Assignment of

TAX LAWS II
TOPIC: BACKGROUND, CONCEPT AND NEED OF VALUE ADDED TAX Prepared under the guidance of Dr. kahkashan Danyal

Submitted by- Ayush Jha, Roll. No. 09-BALLB-10, 7th Semester/ 4th Year

ACKNOWLEDGEMENTS

I would like to thank my teacher Dr. Kahkashan Danyal for being a great teacher and for giving me support and guidance regarding this assignment. . I would also like to thank my friends and peers for their encouragement throughout the making of this assignment.

CONTENTS
INTRODUCTION......................................................................................................................4 CONCEPT OF VALUE ADDED TAX.....................................................................................7 DIFFERENCE BETWEEN SALES TAX & VALUE ADDED TAX......................................8 HISTORY OF VALUE ADDED TAX......................................................................................9 VAT: THE INTERNATIONAL SCENARIO.........................................................................10 VALUE ADDED TAX IN INDIA...........................................................................................11 PRE-VAT AND POST-VAT SCENARIO..............................................................................12 IMPLIMENTATION OF VALUE ADDED TAX IN INDIA.................................................13 FEATURES OF VAT..............................................................................................................15 ADVANTAGES OF VAT.......................................................................................................16 DISADVANTAGES OF VAT................................................................................................17 ITEMS COVERED IN INDIAN VAT....................................................................................18 JUSTIFICATION OF VALUE ADDED TAX IN INDIA......................................................19 CONCLUSION........................................................................................................................20 BIBLIOGRAPHY....................................................................................................................21

INTRODUCTION
Tax reforms in India were initiated as a part of the economic reforms in 1991. The taxation reforms have been initiated on the basis of the tax reforms Committee report. In the first generation fiscal (taxation) reforms, the taxes at the central level were reformed. In the case of direct taxes, the objectives of the reforms were to expand the direct tax base, reduce the rates and reducing the procedures for better resource mobilization. In the case of indirect taxes the average custom duties have been reduced to 40% and are expected to be 35% for all commodities by 2005. With regard to Central Excise the number of rates has been reduced to 40% and is expected to be 35% for all commodities by 2005. With regard to Central Excise the number of rates has been reduced and has brought under VAT (CENVAT) with a single rate. These reforms have certainly increased the revenue to the centre and increased the compliance by the industry. As a part of the second generation fiscal (taxation) reforms the Government of India has proposed the reforms in the state level taxes especially the sales tax. The recent evolution of VAT can be considered as the most important fiscal innovation of the present century. VAT is a multi-point Sales Tax with set-off for tax paid on purchases. It is collected in instalments at each transaction in the production distribution system. It does not have cascading effect due to the system of deduction or credit mechanism. It is a tax on consumption. The final and total burden of the tax is fully and exclusively borne by the domestic consumer of goods and services. It is being a tax on domestic consumption, no VAT is charged on goods exported. It is an alternative mechanism of collection of tax. In many respects it is equivalent to a last point retail sales tax. Value Added Tax is, therefore, a multistage sales tax levied as a proportion of Value Added (i.e. sales minus purchase, which is equivalent to wages plus profits). The VAT is collected at each stage of production and distribution process and, in principle, its burden falls on final consumer only. Thus, it is a broad-based tax covering the value added of each commodity by a firm during all stages of production and distribution. At present the sales tax is a single point levy, either focusing of the first sale by the manufacturer/importer or the last purchase by the manufacturer or the exporter within the state. This has advantage of identifying the tax payer who is usually the manufacturer or the

