new project on vat

8/6/2019 New Project on Vat

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PROJECT REPORT

ON

IMPACT OF INDIRECT TAX AS AN INSTRUMENT FOR ECONOMIC

DEVELOPMENT OF INDIA

(Case study of VAT Service, Mandya)

Submitted in partial fulfillment of the requirement for the award of a degree

In

Master of Business Administration from

Vishwesvaraiah Technological University

Submitted By

KAVYA.B USN.4PS09MBA26

Under the guidance

Of

Ms. Chandrika Mr.R.Ravi

Faculty ,PESCE Chartere Accountants

(Internal Guide) (External guide)

DEPARTEMENT OF MANGEMENT STUDIES

PES COLLEGE OF ENGINEERING, Mandya

2010-2011

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CERTIFICATE

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DECLARATION

I here by declare that this project Report entitled Impact of

Indirect tax as an instrument for the economic development of

India (case study of VAT) is submitted in partial fulfillment of the

requirement of POST GRADUATION DEPARTMENT OF

MANAGEMENT OF PESCE, MANDYA is based on primary and

secfondary data found by me in various departments, books,

magazines and websites and collected by me in under guidance of

Mrs.

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PREFACE

The Value Added Tax (VAT) that has been introduced in a majority of the Indian

States with effect from April 1, 2005, in lieu of the erstwhile Sales Tax, has been the single

most significant fiscal reform in the past fifty years. The stated intent of both the Government

of India and the Empowered Committee of the State Finance Ministers, in introducing this

measure, has been the reduction in aggregate taxes, introduction of a common market and the

facilitation of bringing into being of an integrated Goods and Services Tax.

On the eve of completion of one year under the VAT regime, it was felt necessary to

take stock of the implications of VAT on trade and industry, as perceived by them.

in order to document the experience of businesses across various industrial sectors, on both

the policy and operational aspects of the VAT. The Survey was intended to assess the

experience of businesses inswitching over to the VAT regime and to identify their continuing

concerns with regard there to.

The Survey was conducted by using a focused and structured questionnaire which

was administered to more than a whole saler, retailer and staff of VAT office having all India

operations. We take this opportunity to thank each one of the respondents for having sparedtheir valuable time to provide their viewpoints on the aforesaid aspects of their VAT

experience.

We are happy to present this report summarizing the key findings of the Survey. The

results provide useful insights on how the VAT has come about and how it has impacted

prices in general and business efficiencies in particular. It also highlights the manner in

which both industryand the State Governments have handled the transition.We are confident

that the findings of the Survey will enable the State Governments to better understand the

issues and concerns of trade and industry, especially in view of the recent introduction of

VAT in several additional States, and to consequently further refine the VAT legislation and

rules so as to bring about a simplified, uniform and tax payer friendly VAT.

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Executive Summary

Value Added Tax This much awaited tax reform finally happened in April 2005.

Each of the stakeholders viz. State Governments, Trade and Industry and Consumers had

different experiences to share. The survey was designed to document the experience of the

respondent retailer and wholesaler to identify the unfinished agenda for making the VAT

regime more industry friendly.

It was heartening to note that fully 84% of the respondents believed that the overall

experience of transitioning from the sales tax regime to the VAT regime was smooth.

As to the preparedness of the State Governments in addressing the transition, only a small

percentage of the respondents felt that the State Governments were fully prepared for the

switchover to VAT. The survey respondents also indicated the areas where further

improvements in the VAT regime were required. These were as follows:-

Introduction of uniform product classifications

Extension of input tax credits to Central Sales Taxes paid on procurement

Adoption of a practical approach to VAT audits of assesses

Introduction of single window assessment processes for all State taxes

Change in the mindset of VAT administrators

Only 25% of the respondents felt that the VAT had a significant impact on their

business model. The impact of VAT on prices was more or less neutral insofar as industry as

a whole was concerned. The self assessment system, which is the highlight of the VAT, in

contrast to the erstwhile sales tax, has cast a huge responsibility on businesses since 100%

compliance with the VAT rules and regulations is a pre-requisite for self assessment.

The results of the survey are expected to be very revealing for the State Governments

and other stakeholders to gain an insight as to where we are on VAT implementation today,

the further changes that are required in the VAT regime and the manner of realization of the

integrated GST, in line with the statement made by the Finance Minister in his Budget

Speech.

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ACKNOWLEGMENT

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TABLE OF CONTENTS

CONTENTS PAGES

Certification .. i

Declaration ii

Preface .. .iii

Executive summary .. v

Acknowledgement .. .. ..

Table of Content . . . . .vii

List of Figures . . ..xii

Abbreviations/Acronyms .xiii

CHAPTER ONE

INTRODUCTION

1.1 Background Statement . . . . . 1

1.2 Statement of the Problem . 7

1.3 Research Objectives . . . . 7

1.4 Research Questions ...8

1.5 Significance of the Study ..8

1.6 Limitations 9

1.7 Delimitation .. 9

1.8 Organization of the Study . 10

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction ..11

2.2 Conceptual Framework 11

2.3 Sources of Revenue 12

2.4 value added tax in India . 13

2.5 what is Value Added Tax . . .13

2.6 why VAT is preferred over sales Tax .. . . ...14

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2.7 Difference between VAT and CST ..15

2.8 who gains .15

2.9 What will be the Tax Burden .16

2.10 who pays .. ...17

2.11 How to pay ..17

2.12 Which goods will be taxable under VAT .18

2.13 Other consideration . . 19

2.14 Vat effect on Inflation . . 19

2.15 Distribution effect of VAT 20

2.16 VAT effect on Economic Development . ...21

2.17 Features of VAT . 22

2.18 What is the biggest advantage . . ..22

2.19 Opposition of VAT . ... 23

2.20 Registration of VAT .. . . .. ..23

2.21 Impact of VAT . ..24

2.22 How VAT works .. . .24

2.24 Supplies .. .31

2.25 Keeping Records and Accounts ..35

2.26 Examination of VAT Records . 36

2.27 VAT Returns .37

CHAPTER THREE

METHODOLOGY AND SCOPE OF THE STUDY

3.1 Introduction . 39

3.2 Study Area . .39

3.3 Sources of Data Collection . . 403.4 Target Population/Research Population ..

3.5 Sample Size and Sample Frame .42

3.6 Sampling Techniques .42

3.7 Data Collection Methods/Techniques .. . . . .43

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3.8 Data Analysis and Interpretation .. . . .43

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Introduction ..44

4.2 Age of Respondents .45

4.3 Type of Business Activity .. ..46

4.4 Level of awareness of VAT .. .. ..48

4.5 Medium of education of VAT .. . . .. 49

4.6 Expenditure on VAT .50

4.7 Auditing of VAT 51

4.8 Implementation of VAT ..

4.9VAT Recovery .. . . .. 53

4.10 VAT Return .. . ..54

4.11 VAT Rates ..57

4.12 Impact on prices ..58

4.13 Impact on Margin ..59

4.14 Effects on Business Model .. .. 60

4.15 Motivation of VAT Staff 61

4.16 Methods ofTax Evasion ..

CHAPTER FIVE

SUMMARY OF FINDINGS, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction 65

