …. … …. ..xii
Abbreviations/Acronyms … … … … … … … … … … … … … … … … … … .xiii
CHAPTER ONE
INTRODUCTION
1.1 Background Statement … … … … … … … … … … …. … … …. …. …. … . 1
1.2 Statement of the Problem … … … … … … … … … … … … … … … … …. 7
1.3 Research Objectives … … … … … … … … …. … … … … … …. … … …. . 7
1.4 Research Questions… …… … … … … … … … … … … … … … … … … ...8
1.5 Significance of the Study … … … … … … … … … … … … … … … … … ..8
1.6 Limitations … … … … … … … … … … … … … … … … … … … … … …9
1.7 Delimitation … … … … … … … … … … … … … … … … … … … … … .. 9
1.8 Organization of the Study … … … … … … … … … …. … … … … … … … 10
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction … … … … … … … … … … … … … … … … … … … … … ..11
2.2 Conceptual Framework … … … … … … … … … … … … … … … … … …11
2.3 Sources of Revenue … … … … … … … … … … … … … … … … … … … 12
2.4 value added tax in India… … … … … … …… … … … … …. … … … … … 13
2.5 what is Value Added Tax… … … … … … … … … …. … … … …. … … … .13
2.6 why VAT is preferred over sales Tax … … … … … … … … .. …. … … …. ...14
vii
2.7 Difference between VAT and CST … … … … … … … … … … … … … … ..15
2.8 who gains … … … … … … … … … … … … … … … … … … … … … … .15
2.9 What will be the Tax Burden … … … … … … … … … … … … … … … … .16
2.10 who pays … … … … … … … … … … … … … … … … … … … … … .. ...17
2.11 How to pay … … … … … … … … … … … … … … … … … … … … … ..17
2.12 Which goods will be taxable under VAT … … … … … … … … … … … … .18
2.13 Other consideration… … … … … … … … … … … … … …. … … …. … …19
2.14 Vat effect on Inflation… … … … … … … … … … … … … …. …. … … … 19
2.15 Distribution effect of VAT … … … … … … … … … … … … … … … … …20
2.16 VAT effect on Economic Development … … … … … … … … … … … …. ...21
2.17 Features of VAT… … … … … … … … … … … … … … … … … … … …. 22
2.18 What is the biggest advantage … … … … … … … … … … … …. …. … … ..22
2.19 Opposition of VAT … … … … … … … … … … … … … … … … …. … ... 23
2.20 Registration of VAT… … … … … .. … … …. …. … … … … … … … … .. ..23
2.21 Impact of VAT … … … … … … … … … … … … … … … … … … …. … ..24
2.22 How VAT works … … … … … … … … … … … … .. … … … … …. … … .24
2.24 Supplies … … … … … … … … … … … … … … … … … … … … … .. … .31
2.25 Keeping Records and Accounts … … … … … … … … … … … … … … … ..35
2.26 Examination of VAT Records… … … … … … … … … … … …. … … … … 36
2.27 VAT Returns … … … … … … … … … … … … … … … … … … … … … .37
CHAPTER THREE
METHODOLOGY AND SCOPE OF THE STUDY
3.1 Introduction … … … … … … … … … … … … … … … … … … …. … … … 39
3.2 Study Area … … … … … … … … … … … … … …. … … … … … … … … .39
3.3 Sources of Data Collection … … … … … … … … … … … … … … … …. …. 40
3.4 Target Population/Research Population… … … … … … … … … … … … … ..
3.5 Sample Size and Sample Frame … … … … … … … … … … … … … … … ….42
3.6 Sampling Techniques … … … … … … … … … … … … … … … … … … … .42
3.7 Data Collection Methods/Techniques … … … … … .. … …. …. … …. … … ….43
viii
3.8 Data Analysis and Interpretation … … … … … .. …. … …. … … … … … … ….43
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 Introduction … … … … … … … … … … … … … … … … … … … … … … ..44
4.2 Age of Respondents … … … … … … … … … … … … … … … … … … … ….45
4.3 Type of Business Activity … … … … … … .. … … … … … … … … … … … ..46
4.4 Level of awareness of VAT… … … … … .. … … … … … … … … … … .. ..48
4.5 Medium of education of VAT… … … … .. … … … … … …. …. .. 49
4.6 Expenditure on VAT… … … … … … … … … … … … … … .50
4.7 Auditing of VAT … … … … … … … … … … … … … … … … … … …51
4.8 Implementation of VAT… … … … … … … … … … … … … … … … … .. …
4.9VAT Recovery… … … … … … … … .. … … … … … … …. … …. … … … .. 53
4.10 VAT Return … … … … … … … … .. … … … … … …. … … … … … … … ..54
4.11 VAT Rates… … … … … … … … … … … … … … … … … … ..57
4.12 Impact on prices … … … … … … … … … … … … … … … … … … … ..58
4.13 Impact on Margin… … … … … … … … … … … … … … … … … … ..59
4.14 Effects on Business Model… … … … … … … … … … ….. … … .. 60
4.15 Motivation of VAT Staff… … … … … … … … … … … … … … … … … … …61
4.16 Methods of Tax Evasion… … … … … … … … … … … … … … … … .. … … …
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction … … … … … … … … … … … … … … … … … … … … … … … 65
5.2 Summary of Findings … … … … … … … … … … … … … … … … … … … … 65
5.3 Conclusion … … … … … … … … … … … … … … … … … … … … … … … 67
5.4 Recommendation … … … … … … … … … … … … … … … … … … … … … 67
LIST OF FIGURES
Figures Title Page
1 Age Distribution of Respondents … … … … … … … … … … … … … … 45
2 Type of Business Activities … … … … … … … … … … … … … … … … … … … 46
ix
3 Knowledge on VAT … … … … … … … … … … … … … …. … … … … … … … 47
