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.