Bizness What Is Vat May


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Bizness What Is Vat May

  1. 1. Bizness 8 What is VAT? through a system of deductions whereby taxable persons (i.e., VAT- registered businesses) can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism - Sameer Bagul ensures that the tax is neutral, product is resold or when ‘value’ has regardless of the number of he decision of T been added. transactions involved. implementing the Value The mechanism of VAT is such To understand the mechanism Added Tax (VAT) in this that, for goods that are imported and easily, let’s study the present system year’s budget has churned immense consumed in a particular state, the and VAT. interest in the common man, first seller pays the first point tax, In the present system, the perhaps much more than the and subsequent sellers pay tax only turbulence it created within the manufacturer or the wholesaler on the value addition done by purchases the goods or raw trading community. There are many them - leading to total tax burden materials without payment of any apprehensions about how the tax exactly equal to the last point tax. tax, but against the statutory forms. will affect them? Will the prices of Since the tax is collected from the goods increase? Is this a political In the new VAT system, the seller at each stage as he adds value manufacturer or wholesaler has to gimmick? Why are the traders to the product or goods, hence it is pay tax on his purchases also. This opposing it when manufacturers the Value Added Tax. tax is paid locally and called Input have welcomed this move and It is charged as a percentage of tax credit. Since this tax paid will be politicians call it the most rational prices at each stage, which means set off against his total Central Sales taxation system? that the actual tax burden is visible Tax liability, it is called as Tax credit. Let us examine the basics of VAT at each stage of the production and The impact of VAT is that instead and its implications. distribution chain. of paying tax directly on the sales as Value Added Tax (also referred to VAT is collected by the in the present system, the as input tax or turnover tax) is an government of destination state (i.e. manufacturer or wholesaler pays tax indirect tax levied at every economic the state in which the final consumer stage from the manufacturer to the in two stages one at the time of is located), on consumer purchase and other at the time of retailer. expenditure. Hence it is a sale. One of the definitions of VAT consumption tax because it is borne In order to set off the tax credit, provided by the European Union ultimately by the final consumer. It says that, it is a general tax that the traders now will have to make is not a charge on companies. sure that the vendor, from whom applies, in principle, to all It is collected fractionally, they are buying goods or raw commercial activities involving the production and distribution of goods and provision of Example services. Lets analyse the situation in a case of a distributor for Colour TVs to understand This means VAT is the concept better. collected in stages In a quarter, the wholesaler purchases 10 CTVs @ of Rs.9000/- i.e. goods worth (instalments) rather than at Rs. 90000/-. Lets assume he has to pay 5% local tax on this. one point (e.g. Sales Tax) for So the Input Tax Credit is Rs. 90000 x 0.05 = Rs. 4500/- the transaction-involving sale of goods. Now, the wholesaler sells all the 10 CTVs @ Rs. 10000/- i.e. the invoice will show a sale of Rs. 100000. Lets assume that his Central Sales Tax (CST) liability is 10% on Though value added tax the sales he has to pay Rs. 10000. is similar to sales tax, Since the wholesaler has paid Input tax of Rs.4500/- earlier, now he has to pay instead of implementing one tax of a certain only the remaining tax, which is known as VAT. i.e. VAT = Total Tax Liability – Input Tax Credit percentage at the time of VAT = 10000 – 4500 = Rs. 5500/- retail sale, there is a smaller tax added each time the Advanc'edge MBA / May 2003
  2. 2. Bizness 8 materials, has paid tax to the government. The major would oppose VAT. implication of this exercise is that the onus of paying taxes In such cases the officials are not clear about the is shifted from the government to the traders themselves. interstate implementation of the new taxation system But given the inefficiencies of tax departments traders when a non-VAT state transacts with a VAT implemented are quite apprehensive about the entire process and fear state. losing more money in the By definition of this tax, the form of double taxation and customers are the sufferers as bribe, as evading tax would the prices of the goods would be difficult now. increase and traders and The most important manufacturers would have a exercise for the government tough time dealing with the now would be to train and situation as VAT would educate their officials and actually cut into their profit the traders for effective margins during the initial implementation of the new stages. tax regime. As India moves further into This would also lead to the process of globalisation the abolition of the direct implementation of VAT control on taxes by would lead to creation of a individual states, octroi, sales tax and even custom duties. “Single market” with free movement of the goods without Some of the tax-haven states like Daman & Diu and the state boundaries affecting business. It would Pondichery may lose their zero tax status and the eventually lead to healthy competition with companies registering their offices in these places will rationalisation of prices as in the longer run the prices of not enjoy the benefits anymore. goods would come down and traders would better Though the implementation of VAT is pending over margins. Though a few states in the country have agreed last several years, we have a hope of at least a few states to VAT, with the trading community’s fear, inefficient adopting it. But given the political scenario in the country, bureaucracy and grim political scenario, an efficient VAT especially with the elections coming up, BJP ruled states regime is still a distant reality. Advanc'edge MBA / May 2003