5.2 Summary of Findings 65

5.3 Conclusion 67

5.4 Recommendation 67LIST OF FIGURES

Figures Title Page

1 Age Distribution of Respondents 45

2 Type of Business Activities 46

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3 Knowledge on VAT . 47

4 Medium of Education on VAT 48

5 Government Expenditure on VAT Revenue .. .49

6 Duration for Auditing VAT Registered Businesses . .. 50

7 Benefits of Implementing VAT to Indias Economy . ..51

8 Mode of VAT Collection in India .. ..52

9 Effective Ways to VAT Recovery 53

10 VAT Return Recoveries in Percentage .. .. 54

11 Level of Education on VAT ...55

12 Areas of Spending VAT Revenue 56

13 Motivations to VAT Staff .. .. .. ...57

14 Issue of VAT Invoices to Customers . 58

15 Request for VAT Invoice . ..59

16 Issuance of VAT Invoice Enough to Collect Tax .. .. .. .. .. . 60

17 Effective Ways to collect VAT Revenue .. ..61

18 Methods/Ways of avoiding Tax Evasion . . .. 62

ABBREVIATIONS/ACRONYMS

ERP- Economic Recovery Programme

IMF -International Monitory Fund

WB- World Bank

CEPS- Customs Excise and Preventive Services

IRS -Internal Revenue Service

USA- United States of America

SI -Sales Invoice

PI- Purchase InvoiceDD- Delivery Document

SIC -State Insurance Company

PS -Purposive Sampling

SPSS- Statistical Package for Social Sciences

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CHAPTER ONE

INTRODUCTION

1.1Background Statement

The idea of Value added taxation (hereinafter referred to as VAT) traces back to the

writing of Von Siemens a German businessman in the 1920s. However, not until 1948, the

first value added tax was applied in France. At the beginning, France applied the GNP based

VAT2 covering up to the manufacturing level and subsequently replaced with a consumption

VAT3 in 1954.

VAT proves to be an efficient tool for revenue collection; its performance, therefore, has

direct impact on fiscal mobilization, macroeconomic stability, and development. Asillustrated in the article, compared with alternatives in indirect taxation, the VAT has revenue

potential: it is generally more broad-based and entails a trail of invoices that helps improve

tax Compliance and enforcement.

The IMF assesses the growing importance and worldwide expansion of the VAT as

follows: [The VAT has become] a key source of government revenue in over 120

countries. About 4 billion people, 70 percent of the worlds population, now live in countries

with a VAT, and it raises about $18 trillion in tax revenueroughly one-quarter of all

government revenue. Much of the spread of the VAT, moreover, has taken place over the last

ten years. From having been largely the preserve of more developed countries in Europe and

Latin America, it has become a pivotal component of the tax systems of both developing and

transition economies.

It has become increasingly demanding for governments all over the globe to devise

appropriate means of generating adequate revenue to finance government expenditure which

continue to soar as a result of growth in population with its attendance demand for

infrastructure and other social and economic investment. It is against this reason that taxation

has become legally accepted all over the world as one of the most suitable means of


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generating revenue. There are different kinds of taxes available for governments to raise

revenue.

Modern Government forms a unique part of every nation. They have the

responsibility to protect the nation against internal disorder and external aggression. They

engage a large number of people (judges, civil and public servant, law and order enforcers,

health officials, etc) in order to keep the nation running. Despite the general trend especially

in the twentieth century towards privatization, the maintenance of the state machinery,

production capacity, infrastructure of health, education, Housing, roads and railways, to a

large extent depend on governments.

Governments However, do not earn any income on their own. They must therefore

devise the means to generate revenue to undertake their responsibilities. Historically, this has

been done through the levying of various forms of taxes. In pre-modern times, taxation was

viewed as a direct exchange of bargain in which the taxing authorities on one hand, and the

taxpayer on the other hand, each expected to receive equal benefit in relation to what it gave

out. Taxes were looked upon as the wages paid to government for its services, the chief

among them being security.

This concept became known as the bargain theory. The common view was that

each one was to provide all his needs otherwise he paid the government authorities to do that

for him. It is interesting to note that during the pre-Revolutionary times in France, the

wealthy and privileged classes were largely exempted from taxation simply because they

could hire and pay for the services they needed with these ideas about taxation during those

times; it is not surprising that it was defined as follows:

The imposition on the people by sovereign powers is nothing else but the wages due

to them that Hold the sword to defend private men in the exercise of their several trades and

calling , The revenues of the state are a part of his property which the citizen gives in order

to be sure of other part or to enjoy comfort , The subject, when properly taxed, contributes

only some of his property in order to enjoy the rest .


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The modern view of taxation steams from the common premises that no one can be

an island for Himself. The fight against poverty, crime, economic stagnation, etc., requires

the concerted effort of all and thus all must pay for it. Thus in modern times taxation is

defined as follows:

According to Hicks 1965, A tax is a compulsory contribution from the person to

government to defray the expenses incurred in the common interest of all without reference

to special benefit conferred. Quickly he added that A tax is a compulsory contribution of

the wealth of a person or body of persons for the service of the public powers

By the definitions of the various authors, it is now clear that taxes are now seen as

compulsory extractions that involve personal obligations for common public purposes.

Harley Lutz However, highlighted on this point when he noted that: The modern viewpoint

in taxation is a product of the growing social solidarity and sense of common social

obligation that have characterized human progress during the last hundred years. The

contributory factor in the modern concept emphasizes the greater social unity and the

stronger sense of common burden and responsibilities, which are features of modern life. All

should therefore contribute to its effective support. In the time of Julius Caesar, Roman

citizens did not pay tax. All the revenue required by the empire, including the cost of the

military operations, was requisitioned from the people who lived in territories which had

been occupied by the Romans. Only indirect taxes were raised in Rome itself because direct

taxes were seen to be humiliating and undignified.

Indirect taxes, such as customs duties, are paid by an individual through purchasing

goods and services, and are not directly related to the personal circumstances of the taxpayer.

On the other hand, direct taxes, such as income tax, can directly reduce the tax payers

income and can be directly related to the taxpayers personal circumstances. Romans resisted

direct taxes, not so much because of an unwillingness to pay them, but because of the loss of

privacy which taxes necessitated.

Requisitioning required every citizen to assist the Roman state with his labour and

property. The system has a number of serious disadvantages, principally it lack certainty.

This led to tax demands being levied in an unpredictable and arbitrary way. Thinking about

the system of tax which operates in the UK today, Employers are required to collect the taxes


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due from their employers. If they dont comply they are potentially liable with fines and

interest on tax unpaid.

Some commentators have also argued that there is a lack of certainty about the tax

liability, which a transaction may attract because, until recently, The Inland Revenue refusesto advise taxpayers of their attitude towards activities in advance of Submitting accounts or

computations. According to Terkper, (1998), the introduction of Value Added Tax in India

was in-line with the policy of the Economic Recovery Program (ERP) which was launched in

1983 and which sought among other things to rationalize the tax system.