importer within the state. Traders had preferred single point scheme so that they may deal in tax paid exempt goods, and have much less to do with the tax officials. Levy of Sales tax being a state subject, we have at present different procedures and practices in the States, multiplicity of rate of taxes, rate war amongst different states, different types of incentives and deferral schemes. With differing tax structure between states there was unhealthy diversion of trade between neighbouring states. The rate anomalies between states have to some extent been eliminated with the implementation of Uniform Sales Tax Floor Rates. A major disadvantage attributed to the present system of taxation is that is cascading and therefore the tax embedded in the finished product makes the industry uncompetitive i.e. in the case of manufacturer, the various raw materials and inputs and capital goods are subject to tax. The final product of a manufacturer is again levied with tax. The main task of a system of taxation that would enable the government to reach the income and consumption of individuals without causing any, or more than the minimum possible, adverse effect on economy. At the same time, the system should be made equitable in the sense that equals will pay equal sum of tax and unequal will pay unequal sums with the better off individuals paying more and the worse off paying less. Under VAT since tax paid on raw materials and other inputs will be allowed to be set off against the tax payable on the finished goods there will be no cascading of taxes. In India sales tax is levied both by Central and State Governments. Besides sales Tax, taxes like Entry tax, octroi, luxury tax etc also by various state governments. Some of the perceived problem in the VAT implementation are lack of proper business plan for its implantation, threat of fall in revenue to the state which are implementing it, lack of clarity on the treatment of interstate sales in the VAT, role of CST at the manufacturing after the implementation of VAT, treatment of services, declared goods works contract, threshold in all the states and changes in accounting procedures. VAT as a single tax system covering all indirect levies by the State and Central Government is a wishful thinking and the attempt should be to at least integrate in the proposed state VAT all indirect taxes levied by the State Governments. Where India is concerned, it has also become necessary to introduce VAT in order to broaden the nations tax base and generate the revenue required for national development. Since VAT relieves investment from the burden of taxation, this tax is considered the most neutral and efficient. Export can be
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relieved from the burden of taxation through zero-rating, meaning that Indian-manufactured goods would become more competitive in the international market. Further, as VAT would help broaden the tax base, it would be feasible to reduce the rate of income tax and customs duties further. This would reduce the cost of taxation to the economy. Thus, VAT would have a positive impact on the economy. Over the last few years, the pace of liberalisation of the Indian economy has speeded up. In fact, with export and import norms being relaxed, rupee convertibility on capital accounts closer than ever and the rapid growth of e-commerce, our economy is more outward looking today than ever before. One immediate effect of this environment, however, is greater competition for domestic manufacturers and traders. It is to help counteract this effect that the government has decided to introduce a Value-Added Tax (VAT) regime. The Manufacturing Perspective From a manufacturing perspective, VAT is a multi-point tax on each entity in the supply chain where input tax paid by the manufacturer on the purchase of raw materials is set off against the sale of the processed goods. India has opted for a two-tier VAT system where VAT will ultimately replace the sales tax currently imposed at the state level. There is no consensus yet on whether to abolish or make VATable other state levies like toll tax, entry tax, octroi etc. Thus, while Maharashtra has agreed to abolish turnover tax once VAT is implemented, it has yet to reach a decision on octroi. Only Central Sales Tax (CST), an origin-based tax on the inter-state sale of goods with revenue accruing to the state that exports goods, will be phased out. As of now, a four-year time frame is being finalised for the phasing out of this tax, beginning financial year 2003-04. CST will remain undisturbed for the remainder of 2002-03. The Centre has also agreed to compensate the states for the revenue loss engendered by VAT. This compensation will be 100 per cent for the first year, 75 per cent in the second year and 50 per cent in the third year. States will also be permitted to impose sales tax on sugar, textiles and tobacco from June 2003 at a uniform rate of one per cent. To facilitate this, the Centre has agreed to amend legislation on additional excise duties on special goods. Eight states and all the union territories have already sent in their proposals and the draft laws of Maharashtra, Madhya Pradesh and Chattisgarh have been cleared. One major factor stifling the growth of manufacturing in India has been the high fiscal burden in the form of state and central levies. In many cases, these taxes constitute nearly half
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the selling price of the product, an untenable proposition for companies competing in the global market. Such levies, in tandem with poor infrastructure and high financial costs, cripple the employment generation potential of Indian manufacturing, making it non-viable. VAT will hopefully rectify the situation. Companies will be able to make business decisions on the basis of economic considerations other than tax benefits. VAT will also encourage companies to optimise their operations by adopting methods like JIT or completely outsourcing functions like logistics. The frequency of visits to courts will also decrease. The ideal system, of course, would be a single national VAT as in China. But, given our federal polity, a system modelled on the VAT regime currently in use in the European Union offers the best alternative. The important thing at this critical juncture is to make sure we do not lose sight of the ultimate goal of a VAT system - a common markets within the country. Losing sight of this could well mean a billion mutinies in the most populous country in the world.