4 Medium of Education on VAT … … … … … … … … … … … … … … … … … 48
5 Government Expenditure on VAT Revenue … … … … … … … … .. … … … … … .49
6 Duration for Auditing VAT Registered Businesses … … … … … …. … … … … .. 50
7 Benefits of Implementing VAT to India’s Economy… … … … … … … … … …. … ..51
8 Mode of VAT Collection in India … … … … … … … … … … … … … … … … .. ..52
9 Effective Ways to VAT Recovery … … … … … … … … … … … … … … … … … 53
10 VAT Return Recoveries in Percentage … … … … … … … … … … … … .. .. … … 54
11 Level of Education on VAT … … … … … … … … … … … … … … … … … … ...55
12 Areas of Spending VAT Revenue… … … … … … … … … … … … … … … … … 56
13 Motivations to VAT Staff … … … … … .. .. … … … … … … … … … … … … .. ...57
14 Issue of VAT Invoices to Customers … … … … … … … … … … … …. … … … …58
15 Request for VAT Invoice … … … … … … … … … … … … … … … … … … …. ..59
16 Issuance of VAT Invoice Enough to Collect Tax … … .. … … … .. … … .. … .. .. … . 60
17 Effective Ways to collect VAT Revenue … … … … … … … … … … … … … … .. ..61
18 Methods/Ways of avoiding Tax Evasion … … … … …. … … … … … …. … … … .. 62
ABBREVIATIONS/ACRONYMS
ERP- Economic Recovery Programme
IMF -International Monitory Fund
WB- World Bank
CEPS- Customs Excise and Preventive Services
IRS -Internal Revenue Service
USA- United States of America
SI -Sales Invoice
PI- Purchase Invoice
DD- Delivery Document
SIC -State Insurance Company
PS -Purposive Sampling
SPSS- Statistical Package for Social Sciences
x
CHAPTER ONE
INTRODUCTION
1.1Background Statement
The idea of Value added taxation (hereinafter referred to as “VAT”) traces back to the
writing of Von Siemens a German businessman in the 1920s. However, not until 1948, the
first value added tax was applied in France. At the beginning, France applied the GNP based
VAT2 covering up to the manufacturing level and subsequently replaced with a consumption
VAT3 in 1954.
VAT proves to be an efficient tool for revenue collection; its performance, therefore, has
direct impact on fiscal mobilization, macroeconomic stability, and development. As
illustrated in the article, compared with alternatives in indirect taxation, the VAT has revenue
potential: it is generally more broad-based and entails a trail of invoices that helps improve
tax Compliance and enforcement.
The IMF assesses the growing importance and worldwide expansion of the VAT as
follows: “[The VAT has become] a key source of government revenue in over 120
countries. About 4 billion people, 70 percent of the world’s population, now live in countries
with a VAT, and it raises about $18 trillion in tax revenue—roughly one-quarter of all
government revenue. Much of the spread of the VAT, moreover, has taken place over the last
ten years. From having been largely the preserve of more developed countries in Europe and
Latin America, it has become a pivotal component of the tax systems of both developing and
transition economies.”
It has become increasingly demanding for governments all over the globe to devise
appropriate means of generating adequate revenue to finance government expenditure which
continue to soar as a result of growth in population with its attendance demand for
infrastructure and other social and economic investment. It is against this reason that taxation
has become legally accepted all over the world as one of the most suitable means of
generating revenue. There are different kinds of taxes available for governments to raise
revenue.
Modern Government forms a unique part of every nation. They have the
responsibility to protect the nation against internal disorder and external aggression. They
engage a large number of people (judges, civil and public servant, law and order enforcers,
health officials, etc) in order to keep the nation running. Despite the general trend especially
in the twentieth century towards privatization, the maintenance of the state machinery,
production capacity, infrastructure of health, education, Housing, roads and railways, to a
large extent depend on governments.
Governments However, do not earn any income on their own. They must therefore
devise the means to generate revenue to undertake their responsibilities. Historically, this has
been done through the levying of various forms of taxes. In pre-modern times, taxation was
viewed as a direct exchange of bargain in which the taxing authorities on one hand, and the
taxpayer on the other hand, each expected to receive equal benefit in relation to what it gave
out. Taxes were looked upon as the wages paid to government for its services, the chief
among them being security.
