impact of sales tax, vat & gst on the ... of sales tax, vat & gst on the profitability of...

IMPACT OF SALES TAX, VAT & GST ON THE PROFITABILITY OF ORGANIZATIONS.

Thesis Submitted to the Padmashree Dr. D. Y .Patil University,

Department of Business Management

in partial fulfillment of the requirements for the award of the Degree of

DOCTOR OF PHILOSOPHY

in

BUSINESS MANAGEMENT

Submitted by

SHASHANK S. DHOND (Enrollment No. DYP- PhD. - 066100012)

Research Guide

Dr. R. GOPAL DIRECTOR, DEAN & HEAD OF THE DEPARTMENT

PADMASHREE DR. D.Y. PATIL UNIVERSITY, DEPARTMENT OF BUSINESS MANAGEMENT,

Sector 4, Plot No. 10, CBD Belapur, Navi Mumbai – 400 614

June 2010

IMPACT OF SALES TAX, VALUE ADDED TAX

AND GST ON PROFITABILITY

OF ORGANISATIONS

DECLARATION

I hereby declare that the thesis entitled “IMPACT OF SALES TAX, VALUE

ADDED TAX AND GST ON PROFITABILITY OF ORGANISATIONS”

submitted for the Award of Doctor of Philosophy in Business Management at the

Padmashree Dr. D.Y. Patil University Department of Business Management is my

original work and the thesis has not formed the basis for the award of any degree,

associate ship, fellowship or any other similar titles.

Place: Mumbai.

Date: 10th June, 2010.

Sign. of the Guide Sign. of the Head of the dept. Sign. of the student

CERTIFICATE

This is to certify that the thesis entitled “IMPACT OF SALES TAX, VALUE

ADDED TAX AND GST ON PROFITABILITY OF ORGANISATIONS” and

submitted by Mr. Shashank S. Dhond is a bonafide research work for the award of

the Doctor of Philosophy in Business Management at the Padmashree Dr. D. Y.

Patil University Department of Business Management in partial fulfillment of the

requirements for the award of the Degree of Doctor of Philosophy in Business

Management and that the thesis has not formed the basis for the award previously

of any degree, diploma, associate ship, fellowship or any other similar title of any

University or Institution. Also certified that the thesis represents an independent work

on the part of the candidate.

Place: Mumbai. Date: 10th June, 2010. Signature of the Head of the department Signature of the Guide

ACKNOWLEDGEMENT

In the first place, I am indebted to the Padmashree Dr. D.Y. Patil University

Department of Business Management, which has accepted me for Doctorate

program and provided me with an excellent opportunity to carry out the present

research project.

This dissertation would never be possible without the guidance and support of my

guide Dr. R. Gopal, Director, Dean and Head of the Department of Padmashree Dr.

D.Y. Patil University Department of Business Management, whose kindness and

encouragement personified.

Dr. Pradip Manjrekar, Professor and Head Research and Consultancy and

Extension Centre, Padmashree Dr. D.Y. Patil University Department of Business

Management, Dr. M.S. Deshmukh, Assistant Professor S K. Somaiya College of

Arts, Science and Commerce and Dr. Dilip S. Patil, Professor & Director Life Long

Learning and Extension University of Mumbai have shared the wisdom of their

experience and provided the direction for this research work. The statistical skills

needed to complete this dissertation were learned primarily from Dr. R. Gopal,

whose expertise has added to the quality of this dissertation.

I have many friends to thank for their support and I specially thank my family who

has stood by me throughout the process.

Place: Mumbai. Date: 10th June, 2010. Signature of the student

CONTENTS

CHAPTER

NO.

TITLE PAGE

NO. List of Tables i

List of Figures ii

List of Abbreviations iii

EXECUTIVE SUMMARY v-xix

Chapter -1 INTRODUCTION, OBJECTIVE AND RESEARCH METHODOLOGY OF THE STUDY

1-41

1.1 INTRODUCTION 1

1.1.1 Sales Tax 1

1.1.2 Value Added Tax 3

1.1.3 Goods & Service Tax 5

1.2 CONCEPTS & MEANING 7

1.2.1 Concepts & Meaning of Sales Tax 7

1.2.2 Concepts, Meaning & Computation of Value Added Tax

13

1.2.3 Methods of Computation of VAT 15

1.2.4 Computation of VAT 17

1.2.5 Variants of VAT 19

1.2.6 Concepts & Meaning of Goods & Service Tax 20

1.3 STATEMENT OF PROBLEM 28

1.4 OBJECTIVES OF STUDY 29

1.5 HYPOTHESIS 29

1.6 RESEARCH METHODOLOGY OF THE STUDY 30

1.6.1 Sample Size of the Study 31

1.6.2 Statistical Methods/ Techniques Used 33

1.6.3 Different Models used in Past Study 33

1.7 Importance of the Study 40

1.8 Limitations of the Study 41

1.9 Conclusion 41

Chapter -2 REVIEW OF LITERATURE 42-68

Chapter -3 GLOBAL SCENARIO OF VAT & GST 69-112

3.1 Introduction 69

3.2 Evolution of VAT 70

3.3 Vat Scenario of major Countries in the World. 72

3.3.1 VAT in European Union 72

3.3.2 VAT In Mexico 75

3.3.3 VAT In Canada 77

3.3.4 VAT In Italy 77

3.3.5 VAT In France 78

3.3.6 VAT In Ireland 79

3.3.7 VAT In Germany 80

3.3.8 VAT In U K 82

3.3.9 VAT In Nigeria 83

3.3.10 VAT In China 84

3.4 GLOBAL SCENARIO OF GST 88

3.4.1 Introduction to GST. 88

3.4.2 How GST Works. 89

3.4.3 Harmonization of Provincial Sales Tax & GST. 94

3.5 GST SCENARIO OF MAJOR COUNTRIES IN THE WORLD.

97

3.5.1 Goods & Service Tax in Canada. 97

3.5.2 Goods & Service Tax in Australia. 99

3.5.3 Goods & Service Tax in Hong Kong 102

3.5.4 Goods & Service Tax in New Zealand 105

3.5.5 Goods & Service Tax in Singapore 106

3.6 Conclusion 111

Chapter – 4 INDIA’S TAX STRUCTURE 113-142

4.1 Introduction 113

4.1.1 VAT in India 113

4.1.2 Importance of VAT in India 117

4.1.3 Impact of VAT in India 118

4.1.4 Value Added Tax 120

4.1.5 Salient Features of VAT 121

4.1.6 Advantages of VAT 123

4.1.7 Disadvantages of VAT 125

4.2 Goods and Service Tax 134

4.3 Conclusion 141

Chapter – 5 MAHARASHTRA SALES TAX 143-155


5.1.1 History of Sales tax 143

5.1.2 Revenue to Government 149

5.1.3 Sales tax Function 153

5.1.4 Historical Background & Basis of Collection in Maharashtra

154

5.2 Conclusion 154

Chapter – 6 DATA ANALYSIS 156-192


6.2 Turnover wise Classification of Industries 157

6.2.1 Profile of Capital Goods Industries 157

6.2.2 Profile of Consumer Goods Industries 162

6.2.3 Profile of Infrastructure Goods Industries 167

6.2.4 Profile of Chemical Industries 171

6.2.5 Profile of Pharmaceutical Industries 176

6.2.6 Profile of All Industries. 181

6.2.7 Profile of Small Industries 184

6.2.8 Profile of Medium Industries 186

6.2.9 Profile of Large Industries 188

6.3 Conclusion 190

Chapter – 7 FINDINGS AND SUGGESTIONS 193-225

7.1 INTRODUCTION 193

7.2 Existing Tax Policies 193

7.2.1 Model v/s Reality 193

7.2.2 Direct Tax Reforms : first wave 195

7.2.3 V P Singh Reforms 198

7.2.4 Tax Reforms in the 1990’s 200

7.2.5 Post 2000 Initiatives 202

7.3 Problems/Difficulties In Implementation Of Sales Tax / Vat In India

203

7.4 Chapter wise findings of the study 213

7.5 Major Findings and suggestions of the study 218

BIBLIOGRAPHY 226-239

WEBLIOGRAPHY 240

QUESTIONAIRE 241

i

LIST OF TABLES

Table No. Title Page No.

1.1 Industry wise and Turnover wise Classification of Industries 31

3.1 VAT rates in Non European Countries 74

3.2 The list of VAT taxable items and the rates in China 87

3.3 Application of the GST at the various stages of a production process 91

3.4 Annual GST revenues of Canada, 1998-1999 ($ billions) 93 3.5 Provincial sales tax and effective tax rate, by province 96

3.6 Country wise statement of Percentage of Tax Revenue to GDP & Calculation of CGR and CV

108

3.7 Country wise taxes on goods and services (% of revenue) & Calculation of CGR and CV

110

4.1 Central Government: Direct vs Indirect Taxes in India 116

4.2 State wise sales tax collection of India & calculation of Compound Growth rate and Co-efficient Variance.

128

4.3 State wise revenue receipt of India 2009-10. 131

5.1 Maharashtra State Division wise Sales Tax Revenue Gross Receipts for the years 2003-04 To 2009-10

150

5.2 Act wise Sales Tax Revenue Gross Receipts in Maharashtra for the years 01-02 to 09-10

152

6.1 Industry wise and Turnover wise classification of industries 157 6.2 Sales Tax / VAT on Capital Goods industries. 158

6.3 CGR and CV of Capital Goods Industries 160

6.4 Sales Tax / VAT on Consumer Goods industries 162 6.5 CGR and CV of Consumer Goods Industries 164

6.6 Sales Tax / VAT on Infrastructure industries 168 6.7 CGR and CV of Infrastructure industries 170

6.8 Sales Tax / VAT on Chemical industries 171

6.9 CGR and CV of Chemical Industries 173

6.10 Sales Tax / VAT on Pharmaceutical Goods industries 176

6.11 CGR and CV of Pharmaceutical Industries 178

6.12 Sales Tax / VAT on All industries combined. 182

6.13 Sales tax / VAT on small industries 184 6.14 Sales tax / VAT on Medium Industries 186

6.15 Sales tax / VAT on Large Industries 188

ii

LIST OF FIGURES

Figure

No.

Title Page

No.

1.1 Methods of computation of VAT 16

1.2 Calculation of VAT through Invoice Method 17

1.3 Different variants of VAT 19

3.1 Country wise percentage of tax revenue to GDP from 2001 to 2008. 109

3.2 Country wise taxes on goods and services (% of Revenue) during 2001 to 2008.

111

4.1 State wise Sales Tax Collection in India -2009-10. 130

4.2 State wise Revenue Receipts of India 2009-10 133

5.1 Division wise Sales Tax Revenue Gross Receipts of Maharashtra 2009-10 151

5.2 Act wise Sales Tax Revenue Gross Receipts in Maharashtra 2009-10 153

6.1 The Value of CGR of Capital Goods Industries during the year 2001-02 to 2008-09

159

6.2 The Value of Regression of Capital Goods Industries during the year 2001-02 to 2008-09.

159

6.3 The Value of CGR of Consumer Goods Industries during the year 01-02 to 08-09

164

6.4 The Value of Regression of Consumer Goods Industries during the year 2001-02 to 2008-09.

164

6.5 The Value of CGR of Infrastructure Industries during the year 2001-02 to 2008-09

169

6.6 The Value of Regression of Infrastructure Industries during the year 2001-02 to 2008-09.

169

6.7 The Value of CGR of Chemical Industries during the year 01-02 to 2008-09 173

6.8 The Value of Regression of Chemical Goods Industries during the year 2001-02 to 2008-09.

173

6.9 The Value of CGR of Pharmaceutical Industries during the year 2001-02 to 2008-09

178

6.10 The Value of Regression of Pharmaceutical Industries during the year 2001-02 to 2008-09.

178

6.11 The Value of CGR of All Industries during the year 2001-02 to 2008-09 183

6.12 The Value of Regression of All Goods Industries during the year 2001-02 to 2008-09.

183

6.13 The Value of CGR of Small Industries during the year 2001-02 to 2008-09 185 6.14 The Value of Regression of Small Industries during the year 01-02 to 08-

09. 185

6.15 The Value of CGR of Medium Industries during the year 2001-02 to 2008-09

187

6.16 The Value of Regression of Medium Industries during the year 2001-02 to 2008-09.

187

6.17 The Value of CGR of Large Industries during the year 2001-02 to 2008-09 189

6.18 The Value of Regression of Large Industries during the year 2001-02 to 2008-09.

189

iii

List of Abbreviations

VAT Value Added Tax

GST Goods & Service Tax

CST Central Sales Tax

ST Sales Tax

CenVat Central Value Added Tax

CGST Central Goods & Service Tax

SGST` State Goods & Service Tax

ITC Input Tax Credit

CC CENVAT Credit

EOU Export Oriented Units

MOU Memorandum of Understanding

PAN Permanent Account Number

HST Harmonius Sales Tax

QST Quebec Sales Tax

EU European Union

GSDP Gross State Domestic Product

ET Efficiency of Tax

NIPFP National Institute of Public Finance and Policy

SE Sumptuary Excises

ICMS Indirect Cost Management System

UED Urban Economic Development

OECD Organization for Economic Co-operation and Development

HLE High Level Emulation

ModVAT Modified VAT

PST Provincial Sales Tax

IRD Inland Revenue Department

CMIE Centre for Monitoring Indian Economy

SMRC South Asian Association for Regional Co-operation

IMF International Monetary Fund

RNR Revenue Neutral Rates

CGR Compound Growth Rate

CV Co-efficient Variance

SAD Special Additional Duty

CVD Counter vailing Duty

IGST Interstate Goods & Service Tax

RE Revised Estimates

BE Budget Estimates

RD Registered Dealers

URD Unregistered Dealers

iv

OMS Out of Maharashtra Sales

MST Maharashtra Sales tax

PT Professional Tax

ET Entertainment Tax

LT Luxury Tax

BST Bombay Sales Tax

R Regression

PVT Private

Ltd Limited

CSO Central Statistical Organization

NAS National Accounts Statistics

IGIDR Indira Gandhi Institute of Development Research

SPSS Statistical Package for Social Sciences

RST Resale Sales Tax

v

EXECUTIVE SUMMARY

1) INTRODUCTION:

India has witnessed substantial reforms in Indirect taxes over the past two

decades and is on the verge of another major reform initiative which will bring this

process to a culmination. As a Progressive and welfare oriented Country India should

balance the requirements of direct and indirect taxes in a fair manner. Therefore too

much dependence on direct taxes will be repressive but at the same time passing a

heavy burden to the general public by way of indirect taxes and will constitute

hardships to the common citizen.

The objective of this study is to find out the impact of tax systems on the profitability

of the organization and growth of the revenue in India and the state of Maharashtra.

The past experience in Maharashtra and elsewhere have shown that half baked

reforms in the name of VAT have done more harm than good in evolving a tax system

required for a competitive environment. It is important to assess how this scenario

changes from Sales tax to VAT and VAT to GST.

Sales Tax:

Sales Tax in India is that form of tax which is imposed by the government on

sale/purchase of a particular commodity within the country. It is imposed under

Central Government (Central Sales Tax) and the State Government (Sales Tax)

Legislation. Normally, each state has its own sales tax act and levies the tax at various

rates. Apart from sales tax, certain states also impose extra charges such as works

contracts tax, turnover tax and purchaser tax. Thus, sales tax plays a major role in

acting as a major generator of revenue for the various State Governments.

vi

Sales tax is levied on the sale of a commodity which is produced or imported and sold

for the first time. If the product is sold subsequently without being processed further,

it is exempt from sales tax. Under the sales tax which is an indirect form of tax, it is

the responsibility of seller of the commodity to collect or recover the tax from the

purchaser. Generally, the sale of imported items as well as sale by way of export is

not included in the range of commodities that require payment of sales tax. Moreover,

luxury items (such as cosmetics) are levied higher sales tax rates. The Central Sales

Tax (CST) Act that comes under the direction of Central Government takes into

consideration all the interstate sales of commodities.

Value Added Tax:

VAT is a multi-point sales tax with set-off for tax paid on purchases. It is

collected in installments at each transaction stage in the production distribution

system. It does not have cascading effect due to the system of distribution or credit

mechanism. VAT is a tax on consumption. The final and total burden of the tax is

fully and exclusively borne by the domestic consumer of goods and services. Value

added tax is, therefore a multi-stage sales tax levied as a proportion of value added. In

simple terms, VAT is tax on sale of commodity at every point in the series of sales by

business firms which the provision of set-off tax already paid on inputs as well as on

previous purchases. Unlike a retailer sales tax or the present sales tax or the present

tax scheme, which are essentially single point taxes, VAT is charged and collected at

each stage of the production/delivery of goods and services.

Goods and Service Tax:

Introduction of Goods and Services Tax (GST) in India is a certainty and its

impact on the retail sector is equally crucial to examine. It is believed that traders,

including retailers, would be one of the biggest beneficiaries of this harmonized

vii

system of taxation. Although retail sector has succeeded in evolving as an organized

revenue generating sector, it still continues to be fraught with some inherent

challenges posed by the current indirect tax regime.

2) STATEMENT OF PROBLEM:

Indirect tax reforms have been an integral part of the liberalization process

since 1991. In the first phase, India has been steadily attempting to move towards a

tax structure that is simple, moderate, rational and easy to administer and comply

with. At the central level, the move has been to bring down the tariffs – both excise

and customs, reduce the number of rates, correct anomalies, get rid of the

complexities in the system and on the whole reduce the interface with the

government. In addition to indirect taxes levied by the centre, states are empowered to

levy certain indirect taxes and sales tax forms major part of revenue for almost all

states. There was wide variation in sales tax rates of the same commodity in different

states. In the existing sales tax structure, there are problems of double taxation of

commodities and multiplicity of taxes, resulting in a cascading tax burden. The viable

solution found was to shift to estimations based VAT i.e. Value Added Tax.

Value Added Tax is one of the most radical reforms that have been proposed for the

Indian economy after years of political and economic debate. Revenue growth is the

most important aspect by which to judge the success of VAT in India in general and

Maharashtra in particular. To measure the impact of vat over sales tax, it is essential

to study the various manufacturing sectors and the impact on the profitability of the

sectors since the introduction of Sales tax and VAT.

viii

3) OBJECTIVE OF THE STUDY:

1) To understand the key issues involved in the successful implementation of VAT

and GST.

2) To study the impact of Sales tax, VAT and GST on the profitability of

manufacturing industry.

3) To identify the drivers for the smooth implementation of tax from VAT to GST.

4) To Study the Impact of Sales tax, VAT and GST on the price of the product.

5) To Study the impact of Sales tax, VAT and GST on Government Revenue.

4) HYPOTHESIS:

1) Profitability of manufacturing industry is more in VAT scenario than sales tax.

2) The tax revenue of the Govt. has increased due to implementation of VAT.

3) VAT has lesser cascading effect on firm as compared to sales tax structure.

4) Tax structure under GST will be more simple as compared to VAT and Sales

Tax.

5) RESEARCH METHODOLOGY OF THE STUDY:

Value Added Tax is one of the most radical reforms that have been proposed

for the Indian economy after years of political and economic debate. Revenue growth

is the most important aspect by which to judge the success of VAT in India in general

and Maharashtra in particular. The idea to carry out this research study is to measure

the impact of sales tax value added tax and goods and service tax on profitability of

ix

organizations in India. The present study is partly descriptive and partly explorative.

The data for this study is obtained from secondary sources as well as primary sources.

Primary Data:

Data on total sales and Sales tax/VAT is collected primarily from various

organizations in India, and Maharashtra as well. Primary data of 100 Industries have

been collected through, Observation method, Personal interviews, telephonic

interviews, discussion with experts, Questionnaire and schedule, Case Studies etc.

Data of all the industries were grouped into five major categories, such as

infrastructure industries, capital goods industries, pharmaceutical industries, consumer

goods industries and chemical industries. The present study is based on time series

data for eight years during 2000-01 to 2008-09.

Secondary Data:

Secondary data were collected from referred books, reports, and conference

papers, referred journals, magazines/periodicals, ministry of finance (Economic

Survey) Govt. of India and, Govt. of Maharashtra, Publication of Reserve Bank of

India. In the present study, following statistical tools were used for analysis of data,

simple tabular and percentage method is applied and estimation of annual compound

growth rate and coefficient of variation of total sales and sales tax /VAT for each

organization, state and the country as a whole has been made by using growth rate

formula. Moreover standard statistical package like SPSS is used to calculate the

linear regression and t test to test the hypothesis of the research study.

SAMPLE SIZE OF THE STUDY:

There are a large number of industries in India and particular in Maharashtra.

For our studies we have taken 100 Industries and grouped them in five different types

of Major Industries. The primary data was obtained from the sample respondents who

x

are associated with manufacturing activity. Field survey covered the hundred

industries, grouped into five major categories. Which are as follows?

1) Capital Goods Industries – 18 Industries

2) Consumer Goods Industries – 24 Industries

3) Infrastructure Industries – 10 Industries

4) Chemical Industries – 23 Industries

5) Pharmaceutical Industries- 25 Industries

For our analysis we have further classified industries on the basis of turnover

into small, medium and large industries. Small Industries includes Industries whose

average sales turnover from 2001-02 to 2008-09 is less than two hundred crores.

Medium Industries are those whose average sales turnover during 2001-02 to 2008-09

is more than two hundred crores and less than one thousand crores and large

industries are consists of industries whose average turnover during 2001-02 to 2008-09

is more than one thousand crores.

DATA COLLECTION:

Present research study is based on primary as well as secondary data. With the

help of following techniques, the primary data of 100 industries was collected:

a) Personal Interviews Methods.

b) Telephonic Interviews.

c) Questionnaires.

d) Case Studies, etc.

xi

The questionnaires were designed to collect the information about their Sales and

Sales tax Paid by them after considering the input tax credit from 2001-02 to 2008-09.

The secondary data was collected through Referred journals books, reports, and

conference papers, Referred journals, magazines/periodicals, Publication of Reserve

Bank of India, Ministry of Finance (Economic Survey) Govt. of India and, Govt. of

Maharashtra. Centre of Monitoring Indian Economy (CMIE). Detailed discussion

were held with the knowledgeable personnel who are associated with Indirect Tax

Fields and also with various Tax Consultants, Financial officers of various

Companies.

STATISTICAL METHODS/TECHNIQUES USED:

Appropriate Statistical tools necessary to measure the profitability and growth

of the organizations vis-à-vis revenue scenario of the state has been

incorporated. The study uses the standard Statistical Package for Social

Sciences (SPSS) for the analysis.

6) IMPORTANCE OF THE STUDY:

The objective of the study of this topic is to find out the impact of Sales tax,

Value Added Tax and Goods and Service tax on the Profitability of the Organizations

and to determine which tax system is beneficial to the Industries, Consumers and also

to find out the effect of Sales tax, Value Added Tax and Goods and service tax on the

Price of the product. This study also results in finding the most beneficial system of

tax structure which is suitable means less complicated from the view point of

Government and Industries. This study will be useful to traders; manufacturers to

analyze its tax burden, at the same time the government will also understand how to

generate the revenue through indirect taxes in the Country.

xii

7) LIMITATIONS OF THE STUDY:

The data collected for this research is collected from the state of Maharashtra.

The result received from this research may or may not be suitable for application to

the other states of India due to geographical limitations.

8) RESEARCH FINDINGS AND RECOMMENDATIONS:

Indirect tax reforms have been as integral part of the liberalization process

since new economic reform. A progressive and welfare oriented nation like India tries

to keep a balance between direct and indirect taxes. This chapter attempts to

understand the concepts and methodological approach required to analyse the impact

of Sales tax, VAT and GST on the profitability of the organization as well as the

revenue growth of the Govt. at state and national level.

Maharashtra being a leading state in most of the aspects this research work has

analyzed the extent to which the Value Added Tax is profitable for different

Industries. The Important findings and recommendations of the research study is as

follows:

1) VAT and State Autonomy rightly points out that tax coordination and

harmonisation across states can be achieved by floor rates of VAT for

different goods.

2) It would be in the interest of both state governments and taxpayers to have

uniform laws and procedures for tax administration. In the medium term, a

consensus Tax Administration Act will greatly reduce the cost and it will lead

to increase the profitability of a organization.

xiii

3) Tax buoyancy estimates, which measure the percentage response of tax

revenue to a one per cent change in the tax base, usually provided by the gross

domestic product, are a routine requirement for fiscal projection purposes. The

elasticity of tax revenue is more stringently defined as the underlying revenue

response, holding constant all parameters of tax policy.

4) Universally VAT and GST has been adopted for correcting the fiscal

imbalances as it works well within all political and legal constraints. The

existing VAT system would also increase the tax revenue as well as the

profitability of the organization.

