Saturday, February 10, 2007

Paper read out in the Seminar Organised by All India Services Pensioners’ Cell held on 2nd July,2005

Hon’ble Chairman and respected gentlemen :

I am really thankful to you all for giving me an opportunity to speak on the topic “ VAT- its implication for the common people”. I was working in the Assam Taxation Department and retired from service as the Superintendent of Taxes on May, 31st, 1996. The Value Added Tax, popularly known as ‘VAT’ is, therefore, a new subject to me and I am yet to acquire sufficient knowledge on the subject. Even then, I am trying to project some salient features on the concept of VAT, its constitutional base, impact and implication on the common people and other allied matters to the best of ability.
Assam has immense visible and potential natural resources, namely; agricultural, forest, mineral, water resources. A proper utilization and mobilization of such natural resources may have the consequential effect of immense growth of revenue resources. Assam is, in fact, legging far behind in the industrial scenario, compared to other States of India. The trade activities mainly rest with the sales of goods, imported from places out side the State. To speak truly, Assam is a consuming State rather than a manufacturing State, having no adequate industrial base and other infrastructure. The price structure of the commodities, therefore, always runs to a higher side, compared to the same at the source. The VAT is a tax, which is payable at every stage of sale from the purchase of raw materials in the State till the sale of manufactured products made to the level of the consumers. Again, the sales of imported goods by the whole sellers to the retail sellers and then upto level of the consumer’s incidents of tax will be there.
Assam produces jute, superi, ginger, bamboo and different types of oil seeds in abundance. The raw hides and skins, bones of animals can well be had from the carcasses of animals,- domestic and wild. There is, however, no wide platform for manufacturing and processing activities of many of those materials. Those goods are mostly despatched to other States for manufacturing and trade activities. Thus other States are deriving commercial base and fiscal benefits at the cost of these precious resources of Assam.
The tax revenue collection of Assam was Rs. 2332.00 crore in 2004-2005 as against Rs.528.56 crore in 1994-95. The expansion of the businesses, enlargement of the volume of business, introduction of new measures of tax, enhancement of the rates of tax, change of consumers’ pattern in the modern hi-tech era etc. have a large impact on the revenue generation scenario of Assam.. The State tax officers have also been playing a pivotal role in such revenue generation exercise. We are hopeful that the tax revenue target fixed for 2005-06 at Rs. 2900 crore will safely achieve its goal, if the implementation of the VAT system goes in a right and proper direction.

Constitutional back ground on VAT Law
A tax on the sale or purchase of goods is a State subject. The State Legislatures have been empowered to make law on tax on the sale or purchase of goods within the State by Article 246(3) read with entry 54 -List II- (State List) in the Seventh Schedule of the Constitution of India.

Introduction of the system of VAT.
Keeping this object in view, the Legislatures of Assam adopted the Assam Value Added Tax Bill, 2003. The measure of VAT could not be implemented, as there was lack of consensus amongst the States. However, barring a few States, the system of VAT has, of late, been introduced in India. The Assam VAT Bill, 2003 received the assent of the President of India on February, 25th, 2005 and the Act came into force from 1.05.2005.

What is a VAT?
The VAT is a tax on the goods at every stage in the series of sales made by the registered dealer with the provisions of credit of input tax paid at the points of previous purchases thereof. That is to say, ‘VAT is a multi-point tax at different stages of sales, which ends its course when the goods are sold to the consumers’. VAT is based on value addition to the goods sold. It is equivalent to the sales tax at retail level, but such tax is collected through the entire chain of production and distribution within the State. VAT for a dealer is the difference of tax payable on sales effected by him during a period after deducting therefrom the tax paid or payable on the purchases made within the State. It is collected in instalments at each transaction in the production and distribution system. It does not have cascading effect due to the system of deduction or credit mechanism. VAT is a tax on domestic consumption. The final and total burden of tax fully and exclusively is to be born by the domestic consumers of goods and services. No VAT is charged or levied on sales other than in the States in which sales or purchases of goods are effected. Where any purchase or sale is made in the course of inter-State trade or commerce, it is governed by the provisions of the Central Sales Tax Act, 1956, a law enacted by Parliament. The State taxing authorities carry on the administration of this Central Act and it is to be governed by the provisions of the general sales tax law of the State. The VAT law in the State does not have any direct impact on the same. The proper accountability of such sale or purchase to and from the State has, however, an indirect impact in the process of tax revenue generation of the State.