Concept of Value Added Tax

Value Added Tax, popularly known as VAT, is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service. The value added tax system is designed to address various problems associated with the conventional sales tax system. In sales tax, there is no provision for input tax credit, which means that the end consumer may pay tax on an input that has already been taxed previously. This is known as cascading and leads to increases consumer tax and price levels, which increases the rate of evasion and can be detrimental to economic growth. The value added tax system deals with these problems quite efficiently. As VAT is imposed on value addition at every single stage there is no incidence of cascading. In this way, the final consumers bear the burden of paying value added tax. This system involves absolute transparency at every stage of taxation, thereby making the tax system quite comprehensible and simple. VAT is intended to be levied or charged whenever there is some value addition to raw material. The taxpayers on the other hand, will get credit for the amount of tax paid off at the stages of procurement. The value added tax system has proven to be effective in avoiding problems that normally might arise out of the double taxation of goods and services. In some countries like India, the system of VAT has been designed to change the existing system of sales taxation. Value added tax is different from the conventional system of sales
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tax, because VAT is charged at every stage of value addition whereas sales tax is imposed on final value of transaction only. The value added tax system allows for input tax credit, or ITC, on the amount of tax levied at the preceding stage of the value addition chain. The allowance for ITC is normally appropriated from the value added tax liability imposed on the following stage of the sale of the product.

DIFFERENCE BETWEEN SALES TAX & VALUE ADDED TAX

S. No. 1 Sales tax VAT

Tax levied at the stage of the first sale Tax levied and collected at every (only for cotton, leather and natural gas at point of sale. the final stage).

Successive sales (resale) of goods on Tax collected at every point of sale which tax is already paid do not attract tax. and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale.

Dealers reselling goods on which tax has Dealers reselling tax-paid goods will already been paid do not collect any tax on resale and file nil returns. have to collect VAT and file returns and pay VAT at every stage of sale (value addition).

On 19 goods used as raw materials there is The manufacturer will pay VAT on no input tax credit on the tax paid on such the goods purchased as raw materials goods and 2% tax is levied on other goods but the VAT paid on raw materials used as raw materials for manufacture. will be deducted on the sale of goods manufactured. Thus duplication of tax burden on raw materials will be avoided.

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Computation of tax liability is complex.

It is transparent and easier.

Sales Tax is not levied at the time of VAT dispenses with such forms and purchases against statutory forms but there sets off all tax paid at the time of is misuse of such forms resulting in tax purchase from the amount of tax evasion. payable on sale.

Returns and chalans are filed separately The return and the chalan will be filed and in returns the dealers have to give together in a simple format after selfnumerous details. Scrutiny of returns is assessment also difficult. done by the dealer

himself, which will be subject to scrutiny.

Tax only on goods.

Tax on goods and services both.

HISTORY OF VALUE ADDED TAX

The birth of VAT can be traced back to the year 1918 as an alternative to the turnover tax in Germany. France was the first country that adopted this mode of taxation. In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April 1954. The main objective of this exercise was to harmonies the whole system of taxation. There is little doubt that in the last few decades, VAT has attracted growing attention and interest from all over the world. The success of VAT in the EU showed that VAT is a viable, successful system. When a country introduces VAT, whether to replace another form of general sales tax or as a new tax, there need not necessarily be an aggregate increase in revenues (either from consumption taxes or in general). Similarly, as with any tax, increasing the rate of existing VAT rates will neither necessarily increase revenues proportionately nor be expense-free. Nonetheless, economically, it may be the most sensible way to expand revenue shares, pertaining to the states, if that is the policy goal. The consistent support and advocacy of this form of taxation by the IMF and other countries, first in Latin America, and then around the world, has encouraged and facilitated the adoption of VAT by countries with much less developed economic and administrative structures than those in the original EU member states. However, for various reasons, all the non-EU countries of the OECD, apart from the United States have also, one by one, introduced VAT. The most recent country to do so is Australia in 2000. For these beneficial effects, a full-fledged VAT was initiated first in Brazil in mid 1960s, then in European countries in 1970s and subsequently introduced in about 130 countries, including several federal countries. In Asia, it has been introduced by a large number of
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countries from China to Sri Lanka. Even in India, there has been a VAT system introduced by the Government of India for about last ten years in respect of Central excise duties.