5) Vat has an inbuilt device for reducing the cascading effect by restricting the

levy to actual value addition. It encourages growth by confining tax burden to

the net economic contribution of the taxpayer’s results in no double taxation.

6) Introduction of VAT has brought more transparency in the tax structure. At

every stage of transaction, VAT indicates the quantum of tax payable after

adjusting tax credits. Therefore the taxpayer, the ultimate consumer and

administrators created more awareness about the details of payment.

7) The important objective of Tax policy in India was to improve the tax to GDP

ratio. Therefore VAT has earned the reputation of being a dependable revenue

raising instrument. It can easily access the incremental income generated by

the expanding economic activities without altering the rates or base in every

budget.

xiv

8) There have been serious apprehensions about the inflationary impact of VAT.

The price effect of VAT depends mainly on the elasticity of demand and

supply of the taxable products and conditions in the factor markets. Therefore

it suggests that, if VAT substituted an existing tax with no additional revenue

objective in the short run, it would not have any inflationary impact. Moreover

sometimes, a reverse effect takes place due to input tax relief, which was not

available during sales tax policy.

9) The distributional impact of tax burden across various income groups of the

organization and commodity wise the tax is imposed. Therefore, it is

suggested that to reduce the regressive impact of commodity taxes, VAT rate

has to be less than that of the substituted taxes. In comparison to conventional

indirect taxes, VAT can be more equitable by exempting articles of essential

consumption. Moreover it is also suggested that the tax policy should be

adjusted to the requirements of the country having regard to the existing

patterns of distribution of income.

10) It is understood that conventional commodity taxes are highly prone to tax

evasion. Therefore it is suggested that Vat with tax credit method of collection

does not give much scope for tax evasion to the tax payer

11) VAT is regressive with respect to income therefore if full fledged VAT is

levied at a single rate with no exemptions would be equivalent to a

proportional tax on consumption. However it is suggested that to reduce the

xv

regressivity and to make VAT proportional extent by having excises at higher

rates on a few goods largely consumed by the richer sections of the society.

12) The existing trend in the sales tax system was to push the tax base as close to

imports/manufacture if possible. This was considerably reduced the income-

elasticity of the tax system. In sales tax it implemented that (a) the requzisite

set-off is given for the taxes paid on raw materials; and (b) the states adopt a

structure of 'two-points-with-set off recommended in an earlier study.

However in the VAT system the input tax credit was given to manufacturers.

The said policy of input tax credit was continued to increase the profit of

organization.

13) One of the important components of VAT reform was that instead of multiple

rates of taxes there will be three or four rates of taxes all over the economy.

Therefore, from the consumers point of view the existing three rates of VAT

as per categories of the goods is to be continued.

14) The analytical framework of taxes on international borrowing could be used to

examine the effects of a removal of impediments on capital movements in the

country.

15) Sales taxes in India has taken place in varying circumstances in the different

states, the existing structure is thus heterogeneous and multifarious. Various

forms include single-point tax, double-point tax and multi-point tax.

However, there is a pronounced movement towards a single-point tax and a

xvi

predominant reliance on the first-point tax. Also there exist additional sales

tax and surcharge on the sales tax. The effective rate has thus gone up

considerably and varies from one state to another.

16) From the point of growth, equity, administrative expediency and co-

ordination, it is necessary that the states have as few rates as-possible. There

should be uniformity of rates especially in the neighboring states. Raw

materials should be exempted to avoid the -problem of cascading. However, if

the tax is levied, the rate should not be higher than that of the Central sales tax

(CST).

17) As the sales taxes are having a significant role in the fiscal structure of the

states, it is of paramount importance that the sales taxes are reformed on the

above lines so that the structure is economically rational and administratively

expedient too. It is important to note that the proposed tax structure would not

only be fulfilling the economic criteria set out in Section II of the paper, but

would also' go a long way to check the evasion of the tax.

18) It is obvious from the above analysis that the rationality does not lie in taxing

stock transfers. Besides, other anomalies arise because of the fact that the tax

rate on inter-state transactions under the CST is too high; the rate of tax in the

inter-state transactions has not been kept in tune with its basic philosophy.

19) It is extremely important that a proper organization is developed as a

precondition to have a sound system of taxation. Countries that have earlier

xvii

experience with administering a turnover tax do not encounter serious

problems in switching over to VAT. For others, it is important to have

suitable machinery. With a view to understanding the administrative problems

for the introduction of VAT in the Indian context, it is essential to

comprehend the existing administrative procedures for MODVAT as well as

for sales taxes in the country.

20) The rate rationalisation into four floor rates should be done taking account of

all supplementary levies like surcharge on sales tax and turnover tax. If these

supplementary levies arc continued and if their rates too are differentiated

depending on the turnover range of the dealers, there will be much more rate

differentiation than what is intended and the purpose of minimizing rate

differentiation will be defeated.

21) It is important to work out the revenue neutral rates as the tax base is

expanded in order to demonstrate the advantages of the VAT to the tax

payers. The emphasis should be on long term revenue productivity coming

from better tax compliance.

22) In a federal country like India, it may be ideal to have state and central VATs

substituting the current state and central taxes on goods and services

respectively.

23) An important step in the introduction of VAT, however, is the need for all

taxpayers to understand that VAT will be levied on their value added only and

xviii

not on the gross turnover. Such an understanding will not cause any resistance

and compliance problems from taxpayers. This requires that the government

should vigorously campaign for the case of VAT.

24) The management of VAT in India calls for a separation of duties of different

functionaries of VAT department. For example, the work related to revenue

receipts and follow up action of the defaulters is an important component of

VAT management. It requires special attention on faulters.

25) It is of paramount importance in India that we concentrate on this area of

activity to reduce interaction of the dealers with the department. Availability

of authentic information should be a matter of right for the dealers. Requisite

publicity of their rights and duties with dos and don’ts and use of telephone

and electronic means would help developing proper provisions for

introducing VAT in India.

26) The Integrated GST (IGST) model for taxation of inter-State transaction of

goods and services has been adopted. According to this model, centre would

levy IGST which would be CGST plus SGST on all inter-State transactions of

taxable goods and services with appropriate provision for consignment or

stock transfer of goods and services.

27) The Central GST and the State GST would be applicable to all transactions of

goods and services except the exempted goods and services, goods which are

xix

outside the purview of GST and the transactions which are below the

prescribed threshold limits.

28) It is suggested that under the proposed dual GST model, States would be

allowed to charge and collect SGST on all the supplies under their jurisdiction.

The role of the Centre would be to charge and collect CGST, administer IGST

and work as the clearing house for IGST.

29) It is suggested to prepare the infrastructural setup requisite for adequate

automation in tax administration and engineer the business processes before

the GST implementation.

30) It is suggested that the Special Economic Zones (SEZs) would also be given

same benefits as those given to the exporters, though such benefits would be

allowed only to the processing zones of SEZs. Further, sales made by SEZ

units to Domestic Tariff Area will come within the purview of GST.

1

CHAPTER - 1

INTRODUCTION, OBJECTIVE AND RESEARCH METHODOLOGY

OF THE STUDY

1.1 INTRODUCTION:

India has witnessed substantial reforms in Indirect taxes over the past two decades

and is on the verge of another major reform initiative which will bring this process to

a culmination. As a progressive and welfare oriented country should balance the

requirements of direct and indirect taxes in a fair manner. Therefore too much

dependence on direct taxes will be repressive but at the same time passing a heavy

burden to the general public by way of indirect taxes and will constitute hardships to

the common citizen.

The objective of this study is to find out the impact of tax systems on the profitability

of the organization and growth of the revenue in India and the state of Maharashtra.

The past experience in Maharashtra and elsewhere have shown that half baked

reforms in the name of VAT have done more harm than good in evolving a tax system

required for a competitive environment. It is important to assess how this scenario

changes from Sales tax to VAT and VAT to GST.

1.1.1. SALES TAX:

Sales tax can be levied either by the Central or State Government. State sales taxes,

that apply on sales made within a State, have rates that range from 4 to 15 per cent.

Sales tax is also charged on works contracts in most states and the value of contracts

subject to tax and the tax rate vary from state to state. However, exports and services

2

are exempt from sales tax. Sales tax is levied on the seller who recovers it from the

customer at the time of sale.

Sales Tax in India is that form of tax which is imposed by the government on

sale/purchase of a particular commodity within the country. It is imposed under

Central Government (Central Sales Tax) and the State Government (Sales Tax)

Legislation. Normally, each state has its own sales tax act and levies the tax at various

rates. Apart from sales tax, certain states also impose extra charges such as works

contracts tax, turnover tax and purchaser tax. Thus, sales tax plays a major role in

acting as a major generator of revenue for the various State Governments.

Sales tax is levied on the sale of a commodity which is produced or imported and sold

for the first time. If the product is sold subsequently without being processed further,

it is exempt from sales tax.

Under the sales tax which is an indirect form of tax, it is the responsibility of seller of

the commodity to collect or recover the tax from the purchaser. Generally, the sale of

imported items as well as sale by way of export is not included in the range of

commodities that require payment of sales tax. Moreover, luxury items (such as

cosmetics) are levied higher sales tax rates. The Central Sales Tax (CST) Act that

comes under the direction of Central Government takes into consideration all the

interstate sales of commodities.

Hence, we see that sales tax is to be paid by every dealer when he sells any

commodity, during inter-state trade or commerce, irrespective of the fact that there

may be no liability to pay tax on such a sale of goods under the tax laws of the

3

appropriate state. Sales tax is to be paid to the sales tax authority of the state from

which the movement of the commodities starts or commences.

1.1.2. VALUE ADDED TAX:

VAT is a multi-point sales tax with set-off for tax paid on purchases. It is

collected in installments at each transaction stage in the production distribution

system. It does not have cascading effect due to the system of distribution or credit

mechanism. VAT is a tax on consumption. The final and total burden of the tax is

fully and exclusively borne by the domestic consumer of goods and services. Value

added tax is, therefore a multi-stage sales tax levied as a proportion of value added. In

simple terms, VAT is tax on sale of commodity at every point in the series of sales by

business firms which the provision of set-off tax already paid on inputs as well as on

previous purchases. Unlike a retailer sales tax or the present sales tax or the present

tax scheme, which are essentially single point taxes, VAT is charged and collected at

each stage of the production/delivery of goods and services.

VAT is an acronym for Value Added Tax. It is basically known as a tax on

consumption because its ultimate effect is borne by the consumer it is also known as

Goods and Service Tax (GST). In European Union it is known as VAT while in

Australia, Canada, New Zealand and Singapore it is known as GST. In Japan it is

known as Consumption Tax.

However, most of the states in India, from April 01, 2005, have supplemented the

sales tax with the new Value Added Tax (VAT). VAT in India is classified under the

following tax slabs:

4

• 0% for the essential commodities

• 1% on gold as well as expensive stones

• 4% on capital merchandise, industrial inputs, and commodities of mass

consumption

• 12.5% on all other items

• Variable rates (depending on state) are applicable for tobacco, liquor,

petroleum products, etc.

Value Added Tax is distinctly different from the sales tax levied on exchanges. The

Value Added Tax is a form of indirect tax that is imposed at different stages of

production on goods and services. VAT is levied on the import goods as well and the

same rate is maintained as that of the local produce. Most of the European and non-

European countries have adopted this system of taxation. The transparent and neutral

nature of taxation has prompted VAT to emerge as one of the robust revenue raisers

in these countries. Sales tax, as compared to VAT is the percentage of revenue

imposed on the retail sale of goods. Unlike VAT, sales tax is levied on the total value

of goods and services purchased. The value added tax system, unlike the conventional

sales tax system, efficiently addresses the problems of cascading and input tax credit

that causes an automatic hike in the consumer price level. The incidence of cascading

is avoided in VAT as the tax is imposed on the value addition at every stage of

production. The final consumers are the ultimate bearers of the burden. This indirect

yet coherent form of taxation involves transparency and is therefore easily

comprehensible. The economic effect of VAT falls on the final prices of the goods

and services while sales tax relies on the final sale to the customers. The value added

tax system requires an effective accounting. To deal with this disadvantage, the same

5

tax is charged to each member involved in the production of the goods and services.

The implementation of the tax remains indifferent to the position of the member in the

production cycle or its position with respect to the customers. The system of taxation

under VAT is also successful in avoiding tax evasions that is frequent in sales tax.

Sales tax is often considered a burden if the percentage charged goes beyond 10% and

is subjected to evasion by the consumers who engage in buying products through the

internet and other activities such as buying at wholesale or through an employer.

Although tax evasion is not possible in VAT, it is subjected to other fraudulent

practices such as carousel fraud. This is one of the prominent practices of theft of the

value added tax. It is prevalent in the nations where the movement of goods between

jurisdictions is exempt from VAT. VAT is one of the newest instruments of the global

economy and is widely accepted and implemented in most of the nations. However,

VAT poses constraints in developing countries such as India. The predominance of

low per capita income in these nations poses a difficulty for the governments to earn

revenue through income tax. As compared to VAT, sales tax is a major revenue earner

for the regional governments in such countries.

1.1.3. GOODS AND SERVICE TAX:

Introduction of Goods and Services Tax (GST) in India is a certainty and its impact

on the retail sector is equally crucial to examine. It is believed that traders, including

retailers, would be one of the biggest beneficiaries of this harmonized system of

taxation. Although retail sector has succeeded in evolving as an organized revenue

generating sector, it still continues to be fraught with some inherent challenges posed

by the current indirect tax regime.

6

CENVAT credit of input taxes - Inability to offset the input excise duty (on

procurement of goods) and service tax (on procurement of services viz rentals, freight,

advertisement, other business related services) against the output tax (possible only

value added tax), leads to cascading of taxes. Given that the output VAT can be

(currently) discharged only through utilizing the input VAT, the input service tax

(largely on account of rentals) becomes a cost in the system. The ability to pass on

this additional cost to the final consumers depends on market dynamics and therefore,

may lead to reduction in margins. This issue of inability to offset the input taxes

should get resolved once GST is introduced in India. This is for the reason that under

GST, in the form in which it is currently contemplated, taxes on services would be

available for set off against taxes on goods.

Even in case of retailers involved in provision of services, the quantum of input

service tax credit available is unclear, since the regulation recognizes only

manufactures and service providers. It is expected that GST would remove this

anomaly since the taxable event for levy of GST would shift to 'sale of goods' from

the current 'manufacture of goods', resulting in re-design of input credit regulations to

include any buy-sell arrangement. Lack of uniformity in State VAT laws - Another

challenge currently faced by retail stores pertains to State VAT laws. The lack of

uniformity in these laws with respect to rates of taxes, threshold limits, compliance

requirements, etc lead to unnecessary compliance burden on the retailers.

Goods and Services Tax (GST) is a part of the proposed tax reforms that center round

evolving an efficient and harmonized consumption tax system in the country.

Presently, there are parallel systems of indirect taxation at the central and state levels.

7

Each of the systems needs to be reformed to eventually harmonize them.

In the Union Budget for the year 2009-2010, Finance Minister proposed that India

should move towards national level Goods and Services Tax that should be shared

between the Centre and the States. He proposed to set April 1, 2011 as the date for

introducing GST. World over, goods and services attract the same rate of tax. That is

the foundation of a GST. The first step towards introducing GST is to progressively

converge the service tax rate and the CENVAT rate.

The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy

on manufacture, sale and consumption of goods as well as services at a national level.

Integration of goods and services taxation would give India a world class tax system

and improve tax collections. It would end the long standing distortions of differential

treatments of manufacturing and service sector. The introduction of goods and

services tax will lead to the abolition of taxes such as octroi, Central sales tax, State

level sales tax, entry tax, stamp duty, telecom license fees, turnover tax, tax on

consumption or sale of electricity, taxes on transportation of goods and services, and

eliminate the cascading effects of multiple layers of taxation. GST will facilitate

seamless credit across the entire supply chain and across all states under a common

tax base.

1.2. CONCEPTS AND MEANING:

1.2.1 CONCEPTS AND MEANING OF SALES TAX:

Sales Tax Act, 1956 is basically a single point taxation system where tax is

payable, at the point of first sale as per the Second schedule, a single point

purchase tax at the point of levy specified in the third schedule, a single point

8

tax in respect of declared goods at the point of levy specified in the fourth

schedule, tax on works contract as per the sixth schedule, tax on lease as per

seventh schedule, tax at the point of last sale as per eighth schedule and goods

which are subjected to tax on second or subsequent sale as per ninth schedule..

Goods, which are exempt from payment of tax under the ST Act, are listed in

the fifth schedule.

Under Rule 26 (9)(a) and 26(9)(b) of the ST Rules every dealer who wishes to

claim that he is not liable to tax in the State is required to file a declaration in

Form No.32 obtained from the registered dealer who sold or purchased the

goods to or from him.

In respect of goods manufactured by a dealer other than raw materials,

component parts and packing materials for a brand owner the brand owner is

the person who is deemed to be a first dealer in the State. It implies that the

sales tax is payable by such owner. However, if such manufacturer has

charged sales tax the brand owner is eligible for a setoff of such tax paid

subject to production of proof.

In cases where a dealer assigns the brand name or trademark after purchase of

goods, the dealer selling the goods after affixing such trade mark or brand

name shall be deemed to be the first seller in the State. However, if such

manufacturer has charged sales tax the brand/ trademark owner is eligible for a

set-off of such tax paid subject to production of proof.

9

Dealer:

The definition of "dealer" which forms the cornerstone for the levy of sales tax

is quite exhaustive;

• He must be a person.

• He must be carrying on a business.

• The business may be of selling, buying, supplying or distributing

goods as defined in Section 2(1) (m).

• The consideration for the activity may be for cash or for deferred

payment, or for remuneration, commission or other valuable

considerations.

Goods:

In terms of section 2(m) of the Sales Tax Act goods means all kinds of

movable properties and excludes newspapers, auctionable claims, stock and

shares and securities. Sale of Lottery tickets/Import licences/ exim scrip’s/

Vabals have been held to be sale of goods taxable under the ST Act.

Price:

Price is the amount of consideration which a seller charges the buyer for

parting with the title to the goods, the expenditure which he had to incur for

transporting these from the place of purchased by him, the octroi, his margin

of profit, handling charges including interest on the capital invested, the sales

tax component, and other incidental expenses, constitutes the price of goods.

Business:

The definition of "Business" is an important one in any Sales Tax Law,

because it has an interlink with the definition of "dealer" in Section 2(1)(k)

10

which, in turn, is crucial to the determination of the eligibility of Sales tax levy

under the charging provisions.

The first part of the definition specifies the following items as included in the

definition of "business":

• Any trade, commerce or manufacture

• Any adventure or concern in the form of trade, commerce or

manufacture

It is also made clear that profit motive is not relevant to determine whether an

activity amounts to business or not, and it is also not necessary that any profit

should actually arise from that activity. The second part of the definition

ropes in any incidental or ancillary transaction connected with any trade,

commerce, manufacture, adventure or concern.

Sale:

In order to constitute a Sale all the following conditions should be

cumulatively present.

• A bargain or agreement of sale;

• The payment or promise of payment of price;

• The delivery of goods, and

• The transfer of property from the seller to the buyer

The definition of a sale includes a works contract, a transfer of right to use

goods and a hire purchase transaction.

A sale or purchase of goods is said to take place within the State in case of

specific or ascertained goods at the time the contract is entered into and in case

11

of unascertained or future goods at the time of their appropriation to the

contract.

In terms of explanation 4 to the definition of sale two sets of sales are said to

have taken place in respect of agency transactions in the following

circumstances:

• When the agent purchases/ sells the goods at one rate and transfers the

goods/ sale proceeds to the principal at another rate; or

• When the agent does not account to his principal the entire collections/

deduction/ purchases effected by him; or

• When the agent acts on behalf of a fictitious or non-existent principal.

Taxable Turnover:

Means "taxable turnover" as the turnover on which the dealer becomes liable

to pay tax. Such turnover has to be determined by allowing the deductions

prescribed in Rule 6 from the "total turnover" as defined in section 2(1)(u-2).

Such turnover should, however, not include the turnover of purchase or sale in

the course of inter-state trade or commerce or in the course of export of goods

outside India, or in the course of import of goods into India.

Total turnover:

Means the aggregate turnover in all goods of a dealer at all places of business

in the State, whether or not the whole or any portion of such turnover is liable

to tax, including the turnover of purchase or sale in the course of interstate

trade or commerce or in the course of export of the goods out of the territory

of India or in the course of import of the goods into the territory of India;

12

Declared goods:

Goods, which are of special importance in inter-State trade or commerce as

per section 14 of the CST Act, are called declared goods. The rate of tax on

any sale or purchase of such goods inside the State shall not exceed four

percent and such tax shall not be levied at more than one stage. The rate of tax

and point of levy are specified in the Fourth Schedule. The law envisages

refund of tax in cases where such tax paid goods are subsequently sold in the

course of inter-state trade or commerce.

Purchase tax:

Every dealer who purchases taxable goods on which no sales tax is payable on

sale price of such goods is liable to pay purchase tax when such goods are:

• Consumed in the manufacture of other goods for sale.

• Consumed otherwise.

• Disposed off other than by way of a sale within the State or by way of

interstate sales.

In the above scenarios sales tax will be payable on the purchase price of such

goods at the rate at which tax is payable on such sale.

Section 6 relating to purchase tax will not be applicable in respect of declared

goods taxable at the point of purchase/ sale or in respect of goods which have

suffered tax in the State at any earlier stage.

Turnover tax;

Section 6B of the ST act provides for levy of turnover tax on “total turnover”

at the rate of

13

• 1.5% if the total turnover is less than Rs. 10 crores in a year or

• 3% if the total turnover exceeds Rs.10 crores in a year.

Turnover tax will not be payable in the following cases:

• On the sale of purchase of goods covered under fourth and fifth

schedule of the ST Act.

1.2.2 CONCEPT AND MEANING AND COMPUTATION OF VAT:

Value Added Tax is a tax on the value added at each stage of production and

distribution process and can be aptly defined as one of the ideal forms of consumption

taxation since the value added by a firm represents the difference between its receipts

and cost of purchased inputs.

I ) Single Point Taxation Systems:

In this, a commodity is taxed only at one point of time in the State. This

system is introduced in order to simplify the taxation system. Based on the stage

at which it is taxed it can be further classified into, into three categories:

a) 1st Point Taxation System:

b) Last Point Taxation System:

c) Taxing any Intermediate Point of Sale:

II) Multi Point Taxation System:

In contrast to single point taxation system, in multipoint taxation system

a commodity is subjected to tax at every point of sale. No deduction is allowed as

‘resale’ or ‘second sale’. Normally a set-off of taxes paid on purchases is made in

order to avoid cascading effect of taxes.

14

VAT is the perfect example of a multi point taxation system. One of the

objects of introduction of VAT is to increase the revenue of the State. In effect it

is similar to last point of tax in single point tax system, however it has got certain

advantages over the last point of tax system is concerned, from tax compliance

point of view.

Single Point Taxation System V/s. Multi Point Tax System-(merits and demerits):

Advantages of Single Point over Multi Point taxation System;

• Single point tax system is very easy to comprehend as compared to

multiple point tax system. There is less calculation for set-off. In a country

like India where illiteracy rate is at the highest, implementation of multi

point tax system is very difficult.

• Multi point taxation system adds complexity in record keeping and

increases cost of compliance. Elaborate records of purchase and sales are

required to be kept in order to claim set-off.

• In a single point taxation system very few dealers are required to pay tax

and they comprise of generally big dealers having goods infrastructure

facilities. While in multi point tax system even small dealers are required

to pay tax, who have hardly got any necessary infrastructure.

Advantages of Multi Point over Single Point System:

• Multi point taxation system enjoys international appeal over single point

taxation systems. All over the world, countries are switching over to multi

point taxation system.

15

• Multi tax system eliminates pyramiding effect as there is no retention

money and full set-off is granted.

• Multi tax system is self-regulatory as it creates incentives for compliance.

Since incidence of tax on individual dealer is very negligible, especially

after considering incentive in the form of set-off ,at the same time the base

of tax payer is very broad which make less likely to evade tax. In a single

point tax system taxpayer base is comparatively very small and incidence

of tax is very high and there is comparatively very small and incidence of

tax is very high and there is hardly any incentives in the form of set-off ,

which make more prone to tax evasion

III) Hybrid System:

There could be a hybrid system having characteristics of both single point tax

system as well as multi point tax system. For example certain commodities may be

taxed at a certain rate at the first level. Therefore on a second stage it may be taxed

again with the lesser rate of tax. In old Bombay Sales Tax Act, there was sales tax and

general sales tax. Now also, in many states, there is a concept of resale tax/turnover

tax which is the example of such hybrid tax. The only it differs with VAT is that there

is no set-off available for resale tax/turnover tax paid.

