VALUE ADDED TAX VALUE ADDED TAX

- ISSUES & CONCERNS -

Timir Baran Chatterjee Vice President & Company Secretary DIC India Ltd. Presentation for : XLRI,IIT,KGP,ICSI,ICAI,CII,BCCI,DIC, TISCO,MITSUBISHIPTA

WHY THERE IS A CONCEPT OF VAT:

No way different from LST with respect to the fundamentals
Method of levy differs in the two system The traditional system of levying taxFIRST POINT TAX - NEXT POINT TAX LAST POINT TAX - MULTIPOINT TAX

The Traditional System of Levying Tax

First Point Tax Avoid cascading effect but Govt. loses its control on last point sales with added value leakage of revenue due to various tax management in the subsequent sales after First Point.

Next Point Tax

(especially for banded goods)Burden of tax is shifted to the next point

Govt. gets revenue on value addition upto last point but loses its control on origin of manufacture- possibility for leakage of revenue escaped taxation Not popular with Govt.

Last Point Tax-

The

existing

system

of

levying Contd.

tax

Multipoint Tax- The Govt. keeps control on

overall sales but cost cascading nature increases due to of taxation

VAT is a solution to overcome all the above problems and acceptable both to the Assessor (Govt.) and the Assessee (Dealer)

MEANING OF VAT
VAT in common man's language
is a tax levied on the value added to any product or service AT EVERY STAGE Destination based tax system

Sales to Registered Dealer by a Registered Dealer

Provision for input tax credit tax Credit paid at the previous point of purchase. The tax paid by a registered dealer is netted. Tax is ultimately borne by the consumer

UNDERSTANDING VAT
How VAT would work is best illustrated hereafter which indicates that everybody becomes happier under VAT regime with multi-point taxation but with lesser tax burden.

Raw Material Producer

Sale Rs 100 (VAT Rs 10)

Goods Manufacturer
Sale Rs 150 Gross VAT Rs 15 Net VAT Rs 5 (15-10)

Happy Consumer

ASSUMING A VAT OF 10%

Wholesaler
Sale Rs 180 Gross VAT Rs 18 Net VAT Rs 3 (18-15)

Sale Rs 200 Gross VAT Rs 20 Net VAT Rs 2 (20-18)

Retailer

TAX RATE UNDER VAT

essential commodities, capital goods, basic
inputs and declared goods >> 4%-

PRINTING INK COVERED UNDER 4%

agricultural products and sea goods >> 0%
gold >> 1% cigarettes, liquor, petrol, diesel >> 20% Floor rate of 12.5% (Revenue Neutral Rate)

 Govt. keeps full control on all stages of value addition No escape from tax net It sets up lamp posts all along the value chain, thus bringing to light the entire geography of economic activity. No Cascading effect and thereby reduces overall cost Reduction of Raw Material cost- sales tax is no more an input cost to the manufacturer

VAT IS A SCIENTIFIC SYSTEM OF CHARGING TAX

Ultimate consumer is satisfied due to low cost

ULTIMATE OBJECT OF VAT IS NOW FULFILLED

MAKES INDIA SINGLE ECONOMY INCREASED TAX BASE

TRANSPARENCY

COMPETITIVE PRICES

VAT RESULTS

NO CASCADING EFFECT
NEUTRALITY IN INDIRECT TAXES

REWARDS PRODUCTIVITY

NO REVENUE LEAKAGE

PRE-REQUISITES FOR EFFECTIVE VAT REGIME:

India needs to take following steps to introduce VAT without further delay Application of information technology

Wide spread computerization

Bringing all registered dealers into tax net Avoiding exemptions and incentives Granting rebate on already paid tax Phasing out of Central Sales Tax

VAT: Issues and concerns:

Proposed VAT is not truly an ideal VAT system of taxation since No input Tax credit on Central Purchases of Raw Materials and Capital goods is available
No input tax credit for Branch Transfer is available ( Credit available in excess of 4% ) CST would continue ; CST is an origin based tax system Exemption/Remission Transactions will continue for CST

Not withdrawal of other taxes like Entry Tax, Octroi, Service Tax etc and no input tax credit is available- As
per White Paper Entry Tax to be vatable.

COMMERCIAL ISSUES TO BE TACKLED BY THE INDUSTRY AFTER IMPLEMENTATION OF PRESENT FORM OF VAT

A. CONTINUTATION OF CST AFTER VAT ADOPTION IS A MAJOR ANOMALY- IMPACT

INTER STATE PURCHASES WOULD BE COSTLY-

MAJOR SUFFERER EASTERN & SOUTHERN BASED INDUSTRIES BOTH IN TERMS OF PURCHASE AND SALES [70% RAW MATERIALS ARE SOURCED FROM OUTSIDE THE STATE]
CUSTOMERS WOULD BE ASKING TO SET UP A LOCAL DEPOT/BRANCH/DISTRIBUTORCOST WOULD INCREASE COST MISMATCH BETWEEN DEVELOPED MARKET AND UNDERDEVELOPED MARKET UNFAVOURABLE PRICING EFFECT DUE TO COST MISMATCH AND AVAILABILITY OF INCENTIVES IT WILL LEAD TO UNEVEN COMPETITION

B. NO VAT CREDIT IS AVAILABLE IN CASE OF BRANCH TRANSFER- IMPACT

Companies having centralized manufacturing system and selling through Depots/Branches would be highly affected.
Sales through outstation C & A system will also be affected since materials transferred to C&A would be considered as branch transfer

A FEW TAX MANAGEMENT SOLUTIONS

SLOGAN IN A POSITIVE NOTE ENHANCE LOCAL PURCHASE, INCREASE DIRECT SALES LOCAL OR CENTRAL SLOGAN IN A NEGATIVE NOTE

REDUCE CENTRAL PURCHASE, STOP BRANCH

TRANSFER AND AVOID SELLING THROUGH OUTSTATION DEPOTS/C & F AGENTS

While framing Management Objective, a Company ought to reckon that Business is not solely guided by Tax advantages; Other Commercial issues are equally important.

SOME ACTION PLANS

Analyze existing sources of Purchases Central and State Explore possibilities to convert the existing central purchases to local purchases Ask supplier to open Branch, Depots or ask them to match the price considering VAT impact. Analyze existing sales through Branch Transfer

SOME ACTION PLANS contd.

Explore the possibilities for direct sales to customers instead of selling through outstation Branches/Depots Less dependence on Centralised purchase system- Units to buy materials directly and from local sources

Need for re-alignment of production facilities to maximise VAT benefits (In case of multi unit manufacturing facilities)

SOME ACTION PLANS

VAT Credit is available on Opening Stock on 1.4.2005- Keep Costing system ready to calculate the LST included in the opening stock, finished goods and work-in- progress. Refund to be made in 6 monthly instalments and to start after 3 months from the date of filing of the claim. Keep minimum stock as on 31.3.2005 to minimize claim; Buying on 1.4.05 would immediately allow credit Make necessary Impact Analysis based on existing system of Purchase and Sales(Local Purchase - VAT is available; Central Purchase - No Vat is available; Branch Transfer- No VAT credit is available)

SOME ACTION PLANS contd.

Companies enjoying Remission / Exemption Scheme to re-work their Cash Flow and Profitability system considering that benefits for local purchases and sales may be withdrawn in due course. - Benefits under CST would be pahsed out in next two years VAT accounting and software system would be in place Designing of VAT Invoice - Start Using TIN

THANK

YOU