This concept became known as the “bargain theory”. The common view was that
each one was to provide all his needs otherwise he paid the government authorities to do that
for him. It is interesting to note that during the pre-Revolutionary times in France, the
wealthy and privileged classes were largely exempted from taxation simply because they
could hire and pay for the services they needed with these ideas about taxation during those
times; it is not surprising that it was defined as follows:
“The imposition on the people by sovereign powers is nothing else but the wages due
to them that Hold the sword to defend private men in the exercise of their several trades and
calling” , “The revenues of the state are a part of his property which the citizen gives in order
to be sure of other part or to enjoy comfort” , “The subject, when properly taxed, contributes
only some of his property in order to enjoy the rest” .
The modern view of taxation steams from the common premises that no one can be
an island for Himself. The fight against poverty, crime, economic stagnation, etc., requires
the concerted effort of all and thus all must pay for it. Thus in modern times taxation is
defined as follows:
According to Hicks 1965, “A tax is a compulsory contribution from the person to
government to defray the expenses incurred in the common interest of all without reference
to special benefit conferred.” Quickly he added that “A tax is a compulsory contribution of
the wealth of a person or body of persons for the service of the public powers”
By the definitions of the various authors, it is now clear that taxes are now seen as
compulsory extractions that involve personal obligations for common public purposes.
Harley Lutz However, highlighted on this point when he noted that: “The modern viewpoint
in taxation is a product of the growing social solidarity and sense of common social
obligation that have characterized human progress during the last hundred years. The
contributory factor in the modern concept emphasizes the greater social unity and the
stronger sense of common burden and responsibilities, which are features of modern life. All
should therefore contribute to its effective support”. In the time of Julius Caesar, Roman
citizens did not pay tax. All the revenue required by the empire, including the cost of the
military operations, was requisitioned from the people who lived in territories which had
been occupied by the Romans. Only indirect taxes were raised in Rome itself because direct
taxes were seen to be humiliating and undignified.
Indirect taxes, such as customs duties, are paid by an individual through purchasing
goods and services, and are not directly related to the personal circumstances of the taxpayer.
On the other hand, direct taxes, such as income tax, can directly reduce the tax payer’s
income and can be directly related to the taxpayer’s personal circumstances. Romans resisted
direct taxes, not so much because of an unwillingness to pay them, but because of the loss of
privacy which taxes necessitated.
Requisitioning required every citizen to assist the Roman state with his labour and
property. The system has a number of serious disadvantages, principally it lack certainty.
This led to tax demands being levied in an unpredictable and arbitrary way. Thinking about
the system of tax which operates in the UK today, Employers are required to collect the taxes
due from their employers. If they don’t comply they are potentially liable with fines and
interest on tax unpaid.
Some commentators have also argued that there is a lack of certainty about the tax
liability, which a transaction may attract because, until recently, The Inland Revenue refuses
to advise taxpayers of their attitude towards activities in advance of Submitting accounts or
computations. According to Terkper, (1998), the introduction of Value Added Tax in India
was in-line with the policy of the Economic Recovery Program (ERP) which was launched in
1983 and which sought among other things to rationalize the tax system.
The low performance of these revenue sources explain why India’s tax ratio continues
to fall below the average of 17% of total revenue in Sub-Saharan Africa. The need therefore,
to improve the tax system led to the commissioning of feasibility study in 1991, conducted
jointly by the Harvard Institute of International Development (USA) and the Crown Agent of
the U.K. Among their term of reference was to study into the present tax system and suggest
ways of improving it. Their recommendation therefore led to the introduction of VAT in
March 1995. Unfortunately, the tax burden on the majority of Indians was increased by the
introduction of the Value Added Tax (VAT), In 1995 and later in 1998. In 1995, the
government proposed a VAT of 17.5% on goods and Services, irrespective of public
dissatisfaction and anxieties about inflationary impact, ignorance about How to calculate and
handle the new tax, the government still impose it partly to satisfy a Trigger condition of the
International monitory Fund (IMF) and the World Bank. This sparked off public riots in the
major cities leading to the shooting to death of some civilians. The anti-VAT demonstration
dubbed “kumi-preko” (meaning kill me completely) stands in India’s calendar as a major
citizen protest action against imposed policies.
Whilst the government announced publicly that the tax was being withdrawn, the
sales and services taxes it sought to replace were reinstated. Other goods and services that
were not covered by these taxes were brought into the tax net. Following a much wider
public consultation, the government proposed and received parliamentary approval for a
lower VAT rate of 10% in 1998.
The Value Added Tax levied at the rate of 10% on the cost or price of imports, locally
manufactured goods and services. It is levied at each stage that there is value added tax.
Thus the importer, manufacturer, wholesaler and retailer all pay VAT. All these are absorbed
by the final consumer in the form of high price on the item. The importer, manufacturer and
the retailer do not incorporate the VAT Paid into their pricing because they get credit for
what they pay at VAT. However, the final Consumer picks that VAT at each stage of the
production and distribution process in addition to the profit and so the price becomes
unbearable. The majority of citizens are worse off than before the introduction of VAT.
This makes the whole proposition of VAT really untenable. Due to the hard-sell by
the Government that VAT is a progressive, transparent and equitable commodity taxation
system offering improvement on the existing sales tax system, there has been a burst of
enthusiasm among some section of trade, industry and policy makers. However, enthusiasm
does not combine best with logic. It is necessary to first understand what is possible within
the framework of the constitution.