1.2.3 Methods of Computation of VAT:

There are several methods to calculate the ‘value added’ to the goods for levy of tax.

The three commonly used methods are:

(a) Addition method,

(b) Invoice method and

16

(c) Subtraction method.

Fig. 1.1 Methods of computation of VAT1

Addition Method Invoice Method Subtraction Method

Addition Method:

This method aggregates all the factor payments including profits to arrive at the total

value addition on which the rate is applied to calculate the tax. This type of

calculation is mainly used with income variant of VAT. Addition method does not

easily accommodate exemptions of intermediate dealers. A drawback of this method

is that it does not facilitate matching of invoices for detecting evasion.

Invoice Method:

This is most common and popular method for computing the tax liability under

‘VAT’ system. Under this method, tax is imposed at each stage of sales on the entire

sale value and the tax paid at the earlier stage is allowed as set-off. In other words, out

of tax so calculatd, tax paid at the earlier stage i.e. at the stage of purchases is set-off,

1 Manoharan T N (2010): Taxation, Ketan Thakkar for Snow White Publications Pvt. Ltd. Mumbai.

Aggregating all the factor

payments and profit.

Deducting tax on inputs

from tax on sales.

Deducting aggregate value of purchase exclusive of

tax from the aggregate value of sales exclusive of

tax.

17

and at every stage the differential tax is being paid. The most important aspect of this

method is that at each stage, tax is to be charged separately in the invoice. This

method is very popular in western countries. In India also, under the VAT law as

introduced in several states and under the central Excise law this method if followed.

This method is also called the ‘Tax Credit Method’ or ‘Voucher Method’.

Subtraction Method:

Under this method, the tax is charged only on the value added at each stage of the sale

of goods. Since, the total value of goods sold is not arise. This method is normally

applied where the tax is not charged separately. \

1.2.4 Computation of VAT:

The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value

added (i.e. sales minus purchase) which is equivalent to wages plus interest, other

costs and profits. To illustrate, a figure of transaction is given below:

Fig. 1.2 Calculation of VAT through Invoice Method.

Manufacturer A

Sale Price Rs.300

Gross VAT Rs, 37.50

Net VAT Rs. 21

Wholesaler B

Sale Price Rs. 400

Gross VAT Rs. 50

Net VAT Rs. 12.50

(50-37.50)

Product X

Sale Price Rs. 100

Gross VAT Rs. 12.50

Net VAT Rs. 12.50

Product Y

Sale Price Rs. 100

Gross VAT Rs. 4

Net VAT Rs. 4

Retailer C

Sale Price Rs. 500

Gross VAT Rs. 62.50

Net VAT Rs. 12.50

(62.50 – 50)

18

Note : The rate of tax is assumed to be 12.5% on the transaction relating to goods

manufactured by A.

For a manufacturer A, inputs are product X and product Y which are purchased from

a primary producer. In practice, even these producers use inputs. For example, a

farmer would use seeds, feeds, fertilizer, pesticides, etc. However, for this example

their VAT impact is not considered. B is a wholesaler and C is a retailer.

The inputs X and Y are purchased at Rs. 100 each on which tax is paid @12.5 % and

4% respectively. The manufacturer A would, therefore, take the credit for tax paid by

him for the use of such inputs. The input price of Rs. 200 plus tax would include

wages, salaries and other manufacturing expenses. To this, entire he would also add

his own profit. Assuming that after the addition of all these costs his sale price is Rs.

300, the gross tax (at the rate of 12.5 per cent) would be Rs. 37.50. As manufacturer A

has already paid tax on Rs. 200, he would get credit for this tax (i.e. 12.50+4=16.50).

Therefore, his net VAT liability would be Rs. 37.50 minus Rs. 16.50. Thus,

manufacturer A would pay Rs. 21 only (because of this he would take the cost of his

inputs to be only Rs. 200)

Similarly, the sale price of Rs. 400 fixed by wholesaler B would have net Vat liability

of Rs. 12.50 (Rs. 50-37.50 = Rs. 12.50) and the sales price of Rs. 500 by Retailer C

would also have net VAT liability of Rs. 12.50 (Rs. 62.50-50=Rs. 12.50). Thus, VAT

is collected at each stage of production and distribution process, and in principle , its

entire burden falls on the final consumer, who does not get any tax credit. Thus, VAT

19

is a broad-based tax covering the value added to each commodity by parties during

the various stages of production and distribution.

1.2.5 VARIANTS OF VAT :

VAT has three varints, viz., (a) gross product variant, (b) income variant and (c)

consumption variant. These variants are presented in a schematic diagram given

below:

Fig 1.3 Different variants of VAT2

Gross Product Variant Income variant Consumption variant

The gross product variant allows deductions for taxes on all purchases of raw

materials and components, but no deduction is allowed for taxes on capital inputs.

That is, taxes on capital goods such as plant and machinery are not deductible from

the tax base in the year of purchases and tax on the depreciated part of the plant and

machinery is not deductible in the subsequent years.

The income variant of VAT on the other hand allows for deductions on purchases of

raw materials and components as well as depreciation on capital goods. This method

provides incentives to classify purchases as current expenditure to claim set-off. In

2 Manoharan T N (2010): Taxation, Ketan Thakkar for Snow White Publications Pvt. Ltd. Mumbai

Tax is levied on all sales

and deduction for tax

paid on inputs excluding

capital inputs is allowed.


with set-off for tax paid

on inputs and only

depreciation on capital

goods.


with deduction for tax

paid on all business

inputs(including capital

goods).

20

practice, however, there are many difficulties connected with the specification of any

method of measuring depreciation, which basically depends on the life of an asset as

well as in the rate of inflation.

Consumption variant of VAT allows for deduction on all business purchases

including capital assets. Thus, gross investment is deductible in calculating value

added. It neither distinguishes between capital and current expenditure nor specifies

the life of assets or depreciation allowances for different assets. This form is neutral

between the methods of production; there will be no effect on tax liability due to the

method of production (i.e. substituting capital for labour or vice versa). The tax is also

neutral between the decision to save or consume.

Among the three variants of VAT, the consumption variant is widely used. Several

countries of Europe and other continents have adopted this variant.

1.2.6 CONCEPTS AND MEANING OF GOODS AND SERVICE TAX:

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the

supply of goods or services. France was the first country to introduce this value added

tax system in 1954 devised by a public servant. In India, due to non consensus

between central and state government, the proposal is to introduce a Dual GST regime

i.e. Central and State GST.

Dual GST:- Many countries in the world have a single unified GST system i.e. a

single tax applicable throughout the country. However, in federal countries like Brazil

and Canada, a dual GST system is prevalent whereby GST is levied by both the

federal and state or provincial governments. In India, a dual GST is proposed whereby

a Central Goods and Services Tax (CGST) and a State Goods and Services Tax

21

(SGST) will be levied on the taxable value of every transaction of supply of goods

and services.

Impact on Prices of Goods and Services:-The GST is expected to foster increased

efficiencies in the economic system thereby lowering the cost of supply of goods and

services. Further, in the Indian context, there is an expectation that the aggregate

incidence of the dual GST will be lower than the present incidence of the multiple

indirect taxes in force. Consequently, the implementation of the GST is expected to

bring about, if not in the near term but in the medium to long term, a reduction in the

prices of goods and services. The expectation is that the dealers would start passing

on the benefit of the reduced tax incidence to the customers by way of reduced

prices. As regards services, it could be that their short term prices would go up given

the expectation of an increase in the tax rate from the present 10% to approximately

14% to 16%.

Benefits of Dual GST: – The Dual GST is expected to be a simple and transparent tax

with one or two CGST and SGST rates. The dual GST is expected to result in:-

• Reduction in the number of taxes at the Central and State level

• Decrease in effective tax rate for many goods

• Removal of the current cascading effect of taxes

• Reduction of transaction costs of the taxpayers through simplified tax compliance

• increased tax collections due to wider tax base and better compliance

22

Who would be impacted: All businesses, whether engaged in sales / supply of goods

or supply of services, would be impacted by GST. The impact would be on supply

chains, ERP, product pricing, dealer margins etc.

Applicability to service providers :-Unlike the transition from the sales tax regime

to the VAT, where only businesses dealing in goods were affected, in the case of

GST, as the name suggests, both goods and service providers will be impacted. Thus,

even pure service providers need to plan for the transition to the GST.

Time to Plan for GST:-The draft laws will clarify finer aspects of GST such as rates,

classification and compliances. However, based on the material in the public domain,

one can begin with spreading awareness among various stakeholders within the

organization and identifying broad areas of action before the draft laws are published.

Experience of VAT implementation suggests that there may not be enough lead-time

available between the date of announcement of GST implementation and the actual

date of GST implementation.

Taxable event: - The Taxable event will be the supply of goods and the supply of

services. Hence, the current taxable events such as ‘manufacture of goods’, sale of

goods’ and ‘ rendition of services’ will not be relevant under the GST regime.

Applicability of both CGST and the SGST on all transactions: - A transaction of

’supply of goods’ will attract both the CGST and SGST as applicable on

goods. Similarly, a ‘supply of service’ will attract both the CGST and SGST as

applicable on services.

23

Applicability of other indirect taxes: It is proposed that the taxes to be subsumed

under CGST will include Central Excise Duty (CENVAT), Service Tax and

Additional Duties of Customs and the taxes to be subsumed under the SGST will

include Value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax,

Luxury Tax, Octroi, Lottery Taxes, Electricity Duty and State surcharges relating to

supply of goods and services.

GST collection model: - GST is collected on the value added at each stage of sale or

purchase in the supply chain. The tax on value addition is ensured through a tax credit

mechanism throughout the supply chain. GST paid on the procurement of goods and

services is available for set-off against the GST payable on the supply of goods or

services. The idea is that the final consumer will bear the GST charged to him by the

last person in the supply chain. It is thus a consumption based indirect tax.

Applicability of taxes on imports of goods:- It must be understood that customs

duties will remain outside the GST regime. Thus, the applicable basic customs duty

will continue to be leviable on import of goods. In addition, both the CGST and the

SGST are expected to be levied on imports of goods. Thus, the additional duty of

customs in lieu of excise (CVD) and the additional duty of customs in lieu of sales tax

/ VAT will both be subsumed in the import GST.

Tax on import of services and person liable to pay:- Importation of services will be

taxed and both the CGST and the SGST will apply on such imports. The tax will be

payable on a reverse charge mechanism and the importer of services will hence need

to self declare and pay the tax. As to which State will have authority to collect the

24

relevant SGST, this will be determined based on the place of supply rules that the

government is expected to notify for this purpose.

Separate enactments for the Central and State GST:-There will be separate

enactments. The CGST will be a common code throughout India. Further, each State

will legislate its own enactment to levy and collect the SGST. However, it is

understood that a white paper will be released by the Federal

Government/Empowered Committee of State Finance Ministers based on which each

State will legislate. The expectation is therefore is that a majority of the provisions

will be uniform across the States.

Expected aggregate rate of GST:-The aggregate rate of GST, across the Central and

State GST, is expected to be approximately 16%. This is currently the subject matter

of discussion within the Empowered Committee.

Different rates for goods and for services:- It is expected that there will be one

single rate of GST on services at the Central and State level and the understanding is

that there would be not one but a few rates of Central and State GST for goods.

Carry forward of Input Tax Credits (ITC) and CENVAT Credit (CC)

balances:-Going by the precedence at the time of VAT implementation, it is believed

that the accumulated ITC and CC will both be allowed to be carried forward under the

GST regime, albeit upon fulfillment of prescribed conditions, if any.

Refund of un-utilized CC on inputs and input services:-It is envisaged that under

the proposed Dual GST model there would be refund of unutilized accumulated CCs

25

at the end of each fiscal year and that refunds would not be restricted only to those

relating to exports.

Cross utilization of credits between goods and services:- Under the GST regime,

the incidence of tax will be on supplies, be it supplies of goods or services. The taxes

will be levied in parallel by the Centre and the States who will levy the CGST and

SGST respectively on each supply of goods/services. Accordingly, the cross

utilization of credits for goods and services would be allowed subject to the fact that

cross utilization of credits between the CGST and SGST would not be permissible.

Threshold limits for e levy of GST:-No threshold limits have been prescribed as yet.

However, it has been indicated that the thresholds will be uniform and will be based

on the cumulative turnover of goods and services. Dealers with turnover below these

thresholds will not be covered under the ambit of the GST.

Uniformity under the various indirect tax legislations: - The Dual GST model

envisages uniform threshold limits under both the Central and the State GST.

Exemptions from GST, lists of exempted goods and exempted services:- Under

the GST, exemptions are expected to be minimal. Further, a common list of

exemptions for both the Central and State GST with little flexibility for States to

deviate there from is envisaged.

Benefits availed presently by EOUs (exemption from excise duty and Central

Sales Tax (CST) on domestic procurement of goods):-CST will be phased out and

will have no place in the GST regime. It is expected that the benefits presently availed

26

by the EOUs by way of exemptions would continue to be available in the GST regime

as well.

Status of Software Technology Parks/ 100% Export Oriented Units/Special

Economic Zone units:-Typically, in view of the common list of exemptions, the

exemption would extend to both the CGST and the State GST. With regard to the

position on the Software Technology Parks/ 100% Export Oriented Units/Special

Economic Zone units, it is envisaged that the status quo will remain.

Continuation of exemption currently available:-In view of the fact that under the

GST scheme, exemptions would be minimal, it may not be correct to proceed on the

assumption that the present exemptions would continue under the GST dispensation.

Position with regard to investors who enjoy area-based exemptions or who have

entered into a Memorandum of Understanding with the Governments in respect

of exemption, subsidy etc.:-All exemption schemes are proposed to be converted to

post-tax cash refund schemes. However, it is advised that companies approach the

Government to negotiate their MOUs so that their interests are not jeopardized and

that the incentives granted under the present tax regime are protected.

Taxation of Inter-State sale transactions: Presently, inter-State sales are subject to

Central Sales Tax (CST), which is origin based. However, the GST regime would

work under a destination / consumption based concept and hence the tax on inter-

state sale transactions will accrue to the destination state. As a corollary, it will be

zero rated in the origin state.

27

Treatment of stock transfers:-The taxable event will be the supply of goods and

therefore the stock transfers could be taxed. However, certainty will only emerge once

the GST law is finalized.

Taxation of inter State supply of services: - Detailed place of supply rules will be

framed for such transactions. Taxation of such supplies will however continue to pose

a challenge. Practices currently being followed in the European Union, Canada and

Brazil are being studied. Policymakers are also looking at different options of taxing

inter State supplies of services based on whether they are Business to Business (B2B)

or Business to Customer (B2C)

Fresh registrations and registration of existing VAT and Service tax dealers :-

The position in this regard is not clear at present. However, the rules are expected to

be assessee- friendly in this regard with appropriate soft-landing provisions for the

transition phase.

Single return or multiple returns:-It is expected that a single return will be required

to be prepared by the assessee and copies filed with the Central GST and State GST

authorities. The draft GST laws / Rules will provide further details.

Process of assessment under the dual GST:-The dual GST is expected to be a self

assessed tax. The Tax administration would have powers to audit and re-assess the

taxpayers on a selective basis.

Relevancy of concepts / principles surrounding „manufacture?, „MRP based

valuation „works contract’s etc. under the GST:- As GST is on all economic value

28

addition involving all supplies of goods and services, the above concepts / principles

could lose relevance under the GST.

Refunds on exports: In view of the Government policy that no taxes should be

exported, refund of GST paid on inputs should be available in case of exports of

goods and services, which will both be zero rated.

Uniformity in classification of goods, procedures, forms etc. across the States: -

Based on the current discussions in the Empowered Committee, it is expected that

there should be uniformity in classification of goods, procedures and forms across

States.

1.3 STATEMENT OF PROBLEM:

Indirect tax reforms have been an integral part of the liberalization process since

1991. In the first phase, India has been steadily attempting to move towards a tax

structure that is simple, moderate, rational and easy to administer and comply with. At

the central level, the move has been to bring down the tariffs – both excise and

customs, reduce the number of rates, correct anomalies, get rid of the complexities in

the system and on the whole reduce the interface with the government. In addition to

indirect taxes levied by the centre, states are empowered to levy certain indirect taxes

and sales tax forms major part of revenue for almost all states. There was wide

variation in sales tax rates of the same commodity in different states. In the existing

sales tax structure, there are problems of double taxation of commodities and

multiplicity of taxes, resulting in a cascading tax burden. The viable solution found

was to shift to estimations based VAT i.e. Value Added Tax.

29

Value Added Tax is one of the most radical reforms that have been proposed for the

Indian economy after years of political and economic debate. Revenue growth is the

most important aspect by which to judge the success of VAT in India in general and

Maharashtra in particular. To measure the impact of vat over sales tax, it is essential

to study the various manufacturing sectors and the impact on the profitability of the

sectors since the introduction of Sales tax and VAT.

1.4 OBJECTIVE OF THE STUDY:

1) To understand the key issues involved in the successful implementation of VAT

and GST.

2) To study the impact of Sales tax, VAT and GST on the profitability of

manufacturing industry.

3) To identify the drivers for the smooth implementation of tax from VAT to GST.

4) To Study the Impact of Sales tax, VAT and GST on the price of the product.

5) To Study the impact of Sales tax, VAT and GST on Government Revenue.

1.5 HYPOTHESIS:

1) Profitability of manufacturing industry is more in VAT scenario than sales tax.

2) The tax revenue of the Govt. has increased due to implementation of VAT.

3) VAT has lesser cascading effect on firm as compared to sales tax structure.

4) Tax structure under GST will be more simple as compared to VAT and Sales

Tax.

30

1.6 RESEARCH METHODOLOGY OF THE STUDY:

Value Added Tax is one of the most radical reforms that have been proposed

for the Indian economy after years of political and economic debate. Revenue growth

is the most important aspect by which to judge the success of VAT in India in general

and Maharashtra in particular. The idea to carry out this research study is to measure

the impact of sales tax value added tax and goods and service tax on profitability of

organizations in India. The present study is partly descriptive and partly explorative.

The data for this study is obtained from secondary sources as well as primary sources.

Primary Data:

Data on total sales and Sales tax/VAT is collected primarily from various

organizations in India, and Maharashtra as well. Primary data of 100 Industries have

been collected through, Observation method, Personal interviews, telephonic

interviews, discussion with experts, Questionnaire and schedule, Case Studies etc.

Data of all the industries were grouped into five major categories, such as

infrastructure industries, capital goods industries, pharmaceutical industries, consumer

goods industries and chemical industries. The present study is based on time series

data for eight years during 2000-01 to 2008-09.

Secondary Data:

Secondary data were collected from referred books, reports, and conference papers,

referred journals, magazines/periodicals, ministry of finance (Economic Survey)

Govt. of India and, Govt. of Maharashtra, Publication of Reserve Bank of India. In the

present study, following statistical tools were used for analysis of data, simple tabular

and percentage method is applied and estimation of annual compound growth rate and

coefficient of variation of total sales and sales tax /VAT for each organization, state

31

and the country as a whole has been made by using growth rate formula. Moreover

standard statistical package like SPSS is used to calculate the linear regression and t

test to test the hypothesis of the research study.

1.6.1 SAMPLE SIZE OF THE STUDY:

There are a large number of industries in India and particular in Maharashtra. For our

studies we have taken 100 Industries and grouped them in five different Types of

Major Industries. The primary data was obtained from the sample respondents who

are associated with manufacturing activity. Field survey covered the hundred

industries, which are grouped into five major categories. Which are as follows.






TABLE 1.1 INDUSTRY WISE AND TURNOVER WISE CLASSIFICATION

OF INDUSTRIES

Turnover (Rs. In Crores)

A)

Capital

Industries

B)

Consumer

Industries

C)

Infrastructure

Industries

D)

Chemical

Industries

E)

Pharma

Industries. Total

1-200 11 10 04 16 13 54

201-1000 07 09 02 03 10 31 1000 and

Above 00 05 04 04 02 15

Total 18 24 10 23 25 100

Source: Field work

32

For our analysis, in Table 1.1 we have classified industries on the basis of turnover

into small, medium and Large Industries. Small Industries includes Industries whose

average sales turnover from 2001-02 to 2008-09 is less than two hundred crores.

Medium Industries are those whose average sales turnover during 2001-02 to 2008-09

is more than two hundred crores and less than one thousand crores and large

industries are consists of industries whose average turnover during 2001-02 to 2008-

09 is more than one thousand crores.

COLLECTION OF DATA

Present research study is based on primary as well as secondary data. With the help of

following techniques or methods. The Primary Data of 100 Industries were collected:

a) Personal Interviews Methods

b) Telephonic Interviews

c) Questionnaires

d) Case Studies, etc.

The questionnaires were designed to collect the information about their Sales and

Sales tax Paid by them after considering the input tax credit from 2001-02 to 2008-09.

The secondary data was collected through Referred journals books, reports, and

conference papers, Referred journals, magazines/periodicals, Publication of Reserve

Bank of India, Ministry of Finance (Economic Survey) Govt. of India and, Govt. of

Maharashtra. Centre of Monitoring Indian Economy (CMIE). Detailed discussion

were held with the knowledgeable personnel who are associated with Indirect Tax

Fields and also with various Tax Consultants, Financial officers of various

Companies.

33

1.6.2 STATISTICAL METHODS/TECHNIQUES USED:

Appropriate Statistical tools necessary to measure the profitability and growth

of the organizations vis-à-vis revenue scenario of the state has been

incorporated. The study uses the standard Statistical Package for Social

Sciences (SPSS) for the analysis.

Data Analysis and Findings:

Standard tools were used to analyze the data, presentation of the Findings,

conclusions and recommendations. Based on the above analysis certain conclusions

were drawn.

1.6.3 DIFFERENT MODELS USED IN PAST STUDY:

1.6.3.1 GST MODELS:

1.6.3.1.1 GST MODEL IN INDIA:

It is important to take note of the significant administrative issues involved in

designing an effective GST model in a federal system with the objective of having an

overall harmonious structure of rates. Together with this, there is a need for upholding

the powers of Central and State Governments in their taxation matters. Further, there

is also the need to propose a model that would be easily implementable, while being

generally acceptable to stakeholders.

Salient features of the GST model:

Keeping in view the report of the joint working group on goods and services tax, the

views received from the States and Government of India, a dual GST structure with

defined functions and responsibilities of the Centre and the States is recommended.

34

An appropriate mechanism that will be binding on both the centre and the states

would be worked out whereby the harmonious rate structure along with the need for

further modification could be upheld, if necessary with a collectively agreed

constitutional amendment. Salient features of the proposed model are as follows:

(i) The GST shall have two components: one levied by the Centre (hereinafter

referred to as Central GST), and the other levied by the States (hereinafter referred to

as State GST). Rates for Central GST and State GST would be prescribed

appropriately, reflecting revenue considerations and acceptability. This dual GST

model would be implemented through multiple statutes (one for CGST and SGST

statute for every State). However, the basic features of law such as chargeability,

definition of taxable event and taxable person, measure of levy including valuation

provisions, basis of classification etc. would be uniform across these statutes as far as

practicle.

(ii) The Central GST and the State GST would be applicable to all transactions

of goods and services made for a consideration except the exempted goods and

services, goods which are outside the purview of GST and the transactions which are

below the prescribed threshold limits.

(iii) The Central GST and State GST are to be paid to the accounts of the

Centre and the States separately. It would have to be ensured that account-heads for

all services and goods would have indication whether it relates to Central GST or

State GST (with identification of the State to whom the tax is to be credited).

(iv) Since the Central GST and State GST are to be treated separately, taxes

paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for

35

the Central GST and could be utilized only against the payment of Central GST. The

same principle will be applicable for the State GST. A taxpayer or exporter would

have to maintain separate details in books of account for utilization or refund of

credit. Further, the rules for taking and utilization of credit for the Central GST and

the State GST would be aligned.

(v) Cross utilization of ITC between the Central GST and the State GST

would not be allowed except in the case of inter-State supply of goods and services

under the IGST model which is explained later.

(vi) Ideally, the problem related to credit accumulation on account of refund of

GST should be avoided by both the Centre and the States except in the cases such as

exports, purchase of capital goods, input tax at higher rate than output tax etc. where,

again refund/adjustment should be completed in a time bound manner.

(vii) To the extent feasible, uniform procedure for collection of both Central

GST and State GST would be prescribed in the respective legislation for Central GST

and State GST.

(viii) The administration of the Central GST to the Centre and for State GST

to the States would be given. This would imply that the Centre and the States would

have concurrent jurisdiction for the entire value chain and for all taxpayers on the

basis of thresholds for goods and services prescribed for the States and the Centre.

