value added tax (VAT) regime was supposed to have been
imposed on April 1, 2003. Fierce opposition from the trader
lobbies and several state governments stalled the move
and the introduction of VAT was postponed.
Haryana was the only state to go ahead with the imposition
of VAT in 2003 and in a year''s time the state government''s
tax collections had shot up by 30 per cent. This has opened
the eyes of other state governments to the fact that if
they wish to boost their revenues, then VAT is an idea
whose time has come.
Friday, June 18, finance minister P Chidambaran convened
a meeting of the state finance ministers to discuss the
implementation of VAT. The position now is that almost
all the states have agreed to implement VAT , effective
April 1 2005.
unique feature of the VAT system, which is in use in several
developed countries, is that it ushers a ''win-win-win''
situation for all the concerned parties. In other words,
it is beneficial to the consumer, the businessman and
principle under which VAT works is that tax is only paid
for the ''value -added'' component of a taxable product
or service. To illustrate, let us consider an example,
say, of a textile processor. If he buys raw material,
i.e cloth from the market, for Rs10,000 and under the
present taxation system, if he has to pay a tax of 10
per cent, his cost of raw material becomes Rs11,000.
raw material is then processed into finished goods, which
now has a higher market value of, lets say, Rs20,000.
On the sale of these finished goods worth Rs20,000, once
again a tax of 10 per cent is levied, bringing the total
selling price to Rs22,000, of which the total tax component
is Rs3,000 (Rs1,000 initially and Rs2,000 in the second
stage). Here the tax on the raw material is collected
twice and is unfair to the consumer.
attempts to eliminate this anomaly. In the example above,
under VAT, tax in the second phase will be levied only
on the value-added portion. Thus a tax of 10 per cent
will be levied on Rs9,000, which is the value-added portion
and the total amount of tax collected will be Rs1,900
as against Rs3,000, which was being collected under the
from the taxpayer, the textile processor also stands to
benefit as the cost of the final product comes down which
should lead to a spurt in demand and increased sales from
which the government would get more revenues due to the
increased sales. More importantly, the VAT regime will
bring about better tax compliance, as the textile processor
will have to show proof of having paid the Rs1000 tax
he pays for the raw material in order to get credit for
the tax paid. Thus, non-cash transactions will be eliminated,
and this will widen the tax net.
various state governments'' reluctance to switch over to
VAT was stemmed by the fear of loss of revenues. Under
the earlier system, which has been in force since the
days of the princely states, state governments were virtually
free to slap any sort of tax like entry tax, purchase
tax ,etc, to increase their revenues. While this may have
brought them revenues, these taxes are also dampeners
to free and unrestricted interstate sales. VAT ensures
similar tax levies for all the states and smoother flow
of interstate trade.
proposed tax regime also envisages phasing out of the
central sales tax (CST) which, will now be ''co-terminus''
with the implementation of VAT. This implies that CST
will be phased out by the time VAT is implemented. Indications
are that the CST rate would initially be brought down
from four per cent to two per cent before being eliminated.
Dasgupta, chairman of the ''empowered committee of state
finance ministers on VAT'', which has drawn up the model
VAT bill told reporters after Friday''s meeting that state
governments would be given some "flexibilities"
in dealing with goods of local importance.
the issue of compensation to states for losses, if any,
on the implementation of VAT, Dasgupta said that the finance
minister has assured the states that any losses on account
of implementation of VAT or phase out of CST would be
compensated. "These are positive announcements from
the centre, whose support is needed by us for implementing
VAT. The principle, quantum and the period of compensation
would be decided by the finance ministry in consultation
with the empowered committee by September," he said.
Dasgupta went on to add that the empowered committee argued
before the finance minister that "the right to taxation
of services should be given to the states" and that
they should also be allowed to collect and appropriate
service tax on "major services" to bolster their
said the finance minister has assured the states that
a fresh review of the draft services taxation bill would
be taken up. "He has promised to consult the states
and asked all of them to give their views in writing on
this matter," he said.
April 2005, we can expect the prices of onions and potatoes