The low performance of these revenue sources explain why Indias tax ratio continues

to fall below the average of 17% of total revenue in Sub-Saharan Africa. The need therefore,

to improve the tax system led to the commissioning of feasibility study in 1991, conducted

jointly by the Harvard Institute of International Development (USA) and the Crown Agent of

the U.K. Among their term of reference was to study into the present tax system and suggest

ways of improving it. Their recommendation therefore led to the introduction of VAT in

March 1995. Unfortunately, the tax burden on the majority of Indians was increased by the

introduction of the Value Added Tax (VAT), In 1995 and later in 1998. In 1995, the

government proposed a VAT of 17.5% on goods and Services, irrespective of public

dissatisfaction and anxieties about inflationary impact, ignorance about How to calculate and

handle the new tax, the government still impose it partly to satisfy a Trigger condition of the

International monitory Fund (IMF) and the World Bank. This sparked off public riots in the

major cities leading to the shooting to death of some civilians. The anti-VAT demonstration

dubbed kumi-preko (meaning kill me completely) stands in Indias calendar as a major

citizen protest action against imposed policies.

Whilst the government announced publicly that the tax was being withdrawn, the

sales and services taxes it sought to replace were reinstated. Other goods and services that

were not covered by these taxes were brought into the tax net. Following a much wider

public consultation, the government proposed and received parliamentary approval for a

lower VAT rate of 10% in 1998.


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The Value Added Tax levied at the rate of 10% on the cost or price of imports, locally

manufactured goods and services. It is levied at each stage that there is value added tax.

Thus the importer, manufacturer, wholesaler and retailer all pay VAT. All these are absorbed

by the final consumer in the form of high price on the item. The importer, manufacturer and

the retailer do not incorporate the VAT Paid into their pricing because they get credit for

what they pay at VAT. However, the final Consumer picks that VAT at each stage of the

production and distribution process in addition to the profit and so the price becomes

unbearable. The majority of citizens are worse off than before the introduction of VAT.

1.2 Statement of Problem

The ideal definition of VAT is that-Any tax which unifies and replaces all types of

indirect taxes, is called Value added Tax. If we go by the above definition of VAT, thenonly we will realize that how VAT is totally impractical in the Indian context. That is why;

we all can see that even after the VAT is implemented, there are lot of indirect taxes like

Excise Duty, Central Sales Tax, Entertainment Tax, Luxury Tax, Professional Tax, Service

Tax etc., which are also being levied by the Government in addition to the VAT.

This makes the whole proposition of VAT really untenable. Due to the hard-sell by

the Government that VAT is a progressive, transparent and equitable commodity taxation

system offering improvement on the existing sales tax system, there has been a burst of

enthusiasm among some section of trade, industry and policy makers. However, enthusiasm

does not combine best with logic. It is necessary to first understand what is possible within

the framework of the constitution.

1.3 Research Objectives

The main objective of the study is to know whether the imposition of VAT has had apositive impact on the Indian economy.

Specifically, the study attempt to:


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1. Determine the extent to which the payment of VAT has improved the prospective

businesses, firms, organizations and industries as a whole.

2. Evaluating the positive extent to which the imposition of VAT has helped the Country to

improve its economic fortune as a whole.

3. Assessing the mechanism used in the collection of VAT in India.

4. Establish a clear distinction between the VAT methodology and what was actually used

previously in collection of government revenue.

1.4 Research Questions

It would be of interest to look at VAT implementation, especially in other developing

countries, In India For instance, which introduced the tax a few years back, the political

fallout has been deep. The sharp decline in aid since the early 1990s compelled India to

explore alternative sources of revenue and the search culminated in the adoption of the VAT

in March 1995.

Hence, the following are the research questions of the study,

i. To what extent does the VAT impacted on the Indian economy?

ii. What method if any improves the collection of VAT in Indian?

iii. To what extent do companies, firms, consumers accepts the VAT in India?

1.5 Significance of the Study

This project work is intended to provide immense benefit to VAT administration inIndia and also seeks among other things to establish the extent to which the payment of VAT

has improved the prospective business, firms and organization. Again, knowing the positive

extent to which the imposition of VAT has helped and the purpose of which VAT has been

introduced help in planning the countrys economy. Mechanism used in the collection of


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VAT in India gives a clear distinction of VAT methodology and other taxes that are of great

important to the researcher.

1.6 Limitations

The researcher encounters the following problems.

1. Financial Constraint:

Due to the scattered nature of businesses in the municipality, the researcher spend a

lot of money on travelling, thus move from one place to another to gather more information.

2. Unwillingness to give adequate information:

Most tax payers were reluctant in giving information about the study since most

believed that tax payment was something very confidential and therefore did not open up to

the researcher.

3. Inadequate record keeping (Book-Keeping):

Some respondents were not keeping proper records of their business activities and as

such could not give adequate and correct information on the effect of VAT on their

businesses rippling on the economy of India.

1.7 Delimitation

The collection of data was restricted to the VAT office, businesses and consumers in

the Ho, hence the findings of the study was generalized to cover VAT activities in the Ho and

the VAT office. The generalization of the result of this study to other categories of revenue

collectors in the Country with similar characteristics should be done with caution and

extensive analysis and comparison.


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1.8 Organization of the Study

The project work is categorized into five main chapters. Chapter one focuses on the

background to the study, problem statement, objectives, significant of the study, research

Methodology, limitations and delimitations.

Chapter two is devoted to systematic review of existing literature with emphasis on

history and Introduction of VAT in India, increasing effect of VAT on the economy of India,

benefits derived on the imposition of VAT, keeping of proper financial records and accounts.

The third Chapter deals with research methodology including population, sampling

techniques, methods of Data Collection and the research instruments employed.

Chapter four is also made up of detailed analysis of data collected and presentation of

information with the aid of quantitative and statistical models.

The fifth chapter covers the summary, conclusion and recommendations.


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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This Chapter covers a conceptual framework on the role of VAT on the economy of

India. In order to provide suitable theories on the topic under investigation, the researcher has

reviewed a number of existing literatures; this will help to explain some key terms, which are

relevant to the study.

2.2 Conceptual Framework

The VAT was recommended for member countries by the (New mark) Committee of

the Europeans Economics Community (EEC) and was later approved by the Europeans

Economics Committee Council of ministers. The EEC then directed all its members to

replace the sales tax with VAT.

Denmark, though not a member of the EEC, was the first European Country to

Extend the VAT to the retail sector followed by France and Germany. Several developing

countries have since then given increasing attention to VAT as a means of rationalizing the

system of taxation. VAT is levied on almost all business transactions in over 130 countries

around the world because it is intended to impose a neutral effect on business. VAT is often

recoverable for companies doing business in a foreign jurisdiction. For most companies,

returns are primary available for member states of the EU, Canada, as well as some

additional countries that charge VAT.

According to Henderson and Poole (1985), VAT is defined as a tax rate applied to

each stage of production equal the trial price so that the tax may be shown in the same retail

or sales tax of the same rate.


