VAT''s that?

The proposed introduction of Value-Added Tax (VAT) from April 1, 2005, has the trading community in overdrive. Chartered accountants Sanjay Dhariwal and Anil Jogani demystify the new levy.

As the entire country gears up to adopt 'value added tax' (VAT) from April 2005, businesses across the country, irrespective of their size, must begin preparing for new ways of accounting that will be demanded of them. The Bangalore-based Tally Solutions, makers of India's bestselling accounting software, has seen VAT successfully implemented in over 80 countries across the world. The advantages of switching from the existing sales tax structure to VAT cannot be ignored, and it was just a matter of time before India joined the remaining 130 countries that are currently using VAT.

The VAT regime will, in the long run, benefit everybody. The benefits for the government are quite clear. To begin with, it is not possible under the present sales tax system to bring in transparency about incidence of tax or the quantum of tax payable on commodity. VAT encourages voluntary compliance and thereby simplifies assessment procedures.

Moreover, it eliminates disputes about tax liability of a transaction or rate of tax applicable, reducing compliance costs. VAT reduces the number of tax rates and tax concessions on different goods. It eliminates additional levies like resale tax, turnover tax, cess, additional tax and surcharge. VAT also seeks to prevent the problem of under-valuing and inflation, as all stages of production and distribution are subject to tax. It proposes to permit claims of credit for tax only on the receipt of an invoice.

VAT is a more transparent and accurate system of taxation. The existing sales tax structure automatically triggers double taxation, thereby cascading the tax burden. For example, before a commodity is produced, inputs are first taxed, the produced commodity is then taxed and finally, at the time of sale, the entire commodity is taxed once again. By taxing the commodity multiple times, the cost of the goods increases; at the end it is the consumer who pays for it all.