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Difficulties in Administering Value Added Tax (VAT) - Indirect Tax Laws | Indirect Tax Laws - B Com PDF Download

 Almost three-fourths of India has adopted the VAT regime, switching off its age-old sales tax system that had existed for more than 50 years. However, due to certain political and other considerations, some of the states have not joined the bandwagon of VAT that came into force w.e.f. 1st of April 2005. Such a fractured implementation of VAT has raised many issues causing concern for the trade and industry. Also, there are some gray areas in White Paper on state-level VAT that have raised certain fears among the traders in Delhi state too.
 

During the study on the present topic “Value Added Tax In Delhi- A Critical Study”, the researcher noticed the following observations:

a. Continuance of CST under VAT regime -   

The rate of CST at present is 4% against C-form. Though it is a Central Sales Tax, the Central government does not get any revenue and is totally a revenue receipt of the selling State. The CST at present contributes a substantial amount exchequer to the States and is deep rooted in the tax structure. Also, we have an unbalanced state wise economy in which some states have considerable revenue from CST but majority are consumer states. It was for all such reasons that CST is continued in the VAT regime.

The Government has proposed to reduce CST to 2% in 2006 and ultimately abolish it in 2007. However, CST and VAT are not compatible. CST has not been made VATable. That is, CST paid cannot be claimed for credit under present VAT system. 
Today, all the business units needs to find a local sourcing of materials for a temporary period of two years, which would not be possible for many traders who have been dealing on inter-state purchases for the last several years. The additional tax burden have to be ultimately borne by the final consumer. Until CST is abolished, the main objective of VAT will be lost and will seriously undermine the benefits of VAT in rationalizing the supply chain management and removing distortions in inter-state movement of goods.

b. Differential tax treatment –   While the Delhi state following the VAT regime allow the credit of all the taxes paid at an earlier stage, the states following the sales tax still follow the single point levy, exempting subsequent stages of sale or imposing another tax by various names such as resale tax, turnover tax, etc. this may lead to a situation, where a business unit having its business spread across the country would not be able to maintain a uniform pricing system. The margins of various businesses would also get affected.

c. Complicated Tax:   It is said that the value added tax is a complicated tax and hence needs an honest and efficient government machinery to do the cross checking and link up various production activities and the resulting tax liability of each firm. It is not easy to have such a government machinery because in modern times we find corrupt and inefficient government machinery in most of the countries.

d. Movement of goods   : Where the goods move from Delhi state to a non-VAT state, a credit of locally procured material would be available against the CST that is required to be paid. On the contrary, movement of goods from non-VAT State to Delhi State, the dealer would not be able to set off the tax paid on purchases.

e. Incentive schemes:   With the decision of the implementation of VAT, the delhi state government has put the incentives schemes aside. All the businesses, which were granted the benefits of various incentive schemes, need to find a way out to sustain and survive, as all their financial projections need to be adjusted so as to suit the requirements of the current legislations across various states

f. Inflationary in nature:   It is also found that in Delhi state value added tax is inflationary in nature as it leaves its consumers with largest disposable incomes.

g. Exemption schemes:   As the basic idea of VAT is to ensure uniformity across various sections, it is imperative that there should not be any schemes permitting exemptions for specific dealers. This would result in a situation where the VAT chain breaks in between in case there are dealer specific exemptions, as they exist today. The so called fractured implementation would now make the Delhi state less

competitive compared to non- VAT states, as they would not be in a position to avail any of the exemption schemes.  

h. Additional Burden on Tax Authorities, Producers and Shopkeepers:   Another point of criticism of value added tax in Delhi is that it entails additional burden on tax authorities, producers and shopkeepers etc., because it involves maintenance of elaborate and costly accounting records at every stage from the producer to the retailer. The tax-authorities should be well equipped to do all the necessary cross-checking etc. The whole system becomes uneconomical and tiresome.

i. Sweeping powers given to commissioners:   The legitimate fear of dealer is that of harassment by the officials. Today the main reasons of India having poor GDP is on account of the fact that there is gross miss trust between the department and the dealer. If the relationship is not built on trust it will breed corruption and evasion attitude. What is really needed in India is not the tax reform but tax administration reform.

j. No uniformity in the rates:   Even among the states including Delhi that have implemented the VAT, there is no uniformity in the rates that is being followed. The Empowered Committee covered only 550 commodities in two schedules of 4% and 12.5% VAT, leaving out many items to the whims and fancies of the State tax administration. There are certain critical items where there is a wide disparity in the rates of taxes across neighboring states.

k. Possibility of Tax Evasion:   This system depends a lot upon the active cooperation of tax payers which is not easily coming. Under this system, each firm itself is required to calculate its liability to begin with, and also find out the taxes paid by the earlier firms. Once the taxpayer realizes that the administrative machinery of the government is ill equipped to do the entire necessary cross-checking etc., they will resort to the preparation of false accounts by preparing false purchase invoices showing that taxes have already been paid by others leading to gross tax-evasion. The government machinery is inefficient and is not well equipped with problems of the firm. Thus, it gives wide scope for tax evasion.  

l. Complicated Procedures:   It is found that procedures under value added tax in Delhi State are quite complicated. They will have to be simplified particularly in case of small traders and artisans.
 

m. Poor quality of adjudication orders   For the successful VAT implementation, all the 130 countries who have adopted it had to revamp their judicial systems. In India, this issue has not been suitably addressed yet.