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Also Peggy, (1985) state that a properly implemented VAT equivalent to a

corresponding single state tax. He said, under the expenditure tax, the VAT is not genuinely a

new form of taxation but a merely sales tax administered in different form. Any form of

taxation can be used to discourage consumption of commodities yielding negative

externalities so as to stabilize national income and to redistribute income.

The term value added According to Value Added Tax Act 1994 Act 486 refers to

increase in value of goods and services at each stage of production or transfer of goods and

services. Thus Value Added Tax is basically a tax to levy on the value added by an

organization at each stage of production of goods or rendering of services.

The VAT is a tax on the final consumption of goods or services and is ultimately

borne by the consumer although it is collected at every stage of production or distribution

and a tax credit is granted at every stage for tax paid at the earlier stage in the chain of

transfer/sale of goods and services till it reaches the final consumer.

2.3 Sources of Revenue

The income of government is mainly from taxes, rates, fees and fines, special

assessments and revenue from government owned enterprises. The bulk of Government

income in developing countries like India is principally derived from indirect taxation; while

in the developed countries, like the USA, the bulk of government revenue is rather derived

from direct taxation.

Borrowing becomes necessary when income from regular sources is not sufficient to

take care of expenditures. The money borrowed must be repaid with some interest out of

regular current income or by additional borrowing. But the practice of borrowing cannot be

regular featuring in government administration, hence the need for revenue collection

agencies in developing countries to maximize revenue collection.


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2.4 Value Added Tax (VAT) in India

2.5 What is Value added Tax

Value Added Tax is a broad-based commodity tax that is levied at multiple stages of

production. The concept is akin to excise duty paid by the manufacturer who, in turn, claims

a credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale and both

work in the same manner, according to the white paper on VAT released by finance minister

Chidambaram. The document was drawn up after all states, barring UP, were prepared to

implement VAT from April. It is usually intended to be a tax on consumption, hence the

provision of a mechanism enabling producers to offset the tax they have paid on their inputs

against that charged on their sales of goods and services. Under VAT revenue is collected

throughout the production process without distorting any production decisions.

2.6 Why VAT is preferred over sales Tax

While theoretically the amount of revenue collected through VAT is equivalent to

sales tax collections at a similar rate, in practice VAT is likely to generate more revenue for

government than sales tax since it is administered on various stages on the production

distribution chain. With sales tax, if final sales are not covered by the tax system e.g. due to

difficulty of covering all the retailers, particular commodities may not yield any tax.

However, with VAT some revenue would have been collected through taxation of earlier

transactions, even if final retailers evade the tax net.

There is also in-built pressure for compliance and auditing under VAT since it will be

in the interest of all who pay taxes to ensure that their eligibility for tax credits can be

demonstrated. VAT is also a fairer tax than sales tax as it minimizes or eliminates the

problem of tax cascading, which often occurs with sales tax. These are facilitated by the factthat VAT operates through a credit system so that tax is only applied on value added at each

stage in the production distribution chain. At each intermediate stage credit will be given

for taxes paid on purchases to set against taxes due on sales. Only at consumption stage

where there are no further transactions will there be no tax credits. Lack of input credit

facility in sales tax often results in tax on inputs becoming a cost to businesses which are


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often passed on to consumers. Sales tax is often applied again to the sales tax element of the

cost, thus there is a problem of tax on tax. This is not the case with VAT, which makes it a

neutral tax as it provides the least disturbance to patterns of production and the generation

and use of income.

In addition, the audit trail that exists under the VAT system makes it a more effective

tax in administration terms than sales tax as it helps with the verification of VAT amounts

declared as due. This is made possible by the fact that one persons output is anothers input.

As with sales tax imports are treated the same way as local goods while exports are zero-

rated to avoid anti-export bias.

Notwithstanding the advantages mentioned above, it is worth noting that VAT is a

considerably complex tax to administer compared with sales tax. It may be difficult to apply

to small companies due to difficulties of record keeping and its coverage in agriculture and

the services sector may be limited. To cover the high administration costs, VAT rates of 10-

20 per cent are generally recommended. The equity impact of the relatively high rates have

been a cause for concern as it is possible that the poor spend relatively high proportions of

their incomes on goods subject to VAT. Thus the concept of zero VAT rate on some items

has been introduced.

2.7 Difference between VAT and CST

Under the CST Act, the tax is collected at one stage of purchase or sale of goods.

Therefore, the burden of the full tax bond is borne by only one dealer, either the first or the

last dealer. However, under the VAT system, the tax burden would be shared by all the

dealers from first to last. Then, such tax would be passed upon the final consumers. Under

the CST Act, the tax is levied at a single point. Under the VAT system, the retailers are not

subject to tax except for the retail tax.

Under the CST Act, general and specific exemptions are granted on certain goods

while VAT does not permit such exemptions. Under the CST law, concessional rates are

provided on certain taxes. The VAT regime will do away with such concessions as it would

provide the full credit on the tax that has been paid earlier.

Under VAT law, first, the dealer pays tax on the sale or purchase of goods. The

subsequent dealer pays tax on the portion of the value added upon such goods. Thus, the tax


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burden is shared equally by the last dealer. To illustrate the whole procedure of VAT, an

example is as follows:

At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%.

Therefore, the net VAT would be 12.5%. At the second change of sale, the sale value is

Rs.120 and the tax thereon is 15%. The tax that is to be paid at every point is 15%. The input

tax is 15%. The dealer will get a credit for first change in sale of 2.5%-- i.e. 15% -12.5%.

Therefore, 2.5% will be the net rate. At the third change of sale, the sale value is Rs.150 and

the tax on this is 18.75%. At the last stage, the tax paid is 18.75%. The Input Tax is 18.75%.

Dealers get a credit for second change in sale? i.e. 18.75% -15% = 3.75%. Therefore, 3.75%

would be the net VAT. This means that VAT is paid in the last point tax under the sale tax

regime.

2.8 Who gains

State and Central governments gain in terms of revenue. VAT has in-built incentives

for tax compliance only by collecting taxes and remitting them to the government can a

seller claim the offset that is due to him on his purchases. Everyone has an incentive to buy

only from registered dealers purchases from others will not provide the benefit of credit

for the taxes paid at the time of purchase. This transparency and in-built incentive for

compliance would increase revenues. Industry and trade gain from transparency and reduced

need to interact with the tax personnel. For those who have been complying with taxes, VAT

would be a boon that reduces the cost of the product to the consumer and boosts

competitiveness. VAT would be major blow for tax evaders, both manufacturers who evade

excise duty payments and traders who evade sales-tax.

2.9 What will be the Tax Burden?

The overall tax burden will be rationalized as itll be shared by all dealers, and prices,

in general, will fall. Moreover, VAT will replace the existing system of inspection by a

system of built-in self-assessment by traders and manufacturers. The tax structure will

become simple and more transparent and tax compliance will improve significantly. It will

also be simpler and offer easy computation and easy compliance. VAT will prevent


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cascading effect through input rebate and help avoid distortions in trade and economy by

ensuring uniform tax rates.