(ix) The present threshold prescribed in different State VAT Acts below which

VAT is not applicable varies from State to State. A uniform State GST threshold

across States is desirable and, therefore, it is considered that a threshold of gross

36

annual turnover of Rs.10 lakh both for goods and services for all the States and Union

Territories may be adopted with adequate compensation for the States (particularly,

the States in North-Eastern Region and Special Category States) where lower

threshold had prevailed in the VAT regime. Keeping in view the interest of small

traders and small scale industries and to avoid dual control, the States also considered

that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the

threshold for Central GST for services may also be appropriately high. It may be

mentioned that even now there is a separate threshold of services (Rs. 10 lakh) and

goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

(x) The States are also of the view that Composition/ Compounding Scheme

for the purpose of GST should have an upper ceiling on gross annual turnover and a

floor tax rate with respect to gross annual turnover. In particular, there would be a

compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5%

across the States. The scheme would also allow option for GST registration for

dealers with turnover below the compounding cut-off.

(xi) The taxpayer would need to submit periodical returns, in common format

as far as possible, to both the Central GST authority and to the concerned State GST

authorities.

(xii) Each taxpayer would be allotted a PAN-linked taxpayer identification

number with a total of 13/15 digits. This would bring the GST PAN-linked system in

line with the prevailing PAN-based system for Income tax, facilitating data exchange

and taxpayer compliance.

37

(xiii) Keeping in mind the need of tax payer’s convenience, functions such as

assessment, enforcement, scrutiny and audit would be undertaken by the authority

which is collecting the tax, with information sharing between the Centre and the

States.

It is widely expected that this Budget will chart a roadmap and indicate which model

of Goods and Services Tax will be introduced in the country. GST has been declared

to be the goal for 2010 in the last Budget. There are several models of GST, each with

its own merit and demerit. A look at some of the models in circulation:

1.6.3.1.2 Australian Model: In Australia GST is a federal tax, collected by the Centre

and distributed to the states. But India is a heterogeneous country and there is no

chance that states will allow the Centre to collect all the taxes while they become just

spending institutions.

1.6.3.1.3 Canadian Model: The GST in Canada is dual between the Centre and the

states and has three varieties:

(i) Federal GST and provincial retail sales taxes (PST) administered separately -

followed by the largest majority.

(ii) Joint federal and provincial VATs administered federally (Harmonious Sales Tax

- HST).

(iii) Separate federal and provincial VAT administered provincially (QST) - only for

Quebec as it is like a breakaway province.

The first variety is fundamentally the Canadian model, which is similar (though not

the same) to the existing situation in India.

38

1.6.3.1.4 Kelkar-Shah Model: This model of a unified goods and services tax is

based on a "grand bargain" to merge Central Excise, Service Tax and State VAT into

one common base. Two different rates of tax are to be levied by the Centre and the

states. The collection will be by the Centre. This is like the HST model in Canada.

Ajay Shah wants the collection from big industries to be done by the Centre while the

states collect it from the smaller industries. They want the model to be introduced

straightaway.

This exposition does not even take into account the Constitution in the country. The

Constitution allows Central Excise and Service Tax to be collected by the Centre and

the VAT (sales tax) to be collected by the states. If the Constitution does not allow

such an amalgam, how the model can be operative is not indicated in the model.

1.6.3.1.5 Bagchi-Poddar Model: This model, just like Kelker-Shah's, envisages a

combination of Central Excise, Service Tax and VAT to make it a common base of

goods and services tax to be levied both by the Centre and the states separately. This

means that the Central Excise Act will be abolished and the goods tax will be only on

the sale of goods. It will merge in it the service tax.

To put this in legal lingo, the “taxable event" for the GST will be the act of sale of

goods and services. The concept of manufacture will simply vanish. The difference

between the Bagchi-Poddar and Kelker-Shah models is that in the former, the

collection is at two levels, by the Centre and the states, while in the latter the

collection is only by the Centre.

So while the Kelkar-Shah model is like the Canadian HST, the Bagchi-Poddar one is

like the Quebec model.

39

Although the model says that it is based on the Quebec model, it is actually not fully

so as this model envisages collection both by the Centre as well as the states, whereas

the Quebec model envisages collection only by the state of Quebec.

The Bagchi-Poddar model also clearly envisages that a Constitutional amendment is

necessary to bring the taxing powers on goods and services under the Concurrent List

and to abolish the present division of taxing powers between the Centre and the states.

My arguments against the combined GST in the Bagchi-Poddar model are the

following:

(i) The amendment of the Constitution as envisaged in this model will not be

practicable immediately and it will in any case create a huge political upheaval in the

country.

(ii) The Supreme Court also may not allow the change in the basic structure of the

Constitution because it compromises the fiscal federalism ingrained in the

Constitution.

(iii) Revenue: Total collection of revenue will remain the same. There is no reason

why we should create such an upheaval for merely a theoretical pursuit.

(iv) Combining the service tax with VAT at the state level is fraught with innumerable

problems.

(v) At present the service tax collected at any change is given credit with goods at the

central level against duty on goods cleared from any other states. Such

interchangeability will not be possible in case the service taxes are collected by the

states. The free flow of a common Indian market will be hindered.

(vi) The states may impose different rates of service tax on the same service.

(vii) A service having an all-India character will get different treatment in different

40

states. Even the model itself admits that its success assumes complete similarity of

rates and procedures in all the states, which is most unlikely to happen. The states

could not even enact the same VAT laws recently.

1.6.3.1.6 The Practical Model: The same result with no upheaval/without upsetting

the present setup can be achieved by a dual VAT or parallel GST at the central as well

as the state levels. At the central level we can have, as we have now, a combination of

Cenvat and Service Tax. At the state level we can have VAT alone without Service

Tax. There is no need to combine Cenvat and VAT which envisages the complete

abolition of Central Excise Act, which gives the power to the Centre to charge tax on

manufacture. At the Centre the merging of Cenvat and Service Tax has been already

done to a large extent by allowing interchangeability of input credit for both goods

and services. The rate of tax can be made 14 per cent for both goods and services in

the next Budget or the one after that. At the state level, VAT can be perfected by

abolishing CST and allowing inter-changeability of input credit between states. This

will work administratively as well as revenue-wise. Realising that India is a federal

country with disparate states, this dual or parallel GST and VAT is a most practical

proposition. There is no need to serve a doctrinaire approach and create mayhem to

get the same revenue.

1.7 IMPORTANCE OF THE STUDY:

The objective of the study of this topic is to find out the impact of Sales tax, Value

Added Tax and Goods and Service tax on the Profitability of the Organizations and to

determine which tax system is beneficial to the Industries, Consumers and also to find

out the effect of Sales tax, Value Added Tax and Goods and service tax on the Price

of the product. This study also results in finding the most beneficial system of tax

41

structure which is suitable means less complicated from the view point of

Government and Industries. This study will be useful to traders, Manufacturers to

analyze its tax burden, at the same time government will also understand how to

generate the revenue through indirect taxes in the Country.

1.8 LIMITATIONS OF THE STUDY:

The data collected for this research is collected from the state of Maharashtra. The

result received from this research may or may not be suitable for application to the

other states of India due to geographical limitations.

1.9-CONCLUSION:

Indirect tax reforms have been as integral part of the liberalization process since new

economic reforms. A progressive and welfare oriented nation like India tries to keep a

balance between direct and indirect taxes. In this chapter we have made an attempt to

understand the concepts and methodological approach required to analyse the impact

of Sales tax, VAT and GST on the Profitability of the organization as well as the

revenue growth of the Govt. at State and National level.

42

CHAPTER - 2

REVIEW OF LITERATURE:

2.1 INTRODUCTION:

This chapter includes the study of the various Literature related to tax structure in

general and Sales Tax and VAT in particular & critically understands the same with

the object whether there has been any similar study in the past. Research made in the

past identifies various gaps in the studies.

Bagchi Amresh (2005)1: According to the research conducted by him, it is

inappropriate to impose a uniform tax structure in VAT on the states for it goes

against the principles of fiscal autonomy. It is a pity that erosion of the federal

foundations of the polity is taking place at a time when there is need to strengthen

them. Anything that hurts India’s federalism should be jealously guarded against. One

wonders whether the states while surrendering the most vital part of their fiscal

autonomy thought through the implications of what they were agreeing to.

A uniform rate of sales tax (of which VAT is the modern variant) across the

country has an obvious appeal, particularly to business. That is why there has been

pressure on the EU to have a uniform rate of VAT throughout the Union7 and

proposals were put forward for a single rate of VAT for all countries in the EU. But

the proposal has not found favor primarily because of its implication for the fiscal

sovereignty of the member countries. There is however no Indication that the EU

intends to move away from its current regime of rates varying across countries subject

to a floor.

1 Bagchi Amarshi(2005): (Economic & Political Weekly, Vat & State Autonomy, April 30th)

43

Bird Richard (2007)2: The author points out that the principal reasons for rapid

spread and success of VAT are two fold. The first reason is undoubtedly the early

adoption of Vat in the EU and the perceived success of both the EU and its Vat. The

second is the key role played by the IMF in spreading the word to developing

countries. The consistent support and advocacy of this form of taxation by the IMF in

emerging countries introduced the idea of VAT and facilitated its adoption even by

countries with much less developed economic and administrative structures.

VAT has been an enormous success. It has swept away other contending

general sales taxes in most of the world.

Burgess Robin, Howes Stephen and Stern Nicholas (2003)3: The writers state that

VAT, in essence, is a tax on domestic final consumption. It can be levied at all stages

between production to the point of final sale. The VAT is an attractive tax, and has

proved to be successful tax from the point of view of revenue raising and has in the

last three decades, been introduced into a wide variety of developed and developing

countries.

They have paid attention to the problems arising from the introduction of vat

concerning the centre-state relations, which have been categorized into

a] Harmonised, centrally run system,

b] Non harmonized State run system and

c] Dual Centre- State System.

They conclude stating that the successful introduction of Vat into a large and

heterogeneous country like India will require close Centre-State co-operation.

2 (Bird Richard(2007): (The Vat in Developing and Transitional Countries Cambridge University Press) 3 Burgess Robin, Howes Stephen and Stern Nicholas: (Options for VAT)

44

Burgess Robin and Stern Nicholas (2005)4: The authors present options for reform

of the Indirect in terms of different versions of a VAT designed for a federal context.

It must be emphasized that these constitute only an agenda and the objectives are

limited to a review of theory and experience in a way which points to this agenda.

They have outlined the principles of VAT, examined the experience of four

federal economies, reviewed the Centre State relations in India, and have proceeded

further to set out an agenda for India.

They have argued that the pressure on the Indian domestic indirect tax system,

both for revenue and in terms of complexities and inefficiencies are warrant to serious

considerations. It is important to develop early in the reform process a picture of

where the structure should settle. They argue that there are a number of serious

contenders for a domestic VAT based system which takes into account various

aspects of India’s federal structure.

Chelliah Raja, Aggarwal Pawan, Purohit Mahesh and Rao Kavita(2001)5: The

authors state that value is created or added not only at the stage of manufacturing but

also at all subsequent stages of activities i.e. until the commodity reaches the hands of

the final consumer. So, they consider a tax which covers value added at all

transactions better to that which cover value added only at the stage of manufacture

and sale by an importer. They have further studied the various options for Vat in

regards to the International experience, have undertaken experiments with Vat in

Indian States, design of Vat for major states, issues in administration of Vat and also

studied the options for reforms in CST.

4 Burges Robin and Stern Nicholas: (Programme of Research into Economic Transformation and Public Finance) 5 Chelliah Raja, Aggarwal Pawan,Purohit Mahesh and Rao Kavita (2001): (NIPFP, Primer on VALUE ADDED TAX)

45

Das - Gupta Arindam (2005)6 : India has not implemented a transparent destination

based consumption tax and not even a value added tax. Instead, India’s state ‘VAT’

cascades; has roughly an income rather than a consumption base; will not implement

the destination principle even if the central sales tax on interstate sales is removed;

and is far from transparent. Despite its weaknesses, however, implementation of state

VAT deserves support because of the strengthening of tax administration and the

lowering of taxpayer compliance costs that it will bring about.

The VAT should be judged as a success say three years from now, if revenues

improve, compliance and administration costs per rupee of revenue fall, and exports,

including national exports, increase. Sales tax buoyancy with respect to GSDP at

factor cost, for all states taken together for 1993-94 to 2001-02 was 1.05. Unless VAT

revenue buoyancy exceeds this, it will have failed on revenue grounds. Sales tax

administration costs vary across states from below 1 to around 4 per cent of

collections, a second VAT benchmark. It is harder to suggest quantitative

performance benchmarks for compliance costs and exports given data limitations and,

for trade, modeling problems.

Frenkel Jacob, Razin Assaf, Symansky Steve (1991)7: The authors highlight the

macroeconomic issues pertinent to the understanding of the international and

domestic effects of international Vat harmonization. It outlines elements of the

policies of vat harmonization envisaged for Europe of 1992, and develops a basic tax

model which is suitable for the analysis of the incentive effects of various tax policies

and their welfare implications.

6 Das-Gupta Arindam (2005): (Economic & Political Weekly, Will State deliver Vat? , September 3rd) 7 Frenkel Jacob, Razin Assaf, Symansky Steve (1991) : (National Bureau of Economic Research, International VAT Harmonisation, March 1991)

46

They analyse the dynamic mechanism associated with changes in the time

profile of taxes. Since Vat harmonization involves changes in the competition of

taxes, they examined the dynamic consequences of revenue- neutral tax conversions

between income and consumption (VAT) tax systems undertaken by a single country.

Reflecting their emphasis on the saving-investment balance we demonstrate

analytically that the effects of such changes in the composition of taxes depend

critically on international differences in saving and investment propensities which in

turn govern the time profile of balance of payments.

They have suggested the Tax Model, studied the simulations of Vat

Harmonisation and alternative Tax systems; current Account Imbalances, Tax

conversions: Revenue Neutrality and current Account Imbalances

Glaeser, et al. (1992): He examines agglomeration impacts by estimating the impact

that local industrial specialization and diversity has on a city’s growth. In order to

measure specialization of an industry in an area, they used a location quotient for

industry

i, measured as

specialization

it =

e it /

Eit

e st/

Est

Where e is the number of jobs in an industry, E is the total number of jobs and the

subscripts i, s and t denote counties, the United States and year, respectively. The

47

variable measures how specialized an industry is in a county relative to how it would

be if the industry was randomly spread across the U.S.8

Hicks9 & Joseph (1939)10: They believed that the lump sum taxes are the most

neutral and that the income tax is superior to commodity taxes (such as VAT) in terms

of neutrality. Hicks and Joseph, using technique of ordinal welfare economics

unequivocally demonstrated this. Further, it is shown that VAT is likely to distort the

coparison of benefits and thereby, choices via increase in costs. This in turn

influences the pattern of resource allocation. Hicks- Joseph demonstration of excess

burden of such a tax using the technique of ordinal welfare economics, however,

assumes that the objective of taxation is to maximize tax revenue. On the contrary, in

present times, commodity taxes do have the objective of curtailing consumption of

taxed items. Hence as Kaldor11 state, economic efficiency of tax (ET) can be defined

as changes in private expenditure (c ) over changes in revenue (R ) i.e ET =∆C/∆R .

Morag`s reversal theorem, when the assumption of fixed revenue is dropped

and when we compare taxes creating same reduction in the consumption of the

commodity in question. Even in terms of the theory of optical taxation propounded by

Ramsey and others, VAT fulfills the criterion that there is no loss of technical

production efficiency when the rates are optimally determined and that there should

be no taxation of inputs into the production process12.

8 An identical measure was calculated with county employment relative to Tennessee employment. Models discussed below were conducted with the measure and results remained consistent with those discussed in the paper. The national ratio was used to remain consistent with the majority of the literature (Glaeser, et al (1992) and Gabe (2005)). 9 Hicks J.r.1939. Value and Capital, London: Oxford University Press. 10 Review of Economic Studies, 1939, pp 226-231. 11 Kaldor , N. 1956An Expenditure Tax. London: Allen & Unvin.

12 Atikson, A. B. and J.E. Stiglitz. 1990 Lectures on public Economics. New York: McGraw Hill.

48

A study concluded on optical tax & VAT concluded that the optimal tax is that

there is no loss of technical production efficiency consequent upon imposition of

commodity taxes, if such taxes are designed optimally. A necessary condition for

taxes to be designed optimally is to have a tax on inputs going into the production 13.

Since VAT is a system of commodity taxation designed to avoid tax on inputs being

used for the production process, it is eminently suitable for adoption as an optimal tax

structure.

Kautilya`s Arthasastra14: His works state that the taxes are often perceived to be a

measure for raising resources for the government. In the primitive barter economies

of the medieval period in Europe and even in ancient India, the primary objective of

taxation was to raise resource for the economy.

Keen Michael and Smith Stephen(2007)15

: According to their study the key claim

made by advocates of the VAT is that it is a particularly effective way of raising tax

revenue: Cnossen(1990) argues that ‘purely from a revenue point of view, VAT is

probably the best tax ever invented’. Advocates have also long recognized that VAT,

like any other tax, is vulnerable to evasion and fraud but stress distinctive features of

the vat make it less vulnerable than other forms of taxation. The author reviews the

exposure of VAT to revenue losses through noncompliance, with a particular focus on

fraud and evasion.

13 Diamond, Peter A., and Mirrlees . 1971. “optimal Taxation and Public Production and Efficiency Economic Review 61: 8-26

14 Reference of tax on sale and citation of rules thereof provide ample evidence of a first point sales tax being in existence in ancient India. See for a details Purohit, Mahesh C. 1975.Sales taxation in India,pp 12-18.New Delhi: S Chand & Co

15 Keen Michael and Smith Stephen(2007): ( IMF Working Papers, Vat Fraud and Evasion, February)

49

There is no doubt that VAT is susceptible to evasion and fraud, running all the

occasional concealed sale to sophisticated and large scale attacks by organizations.

All taxes face problems of noncompliance take a particularly striking form, with fraud

potentially leading not merely to an inappropriate reduction in tax towards zero but

outright cash payment to the fraudster.

There is no mystery as to how one might sole the current difficulties of

carousel and related frauds. The deep solution is well known: to fix the VAT chain by

ending the zero rating of trade between member states.

Krugman’s (1991)16 study of the “new economic geography” led to renewed interest

in the notion of agglomerations and led to several studies that recognized the potential

for agglomeration economies to alter the general findings from the tax competition

literature (Kind, et al (1998 and 2000), Ludema and Wooton (2000) and Baldwin and

Krugman (2004)). These papers recognized that the capital mobility driving the tax

competition models also potentially leads to the formation of agglomerations. The

earning of rent in an agglomeration then offers governments an opportunity to

forestall the race to the bottom in capital tax rates. Given that there is evidence of

firms earning rents in the presence of agglomerations, it follows that governments

might then attempt to raise the tax rates paid by the firms to capture a portion of the

rents. This will offset the race to the bottom that is predicted in the standard tax

competition models. The following sections present the standard tax competition

model followed by some insights from tax competition in the presence of

agglomeration economies. In contrast, the presence of the agglomerations may

expedite the race to the bottom in capital tax rates. The jurisdiction without the

16 Krugman, Paul. 1991a. Geography and Trade. Cambridge: MIT Press.

50

agglomeration benefits may compete more vigorously for the capital. Because too

great gap, in tax rates will cause capital outflow, the jurisdiction with the

agglomeration will have to lower its rates as well to maintain the gap.

It is also possible that counties consider other demographically or economically

similar counties when setting tax rates as opposed to just physical neighbors.

Marshall (1920): He studied the incentives for firms to locate near each other and

form what is called an agglomeration. Agglomeration economies are thought to

benefit a firm to the extent that locating within the agglomeration lowers the cost of

operating the firm because of positive externalities from the agglomeration. This is

usually thought to occur through a number of avenues. The presence of a trained labor

force, or labor market pooling, makes the cost of hiring and training new employees

relatively cheaper. Knowledge spillovers exist to the extent that technological

advancements developed in one firm spread to surrounding firms at a lower cost than

transmitting over greater distances. The proximity of firms to producers of

intermediate inputs and to the final demanders of a firm’s output lowers the cost of

production as well. One of the most commonly disputed dimensions of agglomeration

economies is the scope of the externality. The literature has generally labeled the

scope of the agglomerations into three categories: (1) internal economies of scale, (2)

economies of scale external to the firm but internal to the industry (localization

economies) and (3) economies of scale that are external to the firm and the industry

(urbanization economies)17 An additional line of disagreement is over the geographic

scope of the externality with some arguing that any benefits from externalities occur

17 See Eberts and McMillen (1999) for a discussion of the different scopes of agglomerations.

51

at a very localized level, thus discussions of agglomeration economies should not

extend to too great a geographic size (Rosenthal and Strange (2003b). Localization

economies are often attributed to Marshall who envisioned local clusters of industries:

When an industry has thus chosen a locality for itself, it is likely to stay there long: so

great are the advantages which people following the same skilled trade get from near

neighborhood to one another. Employers are apt to resort to any place where they are

likely to find a good choice of workers with the special skill they require. (Marshall

(1920), p. 271)

METRIC18 & A Korean study (1977)

19: The METRIC studies referred to in the

Brookings as well as in the Sixth Report of the Tax Council suggest that a reduction

in VAT by 1 percent would reduce prices by 0.7 percent. A Korean study, however,

suggest that the introduction of VAT did not have any markedly unstable impact on

prices. It shows that in 1977, the wholesale price in Korea increased by 9 percent and

the consumer price by 1.7 percent when VAT was introduce in July 1977.

Mukhopadhyay Sukumar (2005)20

: His study reveals that Revenue growth is the

most important aspect by which to judge the success of VAT in Haryana. The deemed

growth of revenue estimated by the Commercial Tax Department of Haryana,

however, has not taken into account a number of positive factors. As Haryana

18 Aaron Henry J., ed 1981. Value Added Tax: Lesson from Europe. Washington DC: Brooking

Institution. 19 The ministry of finance 1980. The Survey Report on the Practice of value Added Tax in Korea, (In

Korean) pp 168-170 quoted in Han, Seung Soo. 1987. The value Added Tax in Korea DRD 221 World

Bank pp 29-31

20 Mukhopadhyay Sukumar(2005): (Economic & Political Weekly, Vat in Haryana, February 19th)

52

implemented VAT only in 2003, one year is too short a period to judge its efficiency

from a revenue point of view.

The conclusion is that the design of VAT introduced in Haryana is

unexceptional.

For revenue, here an attempt has been made to disaggregate all the possible

parameters concerned. However, it also has to be admitted that, in the first year, there

can be initial problems and that the situation is uncertain. Just one year is too short a

period to judge the efficiency of VAT from the revenue point of view. When VAT

was introduced in Canada in January 1991, even in September 1992, Robin Burgess

and P Stern (VAT in India-Problems and Prospects, p 30) called the revenue result

uncertain. The idea of writing this treatise is to put the whole issue into proper

perspective.

Murthy M N (1995)21

: His study discusses various types of VAT and their

application in a federal country or a country with governments at many levels. In

particular, it takes up a detailed examination of a comprehensive VAT covering the

full chain of business activities from manufacturing to retailing. A case for having a

comprehensive VAT at central and state levels in India is discussed. It finds that such

a tax system supplemented by specific excises and subsidies to deal with the problems

of equity, environment and social needs is ideal for India.

A comprehensive VAT with consumption base covering the full chain of

business activities from manufacturing to retailing is identical to a tax on retail sales.

Given a choice between a VAT and a tax on retail sales, a developing country has to

21 Murthy M N (1995): (Economic & Political Weekly, Value Added Tax in A Federation : Commodity Tax Reforms in India, March 18th)

53

opt for VAT, because retail sales departments are small, unstable and informal in

those countries.

A comprehensive VAT with the consumption base, the tax credit method, and

the destination principle to determine VAT on international and inter-state trade flows

can form an ideal commodity tax structure for India.

In a federal country like India, it may be ideal to have state and central VATs

substituting the current state and central taxes on goods and services respectively.

There can he two types of tax regimes with the state and central VATs: (a) the parallel

state and central VATs on the same base covering business from manufacturing to

retailing stage and (b) the central VAT up to the manufacturing stage and the state

VAT at wholesaling and retailing stages. Tax regime (b) may be ideal for India.

A VAT with one or two rates has to be supplemented by the special excises

and subsidies to deal with the problem of equity, environment and social bads like

tobacco and alcohol.