VAT: THE INTERNATIONAL SCENARIO

Globally, VAT is regarded as a tax that is best levied by the Central government a condition that is difficult to meet in a federal finance system such as ours. It is true that 123 countries have adopted VAT, but most of them have unitary systems of government. VAT is a centrally administered tax with a revenue-sharing mechanism. It is hard to visualize VAT as a revenueneutral measure, or one where the states will not lose out in relation to the present system, in a federal set-up. If VAT is centrally administered, the tax base is quite wide, comprising imports, production and different stages of sales. If the base is divided between the Centre and states, the chain is broken, making tax evasion easier and affecting the states' tax base. In countries where VAT is administered by a federal government, revenue collection on imports accounts for a larger portion of total VAT revenues. In an IMF study of 22 developing countries, it was discovered that in about two-third of them, more than half the VAT revenue was collected from imports. In Pakistan and Bangladesh, VAT collection from imports was 64 per cent of the total proceeds from the tax. As tax evasion on bulk imports is difficult, it also helps in checking tax evasion at subsequent stages of the tax chain. Though tax experts around the world approve of the rationality and uniformity that VAT brings, America has not so far implemented VAT, although is it admirably suited to the federal state system. In Brazil showing the way to sub-national VAT, over 130 countries today have adopted and benefited from vat. Close on the heels of France, Europe adopted VAT to facilitate trade by turning the then existing sales taxes into true destination-based consumption taxes both by ''un taxing'' exports, removing hidden subsidies and by placing the taxation of imports and domestic production on a level playing field. However, the necessity for this step in a world of imperfectly flexible exchange rates is still debatable. INTERNATIONALLY ACCEPTED PRINCIPLES OF VAT: Minimal exemptions. Tax on all transactions.
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Destination based tax- intended to tax consumption and not profits. Credits available for inputs including capital goods- intended to eliminate cascading impact. Self-assessment reduces both compliance costs for traders as well as administrative costs for the revenue authority by minimizing paperwork and forms. Strong audit mechanism achieves effective compliance and enforcement.

Now, it is for India to reap the benefits that VAT promises for our economy! We are on a right track & may will set a wonderful example to other developing countries like ours.

VALUE ADDED TAX IN INDIA

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies. Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax. Value Added Tax (VAT), stamp duty, State Excise, land revenue and tax on professions are levied by the State Governments. Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc. In last 10-15 years, Indian taxation system has undergone tremendous reforms. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India. In one of the large-scale reforms of the country's public finances in over past 50 years, India has finally agreed the launch of its much-delayed Value Added Tax (VAT) from 1st April 2005. At a rate of 12.5%, VAT will come in on April 1, 2005. The tax, agreed after state finance ministers met in New Delhi, is designed to make accounting more transparent, cut trade barriers and boost tax revenues. VAT replaced the sales tax in India. Under the single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There was no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer.

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Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands. India, particularly the trading community, has believed in accepting and adopting loopholes in any system administered by the state or the Central. If a well-administered system comes in, it will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases. Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax levied on the inputs can be claimed back from the tax authorities. The International Monetary Fund (IMF), in its semiannual World Economic Outlook, expressed its concern over India's large fiscal deficit - at 10 per cent of the GDP. Further any globally accepted tax administrative system, will only help India integrate better in the World Trade Organization regime.

