Implementation Process of State Level VAT in India

1
Implementation Process of State Level VAT in
India

• By
• Mahesh C Purohit
• Director,
• Foundation for Public Economics and Policy
  Research,
• Delhi-110052.

2
Division of Tax PowersRelating to Domestic Trade
Taxes

• Dichotomy in division of tax powers.
• Union excise duties (UEDs) and Central sales tax
  (CST) with centre.
• Sales tax with states.
• Many other taxes with states.

3
Position prior to Reforms

• Dichotomy in division of tax powers.
• Union excise duties (UEDs) and Central sales tax
  (CST) with centre.
• Sales tax with states.
• Many other taxes with states.

4
A Unique Indirect Tax System

• The Union Government has the authority to levy
  UEDs on manufacture of goods and
• The State governments are assigned the power to
  levy tax on sale of goods.

5
Tax on Services

• Tax on services initially not specifically
  assigned to either of the government.
• Placed in the residuary entry.
• Constitution amended to include Services under
  the Union List.

6
Tax on Services (Contd.)

• Constitution empowers states to levy tax on some
  services in the form of
• entertainment tax,
• electricity duty,
• motor vehicle tax,
• passengers and goods tax.

7
Process of Reforms

• The Four stages of Reforms
• Back ground work for VAT.
• Introduction of Central and State VAT- A Dual VAT
  system.
• Integration of service tax.
• Reforms in CST.
• Reforms to have a goods and services tax (GST)

8
Evolution of Central VAT

• The Union Government was initially levying UED on
  about a dozen articles.
• Levied at a very low rate of tax.
• Scope enlarged with the passage of time.
• Gradually covered all items, except a few.

9
Evolution of CenVAT (Contd.)

• In 1986, modified value added tax (ModVAT) was
  introduced as the first step towards reforming
  UEDs.
• This provided set-off for about a dozen articles
• In 1987, ModVAT was extended to some additional
  commodities

10
Evolution of Central VAT (Contd.)

• With the recommendations of the report of Tax
  Reforms Committee (TRC) (1991-93), the ModVAT was
  further extended to a large number of commodities
• Gradually, the procedures of ModVAT have also
  been overhauled resulting in a full system of
  Central VAT (CenVAT)

11
Central VAT The Present System

• CenVAT levied on all goods except petro-products
  and tobacco at manufacturing level.
• Allows instant credit for all the taxes paid on
  inputs as well as on countervailing duty (CVD).

12
Central VAT The Present System (Contd.)

• 50 duty on capital goods as input credit in a
  financial year.
• CenVAT a two-rate structure
• 16 (reduced to 14 in 2008-09 budget) and 8.
• Additional excise duty in liew of sales tax,
  special excise duty, cess and surcharges on
  specified commodities as additional levies.

13
Service Tax

• Initially service tax levied on three services,
  viz. general insurance, stock broking and
  telephone.
• Coverage expanded to include 100 services.
• Some more services proposed under the new budget.

14
Service Tax (Contd.)

• The standard tax rate is 12 and provide set-off
  for taxes paid on inputs.
• Cross-input credit for services and goods of the
  same nature.
• Tax administered by a separate department.

15
Evolution of State-VAT

• The states initially levying a first-point
  cascade type sales tax.
• The system suffered from all the weaknesses of
  Cascading, uncontrolled incidence, Multiplicity
  of rates etc.

16
The Initiatives of the Central government (Contd.)

• With the deficiencies in the existing tax system,
  the Government of India took the initiative to
  replace this system with sub-national VAT.
• GoI as a facilitator.
• Empowered committee a good example of cooperative
  federalism.

17
First State Finance Ministers Committee of 1995

• Preparation of educational material for all
  concerned.
• Conducting workshops.
• Developing a design for computerization.
• Preparing model VAT legislation.
• Designing of forms.

18
Second State Finance Ministers Committee of 1998

• Reduce the number of rates exemptions.
• To begin with reduce the effective rate of tax on
  inputs by allowing partial set off.
• Introduce Computerization.

19
Other Committees

• Committee of Finance Secretaries (1999) on
  backward area incentives and
• Chief Ministers Committee 1999 on acceptance of
  all the recommendations.

20
Introduction of SVAT in Indian States

• Haryana -- April 1, 2003
• 18 states -- April 1, 2005
• 2 States May 1, 2005
• Uttaranchal-- Oct 1, 2005
• Jharkhand -- Jan 1, 2006
• 4 states -- April 1, 2006
• Tamil Nadu -- Jan 1, 2007
• UP -- Jan 1, 2008.

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Current system of SVAT

• Three rate categories.
• 0. 4, 12.5.
• Exceptions of 1 and 20.
• Petroleum not included.
• No new incentives.
• Composition scheme for small dealers.

22
Harmonization Achieved so far

• CenVAT at the Central level and StateVAT at the
  state level.
• CenVAT up to manufacturing level. StateVAT up to
  retail.
• CST already on way to phase out.

23
Harmonization Achieved so far (contd.)

• Both the tiers have autonomy in tax rates and
  base but the states have decided to follow
  uniformity on their own through the Empowered
  Committee. No compulsions. Own choice.
• No incentives to be granted by any state. The old
  continue.

24
Harmonization Achieved so far (contd.)

• The taxpayers get full credit from taxes paid in
  earlier stages.
• Special tax regime for small dealers.
• Dealers registered separately for the two taxes.
  Work on having interaction is on.

25
Harmonization Achieved so far (contd.)

• These taxes are not used for intergovernmental
  transfers or financing development.
• There are agencies like Finance Commission and
  the Planning Commission that look into the two
  aspects, respectively.

26
Future reforms

• GST to be introduced from 2010
• To have efficient effective system
• To have taxpayer friendly system
• Preserving central states taxation powers
• To have a model acceptable to all

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Process of Introduction of GST

• The structure and operations to be followed for
  GST are being worked out.
• It will be CenVAT State VAT to be collected by
  one authority to be putting to the respective
  government accounts.

28
Process of Introduction of GST

• Rates of both the taxes will be harmonized to
  have not-very-high-rate.
• Joint Working Group (JWG) constituted
• JWG recommended for a dual GST.

29
Interstate Tax- Earlier Position

• CST Act, 1956 to govern principles of taxation
  of such sales.
• The tax, however, has been assigned to the states
  
• The tax is levied on the basis of origin when
  goods are sold to another states.
• For interstates sales while the dealers make use
  of C form, govt. deptt. uses D form for
  availing same benefits.

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Harmonization of Interstate Tax

• The CST rate is 3 for registered dealer and 10
  for unregistered dealer.
• Reduced to 2 this year.
• 0 by 2010.
• States being compensated by the Centre for
  revenue loss.

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Harmonization of Interstate Tax (Contd.)

• The Union Government to compensate
• No concessional CST rate on interstate sales to
  Govt. Deptt.
• Enabling states to levy VAT on tobacco _at_ 12.5.
• Transferring to the states the revenue from 33
  services
• Assigning 44 new services to them
• To give budgetary support if above measures do
  not fully cover the loss.

32
Harmonization of Interstate Tax (Contd.)

• A platform on the pattern of VIES of EU has been
  established with disaster recouping system known
  as TINXSYS to have information about the dealers
  all over the country with 11 digit tax ID.
• Both the dealers and the departmental officers
  have access.

33
Recommended Options

• The following alternative solutions emerge
• Clearinghouse mechanism
• Destination based Purchase Tax (DBPT)
• Transfer of Credit Across States

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Questions