What is Out put tax?
‘Output tax’ is a tax charged or chargeable by a registered dealer on the sales made by him. The out put tax is thus a tax on sales and a registered under the VAT Act can only collect such tax.

What is input tax?
‘Input tax’ means the amount paid or payable by way of tax under this Act by a purchasing registered dealer to a selling registered dealer on the purchase of goods in the course of business That is, for a seller, such tax is an out put tax and for a purchaser, it is an input tax.

What is credit of input tax?
‘The credit of input tax’ means the amount admissible for set-off with reference to the tax paid at the time of previous purchase. In VAT system, a seller is entitled to get set off of the amount of tax paid at the time purchase made in Assam. He is to pay the difference of tax between the tax payable and the tax paid.

Advantages of VAT over other form of sales taxes
VAT has a flexible capacity to generate large and buoyant revenues. It could be designed to be neutral. VAT eliminates cascading and hence no tax- induced distortion in favour or against vertical integration is possible. It tends to lesson incentive for evasion by not concentrating to the impact of tax on any given level. It makes the tax burden transparent. Zero rating of tax on exports in VAT system is easy. It has a large base. Low tax rates could have the same revenue.

Introduction of VAT In other Countries
France was the pioneer Nation to introduce the system of VAT in 1954. The VAT system has a gradual process of evolution and by now about 132 global Nations introduced the system of VAT. In the neighbouring countries of India, namely; Bangladesh, Shree Lanka, Nepal and Pakisthan, the VAT regime took birth much earlier. Except a few States, the system of VAT has, of late, been introduced in India.

Illustration on input credit and reverse credit
Input credit : Since Value Added Tax is a versatile tax, it offers several methods to calculate the quantum of tax payable. The commonly used methods of calculation are:- addition, subtraction and tax credit methods. In addition, method all factors of payments including profits are aggregated to arrive at the total value addition. The applicable rate is then applied on the tax base to calculate tax liability. This type of computation is used mainly with the income of VAT. Subtraction method is also a simple method, where value added by a firm is calculated by subtracting total purchases from total sales. However, tax credit method is generally preferred to subtraction method, as it is easy to calculate tax liability, tax refund and export refund entitlements. The VAT operating countries mostly employed the input tax credit over the invoice method of computing the actual tax payable. In this method, the deduction of taxes paid on inputs is allowed from taxes payable on the sales on the basis of aggregate of taxes, indicated in invoices. The invoices received for the purchase of inputs and sales of VAT commodities give correct indication of tax liability. This method allows easy access to auditors for matching invoices. However, deliberate tax evasion is possible, if a nexus is established between the buyers and sellers for suppressing the real invoice value and sharing the unpaid quantum of tax. If the consumers do not insist for correct invoice or collude with the dealer for under- invoicing, evasion of tax becomes intractable. The whole exercise may prove futile, as a consequence.
So, VAT equals to the tax payable on sales minus the tax paid on purchase. The above equation is the single most important equation scheme of VAT. Firstly, a dealer has to make a total amount paid to other dealers in the State at the time of purchase during the month. Secondly, he has to make a total of the tax amount collected from the buyers during the month at the time of sale. He is to deduct the two to arrive at the actual VAT payable to the Government.
VAT is generally a tax on value addition, which projects the difference between purchase and sale price of goods, but this one to one correspondence between the purchase price and sale price has become emergenceof the input tax credit method. One has to look into the totalities of the input and output taxes and there is absolutely no necessity to link a particular purchase to a particular sale credit excess out of the out put tax, which can be carried over to the next month.. Input tax does not form part of purchase expenses, because it is reimbursed to the dealer in the form of appropriation from the out put tax. Therefore, in all computation concerning the VAT, the element of tax is not to be included, while stating the purchase price.
Reversal of input credit : When any materials are stolen, destroyed or lost or disposed of on sales or disposed of otherwise than in the course of sales, the question of reversal of input tax credit crops up under certain circumstances and conditions. The dealer forfeits his claim of input tax credit and becomes liable to pay the claimed amount by way of treasury challans