2.10 Who pays?

All dealers registered under VAT and all dealers with an annual turnover of more

than Rs 5 lakh will have to register. Dealers with turnovers less than Rs 5 lakh may register

voluntarily

2.11 How to pay?

VAT will be paid along with monthly returns. Credit will be given within the same

month for entire VAT paid within the state on purchase of inputs and goods. Credit thus

accumulated over any month will be utilized to deduct from the tax collected by the dealer

during that month. If the tax credit exceeds the tax collected during a month on sale within

the state, the excess credit will be carried forward to the next month.

2.12 Which goods will be taxable?

All goods except those specifically exempt. In fact, over 550 items will be covered

under the new tax regime, of which 46 natural and unprocessed local products would be

exempt from VAT. About 270 items, including drugs and medicines, all agricultural and

industrial inputs, capital goods and declared goods would attract 4% VAT. But, following

opposition from some states, it was decided that states would have option to either levy 4%

or totally exempt food grains from VAT but it would be reviewed after one year. Three items

sugar, textile, tobacco under additional excise duties will not be under VAT regime for

one year but existing arrangement would continue.

2.13 Other consideration

It is imperative that policy makers in considering adoption of VAT should be

interested in the economy wide impact of this tax. Special emphasis is often placed on its

effect on equity, prices and economic growth. This is particularly important because of the

potential effects on consumption of certain commodities that have a direct or indirect effect

on labour productivity.


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2.14Vat effect 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 thetrend 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.

2.15 Distribution effect of VAT

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 fallsheavily 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

regressively of VAT the following measures can be taken:

The VAT itself can be used to differentiate taxation of consumer items that areconsumed 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 consumedMostly 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:


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The fact that sometimes it is almost impossible to differentiate between higher qualityexpensive 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.

Increased costs of VAT administration as a differentiated rate structure brings with itproblems of delineating products and interpreting the rules on which rate to use.

significantly increased costs of tax compliance for small firms, which are usuallyUnable 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 atprior 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 verticalIntegration.

Exemptions tend to feed on each other giving rise to a phenomenon calledExemption 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.


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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.

2.16 Vat effect on Indian economy

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 non-

inflationary manner. Compared to other broadly based taxes such as income tax VAT isneutral 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.

2.17 Features of VAT

1. Rate ofTax 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.


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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 neighboring 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,

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.

2.18 What is the biggest Advantages?

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


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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 be2 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.

5. Fair and Equitable VAT introduces the uniform tax rates across the state so that

Unfair advantages cannot be taken while levying the tax.


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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.

2.19 Opposition to VAT

Ayeboafoh, (1997) said the possibility of harassment by the tax inspectors is the

outward reason for opposition by the trading community. Also proper records are required to

be maintained which is very cumbersome job. Some people also argue that VAT would lead

to price rise and as such it is unconstitutional to replace it with the existing sales tax.

However the real reason is different. There is less scope of tax evasion under VAT and there

will be stricter compliance. The trading community wants to retain the scope of tax evasion,

as it existed under the sales tax structure.

2.20 Registration of VAT

In the Public Notice the total value of taxable supplies made by a business is referred

to as its taxable turnover or sales. All goods and services are taxable except those exempted

by law. In principle, all individuals or businesses making taxable supply must register for

VAT. They are called Taxable persons under the law.


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However, the VAT law makes an exception for retailers of goods, hence the criteria

for registration under the law is summarized as follows:

All Individuals and businesses that are eligible to register under the current sales and

service tax collected by the Custom Excise and Preventive Service (CEPS) and Internal

Revenue Service (IRS) respectively must apply for registration. This category covers mainly

manufacturers and service provider.

Again all retailers of goods who make taxable sales or turnover above Rs.20,000.00 a

year must apply for registration. Strictly speaking, manufacturers, service providers and

wholesale businesses are not subject to the turnover limitation, which is commonly referred

to as the VAT Registration threshold. In practice However, artisans and small business

operators (Example Fitters, Repairs, hairdresser, Chop Bar operators etc.) in the informal

sector will not be registered to charge VAT.

The definition of a taxable person includes a Sole Proprietor, Partnership (including

husband and wife partnership), limited liability companies, government institutions and non-

profit organizations. Each registration covers all the business activities of the registered

Person. It may therefore include subsidiaries, divisions and branches of the same business.

The law has other provisions regarding registration. First, a retailer of goods may apply to be

voluntarily registered. If they so wish, even when their annual Taxable turnover falls below

the registration threshold. This is usually done to enable such businesses to take advantage

of the benefit of the input tax Credit. Secondly, the VAT Commissioner has been given

power to compulsorily eligible firms that may be attempting to avoid or evade registration

even though their registration is at hand or their supplies exceed the turnover.

2.21 Imposition of VAT

As pointed out by Tia A. (1995) the basic requirement of the VAT law is that any

supplier of goods and services will attract the tax, unless specifically excluded from the tax

base by law. The word supply is the expression taxable supply and it is used to

distinguish between the goods and services which attract the tax and those which do not.

VAT is payable if supplies of taxable goods and services are made:

a. An import to India.

b. By a taxable person.


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VAT is most certainly a more transparent and accurate system of taxation. The

existing sales tax structure allows for double taxation thereby cascading the tax burden. For

example, before a commodity is produced, inputs are first taxed, the produced commodity is

then taxed and finally at the time of sale, the entire commodity is taxed once again. By taxing

the commodity multiple times, it has in effect increased the cost of the goods and therefore

the price the end consumer will pay for it.

2.21Tax implication under Value Added Tax Act

The transaction chain under VAT assuming that a profit of Rs 10 is retained during

each sale.

SALE 'A' OF CHENNAI

@ Rs. 100/-

'B' OF

BANGALORE

SALE

@ Rs. 114/-

'C' OF

BANGALORE

SALE

@ Rs. 124/-

'D' OF

BANGALORE

SALE

@ Rs. 134/-

CONSUMER

IN

BANGALORE

Tax implication under Value Added Tax Act

Seller Buyer Selling Price(Excluding Tax)

Tax

RateInvoice

value (Incl

Tax)

Tax

Payable

Tax

Credit

Net

TaxOutflow

A B 100 4%CST

104 4 0 4.00

B C 114 12.5%VAT

128.25 14.25 0* 14.25

C D 124 12.5%VAT

139.50 15.50 14.25 1.25

D Consumer 134 12.5%VAT

150.75 16.75 15.50 1.25

Total to Govt. VATCST

16.75

4.00


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*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same though it

could to be reduced to 2% when VAT is introduced and eventually phased out.

VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases

(inputs) and capital goods. What this means is that dealers can actually deduct the amount of

tax paid by him for purchase from the tax collected on sales, thereby paying just the balance

amount to the Government.

2.22 How VAT Works

A registered person or an enterprise making taxable supplies accounts for VAT for an

accounting period which is usually one calendar month. The amount paid to the tax

authorities is the difference between the total VAT collected from customers on sales (output

VAT) and total VAT paid on purchases and expenses (input VAT). The rationale for

allowing registered enterprises to recover the Input VAT is simple. For as long as goods and

services change hands between registered businesses, the output tax charged by others who

buy from them.

