AN ASSIGNMENT ON

VAT and its Implications

-: SUBJECT:-

Engineering Economics and Management

-: SUBMITTED TO :Dr.Hemant Balsara -: SUBMITTED BY :Aashish Gandhi Vinay Kumar Harsh Desai U09CE087 U09CE088 U09CE089

Ujjval Nishkalank U09CE090

SARDAR VALLBHBHAI NATIONAL INSTITUTE OF TECHNOLOGY

2010-2011

INDEX
No. TOPIC PAGE NO.

1. 2.

Introduction Meaning of VAT

Comparison with a sales tax Why a Value Added Tax introduced

03 03 03 04 05 06 06 08 08 08 08 09 10 10 10 11 12 14 15 17 18

3. 4. 5. 6.

The basic principle of VAT History of VAT in India Computation of VAT Registration for VAT

Procedure of Registration Who have to register as a Taxpayer Type of registration 7. 8.

Declaration & Payment of Tax Effect of VAT Effect of VAT on Inflation Effects of VAT on Distribution VAT Effect on Economic Growth

9.

Advantages of application of VAT

10. Criticisms 11. CASE STUDY : Value added Tax in a Federal structure 12. A case study of VAT in Delhi 13. Bibliography

 Introduction of Value Added Tax :Maurice Laur, Joint Director of the French Tax Authority, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors.

What is VAT?
Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production. VAT is widely applied in the European countries. However, now a number of countries across the globe have adopted this tax system. Value added tax, also known as goods and services tax or GST proves to be beneficial for the government. Through implementation of this tax system, government can raise revenues invisibly, where the tax is not shown on the bill paid by the buyer. VAT is different from sales tax in various aspects. While sales tax is to be paid on the total value of the goods and services, VAT is levied on every exchange of the product, so that consumers do not have to carry the total cost of tax. However, VAT is generally not applied on export goods to avoid double taxation on the final product. However, if VAT is charged on export goods, the tax amount is usually refunded to the tax payer. Value added tax can also be recovered. The individual consumers cannot recover VAT on purchases made by them. However, businesses can recover VAT on the services and materials, which are bought by them in order to continue the supply of the products and services.VAT was introduced to arrest the increasing smuggling and cheating, which were resultants of high sales tax and tariffs.

Comparison with a sales tax: Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favour over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain. In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as a loss of some autonomy.
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 Sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler. A general economic idea is that if sales taxes exceed 10%, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.) On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism. However, because of its particular mechanism of collection, VAT becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states.

Why a Value Added Tax introduced?

There are seven significant reasons to reform the tax system. 1) The then existing system was too complex. That tax code has evolved over many years creating thousands of conflicting definitions and exemptions. It required numerous complex forms that take an enormous amount of time and money to complete. It also led to difficulty in enforcement and collection, and created hundreds of loopholes that are used to reduce or evade taxes. 2) It was too easily exploited for political reasons. Tax rates, incentives, and exemptions were altered continuously for political reasons. There was ongoing political pressure to alter tax laws to benefit or exclude special interest groups. 3) The then existing structure created a poor economic impact. The tax code was often altered to provide economic stimulus for various business segments, with dubious results. It neglected the overall health of the economy. It often discourages economic growth by creating a negative incentive to work and to earn more. An ideal system would tax spending to create a positive incentive to earn more, and save and invest more. 4) It was a bureaucratic control. The Income tax Revenue Survey requires a huge operating budget and over 114,000 employees to manage this huge bureaucracy. This was nonproductive labour that does not contribute directly to the economy. In fact, it is a measurable drain on the economy both in direct and indirect costs, estimated at over $600 billion annually. These educated and talented people could contribute greatly in productive jobs in the private sector.

5) It requires a large number of professionals in the private sector, like tax accountants, lawyers, and even entire corporate departments, to advise, interpret and prepare tax returns. This process wastes valuable resources on non-productive labour that could otherwise be used to build businesses and strengthen the economy. 6) It forces business managers to make decisions based on tax implications rather than good business. For example, a company decides not to build a new assembly plant because of negative capital investment tax policies, and thereby deprives a community from new jobs and the company from growth. 7) It is inefficient. It just costs too much to collect taxes this way. If we are ever going to reduce the national deficit without breaking the back of the tax payer, this is the first place to reduce waste.