2. Evaluating the positive extent to which the imposition of VAT has helped the Country to
improve its economic fortune as a whole.
4. Establish a clear distinction between the VAT methodology and what was actually used
previously in collection of government revenue.
iii. To what extent do companies, firms, consumers accepts the VAT in India?
1.6 Limitations
The researcher encounters the following problems.
1. Financial Constraint:
Due to the scattered nature of businesses in the municipality, the researcher spend a
lot of money on travelling, thus move from one place to another to gather more information.
1.7 Delimitation
The collection of data was restricted to the VAT office, businesses and consumers in
the Ho, hence the findings of the study was generalized to cover VAT activities in the Ho and
the VAT office. The generalization of the result of this study to other categories of revenue
collectors in the Country with similar characteristics should be done with caution and
extensive analysis and comparison.
1.8 Organization of the Study
The project work is categorized into five main chapters. Chapter one focuses on the
background to the study, problem statement, objectives, significant of the study, research
Methodology, limitations and delimitations.
The third Chapter deals with research methodology including population, sampling
techniques, methods of Data Collection and the research instruments employed.
Chapter four is also made up of detailed analysis of data collected and presentation of
information with the aid of quantitative and statistical models.
LITERATURE REVIEW
2.1 Introduction
This Chapter covers a conceptual framework on the role of VAT on the economy of
India. In order to provide suitable theories on the topic under investigation, the researcher has
reviewed a number of existing literatures; this will help to explain some key terms, which are
relevant to the study.
Denmark, though not a member of the EEC, was the first European Country to
Extend the VAT to the retail sector followed by France and Germany. Several developing
countries have since then given increasing attention to VAT as a means of rationalizing the
system of taxation. VAT is levied on almost all business transactions in over 130 countries
around the world because it is intended to impose a neutral effect on business. VAT is often
recoverable for companies doing business in a foreign jurisdiction. For most companies,
returns are primary available for member states of the EU, Canada, as well as some
additional countries that charge VAT.
According to Henderson and Poole (1985), VAT is defined as a tax rate applied to
each stage of production equal the trial price so that the tax may be shown in the same retail
or sales tax of the same rate.
Also Peggy, (1985) state that a properly implemented VAT equivalent to a
corresponding single state tax. He said, under the expenditure tax, the VAT is not genuinely a
new form of taxation but a merely sales tax administered in different form. Any form of
taxation can be used to discourage consumption of commodities yielding negative
externalities so as to stabilize national income and to redistribute income.
The term “value added” According to Value Added Tax Act 1994 – Act 486 refers to
increase in value of goods and services at each stage of production or transfer of goods and
services. Thus Value Added Tax is basically a tax to levy on the value added by an
organization at each stage of production of goods or rendering of services.
The VAT is a tax on the final consumption of goods or services and is ultimately
borne by the consumer although it is collected at every stage of production or distribution
and a tax credit is granted at every stage for tax paid at the earlier stage in the chain of
transfer/sale of goods and services till it reaches the final consumer.
Borrowing becomes necessary when income from regular sources is not sufficient to
take care of expenditures. The money borrowed must be repaid with some interest out of
regular current income or by additional borrowing. But the practice of borrowing cannot be
regular featuring in government administration, hence the need for revenue collection
agencies in developing countries to maximize revenue collection.
2.4 Value Added Tax (VAT) in India
There is also in-built pressure for compliance and auditing under VAT since it will be
in the interest of all who pay taxes to ensure that their eligibility for tax credits can be
demonstrated. VAT is also a fairer tax than sales tax as it minimizes or eliminates the
problem of tax cascading, which often occurs with sales tax. These are facilitated by the fact
that VAT operates through a credit system so that tax is only applied on value added at each
stage in the production – distribution chain. At each intermediate stage credit will be given
for taxes paid on purchases to set against taxes due on sales. Only at consumption stage
where there are no further transactions will there be no tax credits. Lack of input credit
facility in sales tax often results in tax on inputs becoming a cost to businesses which are
often passed on to consumers. Sales tax is often applied again to the sales tax element of the
cost, thus there is a problem of tax on tax. This is not the case with VAT, which makes it a
neutral tax as it provides the least disturbance to patterns of production and the generation
and use of income.
In addition, the audit trail that exists under the VAT system makes it a more effective
tax in administration terms than sales tax as it helps with the verification of VAT amounts
declared as due. This is made possible by the fact that one person’s output is another’s input.
As with sales tax imports are treated the same way as local goods while exports are zero-
rated to avoid anti-export bias.
Notwithstanding the advantages mentioned above, it is worth noting that VAT is a
considerably complex tax to administer compared with sales tax. It may be difficult to apply
to small companies due to difficulties of record keeping and its coverage in agriculture and
the services sector may be limited. To cover the high administration costs, VAT rates of 10-
20 per cent are generally recommended. The equity impact of the relatively high rates have
been a cause for concern as it is possible that the poor spend relatively high proportions of
their incomes on goods subject to VAT. Thus the concept of zero VAT rate on some items
has been introduced.
Under the CST Act, general and specific exemptions are granted on certain goods
while VAT does not permit such exemptions. Under the CST law, concessional rates are
provided on certain taxes. The VAT regime will do away with such concessions as it would
provide the full credit on the tax that has been paid earlier.