Registered tax payers are allowed the Input Tax credit to prevent the tax cascading

or increasing the cost of product and or distribution unnecessarily. However, a registered

enterprise or business must be in possession of a tax invoice before it can claim the Input tax

credit.

In the case of imports, the business must be in possession of a Customs Entry or other

approved evidence of tax payment approved by CEPS. At the end of the calendar month, all

taxable persons must total their Output Tax and use these to complete the VAT returns. The

amount due to government is therefore the difference between the output tax charged on

taxable sales and the Input Tax paid on taxable purchases and expenses.

2.23 Supplies

Supply is used to taxable supplies refer to supply of both goods and services

whether taxable or exempt. And it covers the following examples of transactions.


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a. The sale, supply, or delivery of taxable goods to another person including imports.b. The appropriation by the registered person of taxable goods for his personal use or for

use by others.

c. The making of a gift of any taxable goods or taxable services in the course of business.

d. The letting of goods on hire, leasing or other transfers.

e. The acceptance of wager or stake in any form of gambling including lotteries or

gaming machines.

f. The processing of data or supply of information or similar service.

g. The supply of staff.

h. The sales, transfer, assignment or licensing of patent, copyright, trademarks, computer

software and other proprietary information.

i. Any other disposal of taxable goods or provision of taxable services.

2.24 Keeping Records and Accounts

Bertnam, et al (1987) pointed out in their book Comprehensive aspect ofTaxation

that all registered traders must keep records and accounts of taxable goods and services

received or supplied in the course of doing any business including zero rated supplies made

or received. In addition, the trader should keep a summary of the totals of input and output

tax for each calendar month. This is called VAT Account.

All these records must be kept up to date and in sufficient detail to enable the tax

payer calculate correctly the amount of VAT to be paid to the VAT Authorities. It is also to

provide evidence of claims for input tax credit. The records must be kept properly and made

readily available to enable the VAT officer check figures used to file the VAT returns. The

principal records which registered persons must keep for VAT include


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Sales Invoice: Copies of all invoices issued in serial number order showing details of the

amount of tax charged on each supply made.

Purchases Invoice: All purchases invoice copies of custom entries receipt for the

payment of duty or tax.

Debit and Credit Notes: Copies of all debit and credit notes issued.

VAT Account: Totals of output and input tax each period and the net amount payable or

the excess tax carried forward at the end of each month.

Delivery Document: Details of each supply of goods and services from the business

premises unless each details are available at the time of supply on invoice issue at or before

the time.

2.25 Examination of VAT Records

The records of all business, including those not specifically registered for VAT may

be subjected to independent examination by the VAT authorities. The examination or audit

may cover the VAT account and other records relating to VAT. All records should be made

readily available to the authorities on request and should be kept at the principal place of

business specifically permitted to keep them elsewhere. As noted earlier, the records should

be kept for a period of six years before they can be destroyed, unless otherwise directed by

the commissioner.

2.26 VAT Returns

A VAT registered person is required to file monthly returns showing details of VAT

transactions for each calendar month . The records for each month must be submitted not

later than the last working day of the month immediately following the month to which it

relates. The return must show details of the sales and purchases made during the month

immediately preceding that in which the return is being filed and the related VAT on these

values. The return must show details of the sales and purchases made during the month

immediately preceding that in which the return is being filed and the related VAT on these

values. It must be in the form prescribed in form

.


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a. Each return will include the following particulars:

b. Sales-for each rate of tax (i.e. standard and zero-rate)

Total Value of Supplies made Tax Rate Amount of output tax payable

c. value of exempt supplies

d. purchase/expenses-for rate of tax (i.e. standard and zero-rated)

Total value of supplies received. Tax rate. Amount of input tax paid.

The amount of input tax deductible (and upon apportionment where applicable). i.e. The

net amount of tax either payable to tax authorities or repayable by them. A late return or one

without the required amount of tax will attract penalties under the law. If no taxable suppliers

are made or received during the preceding month, a nil returns should be submitted by the

registered trader. It is necessary for the registered trader to keep copies of all VAT services

rendered on the business premises.

The accurate completion and prompt submission of VAT returns and payment are the

way of avoiding penalties under the law. If a registered person fails to file a VAT Returns or

submits an inaccurate Return at the end of the month, the Act gives powers to commissionerto raise an assessment and in addition impose penalties and interest charges, where

appropriate. The monthly VAT payments should be made at the same time as the filing of a

return, either in cash or cheque. All cheques be crossed and marked account payee only

remember that it is an offence to bounce a cheque.


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CHAPTER THREE

METHODOLOGY AND SCOPE OF THE STUDY

3.1 Introduction

This chapter deals with the sources of data collected, the research population,sampling techniques employed and the sample size. Besides, the research instrument used in

the data collection, the data collection procedure and tools for data analysis were also

discussed.

3.2 Study Area

The study was undertaken at Mandya, the administrative capital of the Volta Region

of India in general and VAT office in particular. The Ho municipality covers an area of about

45km radius and has dispersed VAT traders all over the municipality.The VAT office occupies the floor of the former co-operative bank under the roof of the

State Insurance Company (SIC) near Goil Filling Station on the main Ho-Accra trunk road.

The main activities performed in the municipal VAT office include:

Opening of files for taxable traders, issuance of VAT certificate, provision of VAT

(20) return forms, provision VAT education, invigilation, control and verification of VAT

custom documentations, prosecution of tax evaders and recalcitrant traders and taking

distress actions as well as sealing off customers premises. The VAT office in particular was

painstakingly considered owing to its representation, accessibility and limited time constrains

as well as financial difficulties to enable this research cover the VAT fraternity in India..

3.3 Sources of Data Collection

Data was gathered from primary and secondary sources. Under primary data the

researcher targeted all staffs of the VAT Service office in Ho, wholesalers, Retailers, Service

providers and a section of the consuming public in the municipality. Questionnaire was themain tool used to elicit majority of the information, open-ended, close-ended and multiple-

choice questions were combined in the questionnaire designed for the research work.

Secondary data were extracted from selected books, journals, internet, and pamphlets on the

project topic understudy. Other revenue agencies were also consulted for their views on the

role of VAT on the economy of India.


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Both qualitative and quantitative methods were employed to gather the essential data

for the study to be undertaken successfully. The choice of data collection methods was

informed by the general objectives of the project work, the effect of VAT on the economy of

India. Questions were carefully set to elicit all information necessary to achieve the research

objectives. In drawing up the research questionnaire, special attention was attached to the

number of questions and their relevance to the objective.The questionnaires cover issues like:

personal background, meaning and perception of VAT, and the role of VAT on the economy

of India etc.

Observations were made by the researcher whilst on visit to some of the shops in the

municipality both retail and wholesale to solicit divergence views. Interesting revelations

were made. These revelations were discussed in detail in the next chapter. In spite of the

exacting response from the research questionnaires, it became necessary to use check list to

elicit additional information and in some cases explanations that were deemed necessary.

3.4 Target Population/Research Population

Population is the entire aggregation of items from which samples can be drawn. This

research is focused on the VAT office and the Ho municipality. All categories of staffs of the

VAT office Ho, Retailers, Wholesaler, Service Providers and a section of the consuming

public constituted the population of interest. Besides, the various revenue agencies that

collect VAT on behalf of the government were covered in the study.