The basic principle of VAT :The Value Added Tax system has its origin in the West European countries. Generally, taxes are levied on the selling price of the product. Today raw material passes through a number of stages and processes until it reaches the ultimate stage. For instance, steel ingots are made in a steel mill, which are then rolled into plates in a rerolling unit and after this a third manufacturer will make furniture from these plates. Thus, output of the first manufacturer becomes the input of the second manufacturer, who carries out further processing and supplies it to the third manufacturer. This process continues till the final product emerges.

 History of VAT in India:Finally after 14 years vat was implemented. Let us have a glance on the history of vat up till April 2005 and reasons why it could not be implemented before. Economic reforms were on a priority by the government since 1991. But it is to be noted that, VAT was introduced in India in the year 1976, in respect of Central Excise. However, it was restricted only up to the Excise Duties, and was known as Modvat (modified value added tax). The coverage of Modvat gradually increased and covered various other chapters. The importance & need of VAT in the sales tax structure of India was recognized by the taxation authorities. But the reason why the proposal of VAT took a long time is because VAT in its simplest form cannot be adopted in India where there are various authorities who can levy the taxes (e.g.: State/ Central/ Municipality) There are various reasons why the implementation can take time. It is the policies, the framework, the commodities, the taxation rate, changing from a multiple point tax to a single point tax, etc and all such details had to be worked upon. Moreover, in the then existing sales tax regime, it is the states that collect the taxes, that too at different rates. VAT has replaced the sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is 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.

Computation of VAT: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.

Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2 VAT levy will be administered by the Value Added Tax Act and the rules made thereunder.
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 VAT can be computed by using either of the three methods detailed below :
The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales. India opted for tax credit method, which is similar to CENVAT.

Registration for VAT : Procedure of Registration for VAT: Download or buy forms; FORM 1, FORM 2, FORM 3, Fill the Application in duplicate and affix photograph. Attach the following documents to the application a. Copy of the constitution document e.g. Partnership deed for partnership firm, Memorandum and Articles of Association for a company. b. Board Resolution authorizing the signatory to sign the application in case of company. c. Proof of identification of the authorized signatory e.g. voter identity card, passport, driving license. d. Proof of principal place of business e.g. rent receipt, lease agreement, electricity bill. e. Submit the forms to the jurisdictional Central Excise Office Submit the above in the nearest Commercial Tax Office. On submission, the Commercial Tax Officer would verify if the submission is complete and desirable. He would make a field inspection of your premises. The Office of Commercial Tax Officer would send you the VAT CERTIFICATE Once registered, you will have to account for output tax that is attributable to your taxable sales. You will also have to submit VAT returns monthly to the Commercial Taxes Department and keep proper books of accounts

 Who have to register as a Taxpayer?

All legal and natural persons who provide goods, works or services and have an annual sales turnover exceeding the threshold limit should register as taxpayer. All importers are required to register irrespective of their annual turnover. If the dealer supplies only exempt goods and services he must still notify the local VAT office if his turnover exceeds the threshold limit. Totally exempt businesses will not however be registered as taxpayers but still be subjected to later visits by VAT officials to confirm their exempt status. It is the person, NOT the enterprise, who is registered for VAT. The person is only registered once for all enterprises/branches/divisions carried on unless permission is granted to register them separately. The person to be registered Sole proprietor (individual) Incorporated/unincorporated body of persons Corporation / company Association not for gain Welfare organization / trust Local authority and certain public authorities

Type of registration:1. VAT (Obligatory):All those businesses having Annual turnover equal to or more than 5 lacks Carries out Inter State transactions (Irrespective to annual sales) 2. VAT (Voluntary):Any one not fulfilling the above conditions may register himself under VAT voluntarily keeping future in consideration.

 Declaration & Payment of Tax:One must complete a VAT declaration form monthly as per directions of the VAT office for instance on the 16th day of each month. On the form you will show the amount of VAT you have paid to your suppliers and the amount you have charged your customers. The difference between the two figures is either the amount of tax due to be paid to the VAT office or the amount of credit to be carried forward to the next months declaration. Credit for purchases can only be claimed if you are in possession of an official tax invoice which shows the amount of VAT you have paid on the transaction. If you calculate that you owe tax to the VAT office it should be paid at the same time as you submit your declaration form. If you are owed tax it will be carried forward and you will deduct it from the tax you owe the following month. You will also need to show other information on your declaration. In case of Annual turnover more than 1 crore : Monthly declaration & payment of Output tax using FORM 16 o This is annexure less return On the end of every quarter through FORM 15 o Annexures FORM 18, 19, 23, 24 o FORM 23 & 24 includes the Total Purchases, input tax, Total Sales & input taxes In case of Annual turnover less than 1 crore : Filing of Quarterly return using FORM 15 with FORM 18, 19, 23, 24 as annexure.

