Countdown to VAT

Unconfirmed reports state that the Finance Minister has agreed to reduce CST to 2% from 01/04/2003, 1% from 01/04/2004 and to scrap the levy from 01/04/2005. In lieu of the reduction of CST, the Centre is exploring the possibility of imposing a tax on Inter State sale which will be compatible with the proposed VAT.

VIEWS

Current estimates of CST collection is about Rs.15,000 Crores per annum. The 2% reduction of CST means a loss of about Rs.7500 Crores in the first year.. The Centre will not compensate the loss. If there is no agreement on a new levy compatible with the VAT regime, the States may not agree to the reduction of CST. Let us hope for the best!

Unconfirmed reports state that the Finance Minister has agreed to reduce CST to 2% from 01/04/2003, 1% from 01/04/2004 and to scrap the levy from 01/04/2005. In lieu of the reduction of CST, the Centre is exploring the possibility of imposing a tax on Inter State sale which will be compatible with the proposed VAT.

Current estimates of CST collection is about Rs.15,000 Crores per annum. The 2% reduction of CST means a loss of about Rs.7500 Crores in the first year.. The Centre will not compensate the loss. If there is no agreement on a new levy compatible with the VAT regime, the States may not agree to the reduction of CST. Let us hope for the best!

According to reports, the RNR projected by the States are

According to reports, the RNR projected by the States are

The Empowered Committee had last year recommended that the RNR should be between 10% to 12.5%. We had last year projected that the RNR could be in the region of 16% when VAT finally crystallises. The projections now made by the States are close to our expectations.

Fixing a higher RNR could be very inflationary as a large number of goods that are currently taxed at lower rates will move to the RNR. No doubt, a number of goods already taxed at higher rates will be moving to the 4% slab.

With the implementation of Uniform Sales Tax Floor Rates, most of the States have already realigned their rates of tax. For instance, in the case of Tamil Nadu, most of the goods have been realigned in the 12% slab taxable at the first point of sale. Under VAT these goods will move to the RNR. The projected RNR of Tamil Nadu is 15.5%. Considering that VAT is a multi point levy, and assuming a value addition of 10% at three stages in the supply chain, the rate translates to 20% on the value at the first point of sale.

It is not clear if the RNR has been calculated without considering the Projected revenue loss on transition to VAT. If the RNR has been calculated after factoring in the compensation for the revenue loss either by the Centre or by levy of Service Tax by States, a relook at the projections is warranted.

The Empowered Committee had last year recommended that the RNR should be between 10% to 12.5%. We had last year projected that the RNR could be in the region of 16% when VAT finally crystallises. The projections now made by the States are close to our expectations.

Fixing a higher RNR could be very inflationary as a large number of goods that are currently taxed at lower rates will move to the RNR. No doubt, a number of goods already taxed at higher rates will be moving to the 4% slab.

With the implementation of Uniform Sales Tax Floor Rates, most of the States have already realigned their rates of tax. For instance, in the case of Tamil Nadu, most of the goods have been realigned in the 12% slab taxable at the first point of sale. Under VAT these goods will move to the RNR. The projected RNR of Tamil Nadu is 15.5%. Considering that VAT is a multi point levy, and assuming a value addition of 10% at three stages in the supply chain, the rate translates to 20% on the value at the first point of sale.

It is not clear if the RNR has been calculated without considering the Projected revenue loss on transition to VAT. If the RNR has been calculated after factoring in the compensation for the revenue loss either by the Centre or by levy of Service Tax by States, a relook at the projections is warranted.

The absence of a compensation formula, which according to the states is a must to counter apprehension of a revenue loss in the initial years of VAT introduction, has been one of the major reasons for postponement of VAT deadline twice.

Preliminary estimates by states had put losses on account of VAT implementation at a staggering Rs 50,000 crore. However, subsequent calculations using a formula provided by the Centre has revised the estimate in the range of Rs 12,000 crore to Rs 14,000 crore.

The Centre is likely to compensate states up to 75 per cent of revenue losses on account of implementation of value added tax (VAT) system in the first year. The compensation will be reduced to zero level in the next three years.

If the Centre’s current offer of graded compensation for three years is accepted and the estimated loss is pegged at Rs 12,000 crore, the Centre has to fork out around Rs 18,000 crore in three years. At 75%, the compensation for the first year would be Rs 9,000 crore, followed by Rs 6,000 crore in the second year (at 50%) and Rs 3,000 crore in the third year (at 25%), imposing a major burden on the Centre’s finances.

The committee comprising central and state government officials has already approved the formula. A final Clearance from the Union finance ministry is however awaited. Decisions on the modalities and quantum of compensation would take a month. Instead of a direct payout, the Union finance ministry is looking for options which would ease the burden by spreading out the outgo.

VIEWS

From press reports it is evinebt that the Finance Minister Mr.Jaswant Singh is keen to implement VAT from 01/04/2003 and we hope that the modalities of compensation would be finalised soon.

If part of the package includes levy or collection of service tax by States, the adherence to the time limit of one month (November,2002) may be difficult.

UNIFORM VAT LEGISLATION

NEWS

The Empowered Committee in the meeting held in the first week of October 2002 had discussed various modalities of the uniform VAT legislation and decided to form a group comprising of Commissioners of Commercial Tax from Maharashtra, Karnataka, Gujarat, Uttar Pradesh, West Bengal and Assam.

