One of the important components of tax reforms initiated since liberalization is the introduction of Value Added Tax (VAT). VAT is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/ distribution chain. The term 'value addition' implies the increase in value of goods and services at each stage of production or transfer of goods and services. VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer. It is a multi-stage tax with the provision to allow 'Input tax credit (ITC)' on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. It is given for all manufacturers and traders for purchase of inputs/supplies meant for sale, irrespective of when these will be utilised/ sold. The VAT liability of the dealer/ manufacturer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund.
VAT is basically a State subject, derived from Entry 54 of the State List, for which the States are sovereign in taking decisions. The State Governments, through Taxation Departments, are carrying out the responsibility of levying and collecting VAT in the respective States. While, the Central Government is playing the role of a facilitator for the successful implementation of VAT. The Ministry of Finance is the main agency for levying and implementing VAT, both at the Centre and the State level.
The Department of Revenue, under the Ministry of Finance, exercises control in respect of matters relating to all the direct and indirect taxes, through two statutory Boards, namely, the Central Board of Direct Taxes (CBDT) and the Central Board of Customs and Central Excise (CBEC). The Sales Tax Division, of Department of Revenue, deals with enactment and amendment of the Central Sales Tax Act; levy of tax on sales in the course of inter-State trade or commerce; levy of VAT; etc. The Central Board of Excise and Customs (CBEC) deals with the tasks of formulation of policy concerning levy and collection of customs and central excise duties, allowing of Central Value added Tax (CENVAT) credit, etc. While, the decision to implement State level VAT has been taken in the meeting of the Empowered Committee (EC) of State Finance Ministers, held on June 18, 2004, where a broad consensus was arrived at to introduce VAT in all States/ Union Territories (UTs).
The entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, needs to issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice is to be signed and dated by the dealer or his regular employee, showing the required particulars. For identification/ registration of dealers under VAT, the Tax Payer's Identification Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first two characters represent the State Code and the set-up of the next nine characters can vary in different States.
In India's prevalent sales tax structure, there have been problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in this structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. Hence, the VAT has been introduced to replace such sales tax structure. Moreover, it seeks to phase out the Central Sales Tax (CST) and several efforts are being made in this regard.
The main motive of VAT has been the rationalisation of overall tax burden and reduction in general price level. Thus, it seeks to help common people, traders, industrialists as well as the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system. The main benefits of implementation of VAT are:-
Minimizes tax evasion as VAT is imposed on the basis of invoice/ bill at each stage, so that tax evaded at first stage gets caught at the next stage;
A set-off is given for input tax as well as tax paid on previous purchases;
Abolishes multiplicity of taxes, that is, taxes such as turnover tax, surcharge on sales tax, additional surcharge, etc. are being abolished;
Replaces the existing system of inspection by a system of built-in self-assessment of VAT liability by the dealers and manufacturers (in terms of submission of returns upon setting off the tax credit);
Tax structure becomes simpler and more transparent;
Improves tax compliance;
Generates higher revenue growth;
Promotes competitiveness of exports; etc.
At the Central level, there is Central Value Added Tax (CENVAT) which pertains to the rationalisation of Central excise duty structure in India. At present, there is a uniform rate of CENVAT of 16 per cent on most of the inputs and final products. The CENVAT has been introduced to end all the disputes that were taking place due to classification of various types of inputs as rates were different on different varieties. Accordingly, the CENVAT Credit Rules have been notified and amended, from time to time, which are as follows:-
Under these, a manufacturer or producer of final products and a provider of output service is allowed to take credit (known as CENVAT credit) of the duty of excise, as mentioned in the Rules, paid on specified inputs and capital goods used in or in relation to the manufacture of specified final products. The CENVAT credit so allowed can be utilized for payment of :- (i) any duty of excise on any final product; or (ii) an amount equal to CENVAT credit taken on inputs, if such inputs are removed as such or after being partially processed; or (iii) an amount equal to the CENVAT credit taken on capital goods, if such capital goods are removed as such; or (iv) service tax on any output service, as per the conditions laid down in the rules. In the latest budget, it is proposed to reduce the general CENVAT rate on all goods from 16 per cent to 14 per cent in order to give a stimulus to the manufacturing sector.
At the State level, the Empowered Committee of State Finance Ministers have finalized a design of VAT to be adopted by all the States/ UTs. This basic design of VAT retains the essential features of VAT and keep them common for all the States/ UTs, like, the rates of VAT on various commodities are kept uniform for all. At the same time, it provides a measure of flexibility to the States/ UTs so as to enable them to meet their local requirements.
At present, there are 2 basic rates of VAT, namely, 4 per cent and 12.5 per cent, besides an exempt category and a special rate of 1 per cent for a few selected items. The items of basic necessities and goods of local importance (upto 10 items) have been put in the zero rate bracket or the exempted schedule. Gold, silver and precious stones have been put in the 1 per cent schedule. There is also a category with 20 per cent floor rate of tax, but the commodities listed in this schedule are not eligible for input tax rebate/set off. This category covers items like motor spirit (petrol, diesel and aviation turbine fuel), liquor, etc. Some of the other features of VAT in the State (as finalized by the Empowered Committee) are:-
As per provision for eliminating the multiplicity of taxes, all the State taxes on purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be subsumed in VAT or made VATable.
A provision has been made for allowing 'Input Tax Credit (ITC)' which is the basic feature of VAT. However, since the VAT being implemented is intra-State VAT only and does not cover inter-State sale transactions, ITC is not to be available on inter-State purchases.
Exports to be zero-rated, with credit given for all taxes on inputs/purchases related to such exports.
There are provisions to make the system more business-friendly. For instance, provision for self assessment by the dealers; provision of a threshold limit for registration of dealers in terms of annual turnover of Rs. 5 lakhs; and provision for composition of tax liability up to annual turnover limit of Rs. 50 lakhs.
Regarding the industrial incentives, the States have been allowed to continue with the existing incentives, without breaking the VAT chain. Further, no fresh sales tax/ VAT-based incentives are permitted.
Haryana became the first State in the country to introduce Value Added Tax (VAT). Till 2007, VAT has been introduced by more than 30 States/UTs, including Tamil Nadu(implemented VAT from January 1, 2007) and the UT of Puducherry (implemented VAT from April 1, 2007). From January 01, 2008, the Government of Uttar Pradesh has made VAT effective in the State. Some of the other States/ UTs which have implemented VAT are:-
Over the years, the experience of implementing VAT in India has been very encouraging, with the Empowered Committee constantly reviewing the progress of implementation. The revenue performance of VAT-implementing States/UTs has also been very significant. During 2006-07, the tax revenue of the 31 VAT States/UTs had collectively registered a growth rate of about 21 per cent over the tax revenue of 2005-06. During 2007-08, the tax revenue of 32 VAT States/UTs showed a further growth of 14.6 per cent during the first six months of 2007-08 (April-September) as compared to the corresponding period of last year.
Besides, the Central Government had announced a compensation package under which the States are compensated for any revenue loss on account of VAT introduction at the rate of 100 per cent of revenue loss during 2005-06, 75 per cent during 2006-07 and 50 per cent during 2007-08. Further, the technical and financial support are being provided to the States/ UTs for VAT computerization, publicity and awareness and other related aspects.