-
With
the introduction of VAT, all other local taxes should be discontinued, and the
same should be taken into account in determining the RNR.
-
AED
may continue for textiles upto 2005, it may continue even thereafter for
cigarettes which should not be subjected to VAT.
-
For
the stability and continuity of VAT, a VAT Council or a permanent suitable
alternative vested with adequate powers to take steps against discriminatory
taxes and practices and eliminate barriers to free flow of trade and commerce
across the country should be explored.
Extract
from Kelkar’s Final Report on Indirect Taxes
From
the preamble
Value
Added Tax (VAT) is unanimously acknowledged to be a major
reform in the indirect taxation system. By adopting VAT
the country would soon be joining the majority of the
countries and hopes to derive the advantages thereof in
like measure. The Task Force has had the benefit of
meeting with the Empowered Committee of the Finance
Ministers of the States, constituted for the purpose of
implementing a nationwide State-level VAT. Most all vital
areas have been covered by the Empowered Committee and it
would not be appropriate, nor is it considered necessary
for this Task Force to reexamine these issues. The Task
Force would like only to highlight few issues to ensure
successful implementation of VAT, and its continuity and
stability in a dynamic sense. These matters assume
importance in view of the limited time now left for the
proposed implementation of State VAT, from 1st April 2003.
From
the main report
CHAPTER
9
VALUE
ADDED TAX
1.
Introduction
1.1
Value Added Tax (VAT) is unanimously acknowledged to be a
major reform in the indirect taxation system for the
following reasons:
(i)
It eliminates the cascading effect of taxes;
(ii)
It promotes competitiveness of exports;
(iii)
It has a simple and transparent structure; and
(iv)
It Improves compliance.
1.2
In recent time, more and more countries have been adopting
VAT for taxation of commodities and services, and
presently there are more than 120 countries in which VAT
is in force. Only the USA and India are amongst the more
populous countries that do not have a VAT. Economists have
generally shared the view that VAT is best suited as a
Federal or Central tax, and not at the State-level.
However, states and provinces in a few large federal
countries like Brazil, and, to a lesser extent, Canada,
have adopted VAT, with varying degrees of success. By
adopting VAT the country would soon be joining the
majority of the countries and hopes to derive the
advantages thereof in like measure.
1.3
Considering that the implementation of VAT is closely
linked to the administration of other indirect taxes and
impacts the tax to GDP ratio, it has become necessary to
examine the relevant issues. In this direction the Task
Force has had the benefit of meeting with the Empowered
Committee of the Finance Ministers of the States,
constituted for the purpose of implementing a nationwide
State-level VAT. The Empowered Committee is indeed a
unique experiment in federal fiscal planning and has
achieved much in terms of building a consensus on many of
the critical issues relating to implementation of VAT in a
relatively short spell of time. Most countries have taken
several years to implement VAT. As was learnt, decisions
have been taken on the important features of VAT relating
to replacement of the Sales Tax levied by the States
(though some other local taxes like octroi, mandi cess
etc. may continue); the Revenue Neutral Rate and other
rates; the tax to be a multi-point levy, with the tax paid
on inputs within the State being set off against the tax
payable on the dealer’ s sales (subject to a threshold
limit); phasing out of CST in 4 years; adoption of uniform
classification, etc. Most all vital areas have been
covered by the Empowered Committee and it would not be
appropriate, nor is it considered necessary for this Task
Force to reexamine these issues. The Task Force would like
only to highlight few issues to ensure successful
implementation of VAT, and its continuity and stability in
a dynamic sense. These matters assume importance in view
of the limited time now left for the proposed
implementation of State VAT, from 1st April 2003.
2.
Preparedness for State VAT
2.1
For State VAT to become a reality, a high level of
commitment is required for all concerned tax
administrators and businesses which include the small
traders. Thus, clear and transparent dissemination of
information is going to be critical to the success of the
implementation of State VAT. In this regard, it is evident
that what is required is a comprehensive publicity
programme across the country to apprise and educate all
concerned regarding the implications of VAT. This
programme should take place at National and State level
and percolate down to the Districts. Naturally this
requires resources. It is the view that the publicity
programme must involve both Central and State Governments
and the former should be prepared to extend financial
support for this.