Procedure of allowing the input tax credit
(a) A manufacturer purchased raw materials in Assam at Rs. 1000.00 and paid out put tax @ 4 paise in the rupee. The purchase price will thus be Rs. 1040.00. Input tax paid at Rs. 40.00
(b) If he manufactures finished goods and sells such goods to a whole sellers in Assam, say, at Rs. 2000.00 (including manufacturing cost profit margin etc.) and charge tax @ 4 paise in the rupee, such sale value will be Rs. 2080.00. The said dealer paid tax at the time of previous purchase at Rs. 40.00.
So, the credit of input tax will be admissible at (Rs. 80.00-Rs.40.00)= Rs. 40.00 The VAT payable by the seller is Rs. 40.00. The purchaser of the goods is to pay the price of Rs. 2080.00 inclusive of tax Rs. 80.00.
(c) When the whole seller makes sale to a retail seller, say, at Rs. 2500.00 (including profit margin & other charges) and the rate of tax is 4 paise in the rupee, the sale value of the goods will be Rs. 2500.00+ Rs. 100.00 (tax)= Rs. 2600.00. VAT will be payable by the whole seller at Rs. 100.00- Rs. 80.00= Rs. 20.00.The seller will get credit of input tax Rs. 80.00.
(d) If the retail seller makes sale to the consumer at Rs. 3000.00, he will have to pay tax @ 4 paise in the rupee, that is, Rs. 120.00. The sale value of such goods will be Rs. 3120.00..The input tax credit will be admissible at Rs. 100.00. He will be liable to pay VAT at Rs. 20.00
The difference between the tax collected and the tax payable is to be retained by the selling dealer. The final reconciliation is to be made at the time of furnishing of the return and allowance thereof.
It will be seen that right from sale of raw materials to the sale made to the consumer, the State will receive tax of Rs. 40.00+Rs. 40.00+ Rs.20.00+20.00 = Rs.120.00. The sellers at different stages of sales will get the credit of input tax of Rs. 40.00+ 80.00+ Rs. 100.00= Rs.220.00. The consumer will, however, have to bear the burden of tax Rs. 40.00 + Rs. 80.00 + Rs. 100.00 + Rs. 120.00= Rs. 340.00 apart from the increased sale value due to inclusion of the recurring margin of profit and other allied charges.
It is to be noted that credit of input tax is admissible on sale when one registered dealer makes sale to another registered dealer through Tax Invoice. The sale is to be made to the consumer through Retail Invoice.
A similar mode of trade deals may be there in the case of sales of goods (raw materials or finished products), imported from places out side the State. The credit of input tax will not be admissible on the first sale of the raw materials or the finished products, manufactured out of such raw materials or the imported finished products, as the tax on such purchase was paid in other State/ States. Where any sale is effected subsequent to the first sale of such goods, the question of credit of input tax will crop up and the admissibility of credit of input tax will be governed in like manner.

Consumers to bear the burden of heavy price rise
It will be seen from the above analysis that in the process of VAT deals, the value addition by way of margin of profit, other recurring cost and element of tax thereon, make the price hike in each stage of sale. When such goods are sold to the consumer at the point of last sale, it has to bear the burden of high price rise. In fact, the Government will get the legitimate tax on the sales. The common people can neither refute nor refuse, when any tax is charged on exempted goods for want of proper knowledge about the taxability or non-taxability of such goods. The increased value of goods may simply enlarge the margin of profit of such unscrupulous dealers illegally and improperly in the name of VAT. Unless the consumers are cautious and conscious, such type of malpractice will continue.

Tax under pre-VAT system
In pre-VAT system, there was no multiplicity of tax. The tax was payable at one stage of sale. In case first point tax, a tax was payable at the point of first sale in Assam. For second or subsequent sales, no tax was payable provided the selling dealer discharged the onus that the tax was paid at the point of first sale. In case of last point tax, such tax was payable at the point of last sale made to the consumers in Assam. For the earlier sales, a chain was maintained by way of issue of declaration in statutory forms to the effect that the goods, so purchased, were for resale within the State of Assam . No tax was payable on the intermediary sales. There was another measure of tax at the first point and last point of sales. The rate of tax was bifurcated into two under the provisions of law. One is for first point and the other is at the last. This benefit was admissible in respect of the sales -purchase deals made between two registered dealers only. For intermediary sales, made between the registered dealers, no tax was as well payable provided declaration form was issued in an identical manner. When, however, such sale is made at the first point to an unregistered dealer, the rate of tax is chargeable in full on such sale value.
In the VAT system, a reverse position has been maintained to make levy of tax at every stage of sales, whereby the trend will be towards automatic price rice. The system may ensure transparency, no doubt, but the price hike is likely to be detrimental to the interest of the common people.
It is not out of the place to mention here that a section of unscrupulous dealers may as well take full advantage to the VAT system and make price hike on the commodities irrespective of taxable or exempted under with imaginary and unsubstantial pretext.