PRE-VAT AND POST-VAT SCENARIO

Pre-VAT Scenario Before VAT being come into the force sales tax was there. This was levied on the sale of a commodity which is produced or imported and sole for the first time. Sales tax can be levied either by central government or state government. It was charged rates that range from 4 % to 15%. It was quite difficult to have a clean & proper tax record. Trading community was amongst the biggest offenders when it comes to evading taxes. This tax evasion results in huge deficit in the government revenue. Most of the trading transactions were performed without having any particular record. Tax authorities in India felt the need of tax record at

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each stage. Necessity of VAT was realized at this period. These all conditions strongly demands for the proper taxation system i.e. VAT. Post-VAT Scenario VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit. It means now after adopting VAT every seller of goods and service provider has to pay the tax after availing the input tax credit. It is the form of collecting sales tax under which tax is collected in each stage on the value added of the goods. Value Added Tax is charge at the rates 0%, 1%, 4%, 12.5% and in some cases 20% also. Currently in practice, the dealer charges the tax on the full price of the goods, sold to the consumer and at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers from whom he purchased the goods and deposits such amount of tax in government treasury.

IMPLIMENTATION OF VALUE ADDED TAX [VAT] IN INDIA

The most significant achievement of the government is the implementation of VAT at state level in 2005. This is the most historic tax reform since independence. Following are development steps taken meanwhile implementing Value Added Tax in India: 1 MARCH 1986 - modified VAT (MODVAT) is introduced in India as a forerunner for introduction of full-fledged vat. 27 MAY 1994- conference of chief minister or finance minister of state to the discuss introduction of vat under the chairmanship of finance mister Yashwavant Sinha unhealthy tax war between the state to stopped an minimum rate sales tax fix. 16 NOVEMBER 1999- conference of chief minister & state finance ministers agrees to replace sales tax with VAT. 1 APRIL 2000 -MODVAT covers almost all taxable goods and so it evolves into a fullfledged CENVAT or central VAT 17 JULY 2000 empowered committee on VAT is established to look into the procedure and system of vat chaired by the finance minister of Bengal, Dr. Asim Dasgupta .
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1 APRIL 2002- first deadline for introducing vat fifteen state and five union territories are ready but deadline is deffered as most other states are not ready. 1 OCT.2002- second deadline for introduction of vat.Again it was not introduced due to various reasons including protests by traders and industry , and states not ready with VAT laws. VAT will be introduced on 1april 2003 . 18 OCTOBER 2002- Prime Minister A.B. Vajpayee chairs a meeting and the request to all state to prepare their VAT bills. MARCH 2003 traders protest again the introduction of vat on 1st April 2003. 1 APRIL 2003- most states, except Haryana, announce delay in switching to VAT, Haryana introduces VAT. 1JUNE 2003- around fifteen states, excluding the north-eastern state, are expected to introduce VAT. These state accounts for 75 percent of the countrys total trade and industrial production. Once again, the introduction of VAT is delayed. JANUARY 2004- soon after coming into power, the congress government announces the introduction of VAT. 8 JUNE 2004 all states except U.P., say they will introduce VAT. 8 JUNE 2004- the data for the introduction for VAT is decided as on 1 April 2005. 26 JUNE 2004- finance minister of all the states become members of the empowered committee. 17 JANUARY 2005 its chairman, Dr. Asim Dasgupta, publishes white paper on VAT. 21 FEBRUARY 2005- traders protest against VAT with a national strike but it is partially successful. 1 APRIL 2005- Uttranchal introduces VAT. 15 DECEMBER 2005- Chandigarh introduces VAT. 1 APRIL 2006 The five states ruled by Bharatiya Janata Party Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh and Rajasthan introduce VAT. Tamil Nadu, Pondicherry and UP have not imposed VAT.
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FEATURES OF VAT
1. Rate of Tax VAT proposes to impose two types of rate of tax mainly: a. 4% on declared goods or the goods commonly used. b. 10-12% on goods called Revenue Neutral Rates (RNR). There would be no fall in such remaining goods. c. Two special rates will be imposed-- 1% on silver or gold and 20% on liquor. Tax on petrol, diesel or aviation turbine fuel are proposed to be kept out from the VAT system as they would be continued to be taxed, as presently applicable by the CST Act. 2. Uniform Rates in the VAT system, certain commodities are exempted from tax. The taxable commodities are listed in the respective schedule with the rates. VAT proposes to keep these rates uniform in all the states so the goods sold or purchased across the country would suffer the same tax rate. Discretion has been given to the states when it comes to finalizing the RNR along with the restrictions. This rate must not be less than 10%. This will ensure By doing this that there will be level playing fields to avoid the trade diversion in connection with the different states, particularly in neighbouring states 3. No concession to new industries Tax Concessions to new industries is done away with in the new VAT system. This was done as it creates discrepancy in investment decision. Under the new VAT system, the tax would be fair and equitable to all. 4. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of sale All the tax, paid on the goods purchased within the state, would be adjusted against the tax, payable on the sale, whether within the state or in the course of interstate. In case of export, the tax, paid on purchase outside India, would be refunded. In case of the branch transfer or consignment of sale outside the state, no refund would be provided. 5. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the tax on the full price of the goods sold and shows separately in the sell invoice issued by him. 6. VAT is not cascading or additive though the tax on the goods sold is collected at each stage, it is not cascading or additive because the net effect would be as follows: - the tax,