 Effect of VAT: Effect of VAT on Inflation :In considering the introduction of VAT, countries are often concerned that it would cause an inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD countries that introduced VAT indicated that VAT had little or no effect on prices. In cases where there was an effect it was a one time effect that simply shifted the trend line of the consumer price index (CPI). To guard against any unforeseen price effects the authorities may consider a tighter monetary policy stance at the introduction of VAT.

Effects of VAT on Distribution :Value added tax is widely criticized as being regressive with respect to income that is its burden falls heavily on the poor than on the rich. This emanates from the fact that consumption as a share of income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than the rich. This criticism is valid when VAT payments are expressed as a proportion of current income. However if, following the premise that welfare is demonstrated by the level of consumption rather than income, consumption is used as the denominator the impact of VAT would be proportional. A proportional burden would also be demonstrated if lifetime income rather than current income is used. A lifetime income concept considers the fact that many income recipients are only temporarily at lower income brackets as their earnings increase. In order to address the regressivety of VAT the following measures can be taken: The VAT itself can be used to differentiate taxation of consumer items that are consumed primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher than standard rate. VAT exemptions may also be granted on goods and services that are consumed mostly by the poor. Equity concerns may also be addressed through other ways, outside the VAT system, such as other tax and spending instruments of government. This could be in the form of lower basic income tax rates on the poor or some pro-poor expenditures of government. The use of multiple rates of VAT has however been widely discouraged for various reasons. These include: o The fact that sometimes it is almost impossible to differentiate between higher quality expensive products e.g. food, consumed by the rich and ordinary products consumed by the poor. Thus any concessions extended may tend to benefit the rich much more than the poor. o Increased costs of VAT administration as a differentiated rate structure brings with it problems of delineating products and interpreting the rules on which rate to use.
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o Significantly increased costs of tax compliance for small firms, which are usually unable to keep separate records/accounts for sales of differently taxed items. This results in the use of presumptive methods of determining the tax liability, which leads to more difficulties in monitoring the compliance. The higher compliance cost resultant from differentiation of VAT rates may also be regressive with respect to income since smaller firms with lower income tend to bear proportionately more of the burden than do larger firms. Exemptions refer to situations where output is not taxed but taxes paid on inputs are not recoverable. The rationale behind exemptions is to reduce negative distributional effects of tax through the effect on incomes. The effects of exemption may be as follows: Falling of revenues exemptions break the VAT chain. If exemptions are granted at prior to the final sale, it results in a loss of revenue since value added at the final stage escapes tax. Un-recovered taxation of some intermediate goods may lead to producers substituting away from such inputs thus distorting the input choices of the said producers. Exemptions may create incentives to self supply i.e. tax avoidance by vertical integration. Exemptions tend to feed on each other giving rise to a phenomenon called exemption creep. This arises from the fact that each exemption gives rise to pressures on further exemption. For example creating an exemption to reduce the tax burden on a particular commodity or goods may lead to increased pressure for exemption or zero rating of inputs used for the production of such a commodity. Based on the above, it is important that care is taken when introducing exemptions in order to avoid distortions in the production process as well as to minimize revenue loss resulting from such distortions. Given the fact that the primary purpose of VAT is to raise government revenue in an efficient manner and with as little distortions of economic activity as possible, distribution effects are perhaps better addressed by other forms of tax and government expenditure policies which can often be better targeted at these aims.