2.2
It is recommended that a publicity awareness programme
should be started jointly by the Central Government and
the State Governments and the former should extend
financial support for this, if required. Since the State
VAT is expected to be implemented from 1.4.2003 it is also
necessary that the publicity awareness programme should be
implemented at the earliest.
3.
Uniformity of definitions
3.1
Reportedly, some of the State VAT legislations are not
fully based upon the model legislation and, as a result,
there is a variance in the definitions of dealers,
distributors, etc. In some cases even the charging section
is not uniform. Further there must also be uniformity in
the procedures and documentation. In fact, common
classification of goods is critical, though there is one
view that it would be difficult for the small dealers to
adapt to the same. However, uniformity in all these
matters is important for the creation of a truly common
market. It will also take care of the apprehension that
absence of uniformity may give rise to avoidable disputes.
3.2
It is recommended that an attempt should be made towards
uniformity of all State legislations, procedures and
documentation relating to VAT.
4.
Compensation to States
4.1
One of the issues which impact the transition to VAT is
the compensation to be given to the States upon the
removal of Sales Tax and the introduction of State VAT, in
the event the tax revenue drops due to the change over. In
this regard it is observed that the experience world-wide
has been that a move to VAT results in higher revenue
realisation. Therefore, there is no cause for concern.
Nevertheless if such eventuality arises any compensation
should be through revenue mobilization (by the States)
from specified services and not through Budgetary support.
One avenue is to allow the States to collect and
appropriate the Service Tax on identified services.
4.2
It is recommended that issue of compensation, if it
arises, must be primarily tackled through mutually
acceptable mechanism of additional resource mobilization
through Service Tax and not through Budgetary support.
5.
VAT to unify all local taxes
5.1
During the meetings that the Task Force had with several
industry and trade bodies, it was represented that the
switch-over to VAT must ensure that the desired benefits
are achieved, especially in view of the fact that this
switch-over will entail a major overhaul of systems and
procedures for businesses and governments, and at
substantial expenditure of money, time and effort. One of
the views that was consistently expressed is that the
simultaneous imposition of several taxes on goods, with
VAT alone being eligible for credit and set-off, would not
serve the purpose. Currently, about 16 States impose Entry
Tax on goods, 12 States impose Luxury Tax on goods, in
addition to which a number of States impose Mandi Cess and
a number of local bodies impose Octroi. The rates of each
of these taxes vary widely between the States. It was
pointed out that if VAT were to achieve its purpose
including removal of the cascading effect then it must
replace all these local taxes.
5.2
The Task Force is an agreement with the submission of the
industry and trade. At the same time, it is a fact that
local taxes such as Entry Tax, Octroi, Luxury Tax etc., in
addition to Sales, Purchase and Turnover Taxes, are
productive sources of revenue for many States, and that
therefore, it would be difficult for the States to forego
the revenue from these taxes. The proposed VAT should,
therefore, meet both these concerns.
5.3
It is recommended that with the introduction of VAT, all
other local taxes be discontinued, and the same should be
taken into account in determining the RNR.
6.
VAT and AED
6.1
The Additional Duties of Excise (Goods of Special
Importance) Act, 1957 imposes Additional Duties of Excise
(AED) on sugar, textiles and tobacco products. AED was
introduced in lieu of sales taxes being levied at that
time by the States. There is once view that the rationale
for the Act is no longer valid and States should be
allowed to levy sales tax on the goods. Another view is
that as a policy multiplicity of levies must be reduced
and in this direction AED is not required. A third view is
that the goods, particularly tobacco products contribute
significantly to the revenue that the matter of changing
the methodology of levy and rate of tax must be handled
with caution as the country can ill afford uncertainty in
revenue generation. Accordingly, the matter has been
examined in its entirety.
6.2
It is a fact that if AED is removed and the goods are
subject to State level taxes the incidence thereon is
likely to increase. Thus, the issue of removal of AED has
to be examined in the context of impact of higher and also
differential incidence of taxes from State to State. As
regards tobacco products, it has been the experience of
many countries that differential taxes on such high-excise
goods particularly cigarettes, incentives large scale
illegal cross-border movement resulting in huge evasion of
revenue. Studies also reveal that such revenue losses, as
a proportion to revenue collected, range from 10-14% in
the case of Canada to 25% in the case of Sweden.