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previously paid on the sale of goods, would be fully adjusted. It will be like levying tax on goods, sold in the last state or at retail stage. ADVANTAGES OF VAT The biggest benefit of VAT is that it could unite India into a large common market. This will translate to better business policy. Companies can start optimizing purely on logistics of their operations, and not on based on tax-minimization. Lorries need not wait at check-points for days; they can zoom down the highways to their destinations. Reduced transit times and lower inventory levels will boost corporate earnings. Following are the some more advantage of VAT: 1. Simplification-Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. This will eliminate any disputes that relate to rates of tax and classification of goods as this is the most usual cause of litigation. It also helps to determine the relevant stage of the tax. This is necessary as the CST Act stipulates that the tax levies at the first stage or the last stage differ. Consequently, the question of which stage of tax it falls under becomes another reason for litigation. Under the VAT system, tax would be levied at each stage of the goods of sale or purchase. 2. Adjustment of tax paid on purchased goods-Under the present system, the tax paid on the manufactured goods would be adjusted against the tax payable on the manufactured goods. Such adjustment is conditional as such goods must either be manufactured or sold. VAT is free from such conditions. 3. Further such adjustment of the purchased goods would depend on the amount of tax that is payable. VAT would not have such restrictions. CST would not have the provisions on refund or carry over upon such goods except in case of export goods or goods, manufactured out of the country or sale to registered dealer. Similarly, on interstate sale on tax-paid goods, no refund would be admissible. 4. Transparency-The tax that is levied at the first stage on the goods or sale or purchase is not transparent. This is because the amount of tax, which the goods have suffered, is not known at the subsequent stage. In the VAT system, the amount of tax would be known at each and every stage of goods of sale or purchase.
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5. Fair and Equitable-VAT introduces the uniform tax rates across the state so that unfair advantages cannot be taken while levying the tax. 6. Procedure of simplification-Procedures, relating to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector. 7. Minimize the Discretion-the VAT system proposes to minimize the discretion with the assessing officer so that every person is treated alike. For example, there would be no discretion involved in the imposition of penalty, late filing of returns, non-filing of returns, late payment of tax or non payment of tax or in case of tax evasion. Such system would be free from all these harassment. 8. Computerization-the VAT proposes computerization which would focus on the tax evaders by generating Exception Report. In a large number of cases, no processing or scrutiny of returns would be required as it would free the tax compliant dealers from all the harassment which is so much a part of assessment. The management information system, which would form a part of integral computerization, would make the tax department more efficient and responsive.