Under VAT law, first, the dealer pays tax on the sale or purchase of goods. The
subsequent dealer pays tax on the portion of the value added upon such goods. Thus, the tax
burden is shared equally by the last dealer. To illustrate the whole procedure of VAT, an
example is as follows:
At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%.
Therefore, the net VAT would be 12.5%. At the second change of sale, the sale value is
Rs.120 and the tax thereon is 15%. The tax that is to be paid at every point is 15%. The input
tax is 15%. The dealer will get a credit for first change in sale of 2.5%-- i.e. 15% -12.5%.
Therefore, 2.5% will be the net rate. At the third change of sale, the sale value is Rs.150 and
the tax on this is 18.75%. At the last stage, the tax paid is 18.75%. The Input Tax is 18.75%.
Dealer’s get a credit for second change in sale? i.e. 18.75% -15% = 3.75%. Therefore, 3.75%
would be the net VAT. This means that VAT is paid in the last point tax under the sale tax
regime.
Equity concerns may also be addressed through other ways, outside the VAT system,
such as other tax and spending instruments of government. This could be in the form of
lower basic income tax rates on the poor or some pro-poor expenditures of government. The
use of multiple rates of VAT has However been widely discouraged for various reasons.
These include:
The fact that sometimes it is almost impossible to differentiate between higher quality
expensive products – e.g. food, consumed by the rich and ordinary products
consumed by the poor. Thus any concessions extended may tend to benefit the rich
much more than the poor.
Increased costs of VAT administration as a differentiated rate structure brings with it
problems of delineating products and interpreting the rules on which rate to use.
significantly increased costs of tax compliance for small firms, which are usually
Unable to keep separate records/accounts for sales of differently taxed items.
This results in the use of presumptive methods of determining the tax liability, which
leads to more difficulties in monitoring the compliance. The higher compliance cost resultant
from differentiation of VAT rates may also be regressive with respect to income since
smaller firms with lower income tend to bear proportionately more of the burden than do
larger firms.
Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional effects of
tax through the effect on incomes. The effects of exemption may be as follows:
falling of revenues – exemptions break the VAT chain. If exemptions are granted at
prior to the final sale, it results in a loss of revenue since value added at the final stage
escapes tax. Un-recovered taxation of some intermediate goods may lead to producers
substituting away from such inputs thus distorting the input choices of the said
producers.
Exemptions may create incentives to “self supply” i.e. tax avoidance by vertical
Integration.
Exemptions tend to feed on each other giving rise to a phenomenon called
“Exemption creep”.
This arises from the fact that each exemption gives rise to pressures on further
exemption. For example creating an exemption to reduce the tax burden on a particular
commodity or goods may lead to increased pressure for exemption or zero rating of inputs
used for the production of such a commodity.
Based on the above, it is important that care is taken when introducing exemptions in
order to avoid distortions in the production process as well as to minimize revenue loss
resulting from such distortions.
Given the fact that the primary purpose of VAT is to raise government revenue in an
efficient manner and with as little distortions of economic activity as possible, distribution
effects are perhaps better addressed by other forms of tax and government expenditure
policies which can often be better targeted at these aims.
1. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
a. 4% on declared goods or the goods commonly used.
b. 10-12% on goods called Revenue Neutral Rates (RNR). There would be
no fall in such remaining goods.
c. 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.
2. 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 has been given to the states when it comes to
finalizing the RNR along with the restrictions. This 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
3. No concession to new industries Tax Concessions 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.
4. 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.
5. 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 sell invoice issued by him.
6. VAT is not cascading or additive though the tax on the goods sold is collected at each
stage, it is not cascading or additive because the net effect would be 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.
1. Simplification under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%,
8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there would only be
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. This is necessary as the CST
Act stipulates that the tax levies at the first stage or the last stage differ. Consequently, the
question of which stage of tax it falls under becomes another reason for litigation. Under the
VAT system, tax would be levied at each stage of the goods of sale or purchase.
2. Adjustment of tax paid on purchased goods Under the present system, the
tax paid on the manufactured goods would be adjusted against the tax payable on the
manufactured goods. Such adjustment is conditional as such goods must either be
manufactured or sold. VAT is free from such conditions.
3. Further such adjustment of the purchased goods would depend on the amount
of tax that is payable. VAT would not have such restrictions. CST would not have the
provisions on refund or carry over upon such goods except in case of export goods or goods,
manufactured out of the country or sale to registered dealer. Similarly, on interstate sale on
tax-paid goods, no refund would be admissible.
4. Transparency The tax that is levied at the first stage on the goods or sale or
Purchase is not transparent. This is because the amount of tax, which the goods have
suffered, is not known at the subsequent stage. In the VAT system, the amount of tax would
be known at each and every stage of goods of sale or purchase.
5. Fair and Equitable VAT introduces the uniform tax rates across the state so that
Unfair advantages cannot be taken while levying the tax.
6. Procedure of simplification Procedures, relating to filing of returns, payment of
Tax, furnishing declaration and assessment are simplified under the VAT system
So as to minimize any interface between the tax payer and the tax collector.
