The VAT design should be simple, transparent and practical
As a late starter, Tamil Nadu has the advantage of learning from other States. The key requisite is a well designed VAT administration software.
While industry and a section of the trade are rooting for early implementation of Value Added Tax in Tamil Nadu, it is reported that the State Government is yet to take a policy decision on implementing VAT.
There is a demand that VAT be implemented from October 1, 2006. Implementing VAT mid-year would be inconvenient for not only for the tax administration but also trade and industry.
While two assessments may have to be made for 2006-07, dealers would also have to prepare accounts for the periods ending September 30, 2006. There could also be problems in claiming input-tax credit on stock of goods on the date of implementation of VAT with the need to prepare inventory statement mid-year rather than at the end of the accounting year.
Considering the limited time available, it is doubtful if the administration can gear up for implementing VAT from October 1. A more desirable date would be from April 1, 2007.
Importance of software
As a late starter, Tamil Nadu has the advantage of learning from the experience of other States. The foremost requisite for effective implementation is proper design of VAT administration software. VAT being a self-assessed tax, with selective audit and verification, the need for the right software cannot be overemphasised. During the initial honeymoon period, when the administration would not be carrying out extensive checks, the only source of monitoring compliance would be the administration software.
Every VAT invoice is a cheque issued on the Government, with an obligation to either allow input-tax credit for set off against output tax (subject, of course, to restrictions in the VAT legislation) or to refund to the dealers the input-tax credit not utilised for a period of 24 months which would be a recurring deposit to be redeemed after 24 months.
The software should be capable of highlighting the risk factors and facilitate broad cross-verification of claim of input-tax credit of a dealer with output tax paid by the selling dealer to alert on any misuse or improper utilisation of the input-tax credit facility. It is learnt that in one of the States use of bogus invoices for claiming input tax credit was detected recently.
The software should provide an interface for the dealers to check their VAT credit status and track the progress of their refund claims. The dealer should be able to check on the input-tax credit claimed on their invoices by their customers so that they can alert on any bogus claim.
Keeping the population of VAT registered dealers as low as possible in the initial years would be an appropriate strategy for monitoring VAT compliance.
This can be achieved by fixing a higher threshold for retail dealers and a composition rate of tax of less than 1 per cent, as in West Bengal and Kerala. A lower percentage of composition tax, say, 0.5 per cent, at least in the initial years, would reduce the resistance of retail dealers to VAT. It is learnt that in some States with lower threshold and a composition tax rate of 1 per cent, retail dealers are not enthusiastic about opting for composition. Maybe, the 1 per cent tax is a disincentive.
For instance, if the cost is Rs 1,000, the retailer would have paid VAT at 12.5 per cent of Rs 125 at the point of purchase. As a composition dealer, the cost would be Rs 1,125 and assuming a profit margin of Rs 50, the tax inclusive cost to the consumer will be Rs 1,186.75 (Rs 1,125 + Rs 50 margin + 1 per cent composition tax). As a VAT registered dealer, the cost to the consumer will be Rs 1,181.25 (Rs 1,000 + Rs 50 margin + VAT at 12.5 per cent).
A lower rate, at least in the initial years, will be an incentive to opt for composition. The tax contribution by a large population of small taxpayers would be a small proportion of the total tax revenue. The administration could focus on monitoring compliance of medium-sized enterprises and large taxpayers who contribute a larger proportion of tax revenues.
Campaign to educate
An effective campaign for educating VAT dealers, distribution of pamphlets on VAT compliance and continued assistance by establishing help-centres across the State is essential. In some of the VAT implementing States, the non-compliance/short-payment of tax is more due to the lack of knowledge and clarity in drafting of VAT legislation than a deliberate exercise at that.
Care should also be taken to train all officials on VAT provisions to be able to guide the taxpayers on at least basic compliance issues.
An effective mechanism for clarifying issues and doubts should function from Day One. It is essential to take the community into confidence about the efficiency of the tax system.
In certain States, industrial inputs have been listed. As it is almost impossible to list all of them, Section 3(3) of the TNGST Act may be incorporated for charging concessional rate of VAT at 4 per cent on industrial inputs. This would necessitate the submission of a form similar to Form XVII under the TNGST Act. Haryana has provided for a declaration for industrial inputs.
VAT purists would scoff that Forms have no place in VAT. Experts opine that each country will have to develop a VAT design that suits it.
Even in Canada, where sub-national VAT has been successfully implemented, there is disparity among States in VAT design. Experts say that though the Canadian VAT lacks purity, it works. So one should be practical, and not dogmatic, in designing the VAT system based on the economic ground realities. Such issues as the desirability of specifying HSN for Schedule entries, desirability of defining capital goods and treatment of existing tax concessions should be discussed with industry and trade bodies.
Considering that greater focus of the administration would be required for effective implementation of VAT, bold decisions such as summary assessment of the returns of all dealers for the years prior to implementation of VAT (except perhaps those subject to enforcement action and requirement of furnishing the statutory forms) may have to be taken.
An efficient administration will ensure better realisation of revenue in the long run. The VAT design should be simple, transparent and practical. It is hoped that the Tamil Nadu Government rolls out VAT smoothly and makes compliance easy for the taxpayer.
S. Sridharan (The author, a Madurai-based chartered accountant.)