Sales made through Retail Invoice
When any registered dealer makes sale of goods to an unregistered dealer or to a consumer, such selling dealer is not to issue any Tax Invoice. The issue of a Retail Invoice on such sale will be imperative. The credit of input tax is admissible. In case, any sale is made in the course of inter-State trade or commerce, the seller is also to issue the Retail Invoice. The credit of input tax will be admissible provided the previous purchase was made in the State of Assam. It is the duty of a consumer to demand Retail Invoice in course of any purchase of goods. If this not done, the seller may suppress such sale, though he collected the element of VAT along with the sale value of the goods.

Reverse of input tax credit
It has been discussed earlier, the circumstances under which the question of reversal input tax credit crops up. An illustration in this respect will make the position more clear.-
Say,- A dealer purchased goods worth Rs. 5000.00 locally on payment of VAT A part of such goods, say, valued Rs. 1000.00 has to be returned to the seller of the goods for some obvious reasons. The rate of tax of such goods is, say, 4%. Such dealer would have been entitled to input tax of credit of Rs. 200.00 on the purchase of Rs. 5000.00. Since he returned goods worth Rs. 1000,00 to the seller, he can not lawfully claim input tax credit on the said amount of Rs. 1000.00, say- Rs. 40.00. Such claim of Rs. 40.00 will be reversed or disallowed lowering his claim of input tax credit from Rs. 200.00 to Rs. 200.00- Rs. 40.00)= Rs.160.00. The claim of the original seller will also be lowered to that extent also. Though this is not relevant to the common consumers, but we should have an idea on such implications. In VAT system priority has been given on the question of self-assessment to be made on the basis of returns of turnover submitted by a dealer. Unless, there is proper scrutiny in course of audit assessment, such shortfalls may not come to the sight. There are some obvious conditions for initiation of the audit-assessment proceeding.

Does VAT always mean Value Addition tax?
Suppose, a manufacturer purchases raw materials worth Rs.1000.00 by paying tax of Rs. 40.00 @ 4%. It manufactures finished goods out of such raw materials and sells at Rs. 2000.00, which is taxable @ 12.5 %. Now, the total value of the goods including the tax will be Rs. 2000.00 + Rs. 250.00 (tax)= Rs. 2250.00. The manufacturer cum seller of the goods will be liable to tax after credit of input tax of Rs. 40.00, that is, at Rs. 250.00-Rs. 40.00 =Rs 210.00.
If we take the value added tax portion only, it will be Rs. 2000.00- Rs. 1000.00= Rs. 1000.00 and the tax payable thereon @12.5%. is Rs. 125.00. So, VAT is not always a tax on value addition. The main question for consideration is the out put tax payable- the input tax paid.

Zero-rating of tax
Suppose, a dealer purchased goods at Rs. 1000.00 locally by paying tax @ 4%, that is Rs. 40.00. He subsequently sells such goods in the course of export out of the territory of India or in other Economic Zone area, where rate of tax on sale is zero, such dealer is not liable to pay VAT. He will be rather entitled to get refund of tax paid at the time of purchase made locally in Assam. He paid VAT at Rs. 40.00 on purchase of such goods valued Rs. 1000.00, which will be in full refundable to him provided he proves to the satisfaction of the competent tax authority that sales were actually made in the course of export as well to the exempted zone areas.

Credit sales-accountability thereof
Sale of goods on credit system is a regular trade practice. Such credit sale is not only confined to between one dealer to another, but it extends to the consumers as well. In case of organized sector or whole sellers, the system of issue of credit memo. or bill is there. In other cases, it is generally not. The sellers maintain such accounts in toka- bahi or rough account book, which is an account outside the purview of the main set of the books of accounts. A retail seller making such credit sale to the consumers, likewise, never maintains such credit memo. or credit bill and maintain it identical system of Katcha accounts. In VAT system, issue of Retail Invoice for such credit sale is a must. If the consumers use to ignore the gravity of the matter and makes credit purchases in this manner, it will be an indirect indulgence and encouragement to such dealers to evade taxes. The credit system was there in the past and the credit system would be there in future, but if such credit deals continue to be unaccounted, the trade chain in the VAT system will be lost and the State will be deprived of the lawful revenue.