Musgrave (1986)22

: The effects of VAT are felt all over the economy. This is

because this tax influences several macro economic variables such as savings,

investment, employment, distribution prices, and efficiency of resources. VAT

affects some of these variables directly and others indirectly. According to Musgrave

the second alternative might be the most realistic one. Hence, it is expected that “an

absolute price level increase is the most likely result. VAT would be inflationary if it

is shifted forward so that the consumer maintains real consumption and there exist an

accommodative credit policy. In fact it would be necessary to have sufficient increase

22 Musgrave, R.A. “Effect of business Taxes on International Commodity flows.” In collected papers

of Richard A. Musgarve. 1986. Public Finance in a Democratic society Vol. I, Social Goods Taxation

and Fiscal and policies. New York: University Press.

54

in wages (to offset increase in prices due to VAT) to help the consumer maintain his

present consumption level. Such an increase in wages will cause an inflationary

spiral, for the business cost will trigger a price increase. The studies involving partial

equilibrium analysis do not, however, capture the adjustment among taxed and non

taxed commodities. Moreover, such studies attribute the effect of taxes replaced and

the new VAT to different commodities consumed by different consumer groups.

However these studies do not examine the effect on substitution of taxed

commodities.

NIPFP (1989) 23

: A study conducted by NIPFP reveals that the central VAT in India

indicates that during April 1986 to September 1987, the level of wholesale prices of

all commodities. The study shows that, at the disaggregated level, the price impact is

significant but marginal in respect of a few, basically intermediate inputs and capital

goods. For all the intermediate goods, the decline in price level was about 0.4 percent.

A similar result is also arrived at in the case of capital goods. More importantly, the

price impact was negligible even for consumer goods. Hence, it would be correct to

state that VAT is generally not inflationary.

NIPFP(1989): A study conducted by NIPFP found similar result in the case of capital

goods. More importantly, the price impact was negligible even for consumer goods.

Hence, it would be correct to state that VAT is generally not inflationary.

The effect of VAT on prices is significant and direct. The effect, however,

depends upon whether VAT is a new levy (intended to mobilize additional resources)

23 National Institute of public Finance and policy 1989. The operation of MODVAT New Delhi :

NIPFP.

55

or simply a replacement for the existing taxes to recover the lost revenue from other

taxes reduced or replaced by VAT.

The central government needs “excess” revenue to carry out its allocative and

distributive roles (Via intergovernmental transfers) to influence state actions and

achieve both “incentive compatibility” and horizontal equity.

Purohit Mahesh (1993)24

: His research concluded that the adoption of the Value

Added Tax (VAT) by a rapidly growing number of countries has been one of the most

remarkable events in the evolution of commodity taxation in this century. He

examines the general trends in the structure of VAT—rates, tax base and

exemptions—in the countries which have adopted it. The author then presents his

assessment of the existing system of commodity taxation in India and, against that

background, discusses the likely problems in introducing VAT in the context of the

country's federal structure.

The analysis of the existing structure of the three important taxes suggests that

the present system of commodity taxes in India is an un-integrated one. It is not a

system in itself but a juxtaposition of a number of systems. Also, services are

generally excluded from the purview of taxation.


: His Study revealed that one of the factors responsible for

proper enforcement of a VAT is organization of the tax administration. Another

important aspect related to the management of a VAT is its operations commencing

24 Purohit Mahesh(1993): (Economic & Political Weekly, Adoption of VAT in India : Problems and Prospects, March 6th) 25 Purohit Mahesh(1994): (National Institute of Public Finance and Policy New Delhi, Management of VAT in France, February)

56

with registration of taxable persons. All the issues related to the administration of the

tax system as well as the compliance costs are equally important.

Management of VAT commences with the registration of taxable persons,

once registered, the taxpayers obligations in submitting the returns and procedures in

maintaining books of accounts differ on the basis of the activities and volume of

turnover. Methods of assessment also change according to the category of the

taxpayers. The system of lumpsum taxation is relatively complex but offers various

advantages to the taxpayers regarding their obligations.


: His study stated that although more than 100 countries

have gone in for a system of Value Added Tax (VAT), it is not a sheer coincidence

that most of the federations have not adopted it. Brazil has the distinction of being the

only federal country in the world with independent value added taxes (VATs) at the

federal and state levels.

The existing system of taxation in Brazil is based on tax reforms enacted as

part of the 1988 constitutional reforms which aimed at strengthening the structure of

value added tax at the state level. The existing indirect tax system of Brazil is

characterised by a variety of taxes. The taxes are levied by all the three tiers of

government. The federal government levies the IPI - a federal VAT on

manufacturing; the state governments levy the ICMS - a state VAT on agriculture,

industry, and many services; and the municipal governments levy ISS - a tax on

services which is not included in the ICMS. Notwithstanding various limitations with

the VAT at the two levels of government in Brazil, VAT of Brazil could be followed

by the other federations. However, the issues of significance for the other federations

26 Purohit Mahesh (1997): (Economic & Political Weekly, Value Added Tax in a Federal Structure: A Case Study of Brazil, February 15th)

57

included (i) the structural strength of the ICMS, and (ii) the operational efficiency of

the state-VAT, especially in the context of equity and efficiency of the tax system. As

regards the structural strength of the ICMS, the mechanism of interstate adjustments

based on the principle of 'origin' creates interstate inequity. Also, the rate variations

for interstate flows (i e, to have varying rates for different states based on the stage of

economic development) have given rise to malpractice by the rich states (such as

offering of special tax deferrals). Such practices have attained increasing importance

in recent years.


: He studied the allocative and distributive functions of the

Centre, and proposed that the center should levy, in addition to the CENVAT,

Sumptuary excises (SEs) on a few select commodities. Theses commodities would be

at the most a dozen in number. The center would retain to the Center approximately

half the revenue from the UEDs. The central kitty would, therefore, not be affected by

the proposed change in the system.

As regards assignment of tax powers between the different layers of

government, the fiscal federalism thermo demonstrates that highly progressive and

mobile tax bases should be assigned to the national government and the sub national

governments should levy mainly the benefit taxes and taxes on static/ immobile tax

bases (Musgrave, 1959; Oates, 1972, 1999). This is because a mobile tax base can

migrate across jurisdictions in response to favorable/unfavorable tax treatment given

27 Purohit , Mahesh C. 2000.”Assignment of taxing Powers for Fiscal Balance.” In fiscal

Federalism in India: Contemporary Challenges – Issues Before the Eleventh Finance Commission , ed.

D.K. srivastava , pp 312-329. New Delhi: NIPFP.

58

by the various sub – national jurisdictions. Such migration produces an excess burden

and may lead to low or zero tax rates in equilibrium at the sub-national level 28

A key feature of the aforesaid Constitution assignment of responsibilities and

tax powers has been the in-built imbalance between expenditure requirements and

revenue over expenditure needs, the states in general have revenue shortages. The

presence of such “vertical fiscal imbalance “29 is a characteristics feature of the Indian

federation and occurred because of historical and political factors30. To mitigate the

fiscal imbalance, the Indian Constitution provides four channels of resource flows

from the center to the states viz., revenue assignment, revenue distribution, revenue

sharing and grants- in – aid from center. For details and nature of these transfers, see

Rao and Sen (1996) Vithal and Sastry (2001) and Shome (2002)31.

28 For instance , if one sub-national government unit increases its tax rate , then the

neighboring units will have an incentive to reduce /retain their rates in order to increase the

tax base by way of attracting mobile tax bases into their territories.

29 Besides there exist horizontal imbalance among the states , because of difference among

States in their levels of development (due to difference in endowment of natural resource),

and standard of public services (due to their historical background and factors) .

30 (Rao and Sen 1996.) The historical-cum –political rational that shaped the Constitutional

arrangements was the need to ensure and protect the ‘unity, integrity and sovereignty ,’ of

the country which owing to historical circumstances , the framers of the Constitution

Of India 1988) moreover , the government of India Act, 1935 based on which the many

aspects of Constitutional assignments were decided upon , was designed to keep firm

administrative control of the country with the center believed could be ensured only by a

functionally and financially strong center (Government

31 The other major channels of resource transfers from the center to State are the Commission

and central government ministries (See Rao and Sen, 1996 and Sury, 1998).

59

Evidence collected from different countries show that VAT is either partially

progressive or proportional. In Dutch countries, the VAT was designed in such a way

that it would be distributionally neutral32. In France, VAT was to be proportional or

mildly regressive when taken in relation to consumption and regressive in relation to

income33. In the United Kingdom, VAT is progressive mainly because of zero- rating

for food, housing and children clothing.34. The results of the studies relating to

Denmark (1981) , Netherlands (1983) , Sweden (1985) and United Kingdom (1985) ,

35 as given in table 2.2, show that in all these countries, when measured against

consumption, VAT is roughly proportional but has tendency to moderate progression

in the Netherlands and moderate regression in Denmark. When we measure incidence

against disposable income, it is highly regressive in Denmark and less so in Sweden.

When the incidence is measured against gross income, it is highly regressive in

Denmark and Sweden. Here it is important to note that the result of Denmark would

have been less regressive if account had been taken of the indirect VAT influence on

housing costs and of the progressive automobile registration fee36.

The results of study done in Korea suggest that the effective burden on the

lowest income decline was higher (9.4 percent) and it decline (3.8 percent) as the

income increased. The regressive nature of VAT is also shown in the study for Korea

32 Conssen , S.1981. “Dutch Experience with the value Added Tax “ Finanzarchiv 39(2) :223- 54. 33 Lienard Messere and Owens. 1987. “Franace In Comparative Tax system Europe , Canada and Japan

Joseph A. pechman , pp 1980- 81 Arlington , Arlington , Virginia ; Tax Analysts. 34 Hemming and Kay “The United Kingdom.” In The Value Added Tax : Lesson from Europe , ed.

Henry J. Aaron , 1981 pp. 83-85. Washington, dc; Brooking Institution. 35 The figure within parentheses indicates the year for which the data are collected for the

analysis of incidence of VAT in the country concerned. 36 OECD. 1988. Taxing Consumption, pp 122-45. Paris: OECD.

60

in the case of farm households.37 Studies presented by OECD, 38brooking, 39 and tax

Council 40 have found VAT to be mildly progressive when measured with reference to

consumption. These results are confirmed in a later study by Adams41, which suggest

that VAT is somewhat more regressive than the results presented in studies

undertaken in the early and mid-seventies.

The results of distributional effects indicate that VAT is not a useful instrument to

mitigate. In Ireland, for example, it is found that although the poor spend relatively

more of their income on groceries than the rich, in absolute amounts the rich spend

twice as much the poor.42 The same has been found for Canada in an official study

relating to family Expenditure Surveys. The study shows that in 1986 people earning

$ 10,000 to $15, 000p.a. spent $ 2,500 (with all taxes including Federal Sales Tax) on

food purchased from stores, compared with $4,900 spent by people in the $ 50,000 to

60,000 income class. 43 Abolition of standard rate on groceries benefits single people

with higher incomes.44 To estimate the total distributional effect of VAT, we must

simultaneously look into the distributional impact of government expenditure which is

37 Heller, Peter S.1981. “Testing the Impact of value added and Global Income Tax reforms on Korean

Tax Incidents in 1976: An Input-Output and Sensitivity Analysis.” IMF staff papers (June) 28(2) : 375-

410 38 OECD. 1981. The impact of Consumption Taxes at Different Income Levels. Paris :

OECD 39 Balladur, Jean –Pierre and Antoine Coutiere .1981. “ France “ In The Value Added Tax :

Lessons from Europe, ed. Henry J. Aaron, 1981. Washington, DC: Brookings institution. 40 Tax Council. 1983 .sixth report of the Tax Council to the President of the Republic. Paris. 41 Adams, D.W. 1980. “The Distributional Effects of VAT in the United Kingdom , Ireland,

Belgium and Germany.” The three Review 128 (December). 42 Commission on taxation 1984. Third Report: Indirect Taxation . Dublin: Stationery Office. 43 Statistics , Canada, Family Expenditures in Canada :1986 , Catalouge No. 62-555, 34-39,

Table 2. 44 Skall Matmomsen Slopas? (Should the VAT be removed on Food?) SOU, 1983: 54

(stockholam, 1983) , quoted in Cnossen, S.1989. “What rate Structure for a goods and

Services Tax? The European Experience.’ Canadian Tax Journal (September- October)

:1167-1181

61

a major policy variable to influence the redistributive which is a major policy variable

to influence the process.45


: His study concluded that India’s unique indirect tax

system with the central government imposing a broad spectrum of excise duties on

production and manufacture, and the states assigned the power to levy sales tax on

consumption and on services has meant that the adoption of a European-style VAT

has been slow in India. The author examines the problems and prospects of

introducing VAT taking account of the experience of states’ experiments in adopting

VAT in some form or other.

With the withdrawal of the centre from the field of commodity taxes, there

would be no dichotomy of taxing powers between the centre and the states. States

would be able to levy a comprehensive state-VAT. As a next step, it should be useful

to combine all the taxes on Commodity and services levied by the states. Finally, as

already recommended by the empowered committee of state finance ministers, when

the state governments are authorised by the centre to levy tax on some of the localised

services, including sales tax related services (such as service component of works

contract), these also could be integrated in to the state-VAT.


: The authors’ study points out that though VAT has been

introduced in a large number of countries, it has not been possible to introduce a fully

harmonized VAT in any of the federations. The key difference in introducing VAT in

45 Reddy , K.N., and S. Sudhakar. 1988. Distribution of benefits of public Expenditure :A case

Study of Andhra Pradesh. New Delhi: NIPFP 46 Purohit Mahesh (2001): (Economic & Political Weekly, National and Sub-National VAT’s: A Road Map for India, March 3rd) 47 Purohit Mahesh(2002): (National Institute of Public Finance and Policy New Delhi, Harmonising Taxation of Inter-State Trade under a Sub National Vat: Lessons from International Experience, July)

62

a unitary form in a federal country lies in designing a ‘destination based’ national

VAT. The important issue that needs to be addressed in designing a sub-national VAT

relates to treatment of inter-state trade.

As in most federations, India also faces the problem of harmonizing tax on

inter-state trade in the context of introducing VAT. A study of Canada and EU

suggests that there should be no tax on the basis of ‘origin’, while that of Brazil

suggests that if the tax is levied on the basis of ‘origin’ the ‘set-off’ needs to be served

as an ‘equalising mechanisation’ in a federal structure. The other models available in

the literature suggest that the central and state VATs could collaborate each other in

carrying the tax of the origin state to the destination state. However, the other two

models are quite useful i.e. prepaid destination VAT and destination based central

purchase tax.

In all the models, the revenue of the CST becomes ‘nil’ as the tax becomes

destination based. The states need to be compensated for the loss of revenues through

various measures including the power to tax services and compensation to the states

through the Finance Commission.

Rajaraman Indira, Goyal Rajan, Khundrakpam Jeevan (2006)48

: The authors

have laid down Tax buoyancy estimates, which measure the percentage response of

tax revenue to a one percent change in the tax base, usually proxied by the gross

domestic product, are a routine requirement for fiscal projection purposes. The

elasticity of tax revenue is more stringently defined as the underlying revenue

response, holding constant all parameters of tax policy. In developing countries,

where tax policy parameters are changed every year, the elasticity of tax revenue is

48 Rajaraman Indira, Goyal Rajan, Khundrakpam Jeevan (2006): (Economic and Political Weekly, Tax Buoyancy estimates for Indian States.)

63

virtually impossible to estimate with any appreciable degree of accuracy. In such a

fiscal context, where tax policy parameters are in a state of constant flux, the

buoyancy coefficient may provide the only feasible alternative to estimate the

underlying revenue generating properties of the system. If estimated over a

sufficiently long period of time, the buoyancy coefficient essentially estimates the

revenue response with endogenised tax policy.

With the introduction of the a destination based Vat in all but eight states

starting from April 2005, there is a need for a good indicator of tax buoyancies in

states in the period immediately preceding. The authors here, attempt to provide such

a base, with buoyancies in states in the period estimated over a 23 year span starting

in 1980-81.

Rao Govind M, Sharma J V M (1997)49: Their study concluded the need for

coordinated development of domestic trade taxes in the Indian federal polity has

shifted the focus to reforms in the states' sales tax systems. Detailed deliberation has

led to a consensus on the need to transform the prevailing sales taxes into a

destination based consumption type value added tax. However, attempts to reform

sales taxes have not always been in the right direction and, in addition, have met with

resistance from traders.

The fear of losing revenue is likely to weigh heavily in any rationalisation

measure leading to the introduction of the VAT. Unless the bureaucrats are assured

that they will not be penalised in the case of short term revenue loss, they are likely to

develop cold feet. It is therefore important for the centre to create a fund to

49 Rao Govinda M& Sharma J V M (1997): (Economic & Political Weekly, Value Added Tax in States : Challenges ahead, February 1)

64

compensate the states in the event of a significant shortfall in revenue. The detailed

modalities of compensation can be worked out and the multilateral institutions can

also be asked to assist the fund as they have shown a keen interest in the sales tax

reform in recent years.

Sthanumoorthy R (2006)50

: The results of his study reveal that a major defect of the

present state level VAT system, in India, has been the variations in tax rates between

states. It is expected to result in diversion of trade, rate wars and a race to the bottom

in rates. Hence, total uniformity in rates among the states has been stressed. However,

this has attracted criticism because full uniformity would curb rate autonomy of

states. A suggested alternative has been a uniform floor rate system. However, this

may be ineffective in eliminating rate differentials among states. An appropriate

solution might involve rate autonomy for the states on commodities which are not

prone to trade diversion and rate wars. In the case of others, states should apply

uniform rates. Unfortunately, this has been hampered by the lack of empirical

evidence on rate wars and a race to the bottom among the states. This paper makes a

modest attempt to provide empirical evidence on these phenomena in the context of

tax rate setting behavior of the southern states under the previous sales tax regime.

The conclusions of the study are useful to arrive at an appropriate VAT rate structure

for the states.

Rate wars and the resulting race to the bottom are not generalized phenomena

but commodity specific. Given this result, application of uniform rates for

commodities that are not subject to rate wars would serve no useful purpose. Rather

they deny the states a productive revenue source. Therefore, states can be allowed to

50 Sthanumoorthy R (2006): (Economic & Political Weekly, Rate War, Race to the Bottom and uniform state Vat Rates: An Empirical foundation for a difficult policy issue, June 17th)

65

maintain their autonomous status with respect to LLD commodities. For such

commodities, each state should be allowed to choose the rates according to their

economic conditions, revenue needs and the rate elasticities. Such an arrangement, to

a larger extent, does not impinge on the states’ freedom to levy their own rates. At

the same time, application of uniform rates on HLE commodities would help to

achieve desired level of results in terms of controlling trade diversion and rate wars.

It was pointed out by the referee that commodities likely to be subject to trade

diversion and rate wars may vary from state to state. However, as demonstrated in

this study, such commodities by and large appear to be common across the states. In

any case, the ideal step would be to identify a common set of commodities that are

prone to trade diversion across all states in consultation with the states. If there are

any discrepancies in the list of commodities which are prone to trade diversion

between the states, the policy options in their order of choice could be (a) application

of uniform rates among those states which perceive a threat of trade diversion in

respect of a particular commodity. For instance, if Tamil Nadu and Kerala claim

diversion of trade in respect of a particular commodity whereas Andhra Pradesh and

Karnataka are not, then the former states can be asked to apply uniform rates, and (b)

exemption of such commodities from the purview of uniform rates. In this context,

what is perplexing is the decision of the ECSFM to enforce total uniformity in rates

among the states across commodity groups. This only points to the absence of an

empirical basis for such a major policy initiative. An analysis of the present rate

structure in the southern states reveals that although full uniformity in the rates of a

majority of the commodities selected for the study have been attained among the

VAT states, the lower sales tax rates present in the non-VAT states, particularly in

respect of a number of HLE commodities, have the potential to cause trade diversion

66

in favour of non-VAT states and a resulting rate war. The recent threat by the Delhi

government to reduce its VAT rate on bullion from 1 per cent to 0.25 per cent present

in the non-VAT states of Rajasthan and Uttar Pradesh is a case in point. Hence non-

VAT states must be persuaded to join the VAT system without further delay. Finally,

on the downside, the study is region specific as it covers only the southern states. A

study covering all the states and many more commodities may help to gain further

insight into the issue. Any future research, therefore, should be on these lines.

However, this does not prevent us from generalizing the findings of this study for

other states.

Tait, Alan A. (1988)51

: He studied the that the review of policies in different

countries suggest that government in several have adopted extra- ordinary

interventionist policies to cope with the sensitive problem of price change at the time

of introduction of VAT . Studies’ relating to the impact of VAT on prices confirms

that the exact effect would depend upon whether it is a new tax or a substitute for

another tax. The overall experiences suggest that this tax is not inflationary.

Tax Council (1988): Studies presented in the Sixth Report of the Tax Council to the

President of the republic 52 (Paris) suggest that rate changes do not have an automatic

impact on prices but the degree of impact depends upon the general economic

situation and on the other measures taken by the government. VAT would be

inflationary depends not only on the possible offsetting changes in other taxes and on

51 Tait, Alan A. 1988. Value Added Tax: International Practice and Problems Washington, DC: IMF. 52 Tax council 1983. Sixth Report to the President of the Republic on Value Added Tax, Paris.

67

the current money supply but also on the reaction of wages, transfer payments,

liquidity and psychological effects.53

Vishwanathan Renuka (2005)54

: Her study stated that the most significant tax

reform at the state level since independence is clearly the introduction of value added

tax (VAT).

Movement towards a more rational and economically neutral system of

consumption taxation in a federal country in which sub-national governments are

constitutionally empowered to levy taxes on goods and some services calls for

consultation and compromise, consensus and conflict resolution among states as a

group as well as between federal and provincial governments.

Administrative and procedural requirements for introducing VAT have been

laid out in some detail. Modifications in present procedures are essential to respond to

legitimate fears of harassment expressed by dealers, which have proved to be a major

barrier in introducing the tax. Hands off, account-based administration, from

registration through assessment and audit is possible under the self-policing VAT

structure. Unfortunately, much still needs to be done on this count as well as in IT

based networking and governance.

Standard Tax Competition. The standard theoretical explanation for capital tax

competition arises because of capital mobility.55 Zodrow and Mieszkowski (1986)

and Wilson (1986) were among the first to formally examine tax competition for

53 Tanzi, Vito. 1983. “ Taxation and Price Stabilization . “ In Comparative tax Studies: Essaya in

honour of Richard Goode, ed. Sijbren Conossen. Amesterdam: North Holland. 54 Vishwanathan Renuka(2005): (Economic & Political Weekly, The Economic of Value Added Tax, December 10th) 55 Because this paper is primarily concerned with tax competition for capital, discussion of commodity tax competition is excluded. For important contributions to the literature, see Mintz and Tulkens (1986) and Kanbur and Keen (1993).

68

capital between governments. In the case of capital tax competition, governments

compete for a fixed level of capital by luring capital into the jurisdiction with lower

capital tax rates. The end result of the theory is a race to the bottom between

governments with respect to capital tax rates. Because of the assumption of fixed

capital supply, an outflow of capital resulting from an increase in tax rates from one

jurisdiction represents an inflow into the other jurisdiction. Thus, the optimization

problem for the government consists of the tax rates of its own jurisdiction as well as

tax rates of the other jurisdiction. In other words, government behave strategically

when setting capital tax rates.

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CHAPTER - 3

GLOBAL SCENARIO OF VAT AND GST

3.1 INTRODUCTION:-

The origin of Value added tax (VAT) can be traced as far back as 1918 when

F Von Siemens proposed it as a substitute for the then newly established German

Turnover Tax. Since then numerous economists have recommended it in different

contexts. In 1921, VAT was suggested by Prof. Thomas S. Adams for the United

States of America who Recommended “Sales – tax with a credit of refund for taxes

paid by the producer of Dealer (as purchaser) on goods bought for resale or for

necessary use in the production of goods for sales.” VAT was recommended by the

Shoup Mission for the reconstruction of the Japanese economy in 1949. However, the

tax was not introduced by any county till 1953. France led the way in 1954 by

adopting a VAT that covered the industrial sector alone and the tax was limited up to

the whole sales level. The tax was limited to the boundaries of France until the fifties.

VAT has however, been spreading rapidly since the sixties. The Ivory Coast followed

France by adopting VAT in 1960. The tax was introduced by Senegal in 1961 and by

Brazil and Denmark in 1967. The tax gathered further momentum as it was made a

standard form of sales tax required for the countries of the European Union. In 1968,

France extended Vat to the retail level while the federal Republic of Germany

introduced it in its tax system. The Netherlands and Sweden imposed this tax in 1969

while Luxembourg adopted it in 1970, Belgium in 1971, Ireland in 1972, and Italy,

the United Kingdom and Australia in 1973. Of the other members of the European

Union, Portugal and Spain introduced VAT in 1987, while this tax was adopted by

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Finland in 1994. Many other European countries have adopted VAT. Similarly, many

countries in the north and South America, Africa and Oceania have introduced VAT.

