PROJECT REPORT ON

Macroeconomic impact of implementation of vat in Odisha

PREPARED & SUBMITTED BY MR. SAGAR NAYAK U212049

ABSTRACT
Value added tax (VAT) is a type of indirect tax that is imposed on goods and services. A question that arises is whether value added tax has been a boon or misery for a developing country like India. Around 136 countries in Asia have recognized the importance of value added tax. In one of the most large scale reforms of the countrys public finances in over the past 50 years, India has finally agreed the launch of its much delayed value added tax from 1st April, 2005 at a rate varied from 1% to 12.5%. The tax rate is fixed by meeting of different state level Finance Minister, in New Delhi, designed to make accounting more transparent, to cut short trade barriers and boost tax revenues.

THE MECHANISIM OF VALUE ADDED TAX

Value Added Tax (VAT) means the tax which is payable only on value-added. It is multi-point tax system but without the effect of double taxation. Value is added to the products, which an organization buys from other organizations such as raw materials, partly finished goods etc. After buying the organization applies its own labor and machine to manufacture the final products. VAT is a tax, which is imposed at every stage of production i.e.., from production level to retail level. Under VAT tax is calculated on value Added where value added is the difference between sales value and purchase value.

A government should tax its people like a shepherd shears a flock or a bee gets nectar from a flower -Chanakya

A B C

PRODUCTION+PROFIT=100 SELLING PRICE WITH VAT @10%=110 TAX TO BE PAID BY A =10 BUYING PRICE WITH OUT TAX(100)+PROFIT ON PROCESS(50)=150 SELLING PRICE WITH VAT @10% =165 TAX TO BE PAID BY B =15-10(ALREADY PAID BY A)=5 BUYING PRICE WITH OUT TAX(150)+PROFIT ON PROCESS(40)=190 SELLING PRICE WITH VAT @10% =209 TAX TO BE PAID BY C =19-15(ALREADY PAID BY A+B)=4

TOTAL TAX PAID UNDER VAT IS 19 UNITS WHILE GOING BY OLD SALES TAX IT WOULD HAVE 48 UNITS.

BACKGROUND OF VAT SYSTEM IN INDIA

Indirect tax system plays an important role in the economic development of a country by influencing the rate of production and consumption. The Government of India has after committing to the World Trade Organization (WTO) regime, decided to modernize and streamline its indirect taxation, in the light of the experience of other WTO member countries. Initially, all states were to move to VAT system by 2000, but administrative problems and concern over the revenue implications of the change delayed the scheduled implementation. It was postponed five times before implementation. In fact, introduction of a full fledged VAT in India seem to present numerous administrative and constitutional difficulties, including the vexed question of Union-State relations. In addition to this, implementing VAT in India in context of economic reforms has paradoxical dimensions. On one hand economic reforms have led to more decentralization of expenditure responsibilities which in turn demands more decentralization of revenue raising powers if fiscal accountability is to be maintained. But on the other hand, the process of implementation of VAT could have lead not only to revenue loss for the states but can also steal away the states autonomy indicating more centralization. Thus, there was a need to develop such a Federal Friendly Model of VAT (along with a suitable compensation package) that can be implemented in India without compromising federal principles. The original dateline for implementation for VAT in India was 1st April, 2003. But this could not be met since the states had not brought the required legislation. So finally VAT was implemented in 22 states from 1st April 2005.

12.5% RATE: It would be applied to all commodities (about 425 items) 4% RATE: Basic Necessities, Capital Goods, Industrial and Agricultural Inputs, sugar, textiles and tobacco products. 1% RATE: Gold, Silver, Precious and Semiprecious Stones

0% RATE: Unprocessed Agricultural Goods and Export Items;

Certain items like Aviation Turbine Fuel (ATF), certain petroleum products etc. will be kept outside the VAT regime. Rates applicable to scrap and obsolete items will be the same as for the original item, at the time of disposal. Most essential commodities are exempt from VAT or fall under the four percent category. The VAT rates will be uniform in all states across the country. The same set of goods will be charged at the same rates in all the states. All business transaction carried on within a state by individual, partnerships, companies etc. will be covered by VAT.

IMPLIMENTATION OF VAT IN ODISHA AND ITS IMPACT ON STATESS REVINUE

VAT Implementation:
Value Added Tax was introduced in Odisha w.e.f. 1.4.2005 by replacing the erstwhile Sales Tax Act. The VAT scheme immediately expanded the tax base after its inception due to the fact that it eliminates cascading i.e. tax on tax because of set off tax paid on inputs and capital good. Reduction in cost of domestic product because of inbuilt system of input tax credit makes domestic products competitiveness helps growth of industries, increases marketability of products having perspective impact on employment generation. Now, the VAT system has been stabilized further in the sphere of almost all economic activities in the State.