7. Minimize the Discretion the VAT system proposes to minimize the discretion
with the assessing officer so that every person is treated alike. For example, there would be
no discretion involved in the imposition of penalty, late filing of returns, non-filing of
returns, late payment of tax or non payment of tax or in case of tax evasion. Such system
would be free from all these harassment.
*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same though it
could to be reduced to 2% when VAT is introduced and eventually phased out.
VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases
(inputs) and capital goods. What this means is that dealers can actually deduct the amount of
tax paid by him for purchase from the tax collected on sales, thereby paying just the balance
amount to the Government.
2.23 Supplies
Supply is used to “taxable supplies” refer to supply of both goods and services
whether taxable or exempt. And it covers the following examples of transactions.
a. The sale, supply, or delivery of taxable goods to another person including imports.
b. The appropriation by the registered person of taxable goods for his personal use or for
use by others.
c. The making of a gift of any taxable goods or taxable services in the course of business.
All these records must be kept up to date and in sufficient detail to enable the tax
payer calculate correctly the amount of VAT to be paid to the VAT Authorities. It is also to
provide evidence of claims for input tax credit. The records must be kept properly and made
readily available to enable the VAT officer check figures used to file the VAT returns. The
principal records which registered persons must keep for VAT include
Sales Invoice: Copies of all invoices issued in serial number order showing details of the
amount of tax charged on each supply made.
Purchases Invoice: All purchases invoice copies of custom entries receipt for the
payment of duty or tax.
Debit and Credit Notes: Copies of all debit and credit notes issued.
VAT Account: Totals of output and input tax each period and the net amount payable or
the excess tax carried forward at the end of each month.
Delivery Document: Details of each supply of goods and services from the business
premises unless each details are available at the time of supply on invoice issue at or before
the time.
Tax Rate
Tax rate.
The amount of input tax deductible (and upon apportionment where applicable). i.e. The
net amount of tax either payable to tax authorities or repayable by them. A late return or one
without the required amount of tax will attract penalties under the law. If no taxable suppliers
are made or received during the preceding month, a “nil‟ returns should be submitted by the
registered trader. It is necessary for the registered trader to keep copies of all VAT services
rendered on the business premises.
The accurate completion and prompt submission of VAT returns and payment are the
way of avoiding penalties under the law. If a registered person fails to file a VAT Returns or
submits an inaccurate Return at the end of the month, the Act gives powers to commissioner
to raise an assessment and in addition impose penalties and interest charges, where
appropriate. The monthly VAT payments should be made at the same time as the filing of a
return, either in cash or cheque. All cheques be crossed and marked “account payee only”
remember that it is an offence to bounce a cheque.
CHAPTER THREE
METHODOLOGY AND SCOPE OF THE STUDY
3.1 Introduction
This chapter deals with the sources of data collected, the research population,
sampling techniques employed and the sample size. Besides, the research instrument used in
the data collection, the data collection procedure and tools for data analysis were also
discussed.
4.1 Introduction
The focus of this chapter is on the analysis of the data collected from the field of
study according to the response given by the respondents.
In all, One Hundred (100) questionnaires were distributed among VAT Office staffs,
Wholesalers, Retailers and Consumers in the Mandya. The researcher also contacted other
Revenue Agencies to have additional information on the role of VAT on their Operations in
the municipality which are analyzed.
(i)How the State governments’ are finances these days? Are they healthier in
comparison to the pre-1990 days?
Public Finance statistics for 2004-05 released by the Ministry of Finance indicate that
the combined budgetary finances of the States moved from a position of deficit during 1990-
91 (0.02 per cent of GDP) to one of surplus in 2004-05 (0.24 per cent of GDP). However, the
surplus in recent years is primarily driven by a surplus in the capital account, which has more
than offset the increasing deficit in the revenue account of the States. Focusing merely on the
revenue account, the deficit has increased from 0.9 per cent of GDP in 1990-91 to 1.44 per
cent of GDP in 2004-05.
What this means is that the States have been funding the shortfall between the developmental
and non-developmental expenditure and the direct tax, indirect tax and non-tax revenues by
dipping into the surplus funds in the capital account. While the capital account was largely
funded by loans from the Centre in the early half of the 1990s, there has been a shift towards
market borrowings in recent times, which will add to the future interest burden of the States.
Moreover, the States in aggregate have increased their spending on non-developmental items
at an average rate of 16 per cent each year over the period 1990-91 to 2004-05 while
developmental spending has lagged behind with an average increase of 11.7 per cent over the
same period. Therefore, the deficit in the revenue account of the States is largely due to
excessive spending on the administrative machinery of the States and interest payments
rather than income generating developmental projects. It is time to embark on a conscious
programme of fiscal conservatism at the level of the States and evaluate the marginal benefits
of additional expenditure before sanctioning new projects.
(2)Are there new revenue streams that are significantly contributing to the kitty of the
State governments?
Overall, the share of direct taxes in total tax revenue for the States has increased from
approximately 12 per cent in 1990-91 to 15 per cent in 2004-05; this was accompanied by a
corresponding decrease in the share of indirect tax collections (which declined from 88 per
cent in 1990-91 to 85 per cent in 2004-05).