3.5 Sample Size and Sample Frame

The researcher chooses all categories of groups or strata in the Ho municipality for

investigation. This includes:

15 staffs of the VAT office, Mandya 5 Wholesalers 10 Retailers 8 Service Providers 2 Manufactures and 60 Consumers of goods and services.


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In all, a sample size of 100 people was considered appropriate, considering the

financial and time constrains of the researcher.

3.6 Sampling Techniques

Sampling is the process of selecting a part of a population to represent a whole. The

researcher used Purposive sampling (PS) in the selection of samples in the study area. The

research was conducted on the basis of giving equal right to selected males and females in

the strata. This enables the researcher to sample the view of all the groups under investigation

on the role of VAT on the economy of India.

Questionnaires were administered to all members of the strata. Again simple random

sampling was employed in selecting respondents to the items in the questionnaire. In all 100

questionnaire were issued out and all questionnaires were retrieved (100%), the final samplesize of the study was 100.

3.7 Data Collection Methods/Techniques

The data collection methods or techniques formed an important part y research.

In this regard, the researcher used two different methods of gathering required data. These

are questionnaires and published materials.

3.8 Data Analysis and Interpretation

Both quantitative and qualitative methods were employed in the data analysis. For the

quantitative aspect, Statistical Package for Social Sciences (SPSS) and excel were used.

Frequency distributions, Percentages, and Descriptive Analysis of assessing the effect of

VAT on the economy of India. Data collected were collated and analyzed using various

quantitative statistical models such as bar chart and pie chart. Each datum was examined and

analyzed on its own merit and grouped into the various aspects of information requirement

for the purposes of this project work. The findings were critically examined again to make

sure that they were not incongruous with the research objective and hypotheses. The findings

which were discussed in the next chapter are presented in statistical form.


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CHAPTER FOUR

DATA ANALYSIS AND FINDINGS

4.1 Introduction

The focus of this chapter is on the analysis of the data collected from the field of

study according to the response given by the respondents.

In all, One Hundred (100) questionnaires were distributed among VAT Office staffs,

Wholesalers, Retailers and Consumers in the Mandya. The researcher also contacted other

Revenue Agencies to have additional information on the role of VAT on their Operations in

the municipality which are analyzed.

4.2News paper Articles collations

Topic - Positive impact of VAT appeared sooner than was expected

News paper Article Answered by DR SHANTO GHOSH, DIRECTOR ANDPRINCIPAL ECONOMIST, DELOITTE, HASKINS AND SELLS,

MUMBAI

(i)How the State governments are finances these days? Are they healthier in

comparison to the pre-1990 days?

Public Finance statistics for 2004-05 released by the Ministry of Finance indicate that

the combined budgetary finances of the States moved from a position of deficit during 1990-

91 (0.02 per cent of GDP) to one of surplus in 2004-05 (0.24 per cent of GDP). However, the

surplus in recent years is primarily driven by a surplus in the capital account, which has more

than offset the increasing deficit in the revenue account of the States. Focusing merely on the

revenue account, the deficit has increased from 0.9 per cent of GDP in 1990-91 to 1.44 per

cent of GDP in 2004-05.

What this means is that the States have been funding the shortfall between the developmental

and non-developmental expenditure and the direct tax, indirect tax and non-tax revenues by


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dipping into the surplus funds in the capital account. While the capital account was largely

funded by loans from the Centre in the early half of the 1990s, there has been a shift towards

market borrowings in recent times, which will add to the future interest burden of the States.

Moreover, the States in aggregate have increased their spending on non-developmental items

at an average rate of 16 per cent each year over the period 1990-91 to 2004-05 while

developmental spending has lagged behind with an average increase of 11.7 per cent over the

same period. Therefore, the deficit in the revenue account of the States is largely due to

excessive spending on the administrative machinery of the States and interest payments

rather than income generating developmental projects. It is time to embark on a conscious

programme of fiscal conservatism at the level of the States and evaluate the marginal benefits

of additional expenditure before sanctioning new projects.

(2)Are there new revenue streams that are significantly contributing to the kitty of the

State governments?

Overall, the share of direct taxes in total tax revenue for the States has increased from

approximately 12 per cent in 1990-91 to 15 per cent in 2004-05; this was accompanied by a

corresponding decrease in the share of indirect tax collections (which declined from 88 per

cent in 1990-91 to 85 per cent in 2004-05).

Each State's share of income tax has been a major revenue earner. Moreover, the States have

borrowed less from the Centre over time, as evidenced in the share of central grants in total

revenue receipts it declined from approximately 20 per cent in 1990-91 to 17 per cent in

2004-05. To summarise, there has been a shift by the States, in terms of their source of

revenue receipts, from grants from the centre towards tax revenue (and more on direct tax

revenue). This is a healthy move, which will allow the central government to work more

effectively towards reaching its self-set goals to rein in fiscal indiscipline.

(3)VAT is it proceeding on the right track?

The introduction of the VAT in India in April 2005 has already increased revenue

collections in some States. This positive impact appeared sooner than was expected. The

introduction of the VAT is an important step, as it attempts to simplify and eventually


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harmonies a complex mix of State tax rates across all States. However, significant work

remains to be done to improve VAT implementation.

(4)Unexploited areas with revenue potential and ignored spends that are proving to

be costly.

This question requires in-depth research to accurately identify areas of State finances

that can be implemented to improve the States' respective budgetary positions. The reports of

the State Finance Commissions (SFCs) can be useful resources in this regard. Ironically,

States have shown reluctance in setting up SFCs and failed to adequately cooperate with

them to implement their recommendations. Only Andhra Pradesh, Kerala and Punjab have

constituted the third SFC; several States are yet to set up their second SFC.

It is clear, however, that all the States' have to embark on a conscious programme of fiscal

discipline to curb wasteful spending on the their administrative machinery. There is

significant scope for greater fiscal decentralization with a focus on internal resource

mobilization. The current single digit share of internal resources as a percentage of total

revenues of the panchayats should increase rapidly to double-digit levels.

(5)Similarly, on the outflow side. The newer heads of expenditure.

As mentioned earlier, the States have increasingly spent more on non-developmental items.

There has been a phenomenal increase in the interest burden of the States from 12.79 per

cent of total revenue expenditure in 1990-91 to 22.04 per cent of revenue expenditure in

2004-05. This has resulted in crowding out spending on important sectors such as agriculture

(where spending went down from 12.66 per cent of total revenue expenditure in 1990-91 to

7.16 per cent in 2004-05), education (which fell from 22.51 per cent in 1990-91 to 17.49 per

cent in 2004-05) and industry (which went down from 1.4 per cent to 0.7 per cent).

One positive trend in the States' revenue expenditure is the spending on power and irrigation

projects that almost increased by 72 per cent between 1990-91 to 2004-05.