Unaccounted sale and purchase activities
The unaccounted purchases and sales by a section of dealers by importing goods in fake names or in the name of some fake dealers of other States makes way of evasion of taxes. This, we believe, is still in vogue. Our system of detection of evasion of tax at the source is not upto the mark, as the functioning of the border check posts are not very constructive, scientific and methodical. The requisite infrastructures are still lacking. So, the unaccounted trade deals are paving the way of evasion of taxes. If the consumers are alert against such unaccounted sale deals by not issuing any Retail Invoice or by adopting other fraudulent ways, such unhealthy and unlawful exercise can be frustrated to a great extent.

Evasion and enforcement of law
‘Evasion and avoidance of tax are brothers twine’. Frustration, annoyance with the compliance cost, may cause temptation to a dealer to evade VAT. Straight- forward greed may also tempt a dealer to evade VAT. All tax -payers must be treated equally, if they are expected to pay their share. Enforcement of the law should not rigidly be confined to a particular class or classes of the dealers. A rationality and neutrality should be applied in all case for the sake of equality, fairness and justice. A section of the traders may be liable to VAT, but they avoid to get registered under the VAT law with some false coverage. This dislocates the multi- point chain system in the VAT regime. Exaggerated claims of refund on account the tax paid on the previous purchase is not a healthy sign. The claim of credit input tax is to be tackled in a methodical and scientific way. Unrecorded cash sales made by the farmers without being taped in the VAT- net cause inconveniences to the buyers to get credit of input tax. The use of pad firms (non- existent firms) for the purpose of availing of the credit of input tax, may make way for drainage of revenue. The credit of input tax against taxable purchase, while making sales of exempted good after manufacturing activities in a fraudulent way, may cause loss of revenue. The goods, imported illegally from other States in fake names and sold in the State and VAT charged on unaccounted sales without crediting the same into the Government coffer, may make way for a major evasion of taxes. The under-valuation of goods may as well cause evasion of taxes. Small dealers, flying dealers or casual dealers, collecting VAT, may wound up business and disappear from the business scenario. This may be another way of evasion of taxes. Multiplicity of rates of tax, tax on the sales of unclassified goods at the maximum rate of tax may as well make unhealthy growth of evasion of tax. Irrational price and tax structure, as may be prevalent in neighbouring States, may make way of diversion of trade activities to any such tax free or lower rated tax zones. Manufactured or trade commodities, showing as used for own consumption, may have the consequential adverse impact on VAT revenue of the State. False claim of export and enjoyment of the benefit of refund of input tax with bogus claims may be detrimental to State revenue. The use of barter system between the buyers and sellers without drawing any tax invoice and making any payment of tax, may also have a serious ill- effect in the process of mobilization of VAT revenue. The creative accounting in the system of deals with the sister businesses in fraudulent exercise for diversion of the actual happening, may create confusion and is likely to pave the way of evasion of taxes. The modus operandi of the dealers towards deliberate lapse or negligence in issuing tax invoice and retail invoice needs to be foiled. The self-assessment in VAT system may not always be a successfulrevenue-generated vision and its adverse effect may be counted, side by side. The reason of this type of elaboration is that we the consumers may as well be aware of the tax dodging activities.

Necessity to make aware of the system to all
VAT is a newly born child in the tax -net of Assam. It is now in an infant stage. It is to be nourished properly to give a proper shape. Law is to be enforced methodically, leniently and systematically at this initial stage without causing undue harassment, hardship and inconveniences to the dealers. It will not be out of the place to mention here that from experience, it has found that proper training to the officers, traders and the consumers are yet to be imparted. A very few have acquired the practical knowledge of the system of VAT. If such training was given or received, the same was half-hearted in either side. A co-operation and co-ordination is to be maintained amongst the officer, dealers and the consumers at this maiden stage till the maturity in VAT system is attained. There should be frequent exchanges of views by organizing workshops so that initially, all can work in a common platform with a common aim and approach for successful revenue generation till it takes a final shape.

Measure of Penalty
The VAT Law has been designed in the way of repealed Assam General Sales Tax Act, 1993. A side- track is visible in many cases from the main concept of VAT. The law provided very rigid and harsh actions in preventing and arresting evasion of taxes. Such actions, in our view is to take a gradual process till the maturity is attained in the system.
The taxing machinery is to play the pivotal role in achieving success of the VAT regime. The traders and common people are to extend proper co-operation and co-ordination to make the project a success.

(Paper read out in the Seminar Organised by All India Services Pensioners’ Cell held on 2nd July,2005)

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