Each State's share of income tax has been a major revenue earner. Moreover, the States have
borrowed less from the Centre over time, as evidenced in the share of central grants in total
revenue receipts — it declined from approximately 20 per cent in 1990-91 to 17 per cent in
2004-05. To summarise, there has been a shift by the States, in terms of their source of
revenue receipts, from grants from the centre towards tax revenue (and more on direct tax
revenue). This is a healthy move, which will allow the central government to work more
effectively towards reaching its self-set goals to rein in fiscal indiscipline.
The introduction of the VAT in India in April 2005 has already increased revenue
collections in some States. This positive impact appeared sooner than was expected. The
introduction of the VAT is an important step, as it attempts to simplify and eventually
harmonies a complex mix of State tax rates across all States. However, significant work
remains to be done to improve VAT implementation.
(4)Unexploited areas with revenue potential — and ignored spends that are proving to
be costly.
This question requires in-depth research to accurately identify areas of State finances
that can be implemented to improve the States' respective budgetary positions. The reports of
the State Finance Commissions (SFCs) can be useful resources in this regard. Ironically,
States have shown reluctance in setting up SFCs and failed to adequately cooperate with
them to implement their recommendations. Only Andhra Pradesh, Kerala and Punjab have
constituted the third SFC; several States are yet to set up their second SFC.
It is clear, however, that all the States' have to embark on a conscious programme of fiscal
discipline to curb wasteful spending on the their administrative machinery. There is
significant scope for greater fiscal decentralization with a focus on internal resource
mobilization. The current single digit share of internal resources as a percentage of total
revenues of the panchayats should increase rapidly to double-digit levels.
As mentioned earlier, the States have increasingly spent more on non-developmental items.
There has been a phenomenal increase in the interest burden of the States — from 12.79 per
cent of total revenue expenditure in 1990-91 to 22.04 per cent of revenue expenditure in
2004-05. This has resulted in crowding out spending on important sectors such as agriculture
(where spending went down from 12.66 per cent of total revenue expenditure in 1990-91 to
7.16 per cent in 2004-05), education (which fell from 22.51 per cent in 1990-91 to 17.49 per
cent in 2004-05) and industry (which went down from 1.4 per cent to 0.7 per cent).
One positive trend in the States' revenue expenditure is the spending on power and irrigation
projects that almost increased by 72 per cent between 1990-91 to 2004-05.
4.2 Age of Respondents
Fig 1 Age Distribution of Respondents
Good
Moderate
Low
Increase
Column2
Decrease
No change
No
yes
Non uniformity in the VAT rates across the States has adversely impacted companies
with all India operations as they have had to reckon with varying rates in different States.
Impact on Price
Increase in Price
Decrease in price
No change
The results indicate that there was no change in prices, due to VAT, in the case of
56% of the participants. It is interesting to note that 22% of the respondents increased the
prices of their Products while 20% decreased prices. It would therefore be reasonable to
conclude that the introduction of VAT has been largely price neutral on an overall basis.
4.14 Impact on Margins
Fig 13 Impact on Margins
44% of the respondents indicated that they maintained margins post VAT whereas
28% experienced a positive impact there on .For those industries that experienced a positive
impact on margins, the input tax credit optimization seems to have played a major part.
Impact on Margins
Negative
Positive
No change
Significant
Moderate
In view of the above assertion, there is the need for the researcher to look into the
contribution of VAT on the economy of India and whether the introduction of VAT has any
positive or negative effects on the economy.
The study revealed that government have increase its revenue base with the
introduction of VAT hence the improvement in infrastructure in all tertiary institutions in
India and the alleviation of poverty through the introduction of National Health Insurance
which sought to give equal right to the under privilege to assess health care. Data collected,
Presented and analyzed indicated that the education on VAT before its introduction was not
enough to prepare the mind of the citizenry on the purpose and the role of the VAT on the
economy hence the demonstration at the early stage. Where education can be done through
information Vans, Seminars, Workshops, Radio, Televisions, and talk shops regularly to
create awareness on the benefit the country stands to derived from VAT, it was left in the
hands of the revenue agency (VAT) with limited resources achieve a higher targets.
It has been pointed out in the analysis that, though there has been a tremendous
increase in government revenue with the introduction of VAT which help improve
government commitment to community development, the VAT staffs were not well
motivated to increase efficiency and effectiveness in tax collection hence their inability to go
extra miles Again, the data collected and analyzed indicated that the accounting system put in
place by the government to audit the accounts prepared by corporate institutions that collect
taxes on behalf of government are weak. Hence there are false declarations of sales figure
that prevent full disclosure of VAT revenue.
Finally, the study attempted to establish a relationship between the positive and
negative role of VAT on the economy of India. In postulating, it was established that VAT
creates employment to tax experts which has impacted positively on the Indian economy
whereas consumers also believe that the Introduction of VAT has increased the prices of
goods and services which in effect reduce their real income. Also there were other avenues
identified through the study that the government could explore to effectively monitor and
improve collections of VAT revenue in India. Clearly, an overwhelming majority of the VAT
staffs believes training activities have been centered at the apex where most of those trained
do not go to the field for the assessment of VAT revenues collected on behalf of the
government which have negatively affected the operation of the VAT office and the
government as a whole.