VAT has been spreading in the region as well. The Republic of Vietnam adopted vat

briefly in 1973. South Korea introduced vat in 1977, china 1984, Indonesia in 1985,

Taiwan in 1986, Philippines in 1988, Japan In 1989, Pakistan in 1990, Bangladesh In

1991, Thailand in 1992, Singapore in 1994, Sri Lanka In 1998, while Mongolia has

been implementing this tax since 1998. In the South Asian Association for regional

Cooperation (SMRC) region, VAT has been considered in great depth in India. In

1986, India introduced VAT In different way under the name Modified Value Added

Tax (MODVAT). Unlike the VAT system of other countries, the Indian MODVAT

system was designed to cover manufacturing of goods by giving credit of excise duty

paid on inputs. The scope of MODVAT has been extended over the years and has

been renamed as Central Value Added Tax (CENVAT), which covers services also.

3.2 EVOLUTION OF VAT:

France became the first European country to implement VAT on an extensive

scale in 1954. Since then VAT has been adopted by a large number of countries.

Today, VAT exists in 136 countries. Value Added Tax is perceived by many as means

to promote neutrality and uniformity of tax burden and to provide incentives for

increased productivity and industrialization. The spread of VAT to the developed and

the developing countries alike certainly, makes for an interesting study. The VAT has

been described as Mata Hari of the tax world. According to Tait (1988), “many are

tempted, many succumb some tremble on the brink, while others leave only to return,

eventually the attraction appears irresistible…the history of taxation reveals that no

other tax that has swept the world in some thirty years from theory to practice, that

has carried along with it academics who were dismissive and countries that once

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rejected it”. Financial Times (London) too stressed the growing importance of VAT

when it observed in its centennial review “The economic and technological changes

of the second half of the century have made VAT the quintessential modern tax”. It

will not be an exaggeration if one were to say that the emergence of the VAT as an

important and elastic source of revenue over the last four decades is unparalleled in

the history of taxation. Despite the widespread proclamation of VAT, there have been

difficulties in implementing VAT in its true spirit like in the case of Argentina, Brazil,

Canada and India. There have also been attempts to introduce Value Added Tax in

USA, which however has preferred to retain the retail sales tax system. Yet, those

difficulties notwithstanding, it can be said that Value Added Tax system definitely has

its advantages and is certainly recommended for most economies, particularly the

developing ones. Globally, VAT is regarded as a tax that is best levied by the Central

government a condition that is difficult to meet in a federal finance system such as

ours. VAT is a centrally administered tax with a revenue sharing mechanism. It is

hard to visualize VAT as a revenue-neutral measure, or one where the states will not

lose out in relation to the present system, in a federal setup.

If VAT is centrally administered, the tax base is quite wide, comprising

imports, production and different stages of sales. If the base is divided between the

Centre and states, the chain is broken, making tax evasion easier and affecting the

states' tax base. In countries where VAT is administered by a federal government,

revenue collection on imports accounts for a larger portion of total VAT revenues. In

an IMF study of 22 developing countries, it was discovered that in about two-third of

them, more than half the VAT revenue was collected from imports. In Pakistan and

Bangladesh, VAT collection from imports was 64 per cent of the total proceeds from

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the tax. As tax evasion on bulk imports is difficult, it also helps in checking tax

evasion at subsequent stages of the tax chain.

3.3 VAT SCENARIO OF MAJOR COUNTRIES IN THE WORLD:

3.3.1 VAT IN EUROPEAN UNION:

Since the common VAT system was introduced in the 1970s, its declared objective

has been to create the conditions necessary for the establishment of an internal market

characterized by competitive atmosphere under which the taxation of imports and the

non-taxation of exports in intra-Community trade would be abolished in European

Countries. The VAT system which was tailored to the internal market and operated

within the EU area in the same way as it would within a single country, i.e. to

introduce a system of taxation, where goods and services would taxed in the Member

State of origin. However, in practice, such a radical change has not secured the

necessary support from Member States. Foremost amongst the reasons for this are

reservations about the efficiency of the necessary clearing mechanism for the

distribution of VAT receipts, and the degree of harmonization of rates that such a

regime would necessitate. The elimination of custom controls within the EU area in

1993 made it necessary to reform the VAT system operating up to then according to

the destination principle. The origin principle implies the taxation of goods and

services where produced, regardless of where they are consumed. It is better because

it can be applied without border controls and exports would not travel tax-free and the

potential for tax fraud would be lower. However, the origin principle introduces the

possibility for the tax system to discriminate between domestically produced goods

and imports. The full move from the destination to origin principle would also induce

significant changes in the distribution of VAT revenues across countries.

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Transitional”dual-systems:

Transitional dual system attempts to fulfill the requirements of an internal market

without frontiers whilst allowing room for manoeuvre at the national level as regards

the establishment of VAT rates and the collection and auditing of the tax. The

transitional regime replaced custom controls by the obligation, for all EU firms

exporting to another EU-country. Under current VAT rules, public sector bodies are

subject to a special VAT treatment, which potentially distorts competition. One key

exemption case of public sector bodies applies to the supply of postal services, which

have been traditionally operated by monopolistic public agencies and are increasingly

operating in competitive markets. So the special VAT treatment granted to public

bodies, in place in some countries, may operate to distort competition. It may also

introduce a bias for public authorities towards self-supply of goods and services

versus contracting out to the private sector since they may not claim back the VAT

paid on their inputs provided by the private sector.

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Table 3.1 VAT RATES IN NON EUROPEAN COUNTRIES

Country Rate

Standard Reduced

Argentina 21% 10.5% or 0%

Australia 10% -

Bulgaria 20% -

Canada 7% or 15% 4.50%

China, People's Republic of2 17% 6% or 3%

Croatia 22% -

Dominican Republic 6% 12% or 0%

Ecuador 11% -

Iceland 24.50% 14%

India 12.50% 4%, 1%, or 0%

Israel 16.50% -

Malaysia 5% -

Mexico 15% 0%

New Zealand 12.50% -

Norway 25% 11% or 7%

Philippines 10% -

Romania 19% 9%

Russia 18% 10% or 0%

Serbia 18% 8% or 0%

Singapore 5% -

South Africa 14% 7% or 4%

Sri Lanka 15% -

Switzerland 6.50% 3.6% or 2.4%

Denmark 25% none

Finland 22% 17% or 8%

Germany 19% 7%

France 19.6% 5.5% or 2.1%

Netherlands 19% 6% or 0%

Portugal 20% 12% or 5%

Spain 16% 7% or 4%

Sweden 25% 12% or 6%

United Kingdom 17.5% 5% or 0%

Poland 22% 7%, 3% or 0%

Source: www.wikipedia.com

Value added tax in UK has been imposed on the final consumption of particular goods

as well as services in the national market. At the same time, VAT in the UK is levied

75

at various production phases. This tax is also imposed on the distribution phases of

the products. According to this rule, almost all the goods and services in the United

Kingdom are charged with Value Added Tax. Recently, the VAT rules have been

revised in the United Kingdom. The government has decided to collect VAT at a

standard rate of 17.5%. The VAT registration threshold has also been raised from

£64,000 to £67,000. These new rules and regulations have been implemented from

April 2008. Further, these rules have made it mandatory for the companies to register

for value added tax if the company's taxable supplies have crossed the maximum limit

of VAT threshold. Again, if any company has found that its taxable supplies is under

the UK VAT threshold, but is expected to cross the same within a month, the

company has to register itself for the value added tax. There are instances where the

businessmen have registered themselves for VAT although the business turnover has

been well under the threshold. This is done because registering for VAT provides a

number of additional benefits.

The businesses have to pay this tax for every kind of purchase as well as sell of

products or services. Taxes that are paid for purchasing products or services are

known as input tax and the taxes paid for selling products and services are termed as

output tax. There are certain situations when a VAT registered business' output is

higher than the input tax. In these conditions the difference between the two is paid to

the customs and excise. In certain situations the businesses receive less VAT than it

pays. This extra amount is paid back to the businesses by the C&E.

3.3.2 Value Added Tax in Mexico:

In Mexico value added taxes are imposed on the sale of goods as well as services. The

general rate of value added taxation in Mexico is 15%. The same rate is also

76

applicable as far as importing of goods and services are concerned. However the rates

of value added taxes in Mexico is lower in the areas that are located on the

international border of Mexico. In these areas the rate of the value added taxes is

10%. However, certain commodities are excluded from the value added taxes in

Mexico. For example, the non residential real estate properties are subjected to the

value added taxes but the land upon which the particular property has been

constructed is exempted from taxation. The value added taxes in Mexico are part of

the Federal Tax Structure of Mexico. It may also be regarded as one of the principal

taxes in Mexico. The various items that are exempted from value added taxes in

Mexico are sales of land, financial services, books, medical services, credit

instruments like equity shares, education, residential construction, rental expenses of

residential properties and raw materials for residential construction. However there is

an exemption made in case of the medical services. The interest that is earned by the

credit card providers in case of medical services is subjected to value added taxes.

The taxes that are paid by the business organizations when they buy goods are

normally adjusted against the tax that they pay when they sell any goods or services.

The tax on sales is applicable for all the customers as well. In case there is an excess

amount of credit it may be paid back by the tax authorities to the concerned business

organization.

There are a lot of transactions that are exempted from value added taxes in Mexico.

However the money that is paid on buying raw materials, services and supplies may

be recovered by through either direct refund or by adjusting the amount against the

value added tax the particular individual is supposed to pay. The categories that are

included in this list are rentals, export of goods. sale of specific basic foodstuffs,

77

export of services, agricultural goods, sales to maquilodras, who are in-bond assembly

plants of Mexico, agricultural services and sales to companies that deal exclusively in

the export of goods. There are also certain other minor transactions that are included

in this list.

3.3.3 Value Added Tax in Canada:

Value added tax in Canada is known as Goods and Services Tax. The goods and

services tax was introduced in Canada on the 1st of January 1991. It was introduced

by Brian Mulroney, who was the Prime Minister at that time and Michael Wilson,

who was the finance minister. The goods and services tax in Canada replaced the

manufacturers' sales taxes. The main purpose behind introducing the goods and

services tax was that the manufacturers' sales tax was having a negative impact on the

export prospects of the manufacturing sector in Canada. The manufacturers' sales tax

was hidden and the rate of taxation was 13%. The goods and services tax could be

called a multi-level tax. The introductory rate of the value added taxes in Canada was

7%. At present the rate is 5%. In Canada the value added taxes are taken along with

the sales taxes that are applicable for the particular provinces.

3.3.4 Value Added Tax in Italy:

Value Added Tax or VAT as it is popularly called is an indirect tax that is levied on

business transactions. VAT is applicable on all business deals that include the transfer

of services and goods. VAT is imposed on the additional value resulting out of such a

business transaction. It is also known as Goods and Services Tax or GST. VAT is

paid by the final consumer. Goods that are exported are usually exempted from VAT

in order to avert double taxation. Even if VAT is charged it is subject to refund.

78

Since VAT is also applied to one's assets, the tax rates are fixed in between 4%-8% of

the total asset value. Apart from the VAT, the Inheritance tax is also in place in Italy

after its re introduction in 2007. The Value Added Tax system in Italy is in line with

the European Union Value Added Tax rules and regulations. According to it, the VAT

is paid by the final consumer only. At the production and distribution level, the

suppliers of various services and goods deduct the input VAT. The tax is levied on

any and every service or article that forms a part of a business transaction in Italy.

3.3.5 Value Added Tax in France :

The system of value added tax was formulated by a French economist in the year

1954. The version of VAT that is used in France is called taxe sur la valeur ajoutee or

VAT. It was put into effect for the first time on April 10, 1954 by Maurice Laure, the

then joint director of tax authority of France. The value added tax system has been a

great success in France since the very beginning. In the later years, VAT was imposed

on all other business activities in the French economy. At present, the value added tax

contributes substantial share of the state finance in France. The revenues collected

from VAT make up 45% of the French state revenues.

In France, the value added tax is imposed on all types of general consumption. VAT

is popular for two reasons. The first reason is that it is imposed at each stage of value

addition. Unlike sales tax, there is no scope of cascading in the value added tax.

The VAT system is also helpful in avoiding the incidence of double taxation. Another

major advantage of value added tax is that under this system all traders are dealt

equally. It also involves minimum distortionary effects on economic activities.

79

The standard rate of value added tax in France is 19.6 percent; while the reduced rate

being 5.5 percent or 2.1 percent. The President of France, Nicolas Sarkozy, is hopeful

about raising the issue of VAT rate cut at the upcoming meeting of the European

Council. The demand of France to cut the value added tax rate allover in Europe aims

to check the hike in fuel prices in the global market. The French president has also put

stress on the fact that the call for cut in VAT on fuel needs to be strictly European.

3.3.6 Value Added Tax in Ireland:

In Ireland the general rate of value added taxation is 21% but there are also other rates

of 13.5% and 4.8%. In Ireland value added taxes are imposed on the assets owned by

various entities as well as the different services that are provided throughout Ireland.

Value added taxes are also imposed on all goods that are imported into Ireland.

Value added tax in Ireland may be called a retail sales tax. In case of the luxury items

bought in Ireland the tax paid is 21%. However, the tax rate that is imposed on the

non-luxury products is 12.5%. People, who are from countries that are non members

of the European Union are allowed to claim certain amounts of the value added taxes

paid by them upon purchasing goods while staying in the country. This plan allows

the costs of goods to be brought down by 17.36%. The reduction is not applicable for

services like meals and bills of hotels for example. Rather goods that are bought in the

country and exported outside the European Union within a period of three months

come under the purview of the value added taxes in Ireland. The visitors have to

provide various papers that show that the goods have been merchandised. An example

of such documentation would be the invoice bearing the stamp of the Ireland customs

department.

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There are certain rates that are applicable in these. In cases where the disposer of the

property has held an interest in the property for a decade or more the rate of value

added tax imposed is 13.5%. The rate of value added taxes imposed on the short term

leases is 21% on rents in cases where exemptions have been made. The rate of value

added taxes imposed on construction activities are 13.5% and in case of fittings the

rate of value added taxes to be paid is 21%.

3.3.7 Value Added Tax in Germany:

The value added tax in Germany is levied on the production of goods and services in

the country. All business entities are subject to the payment of tax on performing

production processes in Germany. The current rate of VAT in Germany is 19%,

enforced from 1st January, 2007. In Germany, a reduced tax of 7% is collected from

the sale of particular items such as foods, magazines and books. The rate of VAT is

set according to the parameters of the European Union Value Added Tax system. The

value added tax in Germany effectively earns high revenue for the country in the form

of income through taxation. VAT is generally known as Umsatzsteuer in Germany.

Formerly, the value added tax was referred to as the Mehrwertsteuer. This term is still

prevalent in some parts of the country.

Procedure of Taxation -

The business entities in Germany add VAT prior to the pricing of the product and

services. The gross price of goods in Germany includes the 19% VAT charges. The

business enterprises submit the reports of taxation monthly and are required to pay the

taxes on a monthly, quarterly or yearly basis. The reports also comprise of

computation of tax for the ensuing quarter. The period of tax payments is dependent

81

on the annual turnover of the company. The amount for tax is paid in advance to the

tax office. Most of the large scale producers are required to submit their advance on a

monthly basis.

Returns on VAT -

The value added taxes payable by the business entities in Germany include the taxes

paid by the companies on purchase of goods and services. This is balanced through

returns on VAT. This is known as input VAT or Vorsteuerabzug in Germany. In most

occasions, the business entities pay more tax than what they receive. In later stages

the authorities return the excess tax paid as soon as the computations are complete.

This situation is frequent in the start-up phase where the company's expenditure is

more than its income from sale. No VAT is charged on intra-community shipments

such as a sale of goods to another commercial organization among the members of the

European Union. However, the recipient entrepreneur is subject to acquisition tax that

is payable to the authorities. This is similar to the input VAT and is refundable.

Provisions for small and medium sized companies -

Some of the small undertakings expecting an annual business turnover less than EUR

50,000 in the current year or with less than EUR 17,500 turnover in the previous

financial year are exempted from the payment of value added tax in Germany.

However, these small enterprises are not allowed to deduct the input tax through

billing.

The small and medium sized companies in Germany can also opt for actual receipts

taxation or Istbesteuerung. This allows the companies to pay after they receive their

payments. This method is preferred by the small companies to the imputed tax

payments which may cause cash flow problems. The ceiling for actual receipts

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taxation in the eastern states of Germany is EUR 500,000 till the end of 2009 while

for the rest of the country, the ceiling is EUR 250,000.

3.3.8 Value Added Tax in UK:

Value added tax in UK has been imposed on the final consumption of particular goods

as well as services in the national market. At the same time, VAT in the UK is levied

at various production phases. This tax is also imposed on the distribution phases of

the products. According to this rule, almost all the goods and services in the United

Kingdom are charged with Value Added Tax. Recently, the VAT rules have been

revised in the United Kingdom. The government has decided to collect VAT at a

standard rate of 17.5%. The VAT registration threshold has also been raised from

£64,000 to £67,000. These new rules and regulations have been implemented from

April 2008. Further, these rules have made it mandatory for the companies to register

for value added tax if the company's taxable supplies have crossed the maximum limit

of VAT threshold. Again, if any company has found that its taxable supplies is under

the UK VAT threshold, but is expected to cross the same within a month, the

company has to register itself for the value added tax. There are instances where the

businessmen have registered themselves for VAT although the business turnover has

been well under the threshold. This is done because registering for VAT provides a

number of additional benefits.

The businesses have to pay this tax for every kind of purchase as well as sell of

products or services. Taxes that are paid for purchasing products or services are

known as input tax and the taxes paid for selling products and services are termed as

output tax. There are certain situations when a VAT registered business' output is

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higher than the input tax. In these conditions the difference between the two is paid to

the customs and excise. In certain situations the businesses receive less VAT than it

pays. This extra amount is paid back to the businesses by the C&E.

3.3.9 Value Added Tax in Nigeria:

The value added taxes in Nigeria were created as replacements or substitutions for the

sales taxes that were in operation before. They were imposed on all goods that were

manufactured in the country as well as goods that had been made outside the country

and were selling there. As per the VAT Decree No. 102 made on the 24th of August,

1993 in Abuja by the President and Commander-in-Chief of Nigeria, General I.

Babangida certain goods and services have been exempted from the purview of value

added taxation. As per the specifications laid down in the above mentioned decree

goods such as all exported goods, medical and pharmaceutical products, products

meant for kids, basic food items, commercial vehicles and their spare parts, books and

other educational materials, fertilizer, farming machines, agricultural products,

farming transportation equipments and veterinary medicines and magazines and

newspapers.

As per the above mentioned decree a number of services have been declared

exempted from value added taxation in Nigeria. These services are all the services

that are exported, medical services, plays and performances that are run by

educational institutions for educational purposes and services that are provided by

community banks, mortgage organizations and people's banks. In Nigeria the

companies or business organizations that function on a no profit making basis are

required to pay value added taxes.

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The Nigerian Federal Government enacted the VAT Amendment Act in 2007. This

act empowered the Federal Government to fix the rate of value added taxes to be

imposed in Nigeria. The rate was increased to 10%. However, discussions regarding

the possibility of a 50% reductions in the rate are on. In Nigeria value added taxes are

also imposed on sale of land, as well as check transactions. The number of payments

to be made is 12 and the amount of time is 160-hrs. The value added taxes are one of

the major sources of financing in a number of economically developing countries

across the world. The situation is similar in Nigeria as well. During 1994 the revenues

earned from value added taxes in Nigeria exceeded the projections. They contributed

4% of the total revenue raised by the Federal Government in that year. In 1995 the

rate of contribution was 5.39%. However, there have been some teething issues as far

as value added taxes in Nigeria are concerned. The members of the organized private

sector in Nigeria have been voicing their reservations regarding the value added taxes

that are taking a toll on the prices of their products as well as the operational prices of

their products. The way the Nigerian Federal Government has looked after issues

related to value added taxes in has attracted a certain degree of criticism. Their

management of the expenditure of the revenues generated from the value added taxes

has faced some flak as well. The fact that no research was conducted into the possible

effects of the value added taxes before they were put to work has only compounded

the problems. All in all the situation of the value added taxes in Nigeria is far from

desirable.

3.3.10 Value Added Tax in China:

Value Added Tax (VAT) was implemented in China in 1984. Initially, the tax was

levied on 24 specified items. The need for constructing a socialist market economy

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system in China resulted in the proclamation of 'The Provisional Regulation of the

People's Republic of China on Value Added Tax' on January 1, 1994. Value Added

Tax in China is one of the important sources of fiscal revenues for the government,

especially the central government. The implementation of VAT is done by the State

Administration of Taxation while the customs collects the import VAT. The revenue

earned from VAT is divided between the central (75%) and local government (25%).

VAT in China is payable by individuals as well as enterprises who are associated with

selling merchandise, providing services related to processing, repairing and

assembling and import of goods. VAT Taxpayers in China are categorized into two

sections, normal taxpayer and small taxpayer, depending on the turnover of the goods

and services on sale and the accounting system condition.

The amount of VAT payable by the normal taxpayer can be calculated by the

following:

Output tax payable for the current period – Input tax payable for the current period =

Tax payable. The amount of VAT payable by the small taxpayer is as follows:

Sales amount x Applicable rate = Tax payable

(The applicable rate is 4% for commercial sectors and 6% for others)

Certain items and services are exempted from VAT. These include the following:

• Instruments and equipment imported for direct use in scientific research, experiment

and education

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• The agricultural production materials as ruled, the self-produced primary

agricultural products sold by Agricultural producing units and individuals

• Imported materials and equipment granted, gifted by foreign governments or

international organizations

• Contraceptive medicines and devices

• Articles imported directly by organizations for the disabled for exclusive use by the

disabled

• Materials imported directly to support the poverty relief and charity cause donated

freely by overseas natural persons, legal persons and other organizations

• The taxable services provided by individual disabled laborers

• Antique books purchased from the public

Certain reforms have been implemented in particular areas of China in 2004 with

regard to the VAT.

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Table :3.2 The list of VAT taxable items and the rates in China:

Coverage of Collection Rate

1) Exportation of goods 0

2) Edible vegetable and grain duplicates

3) Agriculture, forestry, aquatic products, products of animal

husbandry

4) Book, magazines, newspapers

5) Tap water, cooling, heating, hot air supplying, gas, hot water,

natural gas, liquefied petroleum gas, coal/charcoal products for

household use

6) Selected non-metal mineral products, Selected metal mineral

products, coal

7) Chemical fertilizers, feeds, agricultural machinery, agricultural

chemicals, plastic converting film for farming

8) Plastic Converting film for farming

9) Crude oil, mine salt and other goods and services not listed above

13%

17%

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3.4 GLOBAL SCENARIO OF GST:

3.4.1 Introduction of the GST:

In the late 1980s, the federal government, led by Progressive Conservative Prime

Minister Brian Mulroney, again pursed the issue of sales tax reform, announcing its

desire to replace the MST with a new value-added sales tax called the Goods and

Services Tax (GST). Moreover, the federal government intended the new GST to be a

nationally harmonized sales tax. The tax would replace individual provincial sales

taxes (PST), and both levels of government would share the revenues generated.

Subsequent negotiations to harmonize the provincial and national sales taxes proved

unsuccessful. Some provinces even challenged the introduction of national sales tax,

arguing that the federal government was exceeding its constitutional powers by

operating in a taxation field historically reserved for the provinces. As a result, in

1989 the federal government announced it would proceed to implement the national

sales tax without the cooperation of the provinces. In 1990, however, Quebec signed

an agreement with the federal government that transferred full responsibility for

administration of the GST (in Quebec) to the province.

The Quebec Sales Tax (QST) was introduced in the province in January 1991. At the

same time, the federal government introduced the Goods and Services Tax in the

remainder of the country, and repealed the old Manufacturer’s Sales Tax. With the

exception of Quebec, the GST was introduced as separate and additional to provincial

sales taxes, meaning that consumers were required to pay two sales taxes on their

purchases. When it was first instituted in 1991, the GST’s rate of taxation was set at

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seven percent, meaning that consumers were charged a tax of seven percent of the

price of the good or service they were purchasing.

The Harmonized Sales Tax:

While initially the federal government was unable to harmonize the GST with

provincial sales taxes (except in Quebec), more recently some provinces cooperated.