VAT Effect on Economic Growth :Economic growth can be facilitated through investment by both government and the private sector. Savings by both parties are required in order to finance investment in a noninflationary manner. Compared to other broadly based taxes such as income tax VAT is neutral with respect to choices on whether to consume now or save for future consumption. Although VAT reduces the absolute return on saving it does not reduce the net rate of return on saving. Income tax reduces the net rate of return as both the amount saved as well as the return on that saving are subject to tax. In this regard VAT may be said to be a superior tax in promoting economic growth than income tax. Since VAT does not influence investment decisions on firms, by increasing their costs, its effects on investment can be said to be neutral.
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 Advantages of application of VAT :In its purest form, VAT is a tax that is levied on the value added along different stages of production and distribution of a commodity or service. Therefore, it is a tax on the sum total of value added, i.e., equal to the value of a commodity or service. In this sense, it should be equivalent to a retail sales tax that is collected only at the retail stage. But the retail sales tax is difficult to collect because there are too many retailers of various sizes. The VAT, instead, can be collected at earlier stages of production in fragments and can end at the retail stage. But the total collected from the VAT should be exactly the same as if collected only from the retailers of the commodity concerned. 1. Eliminates cascading effects :The VAT is preferred because the VAT minimizes distortions. The simple excises or the turnover taxes results in the unintended effect of (i) taxing an output (together with its input content) more than once; as well as (ii) applying a tax on the earlier paid input tax leading to cascading. It causes producers to move their capital or resources away from the production of one output to another one which does not suffer from cascading. The VAT, because it gives credit for input tax earlier paid, avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another. Therefore, it does not alter producers decisions to produce particular commodities which, in general, should reflect the demands from consumers. However, for this benefit to occur, the VAT must give credit for raw materials and capital goods. 2. Eases administration:-

Although there are feasible options limiting the impact of cascading, the utility of multipoint VAT goes much beyond that. Arresting cascading could be considered important to a regime of VAT. Nevertheless, the institution of VAT in fact should be conceived also as an instrument of tax administration an administration that checks evasion through a self monitoring feature, and an account based audit system that is regarded as superior to the system of physical verification. The latter already having fallen into disrepute for causing distress to tax filers needs to be eventually abandoned as its positive impact on revenue yield remains questionable. An account-based audit should not only tighten the tax net but raise revenues through a wider acceptability of a tax administration in the public eye. 3. Improves International competitiveness:-

Since VAT has the potential for eliminating cascading, it is possible to design the VAT in a manner that will ensure that exports are free from any tax burden (zero-rating). Further, such adjustments under the VAT structure are also WTO consistent. As a result the competitiveness of exports in international markets is enhanced. Even though exports are generally exempt from sales tax and the burden of input tax embedded in the exports is sought to be eliminated through the duty drawback mechanism, nevertheless, the process is cumbersome and the effect is not fully realised. As export competitiveness can be adversely

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influenced by then tax factor, the capacity to zero rate easily and accurately is an important aspect of the VAT. 4. Imparts Transparency:Another positive aspect of the VAT is its simplicity and transparency, which commodity taxes usually lack. The VAT tends to collect the quantum of tax payable at every stage of transaction. Both producers and consumers, who ultimately bear the tax burden, are fully aware of the tax liability, which is not as easily ascertainable in other forms of commodity taxation. 5. Buoyant Source of Revenue:When faced with chronic budget deficits and growing expenditures, governments have been turning to tax reform as a way to raise revenues. Governments seek sources that are income elastic and not sensitive to changes in prices of particular goods or income sources. Since the VAT permits a relatively larger coverage in as much as it is possible to extend it to value addition at all stages in the production-distribution chain, the potential for raising resources efficiently is generally higher. 6. Goodbye to Tax on Tax:VAT is the only tax that offers positive alternatives to the negative impact of indirect taxation. It is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at earlier stages of production and distribution get taxed again and again at subsequent points. Consequently, instead of paying taxes on the value addition by a manufacturer, wholesaler or retailer, tax is paid on an inflated value, which includes taxes already paid at earlier stages. Such anomalies escalate prices and encourage vertical integration, where the manufacturer himself tries to wholesale and retail the goods. Vertical integration has been responsible for recession and unemployment particularly in developing countries. VAT has an inbuilt device for reducing the cascading effect by restricting the levy to actual value addition. It encourages growth by confining tax burden to the net economic contribution of the taxpayer. Moreover, since the Capital Investment also gets tax relief. VAT can accelerate economic growth by encouraging modernization and replacement.