5.3 Conclusion
From the data collected on the study, the researcher came to a conclusion that the
VAT has actually improved the economic development of the country. For example, the
2.5% rate mean for the India Education Trust Fund (IET Fund) has helped improved the
educational sector, by building educational structures for all the public tertiary institutions
and also secondary and primary schools are being provided with other educational facilities.
5.4 Recommendations
On the basis of the findings that have been established and the conclusion drawn from
the study area: following recommendations are necessary. Government should spend part of
its revenue generated from VAT to develop the rural areas, in so doing; it will prevent rural-
urban migration and its related vices like over-population in the urban areas, arm robbery and
health related problems.
Supervision of registered traders should not be done on big companies alone but
rather both the small and big companies should all be supervised to prevent cheating
and fraud.
Also VAT officials should try and check or audit the accounts of all registered
traders.
Government should try and widen the tax base by reducing the VAT threshold from
two hundred million to one hundred million, so that more people will be caught in the
tax net
Education on VAT must be done through the following media: Television, radio,
information van, community workshops etc to ensure its effectiveness and efficiency.
BIBLIOGRAPHY
Websites:-
http://www.pwc.com/en_IN/in/assets/pdfs/vat-survey-report.pdf
http://www.economywatch.com/business-and-economy/vat-inflation.html
http://finance.indiamart.com/taxation/impact_of_vat_in_india.html
http://finance.indiamart.com/taxation/vat_faqs.html
http://www.rediff.com/money/2006/apr/21vat.htm
Book Reference:-
Indirect Taxes-: Dr H.C Mehrotra and Agarwal
Indirect Tax : Dr. Vinod K. Singhania and Dr. Monica Singhania
Indirect Tax : Dr. Dinker Pagare
News Paper :-
Economic Times
INTERVIEW QUESTIONNAIRE:
I am KAVYA.B pursuing MBA from PES College of Engineering, Ho.
As a part of the curriculum, I am doing research on “IMPACT OF INDIRECT
TAX AS AN INSTRUMENT OF ECONOMIC DEVELOPMENT OF
INDIA” (a case study on VAT Service, Mandya) Kindly help me in the same
by filling the questionnaire. Your response would be kept strictly confidential
and would be used only for academic research.
SECTION A
Background Information
2. Age Group
18 – 25 [ ] 26 – 32 [ ]
33 – 39 [ ] 40 – 46 [ ] 47
above…………
3. Occupation
Self employed [ ] Employee [ ]
Others (Please specify)……………..
5. Qualification
a. CA/ICWA/ACS (professionals) [ ] b. Post-Graduate[ ]
c. Graduate [ ] d. Cavils (IAS, IPS, KAS etc) [ ]
e. Other (Specified)
SECTION B
The concept of VAT
a. Retailing [ ] b. Manufacturing [ ]
c. Consuming [ ]
7. Do you understand the concept of VAT?
Yes [ ] No [ ]
8.
9. Was the implementation of VAT beneficial to the economy of India?
Yes [ ] No [ ]
11. What in your opinion is the best effective ways to collect VAT on goods?
…………………………………………………………………………………..
…………………………………………………………………………………..
12. Do you think the current VAT rate of 5%, 8% & 13.5% is a burden on the tax payer?
Yes [ ] No [ ]
13. Do you think the awareness and education of VAT is enough for effective
implementation in India?
Yes [ ] No [ ]
14. What do you think is the efficient and effective method of communication to be adapted
to educate the people on VAT.
a. Television [ ] b. Radio [ ]
c. Community workshop [ ] d. Information Van [ ]
Others specified……………………………………………………
16.In your Opinion, where should government spend greater part of its VAT revenue?
Rural[ ] Urban[ ]
18. Do you think that VAT staffs are dedicated and motivated enough for effective collection
of VAT in India?
Yes [ ] No [ ]
19 State reasons(s)……………………………………………………….
20. Which of the following should government spend higher percentage of its VAT revenue
on?
a. Infrastructure [ ] b. Agriculture [ ]
c. Education [ ] d. Health [ ]
e. Salary [ ] f. Other Specified……...............
21. How often should a person or concern registered under VAT be audited?
a. Once every month [ ] b. Once in every three month [ ]
c. Once in six months [ ] d. Once in a year [ ] 22. Do you agree with the system
of collection of VAT in India?
Yes [ ] No [ ]
24. Do you always issue out VAT invoices to your customers? (Retailers Only)
Always [ ] Sometimes [ ]
Not at all [ ]
25. Do you always insist on VAT invoices whenever you buy goods? (Consumers Only)
Always [ ] Sometimes [ ]
Not at all [ ]
27. Considering the high illiteracy rate in India, is insisting on the collection of VAT invoice
by consumers the only sufficient and effective means?
Yes [ ] No [ ]
29. What other methods/ways do you think the government should employ to minimize the
evasion of rate VAT?.................................................................
………………………………………………………………………………
30. Finally, in your opinion has the imposition of VAT impacted positively on the economy
of India?
Yes [ ] No [ ]
31. If no, give reasons……………………………………………………..…..
……...…..…………………………………………………………………
THANK YOU.