In 1996, the federal government, under Liberal Prime Minister Jean Chrétien,

combined the GST with the provincial sales taxes in Newfoundland and Labrador,

Nova Scotia, and New Brunswick to create the Harmonized Sales Tax (HST). The

harmonized tax, which went into effect on April 1, 1997, is collected federally by the

Canada Revenue Agency. Once collected, the appropriate amount is then remitted to

the provinces. Ultimately, the harmonization of the provincial and federal sales taxes

does not affect the costs of goods and services for consumers: harmonization did not

change the amounts of the taxes, only how they were collected by the federal and

provincial governments. As of June 2007, the HST has not been extended outside of

those three Atlantic Provinces.

3.4.2 HOW THE GST WORKS:

A. Taxing Mechanism :

The GST is a sales tax which applies to final consumption at a fixed rate of 7%.

Whereas the former FST was a hidden tax on the manufacture of goods, including

those exported for foreign consumption, the GST is a visible tax on the value added at

each stage of production and distribution of goods and services – which makes it a

multi-stage tax – and applies only to consumption within Canada.

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The GST takes into account the cost of inputs – the factors used in manufacturing or

production – at each stage of the process to avoid double taxation. Input tax credits

enable partnerships, businesses and self-employed workers to recover all GST paid on

goods and services purchased for business purposes by deducting them from their

GST payments. Final consumers are not entitled to such credits, which means that

they pay all the GST on every item purchased. The GST is thus a multi-stage tax on

final consumption.

The application of the GST and input tax credits at each stage of a production process

leading to the purchase of a good (a kitchen stove) by a consumer and shows how it is

ultimately the consumer who pays the GST.

When the government introduced the GST, it decided to exempt two classes of goods

and services: zero-rated goods and services, i.e., goods and services taxed at a nil rate,

but which nevertheless grant entitlement to input credits (for example, exports, basic

food products and medical equipment); and goods and services that are simply tax-

exempt, i.e., which do not grant entitlement to input tax credits (for example,

residential rents, day care services, public transit and medical care).

It is the class of a good or service which determines whether it grants entitlement to

input tax credits. A dentist, for example, is not allowed to claim input tax credits in

order to obtain a refund of the GST he/she has had to pay to purchase various items or

to pay his/her rent or hydro bills because dental care belongs to the tax-exempt

services class.

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Table 3.3 – Example of the application of the GST at the various stages of a

production process:

Stage Transaction GST (7%) Input tax credit

(7%)

GST

paid

Mining

company

Sales: $100 GST collected: $7 – $7

Iron and steel

business

Purchases:

Sales:

$100

$300

GST paid:

GST collected:

$7

$21

$7 $14

Kitchen stove

manufacturer

Purchases:

Sales:

$300

$400

GST paid:

GST collected:

$21

$28

$21 $7

Retailer Purchases:

Sales:

$400

$700

GST paid:

GST collected:

$28

$49

$28 $21

Purchaser Purchases: $700 GST paid: $49 – –

Total GST paid to government $49

Approximately 2,411 million businesses are registered, i.e., they collect the GST from

their customers, deduct input tax credits, and pay the difference to the government.

Small businesses with annual sales under $30,000 may elect to be subject to the GST

or not. If they decide not to, they do not collect the GST on their sales and are not

entitled to claim input tax credits.

Apart from the input tax credit, a GST credit is granted to low- and modest-income

Canadians which takes into account the number of dependent children. In 1998-

1999, the total amount of this credit amounted to $2.85 billion for Canada as a whole.

Special rules also apply to charities and certain non-profit organizations,

municipalities, hospitals, schools, colleges and universities. These institutions are

only entitled to a partial refund of the tax they pay on their inputs.

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Lastly, under the Debt Servicing and Reduction Account Act, all GST revenues are

paid into the public Treasury and constitute the main source of revenue allocated to

debt reduction.

B. GST and Provincial Sales Tax:

A provincial sales tax (PST) is charged in addition to the GST at the retail sale stage

for goods, whereas services are often tax-exempt. The GST rate and terms of

application vary considerably from province to province.

Alberta is the only province with a no-retail-sales-tax policy. British Columbia,

Saskatchewan, Manitoba and Ontario apply the PST to the selling price and simply

add it to the GST, whereas Prince Edward Island and Quebec apply the PST to the

total amount of the selling price and the GST.

Newfoundland and Labrador, New Brunswick and Nova Scotia apply a single sales

tax of 15% – the harmonized sales tax (HST) – which includes the PST and GST. It

is collected by the federal government, which pays those provinces their portion. The

HST went into effect on 1 April 1997. Prior to that date, these provinces applied the

PST to the total amount of the selling price and the GST.

When the GST went into effect, Quebec became responsible for collecting its own

sales tax and the GST under an agreement with the federal government in 1990.

Since 1995, the two taxes have been completely harmonized, i.e., they are applied to

the same tax base. The Government of Quebec receives $92.8 million a year from the

federal government to administer the GST. All GST returns and refund claims from

registered businesses, except those of Quebec residents, have been processed in

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Summer side, P.E.I., since 1993. In his 1999 report, however, the Auditor General of

Canada noted that the federal government had begun to decentralize GST processing.

C. Some Figures:

Figures on annual GST revenues are published in the Public Accounts of Canada.

Table 3.4 contains the latest available data.

Table 3.4–Annual GST revenues of Canada, 1998-1999 ($ billion)

Total amount collected 50.174

Less Refunds

Rebates

GST paid by departments and

agencies

HST transfers to the provinces

22.162

1.909

0.907

1.662

Gross revenues 23.534

Less Quarterly tax credits 2.850

Net revenues 20.684

Source: Receiver General of Canada

The total amount collected ($50.174 billion) includes the share of the three provinces

that apply the HST ($1.662 billion). Consequently, the federal government’s gross

revenues from the GST alone were $48.511 billion before refunds, rebates and other

payments. Less all these cash outflows, net revenues amounted to $20.684 billion for

the 1998-1999 fiscal year.

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The Department of Finance publishes updates on net GST revenues in its monthly

Fiscal Monitor. The May 2000 issue states that net GST revenues for the 1999-2000

fiscal year (unaudited) had increased 9.8% over those from the previous period to

nearly $23 billion. Highly favourable economic conditions have thus, at last, had an

impact on retail sales, and imports have expanded, thus substantially increasing the

amount of GST collected.

3.4.3 HARMONIZATION OF PROVINCIAL SALES TAXES AND THE

GST:

The introduction of the GST was far from unanimous. The tax’s unpopularity, which

may be explained in part by its sudden visibility compared to the former FST, and the

fact that it was introduced during hard economic times, made it a prime target for the

opposition parties.

On 20 June 1994, the Finance Committee published its recommendations. In its

report, it suggested that a VAT (a kind of improved GST) be introduced across the

country, asserting that integration of the federal and provincial sales taxes was the

solution to the problems caused by the existing GST. In addition to simplifying

collection for small businesses through a business transfer tax, the Committee’s

proposal would make it possible to integrate the federal and provincial tax systems

completely.

The national VAT would thus have a federal component and a provincial component.

It would ideally have applied to a single tax base across the country – except in

Alberta, which had no PST – and have a single set of standard rules. The Committee

believed at the time that the provinces would agree to harmonize their respective sales

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taxes with the proposed new national tax because of the benefits afforded by a

national VAT, particularly: a simplified tax system; reduced administrative and

compliance costs; less bureaucracy as a result of the elimination of one complete

order of government; and various economic benefits.

Table 3 provides a summary of the current situation and the changes arising from the

HST’s implementation in April 1997. It shows the effective date of the PST in each

province, the rate of the tax and the effective tax rate (including PST and GST) at

31 March 1997, immediately prior to the introduction of the HST in January 2000.

First, the provinces are reluctant to accept harmonization because this tax is politically

very risky. It is obvious that, by going ahead with harmonization and broadening

their tax bases, the provinces would incur part of the political cost associated with the

GST.

Second, by agreeing to harmonize their respective sales taxes with the federal system,

the provinces would exempt business production inputs. Harmonization would

therefore mean transferring the corporate tax burden to the consumer.

Third, the provinces have always feared giving up significant discretionary powers

over fiscal policy in a harmonized system. Because they could no longer set the tax

base or rate, they would lose any independence and flexibility with regard to their

respective retail sales taxes.

Fourth, the provinces are also opposed to harmonization for reasons of administrative

complexity.

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Table 3.5 – Provincial sales tax and effective tax rate, by province (as a

percentage)

Province

PST

effective

date

PST Effective rate (PST and

GST)

31 Mar 1997 1-Jan-00 31 Mar 1997 1 Jan. 2000

Newf. 1950 12 8 19.84 15

N.S. 1959 11 8 18.77 15

N.B. 1950 11 8 18.77 15

P.E.I. 1960 10 10 17.7 17.7

Que. 1940 6.5 7.5 13.955 15.025

Ont. 1961 8 8 15 15

Man. 1968 7 7 14 14

Sask. 1937 7 6 14 13

Alta. 1936 n/a n/a 7 7

B.C. 1948 7 7 14 14

There is no doubt that a perfectly harmonized system would make tax collection

easier and that compliance costs for businesses (particularly small businesses) would

be reduced. For some of them, however, a system that differed from region to region,

like that of the HST, would lead to problems and increased compliance costs.

Effective tax rates and bases varying from region to region would complicate the tax

treatment of interprovincial transactions.

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3.5 GST SCENARIO OF MAJOR COUNTRIES IN THE WORLD:

3.5.1 Goods and Services Tax in Canada:

The Canadian Goods and Services Tax (GST) (French: Taxe sur les produits et

services, TPS) is a multi-level value-added tax introduced in Canada on January 1,

1991, by Prime Minister Brian Mulroney and finance minister Michael Wilson. The

GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST); Mulroney claimed

the GST was implemented because the MST hurt the manufacturing sector's ability to

export. The introduction of the GST was very controversial. As of January 1, 2008,

the GST rate was 5%.

GST is levied on supplies of goods or services made in Canada and include most

products, except certain politically sensitive essentials such as groceries, residential

rent, and medical services, and services such as financial services. Businesses that

purchase goods and services that are consumed, used or supplied in the course of their

"commercial activities" can claim "input tax credits" subject to prescribed

documentation requirements (i.e., when they remit to the Canada Revenue Agency the

GST they have collected in any given period of time, they are allowed to deduct the

amount of GST they paid during that period). This avoids "cascading" (i.e., the

application of the GST on the same good or service several times as it passes from

business to business on its way to the final consumer). In this way, the tax is

essentially borne by the final consumer. Unfortunately, this system is not completely

effective, as shown by criminals who defrauded the system by claiming GST input

credits for non-existent sales by a fictional company. Exported goods are exempt

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("zero-rated"), while individuals with low incomes can receive a GST rebate

calculated in conjunction with their income tax.

In 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland and

Labrador and the Government of Canada merged their respective sales taxes into the

Harmonized Sales Tax (HST). In those provinces, the current HST rate is 13%. HST

is administered by the federal government, with revenues divided among participating

governments according to a formula. All other provinces continue to impose a

separate sales tax at the retail level only, with the exception of Alberta, which does

not have a provincial sales tax. Ontario proposed in its 2009 Budget to harmonize its

8% retail sales tax with the GST effective July 1, 2010. In July, 2009, the province of

British Columbia announced plans to also merge the PST and GST effective July 1,

2010. In PEI and Quebec, the provincial taxes include the GST in their base. The

three territories of Canada (Yukon, Northwest Territories and Nunavut) do not have

territorial sales taxes. The government of Quebec administers both the federal GST

and the provincial Quebec Sales Tax (QST). It is the only province to administer the

federal tax.

Common zero-rated items include basic groceries, prescription drugs,

inward/outbound transportation and medical devices (GST/HST Memoranda Series

ME-04-02-9801-E 4.2 Medical and Assistive Devices). Certain exports of goods and

services are also zero-rated.

For tax-exempt supplies, the supply is not subject to GST and suppliers do not charge

tax on their exempt supplies. Furthermore, suppliers that make exempt supplies are

not entitled to recover GST paid on inputs acquired for the purposes of making the

exempt good or service. Tax-exempt items include long term residential rents, health

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and dental care, educational services, day-care services, legal aid services, and

financial services.

Many also argue that a switch towards heavier consumption taxes on the European

model has helped the Canadian economy become more efficient and competitive with

lower-priced goods for the international market. However, the effects of the GST in

this realm are quite modest, and are regularly swamped by large changes in the

exchange rate it can also be claimed that the transparent nature of the GST has kept

Canadians acutely aware of their taxation.

Much of the reason for the notoriety of the GST in Canada is for reasons of an

obscure Constitutional provision. Other countries with a Value Added Tax legislate

that posted prices include the tax; thus, consumers are vaguely aware of it but "what

they see is what they pay". Canada cannot do this because jurisdiction over most

advertising and price-posting is in the domain of the provinces under the Constitution

Act, 1867. The provinces have chosen not to require prices to include the GST,

similar to their provincial sales taxes. As a result, virtually all prices (except for gas

pump prices, taxi meters and a few other things) are shown "pre-GST", at the

merchant's choice.

3.5.2 Goods and Services Tax in Australia:

It was introduced by the Howard Government on 1 July 2000, replacing the previous

Federal wholesale sales tax system and designed to phase out a number of various

State and Territory Government taxes, duties and levies such as banking taxes and

stamp duty.

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The idea for a broad-based consumption tax was first proposed by then federal

treasurer Paul Keating at the 1985 Tax Summit but was dropped at the behest of then

Labor Prime Minister Bob Hawke after pressure from the ACTU, welfare groups and

business, which did not like its association with proposals for capital gains and fringe

benefits taxes.

The idea was refloated in 1991 by the opposition Liberal-National Coalition, and was

the centre piece of the opposition's Fight back, platform at the 1993 election, when

Keating was Prime Minister.

Howard proposed a GST that would replace all sales taxes, as well as applying to all

goods and services. The Howard Government suffered a 4.61 percent two party

preferred swing against the coalition, gaining 49.02 percent of the vote, but retained a

parliamentary majority of seats in the lower house, describing the victory as a

"mandate for the GST". Lacking a Senate majority, and with Labor opposed to the

introduction of the GST, the government turned to the minor parties for support.

A prominent selling point of the legislation was that all revenues raised the GST

would be distributed to the states. As such, an agreement was enacted with the state

and territory governments of Australia in 1999 that their various duties, levies and

taxes on consumption would be removed gradually over time, with the budget

shortfall being replaced by GST income from the Commonwealth Grants

Commission. Furthermore, (federally levied) personal income tax and company tax

was reduced to offset the GST.

During the 1998 election campaign, the Democrats leader Meg Lees stated that they

were opposed to the GST unless food, books and tourism packages sold offshore were

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exempt and other tax measures were implemented. The government initially stated

that these exemptions were not possible, and looked more likely to win a compromise

with independent Senator Brian Harradine, but eventually a compromise was reached

with Lees, including most basic food items being exempt from the GST, library

purchases of books being refunded the GST, a temporary 8% refund on school

textbooks, increases to welfare payments, and greater powers to the ACCC. A

proposal was made to exempt tampons from the GST, but it was dismissed by the

Prime Minister. The legislation was passed on 28 June 1999 as A New Tax System

(Goods and Services Tax) Act 1999. It gained assent on 8 July 1999 and came into

operation on 1 July 2000.

Economic and social effects of the GST:

Critics have argued that the GST is a regressive tax, which has a more pronounced

effect on lower income earners, meaning that the tax consumes a higher proportion of

their income, compared to those earning large incomes. Peter Costello, the acting

Federal Treasurer who introduced the GST, counters that, due to the corresponding

reductions in personal income taxes, state banking taxes, federal wholesales tax and

some fuel taxes that were implemented when the GST was introduced, people were

effectively paying no extra tax.

The preceding months before the GST became active saw a spike in consumption as

consumers rushed to purchase goods that they perceived would be substantially more

expensive with the GST. Once the tax came into effect, consumer consumption and

economic growth declined such that by the first fiscal quarter of 2001, the Australian

economy recorded negative economic growth for the first time in more than 10 years.

Consumption soon returned to normal however. The Government was criticized by

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small business owners over the increased administrative responsibilities of submitting

Business Activity Statements on a quarterly basis to the Australian Taxation Office. A

study commissioned by the Curtin University of Technology, Perth in 2000, argued

that the introduction of the GST would negatively impact the real estate market as it

would add up to 8 percent to the cost of new homes and reduce demand by about 12

percent. The real estate market returned to boom between 2002 and 2004 where

property prices and demand increased dramatically, particularly in Sydney and

Melbourne. During the 2004-2006 period Perth has also witnessed a sharp climb in

real estate prices and demand.

3.2.6 Goods and Services Tax in Hong Kong:

Goods and Services Tax (GST) was a proposed Value Added Tax in Hong Kong.

Consultation over a period of nine months was launched on 2006-07-19 and stirred

considerable controversy.

It launched a fierce debate amongst local taxpayers, lawmakers, journalists,

politicians, who hotly debated the need for the tax, and the shape any taxes should

take. The plan to levy GST was dropped on 2006-12-05.

Objectives:

The Government argued that Hong Kong's tax base was narrow; thus, a single-rate

GST was a viable option for Hong Kong in order to broaden the tax base and secure

the sustainability of tax revenues base and the capacity to meet public expenditure

needs in the long run.

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According to Denise Yue Chung-yee, 17% of working people paid 80% of the income

tax of Hong Kong, i.e. households with monthly income more than HK$45 000 pay

80% of income tax of Hong Kong. Meanwhile, a signification portion of those 17% of

working people was double income families. The GST would be levied at a flat rate of

5%. The government would undertake to decrease or eliminate other taxes to make it

revenue neutral.

Proposed relief measures:

For individuals:

Reduction in tax rates for all existing taxpayers; an upfront, one-off supplement

would be provided to households Social Security benefits; an annual cash GST

allowance on a per-household basis for low-income households not receiving CSSA;

a universal annual "GST credit" for each household to be used against water and

sewage charges for an initial five-year period; and a universal annual "GST credit" per

household to be used against rates for an initial five-year period.

For businesses:

A cut in profits-tax rates; abolishing the capital fee to encourage more businesses to

incorporate in Hong Kong; reducing the motor vehicle first registration tax and duties

on liquor, petrol, diesel, aircraft fuel and methyl alcohol; cutting charges for import

and export declarations;

Abolishing the 3% hotel accommodation tax; increasing tax-deduction limits for

charitable donations; and one-off set-up assistance to small and medium-sized

businesses that volunteered to register for GST.

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Pledge to maintain revenue neutrality

The Government proposed that, for the first five years after the GST's introduction, all

revenue it would generate after deducting administrative costs would be returned to

the community as tax relief and other compensation measures, for example, salaries or

profits tax reduction, or to increasing public spending on education, health, social

welfare, law and order or infrastructure.

Opposition:

The first protest against GST was held on 7 August 2006 by the Liberal Party. Over

6000 people participated. The second protest against GST was held on 20 August

2006 by the Democratic Party. About 500 people participated.

According to Financial Secretary Henry Tang, the government had collected 2,200

written submissions in the five months of consultations - with 65 percent opposed to

the plan and 30 percent in favour.

Demise:

In a surprise announcement made on 5 December 2006, Henry Tang Ying-yen

withdrew the plan citing lack of public support. "It's clear ... that we've not been able

to convince the majority to accept a GST as the main option to address the tax base

problem," he said. The withdrawal was linked to the comments, three days earlier, of

Chinese state leader Wu Bangguo to senior Hong Kong officials "to keep their fingers

on the pulse of the people" and to foster "social harmony", and to the impending sub-

sector polls for the Election Committee which will pick the new Chief Executive in

March 2007. However, after the announcement, Henry Tang insisted the decision to

withdraw the proposal was "entirely my own," and free of any political consideration.

105

3.5.3 Goods and Services Tax in New Zealand:

Goods and Services Tax (GST) is a value added tax introduced in New Zealand on

October 1, 1986 at 10%, and later increased to 12.5% on June 30, 1989.

End-users pay this tax on all liable goods and services directly, in that the purchase

price of goods and services includes GST.

GST-registered organizations only pay GST on the difference between GST-liable

sales and GST-liable supplies (i.e., they pay GST on the difference between what they

sell and what they buy: income less expenditure). This is accomplished by reconciling

GST received (through sales) and GST paid (through purchases) at regular periods

(typically every 2 months, with some qualifying companies opting for 1 month or 6

month periods), then either paying the difference to Inland Revenue Department

(IRD) if the GST collected on sales is higher, or receiving a refund from IRD if the

GST paid on purchases is higher. Unlike most similar taxation regimes, there are few

exemptions - all types of food are taxed at the same rate, for example. Exceptions

include rents collected on residential rental properties, donations and financial

services.

Businesses exporting goods and services from New Zealand are entitled to "zero-rate"

their products - effectively, they charge GST at zero percent. This permits the

business to claim back the input GST but the eventual, non-New Zealand based

consumer does not pay the tax (businesses that produce GST-exempt supplies are not

able to claim back input GST.)

Because businesses claim back their input GST, the GST inclusive price is usually

irrelevant for business purchasing decisions, other than in relation to cash flow issues.

106

Consequently, wholesalers often state prices exclusive of GST, but must collect the

full, GST-inclusive price when they make the sale and account to the IRD for the GST

so collected.

The headline price must always be GST-inclusive in advertising and stores. The only

exceptions are for businesses which claim a mainly wholesale client-base. Otherwise,

displaying a prominent GST-exclusive price (i.e. larger and more obvious than the

GST-inclusive price), is illegal.

3.5.4 Goods and Services Tax in Singapore:

Goods and Services Tax (Abbreviation: GST; Chinese was introduced in Singapore

on April 1, 1994, at 3%, but later increased to 4% on 1 January 2003, and 5% on 1

January 2004. It was raised again to 7% on 1 July 2007.

Singapore’s GST is a broad-based consumption tax levied on import of goods, as well

as nearly all supplies of goods and services. The only exemptions are for the sales and

leases of residential properties and most financial services. Export of goods and

international services are zero-rated.

Objectives:

The GST was introduced as part of a larger tax restructuring exercise to enable

Singapore to shift its reliance from direct taxes to indirect taxes. The GST also

enables the country to sustain a lower income tax rate.

The government argues that with an ageing population, Singapore’s income tax base

is expected to decline. With a broad-based GST, the taxation burden will be more

107

evenly spread among the population. Thus, the GST was introduced as part of a larger

exercise to put in place a tax structure to see the country into the future.

A value-added tax, like the GST, also has several features that make it attractive.

Being a tax on consumption, and not on income, the tax system inherently encourages

savings and investments instead of consumption. The tax also has a self-policing

mechanism that discourages evasion, unlike in a retail sales tax system or an income

tax system where it would be relatively easier to evade.

In Singapore, the tax is broad based which include all essential goods like water,

electricity, rice, etc. Hence, a low income worker who would not pay income taxes

would have to pay GST on his daily living expenses. This can be a burden especially

during times of high inflation when the 7% tax is paid on the increasing price of daily

essentials.

Prime Minister Lee Hsien Loong stated the tax hike is to help the lower income

groups and the elderly. Details of the GST increase were announced on 15 February

2007, (Budget Day) by Second Finance Minister Tharman Shanmugaratnam. The

increase was implemented on 1 July 2007, after a period of increased sales by

Singaporeans attempting to beat the tax increase, and wariness amongst the lower-

income groups. The government also announced a GST offset package consisting of a

set of comprehensive measures to help lower income groups. Citizens have to sign-up

beginning 15 May 2007, in order to receive their GST Credits in their bank accounts.