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 Criticisms :The "value-added tax" has been criticized as the burden of it relies on personal endconsumers of products. Some critics consider it to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value-added tax is in fact a proportional tax in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor. Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient. Certain industries (small-scale services, for example) tend to have more VAT avoidance, particularly where cash transactions predominate, and VAT may be criticized for encouraging this. From the perspective of government, however, VAT may be preferable because it captures at least some of the value-added. For example, a carpenter may offer to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner, who usually cannot claim input VAT back. The homeowner will hence bear lower costs and the carpenter may be able to avoid other taxes (profit or payroll taxes). The government, however, may still receive VAT for various other inputs (lumber, paint, gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the VAT on these inputs (unless of course the carpenter also has at least some jobs done with receipt, and claims all purchased inputs to go to those jobs). While the total tax receipts may be lower compared to full compliance, it may not be lower than under other feasible taxation systems. Because exports are generally zero-rated (and VAT refunded or offset against other taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is called carousel fraud. Large quantities of valuable goods (often microchips or mobile phones) are transported from one member state to another. During these transactions, some companies owe VAT, others acquire a right to reclaim VAT. The first companies, called 'missing traders' go bankrupt without paying. The second group of companies can 'pump' money straight out of the national treasuries. This kind of fraud originated in the 1970s in the Benelux-countries. Today, the British treasury is a large victim. There are also similar fraud possibilities inside a country. To avoid this, in some countries like Sweden, the major owner of a limited company is personally responsible for taxes.

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 Value added Tax in a Federal structure:- (A case study of brazil)

Brazil has the distinction of being the only federal country in the world with independent value added taxes (VATS) at the federal and state levels. This paper seeks to present the salient features of the structure of the VATs in Brazil and to discuss issues related to the management of the state VATs in that country.

Introduction ALTHOUGH more than 100 countries have gone in for a system of Value Added Tax (VAT). it is not a sheer coincidence that most of the federations have not adopted it European Union could be considered as one illustration of a federal structure where VAT has been levied by the member states with regulat or y co nt rols of t he European parliament. Canada is another example of a federal country where VAT has been levied by the federal government and sales tax/ VAT by the provincial governments. The only country that has the distinction of being a federal country with independent VAT both at the federal and at the state levels is Brazil. In this context, this paper aims at presentingthe salient featuresofthestructure of VATs and analysing the issues related to the management of state VATs in Brazil. The paper isstructured as follows: Section II assesses the fiscal importance of the federal andthe state V ATsin Brazil.The next section presents the structure of the federal VAT. This is followed by analysis of the structure of thestate VATS in Section IV.Theanalysis in both these sections includes fiscal importance, coverage, exemptions and rates of the tax. The following section presents a ease study of management of the state-VAT in one of the states, viz. Sao Paulo state. Section VI evaluates the reformsard presents the future course of action necessary for a rational tax structure. The final section presents a summary of conclusions. The structure and operations of different VATs in Brazil could be an illustration of how the VATs are levied by both the national and the subnat ional governments. The analysis of management of different VATS in Brazil also throws light on the problems related to interjurisdictional aspects. Fiscal Importance The existing federal arrangements and the structure of taxation in Brazil are based on tax reforms enacted as part of the 1988 Constitutional Refonns which were in the direction of strengthening the structure of VAT at the level of states, although therewas a federal V AT in existence. The overall system of taxes on commodities and services in Brazil is characterised by a variety of taxes, which are levied by all the three levels of government, viz, federal, state and municipal governments. The prevailing indirect taxes could be categorised into three major groups. The first group comprises the VATs - the IN (Imposto Sobre Productos Industrializados), a federal VAT on manufacturing sector and the ICM S (Imposto Sobre Operaeoes Relativas a Circulacao de Mercadorias c Services), a state VAT on consumption covering acriculture, industry and a number of services.3 The second group consists of taxes which are mostly sectors specific. One of the important taxes in this group is ISS (Imposto Sobre Servicos) a tax on services which is not included in the ICMS. It is a cascade type tax levied by municipalities and covers services under industrial, commercial and professional sectors with rates varying from 0.5 to 10 per cent in different municipalities. The other indirect taxes under the second group consist mainly of: (i) tax on financial transactions (IOF), (ii) tax on retail sale of fuels (IV VC) and (iii) tax on transmission of financial amounts and rights (IPMF). The third category comprises contributions to social integration
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programme (PIS). the public employees financial reserve fund (PASEP), and various other social contributions. Trends in revenue from all the commodity taxes in general and from VAT in particular indicatethat the proportion of domestic taxes on goods and services has declined from 27 per cent of the total tax revenue in 1968 to 25 per cent in 1992 (Table I), However, the share of value added tax in total domestic taxes on goods and services has increased from 67 per cent in 1968 to 79 per cent in 1992. Also, the trend in tax revenue as per cent to GDP indicates that whereas these taxes contributed 16.7 per cent of GDP in 1970, the ratio declined to 10.5 per cent in 1988 but increased to 12.9 per cent in 1991 (Table 2). Although the ratio went up in 1991, it was below the 1970 mark in the later years. The proportion of the IPI in GDP has declined from 4.4 per cent in 1970 to 2.O per cent in 1988 and that of ICMS from 6.9 per cent to 5.0 per cent during the saint period. In 1991 there was a small increase in the share of both these taxes bringing the total to9.0pecccnt.The other majorindirect taxes also recorded a change in their proportion to GDP. Whereas their proportion was 5.4 per cent of the total in 1970. it went up to 6.2 per cent in 1980. However, in 1988 it declined to 3.5 per cent. The trends in the proportion of different taxes to GDP indicate that the fiscal role of value added tax has again been on an increase, although the same is yet not very significant in the overall fiscal structure of Brazil. Of course. it is important to note that the contribution of the ICMS varies from state to state (Table 3). Among the major states, the state of Sao Paulo collected 38.20 per cent of its tax revenue in 1991 as against 9.95 per cent in Minas Gerais, 10.30 per cent in Rio de Janeiro. 7.67 per cent in Rio Grande do Sul, 5.47 per cent in Parana, 2.66 percent in Pernambuco and 1.88 percent in Ceara. Thus, almost 60 per cent of the revenue was collected by three states and over 75 percent by seven states. Federal VAT The Federal VAT levied in Brazil is known as IN (Imposto sabre Produtos lndustrializados).-' It is a selective tax restricted to the manufacturing sector and is levied on all Transactions of taxable industrial products on the principle of value added. That is, the tax base consists of industrial value added defined as sales minus purchases of inputs, keeping capital goods outside the creditable base. The scope of the IN is. however, restricted up to the delivery of industrial products at the producer level and is levied on (i) importers of foreign products who subsequently sell them; (ii) industrial establishments performing any industrial process from which a chargeable product results even if it is actually exempt or subject to zero rate and on (iii) establishments assimilated by the law to industrial establishments.