The group comprises representatives from Confederation of Indian Industry, Federation of Indian Chambers of Commerce and Industry and Institute of Chartered Accountants of India.

It is learnt that the States have been asked to finalise their draft legislation by end october,2002. There can be no better news than the consensus on the need for uniformity in the VAT legislation.

TAX PAYER IDENTIFICATION NUMBER

NEWS

Tax payers all over the country will be assigned a taxpayer identification number (TIN) under the upcoming VAT regime similar to the PAN number. A final design for TIN has already been submitted to the empowered committee of state finance ministers on VAT for adoption.

Rohit Kumar Singh, additional commissioner in the Rajasthan government heads the group on VAT. Rajasthan has also been given the task for developing a national VAT information exchange system (VINXSYS) which will facilitate exchange of VAT related information among states to plug evasion and improve tax compliance.

TIN will comprise three components:

1. a. a two-alphabet state code;

2. b. two check digits; and

3. c. a seven digit serial number.

Thus, TIN for a tax payer in Rajasthan would read like RJ276343579. Similarly, a tax payer in Maharashtra will use MH followed by nine digits on his TIN. TIN will be the main key for accessing information stored in a database with respect to a particular taxpayer. The process for registering TIN will possibly begin from January, before VAT comes into operation from April next year.

As TIN will be uniform system of identifying a tax payer across the country, it will eliminate the present cumbersome system where companies operating in different states use different registration numbers.

Difficulties faced by the commercial tax departments as a result of different registration numbers will now be tackled through TIN.

The current Income Tax Permanent Account Number has 10 Digits. The Service Tax Registration Number is added as a five Digit extension. The Central Excise Registration Number is also based on the Income Tax PA Number. It would have been better if the VAT Registration had also been based on the Income Tax PA Number.

However, We believe that the Committee would have definitely deliberated on the Income Tax PA number as a base for the VAT Number and may be for better reasons decided to adopt a different basis.

SERVICE TAX BY STATES

LEGAL ISSUES

The empowered committee of state finance ministers, headed by West Bengal finance minister Asim Dasgupta, had concretised a two-step process for providing powers for taxation of services to the States.

The first step will involve constitutional amendments to create a new entry for service tax in the Union list and introduction of changes in Article 269 for incorporating a service tax legislation and sharing of taxes. The second step will be introduction of a comprehensive service tax Act.

The Centre is working on the enabling provisions which are likely to be in place soon. Under the mechanism the central government will fix rates and states will be allowed to collect tax on services demarcated for them. The modalities are likely to be finalised before the forthcoming winter session of Parliament.

Meanwhile, finance ministry has also referred the proposal outlining constitutional amendments required for allowing states to collect tax on specified services, to the law ministry.

Once the amendment comes through, both centre as well as the states will have the power to tax services.

A demarcation would be worked out, with the centre taxing certain services and sharing the revenue with the states. In the case of other services, states will be given the powers to tax them as per their own policies.

SERVICES IDENTIFIED

Consumers of a range of common services like telecom, insurance, and transport face the prospect of footing fatter bills since state governments have identified these segments as sources of additional revenue.

They have also listed printing, jewellery, diamond polishing, computer services, business centres, hospitals and amusement parks as other potential targets to shore up their kitty.

A list of more than 50 services have been submitted to the central government by various states, which are seeking powers to tax these services in return for implementing a system of value added tax from the next financial year.

While the Centre appears to be willing to allow states to tax around 40 services, the fate of the rest are yet to be decided. The finance ministry has agreed to work out a legislation which will put these services on the concurrent list, highly-placed sources said.

The segments which are under discussion include bulk transport, cargo services, inland waterways transportation, entertainment services, drilling, boring and blasting services, excavation, plumbing, cable TV, video libraries, amusement parks, adventure sports, film professionals including actors, educational services, laundry, housekeeping and florists.

The sectors include labour contractors, sand blasting services, demolition, climate control, fire-proofing, generator rentals, catering and movers & packers.

While the Centre is willing to hand over emerging services to states, the status on traditional services is not clear yet. States want to impose tax on computer maintenance, desktop publishing, photocopy, commercial artists, designers, pre-printing services, printing, translators, money lenders, auditorium, banquet hall, sound services, diamond polishing, jewellery, liaison agencies and upholstery fabricators.

While officials were tight-lipped on the issue, sources said no consensus has emerged on specific areas. In some cases, states want the Centre to share the service tax on certain segments.

VIEWS

Revenue realised from service tax in 1998-99 was Rs 1,875 crore, in 1999-2000 Rs 2,057 crore and in 2001-02 Rs 3,600 crore . The estimates for 2002-03 is Rs 6,000 crore.

Service sector is growing fast and there is still lot of untapped potential from the point of view of revenue realisation.

Consensus on the services to be taxed by the States is likely to be a contentious issue.

Considering the track record of the Government is transacting legislative business, Will the the proposed amendments come through in the Winter Session of Parliament?.

ENTRY TAX IN VAT

NEWS

Some of the States have included Entry Tax in the proposed VAT bills. The consultant to the Finance Ministry Mr.B.R.Atre has suggested bifurcation of the tax provisions from the VAT legislation.

The taxable event under VAT is the sale whereas the taxable event under Entry Tax is the Entry of the Goods into a Local Area. Providing for levy and set off of entry tax in the VAT Legislation will create legal Complications.

01/11/2002.