VALUE ADDED TAX (VAT)
In the earlier existing system before VAT was implemented sales tax on most products is paid by the manufacturer not by the retailer and on very few products by the wholesaler which means most traders don’t have to keep detailed books of accounts. Worse, most do not declare their sales and income correctly. These result massive theft of tax. A few years ago a large chain of sweet shops in Delhi had declared daily sale of Rs. 8,000 at one of its outlets in the city. A raid by the sales tax department found daily sales to be Rs. 92,000 more than 10 times the reported figure. Under reporting of sales means evasion of income tax as well says Ramesh Chandra, member secretary of the Empowered Committee on VAT (a committee comprising finance ministers of all states) ‘Traders have got used to multi points evasion”
Under VAT not only will wholesalers and retailers have to pay taxes, they will also have to ensure that traders they deal with pay tax. This is how it works: a trader (say, retailer) is allowed to deduct from his tax liability, the tax already paid by the person (wholesaler) who sold the product to him. But! To be eligible for that deduction, the retailer must have proof of tax paid by) the wholesaler or else the retailer will have to foot the entire tax (his and the wholesaler’s). This system of self-policing not only ensures that a trader pays taxes; he also keeps records of the tax paid by the traders he is dealing with. It is this feature of VAT exposing evasion that has made it so irresistible to governments and so intolerable to traders. If s not that every small trader is going to be caught in VAT’s net. Most states have exempted traders with annual sales of Rs. 2-5 lakhs from the tax. Traders with annual sales of Rs. 25 lakhs need not keep any record if they agree to pay 1 per cent of their sales as VAT. But even the big traders have some genuine grievances against VAT in its present form.
In Europe and South America, where VAT is most popular, the tax is all inclusive it includes sales tax, Octroi, luxury tax, other interstate taxes and most importantly the excise duty. VAT in these countries is truly a single point that encompasses all indirect taxes, but not in India. The proposed VAT has replaced only sales tax and some minor taxes like work contract tax, lease tax, turnover tax and luxury tax Octroi, Central Sales Tax (CST). Service Tax and of course excise duties will have to be paid separately. Besides, under VAT, interstate movement of inputs will be taxed. So companies buying all their inputs within a state will have unfair advantage over companies sourcing inputs from several states. That defeats the basic purpose of VAT—common market for the whole of India, “We are not opposed to a true VAT as is prevalent in other countries. But the half-baked tax being implemented in India will only hurt business and consumers,” claims Suresh Bindal, secretary general of a body of textile merchants.
Bindal isn’t very hopeful about the prospects of VAT reducing tax evasion. He claims traders are unnecessarily treated with suspicion when ifs the tax officials who actually harass them for bribes and even suggest ways of evading taxes. Chandra admits that VAT in its current form isn’t perfect but he is hopeful that the government will eventually work towards a unified VAT “let there be no doubt that this is only a first step towards the final journey of a single unified VAT/’ he claims. CST has already been halved from 4 per cent to 2 per cent in Budget 2003 and will eventually be phased out after VAT is fully implemented. Traders and some manufactures have also warned of a price hike if VAT is implemented. But barring a very few products, the hike is likely to be marginal, restricted only to a few states and a few products (where current taxes are lower than the proposed VAT). However, medicines could be an exception. Chemists and druggists warn of a price rise of 8-9 per cent post VAT. That is because, the pharmaceutical industry claims, the average sales on drugs will rise from about 7 percent at present to 12.5 per cent under VAT. And the industry is in no state to absorb the cost. ‘The consumer will have to bear the burden”, says Hari Mundra, vice chairman Wockhardt.
The blackmail by the traders apart, states are not adequately prepared for the April 1 deadline. Most states barring Madhya Pradesh and Chhartisgarh were hurrying through their VAT legislations in assemblies in the last week of March even though they had more than two years to prefer. Andhra Pradesh, which remained committed to implementing VAT from April 1, didn’t know till the last week of March how to deal with crores of rupees of investments it has received on the promise of sales tax exemptions. Under VAT, it will be difficult to retain sales tax exemptions.
Even the revenue gains will be uneven among states. In states where the average current sales tax rates are lower than proposed VAT rates, the revenue gains will be higher in states with an average sales tax higher than VAT rates may suffer a loss initially. But all states arc betting on big gains by reducing the currently rampant (5 to 85 per cent of potential tax revenue) tax evasion through VAT. Add to that the larger economic gains of having uniform tax rates for each product all over India and the efficiency and revenue gains from VAT could be reaped for all times to come. Of course, that will happen only after the immediate obstacles of resistance from traders are overcome.