Pre-VAT and Post-VAT tax collection:

The comparative position of pre-VAT (2002-03 to 2004-05) sales tax collection and post-VAT (2005-06 to 2007-08) tax collection including VAT and the growth rate in each of the years is furnished below:
PRE-VAT Actual collection (Rs. in Cr) 1532.69 1546.47 2061.23 Percentage of growth 13.49 0.9 33.28 POST-VAT Actual collection (Rs. in Cr) 2524.18 3042.34 3567.16 Percentage of growth 22.46 20.53 17.25

YEAR 2002-03 2003-04 2004-05

35 30 25 20 15 10 5 0

YEAR 2005-06 2006-07 2007-08

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

The above data only contains VAT value and CST is not included. The average growth rate during 2002-03 to 2004-05 under the repealed Act was 15.89 per cent while the average growth rate for 2005-06 to 2007-08 under the OVAT Act was 20.08 per cent. Thus, the average growth rate in the post VAT period registered an increase of 4.19 per cent. However, the percentage of growth has declined from year to year.

TAX COLECTED UNDER SALES TAX/VAT IN Cr

8000.0 7000.0 6000.0 5000.0 4000.0 3000.0 2000.0 1000.0 0.0 6806.8 4803.3 5408.8

3764.8 1605.2 1864.0 1107.6 1342.1 1402.3 99-00 00-01 2471.1 3011.7

4118.4

.01-02 .02-03 .03-04 .04-05 .05-06 .06-07 .07-08 .08-09 .09-10 .10-11

As we can see the slope of graph is more after wards 05-06 showing that the increase in tax collection is more in the VAT regime. . This also State has achieved a healthy growth rate of tax revenue collection for which State has not claimed any compensation from the Centre for implementing the VAT.

CHANGEING NATURE OF STATE REVENUE THROUGH VAT & OTHER TAX

CST was cut to 3 per cent on April 1, 2007 from 4 per cent and then it was to be reduced to 2 per cent on April 1, 2008, before being proposed to phase out by March, 2010. The rate of VAT in Odisha for the Goods falling under tax slab of 12.5% has been enhanced to 13.5% With Effect from 01 April, 2011. Once again Odisha government raised the slab of VAT from 4 per cent to 5 per cent on April 2012 which will further reduce the government dependence on central aid and phasing out of CST.

100% 80% 60% 40% 20% 0%

19.2

13.4

11.1

9.1

8.6

Year

Value Added Tax 3042.34 3567.16 4268.72 4914.99 6221.28

Central sales tax 722.48 551.27 534.61 493.77 585.52

80.8

86.6

88.9

90.9

91.4

.06-07 .07-08 .08-09

.06-07

.07-08

.08-09

.09-10

.10-11

.09-10 .10-11

Value Added Tax in %

Central sales tax in %

Here we can see Odisha government is in course of phasing out the CST as from 2006-07 to 2010-11 the share of revenue collected through CST drops from 19.2% to 8.6% while VAT increased from 80.8% to 91.4%.

2005-06
TAX FROM OTHE R 67% TAX FROM VAT/C ST 33% TAX FROM OTHER 40%

2009-10
TAX FROM VAT/C ST 60% TAX FROM OTHE R 37%

2012-13
TAX FROM VAT/C ST 63%

Ratio of tax colected through VAT to the tax coleected with other sources

Between 70-80 percent of the States own source revenues are collected from various taxes levied by it and the rest obtained from non-tax revenues including interest receipts and dividends, various user charges for departmentally provided services, and other receipts of a commercial and non- commercial nature. Within the taxes collected by the State, sales tax / VAT is the largest revenue source. From figure we can see that the relative revenue signicance of other taxes have reduced heavily from implementation of VAT in Odisha from 2005.

OBSERVATIONS ON SUMMRY
The VAT scheme immediately expanded the tax base after its inception due to the fact that it eliminates cascading i.e. tax on tax because of set off tax paid on inputs and capital good. Reduction in cost of domestic product because of inbuilt system of input tax credit makes domestic products competitiveness helps growth of industries, increases marketability of products having perspective impact on employment generation. VAT influenced the rate of production and consumption. The finding reveals that there is a healthy increase in revenue growths for the Odisha government. It has largely reduced the dependency of state government on center. The VAT has given a hand to state government to control the price to some extent on selected items by which it may control the inflation at required times. The VAT has made it hard for government to make tax breaks on specified material as the government will give only on end user but not the producer. Defiantly the system has encouraged people to give tax so a steady and healthy rise in tax collection consolidated the state governments financial stability.

BIBLIOGRAPHY

1. 2. 3. 4.

www.orissa.gov/p&c www.odisha.gov.in/finance www.agorissa.nic.in/cwra http://www.pwc.com/gx/en/tax

5. ANNUAL BUDGET OF ODISHA 2005-06 6. ANNUAL BUDGET OF ODISHA 2006-07 7. ANNUAL BUDGET OF ODISHA 2007-08 8. ANNUAL BUDGET OF ODISHA 2009-10 9. ANNUAL BUDGET OF ODISHA 2010-11 10. ANNUAL BUDGET OF ODISHA 2011-12 11. ANNUAL BUDGET OF ODISHA 2012-13 12. REPORT OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA2006-07 13. REPORT OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA2007-08 14. REPORT OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA2008-09 15. REPORT OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA2009-10 16. REPORT OF THE COMPTROLLER AND AUDITOR GENERAL OF INDIA2010-11 17. WORLD JOURNAL OF SOCIAL SCIENCES 18. ECONOMIC SURVEY OF ODISHA 2009-10 19. ECONOMIC SURVEY OF ODISHA 2010-11 20. ECONOMIC SURVEY OF ODISHA 2010-11