Timir Baran Chatterjee

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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

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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 tax-
• FIRST POINT TAX - NEXT POINT TAX
• LAST POINT TAX - MULTIPOINT TAX

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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
• Last Point Tax- 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.

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The existing system of levying tax
Contd.Multipoint Tax- The Govt. keeps control
on overall sales but cost increases due to
cascading nature of taxation

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

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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

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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.

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Goods Manufacturer
Raw Material Producer
Sale Rs 100 (VAT Rs 10)
Sale Rs 150 Gross VAT Rs 15 Net VAT Rs 5 (15-10)
ASSUMING A VAT OF 10
Happy Consumer
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
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TAX RATE UNDER VAT

• essential commodities, capital goods, basic
  inputs and declared goods gtgt 4-PRINTING INK
  COVERED UNDER 4
• agricultural products and sea goods gtgt 0
• gold gtgt 1
• cigarettes, liquor, petrol, diesel gtgt 20
• Floor rate of 12.5 (Revenue Neutral Rate)

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VAT IS A SCIENTIFIC SYSTEM OF CHARGING TAX

• 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
• Ultimate consumer is satisfied due to low cost

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ULTIMATE OBJECT OF VAT IS NOW FULFILLED
INCREASED TAX BASE
MAKES INDIA SINGLE ECONOMY
TRANSPARENCY
NO CASCADING EFFECT
COMPETITIVE PRICES
VAT RESULTS
NEUTRALITY IN INDIRECT TAXES
REWARDS PRODUCTIVITY
NO REVENUE LEAKAGE
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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

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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 will continue for CST
  Transactions
• 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.
• Most of the Governments not ready with IT systems
  

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COMMERCIAL ISSUES TO BE TACKLED BY THE INDUSTRY
AFTER IMPLEMENTATION OF PRESENT FORM OF VAT
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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/DISTRIBUTOR- COST 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

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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 CA
  would be considered as branch transfer

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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

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

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SOME ACTION PLANScontd.

• 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)

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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)

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SOME ACTION PLANScontd.

• 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

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T H A N K Y O U