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4.2 Age of Respondents

Fig 1 Age Distribution of Respondents

Source: Field Survey Data, 2010

According to the figure 4.1 above, 30 percent of the respondents fall between the age

group of 33 39 years while 25 percent fall between 40 46 years. Also 20 percent, 25

percent and 10 percent of the respondents fall between the ages of 26 32 years, 18 25

years and 47 years and above respectively. It was realized that the adult class in the economy

is well represented, showing their interest in knowing the impact VAT is making on the

development of the economy of India.

4.5 Business Activities

Fig.2 Type of Business Activities


The business sector in the economy is largely constituted by retailers and aconsuming public who collect and pay VAT on goods and services respectively. From the

figure above, majority of the respondents, representing 45 percent are in the retailing

business whiles 31 percent represents the consumers. Service providers and those in the

manufacturing sub sector account for 14 percent and 10 percent respectively; hence VAT

affects the retailers and consumers mostly.


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4.4 Level of awareness of VAT

Fig 3 Level of awareness ofVAT


4.5 Medium of Education On VAT

Fig.4 Medium of Education on VAT


The Indian economy is predominantly dominated by the informal sector which mostly

has access to radios and community workshops. This has been established by the figure

above. Most of the respondents identified community workshops as the most appropriate

medium for educating people on VAT. This is represented by 40 percent of their views. The

radio was also identified by 27 percent of the respondents whiles Television and the

Information van have also been identified by 20 percent and 13 percent of the respondents as

the media for educating people on VAT.

Level of avareness of VAT

Good

Moderate

Low


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4.6 Expenditure on VAT

Fig 5 Expenditure on VAT


From the opinion of respondents, the economy of India has to be improved and the

educational and health sectors have been the priority. The educational sector has been

identified by 45 percent of the respondents as the area of investment of VAT revenue whiles

the Health sector has also been identified as the area of expenditure by 28 percent.

Infrastructural development and the agricultural sector have also been identified by 15

percent and 10 percent respectively.

4.7 Auditing of VAT Registered Business

Fig 6 Auditing of VAT Registered Business


From the above figure, most of the respondents representing 44.00 percent suggested that

VAT registered persons should be audited annually. Those who suggested semiannual

auditing represents 27 percent whiles 18% and 11% of the respondents suggested that VAT

registration should be audited quarterly and monthly.


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4.8 Implementation of VAT

Fig 7 Benefits of Implementation of VAT to the Indias Economy


The implementation of VAT to the economy of India was identified by majority of the

respondents as worthwhile. This represents 64 percent of respondents views in the chart

above. Forty six percent of the respondents However stated that implementation of VAT is

not worthwhile to the economy of

4.9 VAT Collection in India

Fig.8 Mode of VAT Collection in India


The collection of VAT in India is not efficient. This was stated by 57 percent of the

respondents while 43 percent of the respondents stated otherwise. Reasons given for the

inefficiency of VAT collection in India are the inadequate education on VAT and the non

accounting of VAT revenue due to fraud.


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4.10 VAT Recovery

Fig 9 Effective ways to VAT Recovery


In order to recover revenue generated from VAT, 57 percent of the respondents suggested

that the standard rate of tax be imposed in the process of pricing while 43 percent also

suggested that this can be done through legislations and effective monitoring and evaluation

of the system.

4.11 VAT Returns

Fig 10 VAT Returns Recovery in Percentage


From the figure above, 53% of the respondents said companies are recovering the full

percentage of their VAT returns whiles 47% of the respondents stated otherwise.


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4.12VAT Rates

Fig.11 VAT rates

Under the sales tax regime, the States were operating the following base rates 4%,

8% and 12%. Whereas the commodities under the erstwhile 4% and 12% rates have beenclassified

under the 4% and 12.5% rates respectively under the VAT regime, the commodities under

the 8% category have been classified either under the 4% or the 12.5% rate under VAT.

It was thus expected that post VAT implementation, the rates of most commodities

would change. 79% of the respondents have confirmed that the rates had indeed changed

with regard to their products due to the switch over to VAT.

Rates comparison - VAT vis-a-vis Sales Tax

The Empowered Committee of State Finance Ministers had endeavored to bring in

uniformity in the VAT structure of the States. As VAT is a State subject, the States have the

liberty to prescribe the rates of sales tax for a particular commodity. As high as 76 % of the

respondents felt that the States have not been successful in bringing about uniformity in the

structure of VAT. The Empowered Committee needs to take note of this very important fact

as one of the main objectives of VAT implementation does not seem to have been met.

0% 10% 20% 30% 40% 50%

No change

Decrease

Increase

Column2

Column1

Series 1


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Non uniformity in the VAT rates across the States has adversely impacted companies

with all India operations as they have had to reckon with varying rates in different States.

4.13 Impact on prices

Fig 12 Impact on prices

One of the key apprehensions raised by certain stakeholders was the likely increase in

prices of products as a result of the introduction of VAT.

The results indicate that there was no change in prices, due to VAT, in the case of

56% of the participants. It is interesting to note that 22% of the respondents increased the

prices of their Products while 20% decreased prices. It would therefore be reasonable to

conclude that the introduction of VAT has been largely price neutral on an overall basis.

Uniformity of state VAT structure

No

yes

0% 10% 20% 30% 40% 50% 60%

No change

Decrease in price

Increase in Price

Impact on Price


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4.14 Impact on Margins

Fig 13 Impact on Margins

44% of the respondents indicated that they maintained margins post VAT whereas

28% experienced a positive impact there on .For those industries that experienced a positive

impact on margins, the input tax credit optimization seems to have played a major part.

4.15 Effect on business model

Fig.14 Effect on business model

Only 25 % of the participating companies felt that the introduction of VAT had

significantly impacted their business models.

0% 10% 20% 30% 40% 50%

No change

Positive

Negative

Impact on Margins

0% 10% 20% 30% 40% 50% 60%

Moderate

Significant

Insignificant

VAT impact on business Model


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This important question as to the impact on business models has had a variety of

differing responses. The telecom, consumer durables, auto and auto ancillary, construction

and IT hardware sectors have all indicated that there has been an insignificant impact of the

switchover to the VAT on their business models. On the other hand, respondents in the retail,

industrial products, FMCG, Parma and healthcare sectors have reported a significant impact

on their business models as a result of the introduction of the VAT. There has thus been a

varied and uneven impact of the VAT across different industrial sectors, perhaps unintended

but a reality nevertheless. As a result, businesses have had to adopt differing responses in

order to cope with these implications.

4.16 Motivation of VAT Staff

Fig .15 Motivation of VAT Staff


Majority of the respondents feel that the VAT staff are motivated enough to do their work

effectively. This according to the chart above represents 72 percent of respondents views.

Twenty eight percent of respondents However feel the VAT staffs are not motivated enough.


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4.17 VAT Collection through VAT Invoice

Fig 16 Issuance of VAT Invoice Enough to Collect Tax


The issuance of VAT invoice has been identified as enough to collect the needed revenues.

This represent majority (70 percent) of respondents views. The other 30 percent of the

respondents stated that issuance of VAT invoice is not enou

4.18 Ways of collecting VAT

Fig 17 Ways of collecting VAT


new project on vat

Documents