DISADVANTAGES OF VAT:
1.VAT is regressive- It is claimed that the tax is regressive, i.e. its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties. 3. VAT is inflationary- Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead to a reduction in income tax, any price increases may be offset by increases in take-

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home pay. In any case, any price consequence is one time only and prices should stabilize thereafter. 4. VAT favours the capital-intensive firm- It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capital- intensive competitor, since the ratio of value added to selling price is greater for the former. This is a real problem for labour-intensive economies and industries. 5. Floor rate- The other deficiency of the design of vat being implemented by the states is the one embedded in the structure of rates. The states have two basic rates; general rate of 12.5per cent and a reduced rate of 4 per cent(and 1 per cent for gold,etc.) these are supposed to be applied uniformly in all states and so although they are described as floor rates. the states will have no discretion to go below or above the prescribed rates, contrary to what a floor rate ordinarily implies. ITEMS COVERED IN INDIAN VAT: More than 550 items are covered under the Indian VAT regime of which 46 natural and unprocessed local products are exempted from VAT. There are just four rates at the State Level: 0%, 1% on bullion, 4% on essential commodities, and 12.5% on other commodities. These rates will be uniform in all states across the country. The same set of goods will be charged at the same rate in all the states. Most essential commodities are exempt from VAT or fall in the category of four per cent. Fifty-six items are exempted from the State VAT; petrol and liquor attract non-VAT sales tax rate of more than 20 per cent. Therefore, sales tax is not entirely VATable; there is no single VAT rate, which is considered essential for efficient tax administration. Since April 2005, States have moved commodities between the 4 per cent and 12.5 per cent Categories. Following table illustrates items covered under Indian Value Added Tax and their rates: Schedule A B C Rate of tax 0% 1% 4% Illustration items Life saving drugs, Vegetable, milk, eggs, bread Precious metals and precious stones and their jewellery. 270 items of basic needs, like medicine, drugs, agro & industrial inputs, capital & declared goods Raw material, notified industrial inputs, notified information technology
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product and a few essential items D E 12.5% 20% and above Surgical product Liquor, petrol, diesel etc.

JUSTIFICATION OF VALUE ADDED TAX IN INDIA In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases. In the prevailing sales tax structure, there is in several States also a multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes will be abolished. In addition, Central sales tax is also going to be phased out. As a result, overall tax burden will be rationalized, and prices in general will also fall. Moreover, VAT will replace the existing system of inspection by a system of built-in selfassessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth. Thus, to repeat, with the introduction of VAT, benefits will be as follows: A set-off will be given for input tax as well as tax paid on previous purchases. Other taxes, such as turnover tax, surcharge, additional surcharge, etc will be abolished. Overall tax burden will be rationalised. Prices will in general fall. There will be self-assessment by dealers. Transparency will increase. There will be higher revenue growth.

The VAT will therefore help common people, traders, industrialists and also the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system.

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CONCLUSION
Value Added Tax is progressive and transparent system of taxation which eliminates the cascading impact multiple taxation through a multi-point taxation and set-off principle. It promotes transparency, compliance and equity and therefore, is both dealer friendly and consumer friendly. It is a multi-stage tax, levied only on value added at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices. It is assumed that due to crosschecking in a multi-staged tax, tax evasion will be checked, resulting in higher revenues to the government. On the whole, VATs effects on trade have been considered to be largely beneficial, with economists applauding the level playing field for imports. Governments too generally pay more attention to the removal of barriers to exports. Economists agree that the success, faced by the EU, will follow in developing countries as well. Financial experts are very positive about VAT.

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BIBLIOGRAPHY
Book: Kul Bhushan (Apr.2006), Working with VAT, Dorling, Kindersley (India) Pvt. Ltd. (Patparganj, Delhi 110 092, India) Reports: A White Paper On State-Level Value Added Tax, The Empowered Committee of State Finance Ministers, (Constituted by the Ministry of Finance, Government of India.) Maharashtra VAT, (Taxpayers Guide) Sales Tax Department, Government of Maharashtra, Mumbai. Mulyavardhit Kar, , July 2008, Vyapari Mitra, 409 Websites: www.mahavat.gov.in www.tinxsys.com www.finmin.nic.in www.finance.indiamart.com

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