n. Not Conducive to efficiency:   It is noticed that in Delhi State, VAT is conducive to efficiency. I claim that in a shortages economy like ours speculative hoarding, non-competitive price rise and similar practices are most common. In a seller’s market goods will be purchased by the consumers irrespective of the fact that they are of inferior quality and high prices. Hence, it is doubtful whether value added tax will prove helpful in improving efficiency in Delhi.

o. High Collection cost:   It is found that in case of value added tax, the collection cost of revenue is quite high as against the other types of taxes.

p. Other problems:  

  • I found that some critics of the VAT have an opinion that it is wrong to assume that value added tax is a perfectly neutral tax.
  • The VAT Bills of Delhi State do not contain any clause to delete relevant acts empowering central Government to collect these taxes. The trading community has apprehension about continuity of such taxes in future also.
  • A well-diversified and integrated tax administration is highly needed to adopt VAT in Delhi state. (Also, the harmonization of Input Tax Credit, which is essence of VAT system, requires a well formulated and compact computer based networking on a large scale throughout the country. This is, however, not readily available in Delhi state due to the lack of necessary infra structure facilities.)

OPPOSITION TO VAT   

The possibility of harassment by the tax inspectors is the outward reason for opposition by the trading community. Also proper records are required to be maintained which is very cumbersome job. Some people also argue that VAT would lead to price rise and as such it is unconstitutional to replace it with the existing sales tax. However the real reason is different. There is less scope of tax evasion under VAT and there will be stricter compliance. The trading community wants to retain the scope of tax evasion, as it existed under the sales tax structure.

The document Difficulties in Administering Value Added Tax (VAT) - Indirect Tax Laws | Indirect Tax Laws - B Com is a part of the B Com Course Indirect Tax Laws.
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FAQs on Difficulties in Administering Value Added Tax (VAT) - Indirect Tax Laws - Indirect Tax Laws - B Com

1. What is Value Added Tax (VAT) and how does it work?
Ans. Value Added Tax (VAT) is an indirect tax imposed on the value added to goods or services at each stage of production or distribution. It is based on the consumption of goods or services and is ultimately borne by the end consumer. VAT is collected by businesses on behalf of the government and is usually calculated as a percentage of the selling price of the goods or services.
2. What are the difficulties in administering Value Added Tax (VAT)?
Ans. Administering Value Added Tax (VAT) can pose several challenges. Some of the difficulties include: - Compliance: Ensuring that businesses accurately calculate and report their VAT liability can be challenging. It requires robust systems and procedures to track transactions, identify taxable supplies, and calculate the appropriate VAT amount. - Complexity: VAT laws and regulations can be complex and vary from country to country. Businesses operating across borders may face additional challenges in understanding and complying with different VAT regimes. - Fraud: VAT systems are vulnerable to fraud, such as false invoicing or underreporting of sales. Tax authorities need to implement effective measures to detect and prevent fraudulent activities. - Cross-border transactions: VAT rules for cross-border transactions can be intricate and may involve different VAT rates, exemptions, or reverse charge mechanisms. This complexity can make it challenging for businesses to correctly account for VAT in international trade. - Administrative burden: VAT compliance requires businesses to maintain detailed records, submit regular VAT returns, and handle VAT refunds or payments. This administrative burden can be time-consuming and resource-intensive for businesses.
3. How does VAT impact businesses and consumers?
Ans. VAT has both direct and indirect impacts on businesses and consumers. For businesses, VAT adds an additional cost to their products or services, as they need to collect and remit VAT to the tax authorities. This can impact their pricing strategy and competitiveness in the market. Additionally, businesses need to invest in systems and resources to comply with VAT regulations, which can increase their administrative burden. For consumers, VAT is included in the price of goods or services they purchase. This means that consumers bear the burden of VAT indirectly through higher prices. The impact of VAT on consumers can vary depending on the VAT rate and the nature of the goods or services they consume. Essential goods or services may be exempt or subject to reduced VAT rates, while luxury goods may attract higher VAT rates.
4. What are the common VAT compliance errors made by businesses?
Ans. Businesses often make the following common VAT compliance errors: - Calculation errors: Businesses may make mistakes in calculating the correct VAT amount, resulting in underpayment or overpayment of VAT. - Input tax errors: Failure to correctly claim input tax credits for VAT paid on purchases or expenses can lead to missed opportunities for VAT reclaims. - Inaccurate invoicing: Incorrect or incomplete VAT invoices, such as missing VAT numbers or incorrect tax rates, can result in non-compliance and may lead to penalties or disputes. - Late filing or payment: Businesses may fail to submit VAT returns or make VAT payments within the required deadlines, leading to penalties and interest charges. - Non-registration: Failure to register for VAT when required can result in non-compliance and potential legal consequences.
5. How can businesses ensure VAT compliance and minimize difficulties?
Ans. To ensure VAT compliance and minimize difficulties, businesses can take several measures: - Invest in robust systems and procedures: Implementing reliable accounting and invoicing systems can help businesses accurately calculate and report their VAT liabilities. - Stay updated on VAT regulations: Regularly monitor changes in VAT laws and regulations to ensure compliance. Seek professional advice if needed, especially for cross-border transactions. - Maintain accurate records: Keep detailed records of all transactions, including sales, purchases, and VAT payments. This will facilitate accurate VAT reporting and help in resolving any disputes or audits. - Train staff: Provide training to employees responsible for VAT compliance to ensure they have a good understanding of VAT rules and procedures. - Seek professional assistance: Engaging tax advisors or VAT specialists can help businesses navigate complex VAT regulations, optimize VAT planning, and minimize compliance risks. By adopting these measures, businesses can enhance their VAT compliance, minimize the risk of errors, and effectively manage the difficulties associated with administering Value Added Tax (VAT).
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