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 A case study of VAT in Delhi :In Delhi, VAT was introduced w.e.f April 1, 2005. It replaced Delhi Sales Tax Act 1975, Delhi Tax on Motor Vehicles into Local Areas Act 1994, Delhi Sales Tax on Works Contract Act 1999, Delhi Sales Tax on Transfer of Right to use goods Act 2002. The VAT applies to movable goods with some exceptions. However VAT has not been introduced in Uttar Pradesh and Rajasthan.This has led to confusion and ambiguity. In Delhi the Vat Registration Certificate DVAT 06 has certain norms. Input tax credit on purchases from other states is not available. It is available on purchases from Delhi. However the Output Tax liability is for Local Sale or Outside sale both. The records are to be maintained for atleast 7 years and Monthly records are to be maintained for Output and Input tax. Also the records are to be made for the order received till date ie records will have to be kept for bank records, challan counterfoils and pay in slips.. VAT cannot be charged on MRP as MRP includes VAT.

The Sales Tax return is filled by the Company. Hence the Cas and CWAs will have appellate work rather than the return filling assignments. Input Tax credit available on Capital Goods is available on a deferred basis i.e. one third in the first, second and the third year each. An Item wise stock register is to be maintained.

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BIBLIOGRAPHY
Dasgupta, A., 2005,A White Paper On State-Level Value Added Tax, The Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8 http://www.finmin.nic.in/downloads/reports/whitepapervat.pdf Dasgupta, A.(2009), A White Paper On State-Level Value Added Tax, The Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8 Available at: http://www.finmin.nic.in/downloads/reports/whitepapervat.pdf Rao, K, 2008, Goods and Services Tax for India, National Institute of Public Finance and Policy New Delhi, http://www.nipfp.org.in "Les recettes fiscales" (in french). Le budget et les comptes de ltat. Minister of the Economy, Industry and Employment (France). 23 February 2009. http://www.performance-publique.gouv.fr/le-budget-et-les-comptes-deletat/approfondir/les-recettes/les-recettes-fiscales.html http://en.wikipedia.org/wiki/VAT#cite_note-0
http://www.articlesnatch.com/Article/Value-Added-Tax--vat--/1449073#ixzz16j6muG8A

http://finance.indiamart.com/taxation/vat_in_india.html http://www.ehow.com/about_5491277_advantages-vat.html http://www.economywatch.com/business-and-economy/definition.html Economic And Political Weekly article: 15 February,1997 http://www.jstor.org/pss/4405096

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