Unregulated tax rates on such high value good have also
been seen to lead to displacement of domestic tax-paid
cigarettes by contraband products, translating to
significant losses in revenue. Further, being a final
consumer product, there is very little value-addition
beyond the manufacturing stage in respect of cigarettes.
In our country the entire trade margin is found to average
about 10%, with around 7% going to the retailers, who
number about 2 million and most of whom would be below the
threshold limit for VAT. Considering that the excise duty
on cigarettes is as high as 100 to 130% in assessable
value terms, the VAT on cigarettes would chiefly be a tax
on excise. Further, cigarettes constitute one of the most
important sources of excise revenue (over Rs.5000 Cr. in
2001-2002) and in addition, the AED on cigarettes, through
a specific rate structure, has achieved a stable and
substantial revenue stream. It has also completely
eliminated the scope for cross-border arbitrage in an
otherwise high evasion-prone category of goods. Thus,
there is a justifiable case for keeping cigarettes outside
VAT.
6.3
In so far as textiles are concerned, India is bound by the
MFA and from 2005 competition would increase. Therefore,
while proposing to keep the central excise duty at 12% no
doubt the idea had been to allow the industry to upgrade
and modernize. To further this objective it appears
necessary that the tax rates on the item must not
increase, a likelihood with the removal of AED and
subsequent multiplicity of State level taxes. Hence, it
appears that while conceptually AED must go there is
sufficient merit in maintaining status quo for this item
upto 2005.
6.4
It is recommended that that whereas AED may continue for
textiles upto 2005, it may continue even thereafter for
cigarettes which should not be subjected to VAT.
7.
Credit on Inter-state transactions
7.1
An important issue is the grant of credit of the tax paid
in one State by another State in the course of inter-State
movement of goods. There is one view that the States into
which goods are imported from other States, may find it
difficult to allow credit of tax already paid on such
goods. However, if the credit is not given there is
apprehension of cascading effect besides placing the ‘
imported goods at a competitive disadvantage vis- à-vis
the local goods with resultant effect of dividing the
common market, since investment decisions will tend
towards States where the market within that State is
larger than that outside.
7.2
In this regard experience of other federal countries like
Brazil and Canada reveals that either the inter-State
transactions are zero-rated or the tax paid in the
exporting State is allowed to be set off by the importing
State. The same is the case between the European Union
members also. It appears that in our context once the
Central Sales Tax is phased out, as presently
contemplated, this would cease to be an issue. However,
the denial of credit in inter-State transactions appears
to have legal implications, inasmuch as it could well
attract the provisions of article 304(a) of the
Constitution which prohibits any discrimination between
local goods and imported goods in the matter of taxation.
7.3
It is recommended that the VAT scheme should provide for
grant of credit of duty by the importing State for the
duty paid in the exporting State, in the course of
inter-State movement of goods.
8.
Stability and continuity of the VAT regime
8.1
VAT is going to be a reality soon chiefly on account of
the commitment of the States which have after years of
painstaking deliberations built a consensus. As earlier
observed, this was possible only due to the tremendous
efforts of the Empowered Committee. Thus, it appears that
stability and success of VAT will, equally, depend on the
States’ continued commitment to the interest of all
stakeholders. In this regard, it appears desirable to
consider having in place an arrangement which ensures
stability and continuity of the VAT regime.
8.2
The creation of a truly unified domestic common market is
the ultimate objective of the tax reform process. A
related and equally important issue is that of a mechanism
to eliminate internal barriers to trade and commerce. In
this regard it is learnt that the Empowered Committee is
contemplating setting up a VAT Council which could
continue the work done so far by the Committee itself. In
view of the fact that the Empowered Committee has achieved
so much it can only be expected that the VAT Council would
further consolidate the tremendous work, especially if it
also includes representation of the Central Government. An
alternate view is to explore the possibility of a
consensual agreement taking support of a Constitutional
provision, such as Article 307. The Task Force would leave
this thought with the Empowered Committee for
consideration since it is the body most concerned with the
long-term stability of the proposed VAT.
8.3
It is recommended that for the stability and continuity of
VAT, a VAT Council or a permanent suitable alternative
vested with adequate powers to take steps against
discriminatory taxes and practices and eliminate barriers
to free flow of trade and commerce across the country
should be explored.
|