108

TABLE 3.6 COUNTRY WISE STATEMENT OF PERCENTAGE OF TAX REVENUE TO GDP & CALCULATION OF CGR AND CV

Country Name 2001 2002 2003 2004 2005 2006 2007 2008 CGR CV

World 15.58 14.5 14.51 14.72 15.13 15.98 16.75 1.63 5.10

Australia 23.79 22.7 23.16 23.35 23.68 23.45 23.14 0.01 1.46

Austria 21.69 21.13 21.23 20.96 20.15 19.81 20.21 20.14 -1.17 3.04

Bangladesh 7.6 7.7 8.07 8.11 8.22 8.17 8.05 8.82 1.58 4.26

Belgium 27.04 26.03 25.45 26.04 26.12 25.77 25.14 25.59 -0.62 2.06

Bulgaria 17.45 16.78 18.85 21.83 22.97 23.61 24.63 24.16 6.04 13.79

Canada 14.51 13.77 13.9 14.07 14.15 13.76 14.17 -0.20 1.75

China 7.4 8.5 8.54 8.86 8.76 9.38 3.82 6.98

Colombia 11.73 10.42 11.62 10.84 20.26 11.85 13.58 12.63 3.05 22.86

Denmark 29.67 29.53 29.61 30.93 32.59 31.34 35.63 2.77 6.52

France 22.96 22.38 22.04 22.21 22.32 22.44 21.81 -0.49 1.49

Germany 11.26 11.25 11.36 10.86 11.06 11.33 11.84 0.49 2.48

Hungary 21.51 21.12 20.85 20.67 20.3 20.05 21.42 23.61 0.70 4.86

Iceland 23.66 23.64 24.67 25.87 28.08 28.07 27.46 24.58 1.78 6.88

India 8.21 8.81 9.23 9.68 10.21 11.47 12.39 12.92 6.87 15.52

Ireland 24.13 23.2 23.7 24.78 25.1 26.42 25.37 1.68 4.09

Italy 22.83 22.08 22.1 21.57 21.21 22.74 23.06 22.56 0.24 2.71

Kenya 17.83 17.29 15.77 16.97 18.67 17.38 17.86 18.88 1.14 5.24

Maldives 13.68 13.31 14.31 16.57 17.95 19.94 21.51 21.02 8.02 18.00

Mauritius 15.4 15.24 16.69 16.73 17.82 17.31 16.35 18.19 2.03 5.90

Nepal 9.45 8.56 8.65 8.97 9.18 8.78 9.77 10.41 1.69 6.40

Netherlands 22.59 22.52 21.64 21.63 22.64 23.21 23.57 0.84 2.98

New Zealand 29.49 29.11 30.2 30.16 31.29 33.16 31.67 1.84 4.24

Norway 26.88 27.93 26.28 27.96 28.92 29.69 29.1 28.14 1.11 3.78

Pakistan 10.04 10.31 10.78 10.28 9.6 9.43 9.84 9.82 -1.02 4.07

Philippines 13.49 12.52 12.75 12.42 12.96 14.26 14.03 14.13 1.53 5.29

Portugal 20.99 21.48 21.49 20.59 21.31 22.03 22.4 22.16 0.83 2.66

Romania 11.74 12.28 12.3 12.21 11.38 11.81 17.89 4.04 16.41

Singapore 15.29 13.29 13.04 12.17 12.23 12.63 13.89 14.64 -0.21 7.90

South Africa 24.81 24.25 24.23 25.7 27.33 28.74 29.01 27.72 2.71 6.97

Spain 15.83 12.79 12.19 11.76 12.59 13.19 13.93 10.64 -2.41 11.24

Sri Lanka 14.63 13.56 12.71 13.47 13.73 14.58 14.22 0.49 4.59

Switzerland 10.04 9.95 9.95 9.98 10.32 10.5 10.18 0.67 1.94

United Kingdom 28.21 27.05 26.34 26.61 27.28 28.1 27.74 28.57 0.52 2.71

United States 12.71 10.55 10.01 10.13 11.39 12.09 12.18 10.29 -0.09 8.88

Source: www.worldbank.org

109

Table 3.6 reveals that Maldives is rank 1st in revenue collection during 2001 to 2008

as Compound Growth rate of Maldives is 8.02 per cent followed by India 6.87 per

cent. Whereas lowest in France (-0.49), Pakistan (-1.02), United States (-0.09).

Co-efficient of Variation during 2001 to 2008 is highest in Colombia (22.86 per cent)

followed by Maldives (18.00) whereas lowest in Australia (1.46 per cent)

Fig. 3.1 Country wise percentage of tax revenue to GDP from 2001 to 2008.

110

Table 3.7 TAXES ON GOODS AND SERVICES ( % OF REVENUE ) & CALCULATION OF

CGR AND CV

Country Name 2001 2002 2003 2004 2005 2006 2007 2008 CGR CV

World 30.13 30.25 31.41 32.04 32.98 32.46 32.56 1.52 3.31

Australia 24.07 25.16 25.52 25.2 24.11 23.59 23.13 -1.08 3.44

Austria 23.57 24.75 25.18 24.9 24.35 23.61 23.45 22.85 -0.83 3.21

Bangladesh 24.83 25.19 32.36 28.95 27.5 28.61 28.18 27.61 1.06 7.87

Belgium 23.16 23.28 22.61 24.38 24.72 24.85 24.45 23.66 0.83 3.23

Bulgaria 35.33 37.41 38.55 40.06 42.54 45.67 45.56 46.86 4.29 9.69

Canada 16.44 17.92 17.38 17.6 17.09 15.35 15.52 -1.77 5.60

China 65.04 72.91 79.46 79.24 79.04 57.19 -1.15 11.68

Denmark 44.44 45.66 45.07 43.58 42.87 44.07 39.84 -1.59 4.06

Finland 32.6 33.39 35.3 34.91 34.48 33.94 32.42 -0.03 3.05

France 23.97 24.57 24.83 24.58 23.81 23.77 23.3 -0.69 2.12

Germany 21.09 21.53 21.77 21.85 22.24 22.12 23.44 1.41 3.11

Greece 30.82 30.8 29.48 29.61 29.14 29.36 28.83 -1.09 2.45

Hungary 32.95 32.82 34.99 37.08 36.01 33.93 33.31 30.96 -0.57 5.37

India 30.14 30.36 30.19 29.7 30.75 28.47 27.06 26.67 -1.85 5.05

Italy 21.97 22.36 21.5 22.16 22.33 22.16 21.58 20.23 -0.78 3.03

Kenya 40.28 39.24 49.74 40.04 44.16 44.25 42.55 40.57 0.24 7.58

Maldives 12.79 12.49 12.9 13.23 8.55 9 8.07 8.48 -7.53 20.44

Mauritius 37.05 39.27 42.61 42.22 44.54 44.18 46.55 45.77 3.51 7.11

Moldova 43.79 42 45.61 47.61 47.26 50.03 48.92 50.3 2.60 5.67

Namibia 22.32 19.18 18.82 17.24 24.51 17.65 18.6 -1.59 12.47

Nepal 31.35 30.28 28.92 30.12 31.7 34.45 35.65 34.87 2.58 7.28

Netherlands 27.24 27.53 28.01 28.39 28.08 27.31 27.5 0.05 1.46

New Zealand 28.94 29.22 28.97 29.09 27.26 26.4 25.89 -2.11 4.69

Norway 28.05 28.22 27.52 26.09 24.54 23.19 23.99 20.76 -4.07 9.78

Pakistan 34.83 30.1 32.19 32.92 34.07 32.83 29.7 33.31 -0.34 5.16

Philippines 25.91 26.74 25.33 24.66 23.46 29.19 28.31 26.15 0.87 6.66

Portugal 31.83 32.4 32.35 30.36 33.67 34.07 32.56 31.57 0.75 3.47

Singapore 18.41 18.52 24.75 23.63 23.41 22.21 23.26 21.74 3.67 10.69

South Africa 31.64 32.22 33.44 34.06 32.98 32.39 31.58 29.78 -0.77 3.82

Spain 24.32 18.3 18.21 17.77 17.82 17.39 15.81 14.47 -5.22 14.92

Sri Lanka 57 56.12 53.67 59.84 55.28 51.13 48.09 -2.35 6.63

Switzerland 32.05 30.34 31.87 32.59 32.6 31.78 31.51 0.23 2.24

Thailand 40.02 40.06 40.11 39.93 39.76 36.86 -1.24 2.96

United Kingdom 29.59 31.1 31.6 30.83 29.06 28.04 28.03 26.74 -1.94 5.48

United States 3.17 3.53 3.55 3.47 3.15 2.83 2.44 2.49 -5.01 52.28

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Source: www.worldbank.org

Table 3.7 reveals that Bulgaria is rank 1st in revenue collection during 2001 to 2008 as

Compound Growth rate of Bulgaria is 4.29 per cent followed by Mauritius 3.51 per

cent. Whereas lowest in Maldives (-7.53), United States (-5.01), Spain (-5.22).

Co-efficient of Variation during 2001 to 2008 is highest in United States (52.28 per

cent) followed by Maldives (20.44) whereas lowest in Netherlands (1.46 per cent)

Fig. 3.2 Country wise tax revenue on goods and services in per cent during 2001

to 2008.

CONCLUSION:

Nowadays VAT/ GST is globally accepted tax system. France the first

European country who implemented VAT on an extensive scale in 1954. Since then

VAT has been adopted by a large number of countries in the world. Value Added Tax

112

is perceived by many as means to promote neutrality and uniformity of tax burden and

to provide incentives for increased productivity and industrialization. Despite the

widespread proclamation of VAT, there have been difficulties in implementing VAT

in its true spirit like in the case of Argentina, Brazil, Canada and India. There have

also been attempts to introduce Value Added Tax in USA, which however has

preferred to retain the retail sales tax system. If VAT is centrally administered, the tax

base is quite wide, comprising imports, production and different stages of sales. If the

base is divided between the Centre and states, the chain is broken, making tax evasion

easier and affecting the states' tax base. Those countries where VAT is administered

by a federal government, revenue collection on imports accounts for a larger portion

of total VAT revenues. A study conducted by IMF of 22 developing countries,

discovered that about two-third of them, more than half the VAT revenue was

collected from imports. In Pakistan and Bangladesh, VAT collection from imports

was 64 per cent of the total proceeds from the tax. As tax evasion on bulk imports is

difficult, it also helps in checking tax evasion at subsequent stages of the tax chain.

Thus it prove that is a indirect tax which has help the world to increase revenue by

reducing tax rate and broadening tax base with minimum tax evasion. GST is a next

step of VAT, where more taxes are merged and procedure is simplified by reducing

administrative procedures

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CHAPTER -4

INDIA’S TAX STRUCTURE

4.1 INTRODUCTION

VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain

with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of

goods by a trader and on purchase of raw materials by a manufacturer. Value Added Tax,

or VAT, is levied on top of the cost of a product or service and generates revenue for a

government. Value Added Tax, popularly known as ‘VAT’, is a special type of indirect

tax in which a sum of money is levied at a particular stage in the sale of a product or

service.

4.1.1 VAT IN INDIA

VAT will replace the present sales tax in India. Under the current single-point system of

tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is

no sales tax on the further distribution channel.

Only the value addition in the hands of each of the entities is subject to tax. For instance,

if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been

charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax

of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the

difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10.

Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his

114

hands.

VAT levy will be administered by the Value Added Tax Act and the rules made there-

under. VAT can be computed by using either of the three methods detailed below: -

• The Subtraction method:- The tax rate is applied to the difference between the

value of output and the cost of input.

• The Addition method: The value added is computed by adding all the payments

that is payable to the factors of production (viz., wages, salaries, interest payments

etc).

• Tax credit method: This entails set-off of the tax paid on inputs from tax collected

on sales.

India opted for tax credit method, which is similar to CENVAT. States such as

Andhrapradesh, Kerala, Maharashtra, Madhya Pradesh, Delhi and Haryana have

experimented with VAT albeit in a limited manner, covering only limited goods. The

experiments never had the full-fledged features of VAT and were only concoctions.

These states have even called off their experiments owing to different reasons. If one

analyses why VAT or its variant failed in Maharashtra, which was the only state to come

Closer to true VAT regime, the following reasons emerge:

1. Dual methodologies of computation of VAT credit. One for the Manufacturing stage

and the other for the trading

Stage, thus breaking the audit trail. It may be noted that one of the advantages of VAT

system, as we would be dealing later on, is the audit trail that is created in the VAT chain.

115

2. Presence of a large number of tax deferral and holiday schemes, which resulted in a

narrow base. It may again be noted that under VAT, which is multi-point, the tax rates

have to be reasonably low, and lower tax rates presupposes that the tax base is wide.

These two features were not present in the Maharashtra tax regime.

3. Low level of awareness among traders, and even administrators, giving rise to fears

and apprehensions. Owing to this, there was considerable consternation among the trade,

which gave rise to open revolt against the system.

4. Partial implementation of the ideal VAT with the existing system coexisting even

under this regime.

5. Increased burden on retailers of Bookkeeping and compliance.

6. Multiplicity of rates of tax under the VAT regime.

7. Drop in revenue for the State Government, though there are no studies attributing such

reduction to the system of taxation.

Thus States had indeed tried some variations of VAT, but eventually gave up due to a

variety of reasons.

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Table 4.1 Central Government: Direct Vs Indirect taxed In India.

Year As per Central GDP As percent of Total

Direct Indirect Total Direct Indirect

1990-91 11024 46489 57513

19.2 80.8 1.9 8.2 10.1

1991-92 15207 52059 67266

22.6 77.4 2.3 8 10.3

1992-93 18132 56434 74566

24.3 75.7 2.4 7.5 10

1993-94 20298 55445 75743

26.8 73.2 2.4 6.5 8.8

1994-95 26966 65328 92294

29.2 70.8 2.7 6.5 9.1

1995-96 33563 77661 111224

30.2 69.8 2.8 6.5 9.4

2001-02 69197 117863 187060

37 63 3 5.2 8.2

2002-03 83085 133181 216266

38.4 61.6 3.4 5.4 8.8

2003-04 105082 149266 254348

41.3 58.7 3.8 5.4 9.2

2004-05 132761 172197 304958

43.5 56.5 4.3 5.5 9.8

2005-06 165201 200949 366150

45.1 54.9 4.6 5.6 10.2

2006-07 230192 243320 473512

48.6 51.4 5.6 5.9 11.5

2007-08 312198 280949 593157

52.6 47.4 6.6 5.9 12.6

2008-09 (RE) 345000 282949 627949

54.9 45.1 6.5 5.3 11.8

2009-10 BE 370000 271079 641079

57.7 42.3 6.3 4.6 10.9

CGR 31.12 16.03 21.46

CV 19.38 20.67 20.06

Source : Reserve Bank of India.

Abbr. : RE : Revised Estimates. BE : Budget Estimates. Note : figures in parenthesis represents percentage of total @ : Excluding States' share in Central Taxes as reported in Central

Government Budget Documents.

117

4.1.2 Importance of VAT in India

India, particularly being a trading community, has always believed in accepting and

adopting loopholes in any system administered by State or Centre. If a well-administered

system comes in, it will not only close options for traders and businessmen to evade

paying their taxes, but also make sure that they'll be compelled to keep proper records of

sales and purchases.

Under the VAT system, no exemptions are given and a tax will be levied at every stage of

manufacture of a product. At every stage of value-addition, the tax that is levied on the

inputs can be claimed back from tax authorities.

At a macro level, two issues make the introduction of VAT critical for India

Industry watchers believe that the VAT system, if enforced properly, will form part of the

fiscal consolidation strategy for the country. It could, in fact, help address issues like

fiscal deficit problem. Also the revenues estimated to be collected can actually mean

lowering of fiscal deficit burden for the government.

International Monetary Fund (IMF), in the semi-annual World Economic Outlook

expressed its concern for India's large fiscal deficit - at 10 per cent of GDP.

Moreover any globally accepted tax administrative system would only help India

integrate better in the World Trade Organization regime.

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Items covered under VAT

• All business transactions that are carried on within a State by

individuals/partnerships/ companies etc. will be covered under VAT.

• More than 550 items are covered under the new Indian VAT regime out of which

46 natural & unprocessed local products will be exempt from VAT

• Nearly 270 items including drugs and medicines, all industrial and agricultural

inputs, capital goods as well as declared goods would attract 4 % VAT in India.

• The remaining items would attract 12.5 % VAT. Precious metals such as gold and

bullion will be taxed at 1%.

• Petrol and diesel are kept out of the VAT regime in India.

4.1.3 The Impact of VAT in India

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.

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

sale.

119

Various Prices under VAT chain.

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 Rate Invoice

value (Incl

Tax)

Tax

Payable

Tax

Credit

Net Tax

Outflow

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 Consu

mer

134 12.5% VAT 150.75 16.75 15.50 1.25

Total to Govt. VAT

CST

16.75

4.00

*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

120

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

balance amount to the Government.

4.1.4 VALUE ADDED TAX

In 1954, the value added tax system was initiated by the then joint director of the tax

authority of France, Maurice Laure. VAT came into effect for the first time on 10th April,

1954. From its inception, the value added tax system was imposed on all major sectors of

France – the first country to use this system. Once instituted, it was Immediately clear

that revenues collected from the VAT system constituted a substantial share of the

government’s revenue in the French economy. Not surprisingly, due to the ease of

payment and ready comprehensibility, the value added tax system has been adopted by

different nations across the world. VAT is intended to be levied – or charged – whenever

there is some value addition to raw material. The taxpayers on the other hand, will get

credit for the amount of tax paid off at the stages of procurement. The value added tax

system has proven to be effective in avoiding problems that normally might arise out of

the double taxation of goods and services.

The value added tax system is designed to address various problems associated with the

conventional sales tax system. In sales tax, there is no provision for input tax credit,

which means that the end consumer may pay tax on an input that has already been taxed

previously. This is known as cascading and leads to increases the consumer tax and price

levels, which increases the rate of evasion and can be detrimental to economic growth.

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The value added tax system deals with these problems quite efficiently. As VAT is

imposed on value addition – at every single stage – there is no incidence of cascading. In

this way, the final consumers bear the burden of paying value added tax. This system

involves absolute transparency at every stage of taxation, thereby making the tax system

quite comprehensible and simple.

In some countries like India, the system of VAT has been designed to change the existing

system of sales taxation. Value added tax is different from the conventional system of

sales tax, because VAT is charged at every stage of value addition – whereas sales tax is

imposed on final value of transaction only.

The value added tax system allows for input tax credit, or ITC, on the amount of tax

levied at the preceding stage of the value addition chain. The allowance for ITC is

normally appropriated from the value added tax liability imposed on the following stage

of the sale of the product.

4.1.5 Silent Features of VAT

a. Rate of Tax VAT proposes to impose two types of rate of tax mainly:

o 4% on declared goods or the goods commonly used.

o 10-12% on goods called Revenue Neutral Rates (RNR). There would be

no fall in such remaining goods.

o 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

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kept out from the VAT system as they would be continued to be taxed, as

presently applicable by the CST Act.

b. 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 neighbouring states

c. 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.

d. 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.

e. 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

123

f. 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.

4.1.6 ADVANTAGES 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 be 2 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

124

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.

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.

125

4.1.7 DISADVANTAGES OF VAT

1)VAT-is-regressive

It is claimed that the tax is regressive, i.e. its burden falls disproportionately on the poor

since the poor are likely to spend more of their income than the relatively rich person.

There is merit in this argument, particularly if it attempts to replace direct or indirect

taxes with steep, progressive rates. However, observation from around the world and

even Guyana has shown that steep tax rates lead to evasion, and in the case of income tax

act as a disincentive to effort. Further, there is now a tendency in most countries to reduce

this progressivity of taxes as has been done in Guyana where a flat rate of income tax has

been introduced. In any case VAT recognises and makes room for progressivity by

applying no or low rates of tax on essential items such as food, clothes and medicine. In

addition it allows for steep rates of tax on luxury items, although this can create problems

for administration and open opportunities for evasion by way of deliberate

misclassification, a problem incidentally not peculiar to VAT, and which takes place

extensively in the area of customs duties.

2) VAT is too difficult to operate from the position of both the administration and

business.

(a)The-administration

It is often argued that VAT places a special burden on tax administration. However, it is

worth noting that wherever VAT was introduced one of its effects was the rationalisation

and simplification of the previous indirect tax system and its administration. Each of the

previous indirect taxes such as customs duties, purchase tax and excise duties replaced by

126

VAT had its own rate structure as well as a different tax base and separate administrative

procedure. The consolidation and incorporation of numerous indirect taxes into the VAT

would simplify the rate structure, tax base, and administration of the indirect tax system,

thereby eliminating the overlapping auditing practices that had plagued those systems.

In addition, the abolition of a number of alternative indirect taxes releases experienced

personnel to focus on a single tax. It also means reduction in the number of forms used,

legislation to be applied and returns and accounts with which the business person has to

contend.

(b)Business

It is true that the VAT is collected from a larger number of firms than under any form of

income tax or single state sales tax; to the typical smaller firms the complexities of the

tax and the need for more extensive records (for example, to justify deductions) are likely

to prove serious. However, it is often overlooked that businesses already function with

considerable administrative responsibility for a number of laws including the National

Insurance Act and the Income Tax Act. Under the Income Tax (Accounts and Records)

Regulations of 1980 every person, without exception is required to maintain detailed and

extensive records of all its transactions. Compliance with this will certainly ensure

compliance with VAT regulations, and since there is an actual benefit to be derived from

accounting for VAT paid on input there is an incentive for proper record-keeping.

As we have noted before, VAT also allows for the exemption of small businesses from

the system. Under any form of sales taxation, small businesses have to be granted special

treatment because of their inability to cope with the requirements of keeping adequate

records which larger enterprises can handle at a reasonable cost. The intent of the special

127

treatment is to reduce the administrative burden on small enterprises, but not the taxes

that normally would be charged on the goods and services they supply. The revenue loss

at the final link in the commercial cycle is limited only to the value added at that stage

,whereas in the case of income tax or sales tax the entire tax is lost. To recover the loss

from exemptions, a flat tax on turnover may be applied.

In the larger businesses with proper staff and computers, the task is really one of double

entry book-keeping and any additional work is hardly ever noticed.

3.-VAT-is-inflationary

Some businessmen seize almost any opportunity to raise prices, and the introduction of

VAT certainly offers such an opportunity. However, temporary price controls, a careful

setting of the rate of VAT and the significance of the taxes they replace should generally

ensure that there is no increase if any in the cost of living. To the extent that they lead to

a reduction in income tax, any price increases may be offset by increases in take-home

pay. In any case, any price consequence is one time only and prices should stabilise

thereafter.

4. VAT favours the capital intensive firm

It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm

compared to the capital- intensive competitor, since the ratio of value added to selling

price is greater for the former. This is a real problem for labour-intensive economies and

industries.

128

Revenue to Government:

TABLE 4.2: STATEWISE SALES TAX COLLECTION OF INDIA AND CALCULATION OF CGR

AND CV.

(Rs In Crore)

States 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-

09(RE)

09-

10(BE)

Compoun

d Growth rate

Co-efficient

Variance

1.Andhra Pradesh 7,741 8,322 9,187 11,041 12,542 15,467 19,026 24,532 27,685 18.40 45.41

(10.58) (10.13) (9.86) (9.90) (9.74) (10.07) (10.97) (12.11) (12.30)

2.Bihar 1,450 1,627 1,995 1,891 1,734 2,081 2,535 3,704 3,948 12.47 36.59

(1.98) (1.98) (2.14) (1.70) (1.35) (1.36) (1.46) (1.83) (1.75)

3.Chhattisgarh 940 1,102 1,299 1,674 2,089 2,843 3,024 3,470 3,776 20.57 44.67

(1.28) (1.34) (1.39) (1.50) (1.62) (1.85) (1.74) (1.71) (1.68)

4.Goa 401 439 502 567 743 845 879 1,110 1,258 15.94 37.93

(0.55) (0.53) (0.54) (0.51) (0.58) (0.55) (0.51) (0.55) (0.56)

5.Gujarat 5,857 6,252 7,170 8,309 10,561 12,817 15,105 17,123 18,215 17.13 39.71

(8.00) (7.61) (7.70) (7.45) (8.20) (8.35) (8.71) (8.45) (8.10)

6.Haryana 2,945 3,337 3,838 4,761 5,604 6,853 7,721 9,785 10,740 18.46 42.84

(4.02) (4.06) (4.12) (4.27) (4.35) (4.46) (4.45) (4.83) (4.77)

7.Jharkhand 1,515 1,622 1,550 1,782 2,150 2,458 2,790 3,715 4,400 14.74 39.61

(2.07) (1.97) (1.66) (1.60) (1.67) (1.60) (1.61) (1.83) (1.96)

8.Karnataka 5,269 5,474 6,649 8,700 9,870 11,762 13,894 15,489 17,727 17.64 40.18

(7.20) (6.66) (7.14) (7.80) (7.66) (7.66) (8.01) (7.64) (7.88)

9.Kerala 4,441 5,343 5,991 6,701 7,038 8,563 9,372 11,011 12,734 13.36 32.63

(6.07) (6.50) (6.43) (6.01) (5.47) (5.58) (5.40) (5.43) (5.66)

10.Madhya Pradesh 2,361 2,906 3,293 3,912 4,508 5,261 6,045 6,720 8,012 16.02 37.19

(3.23) (3.54) (3.53) (3.51) (3.50) (3.43) (3.49) (3.32) (3.56)

11.Maharashtra 12,131 13,488 15,326 18,817 19,677 24,131 26,753 28,439 27,006 12.00 28.29

(16.58) (16.42) (16.45) (16.87) (15.28) (15.71) (15.43) (14.04) (12.00)

12.Orissa 1,402 1,605 1,864 2,471 3,012 3,765 4,118 4,770 5,116 19.03 41.83

(1.92) (1.95) (2.00) (2.22) (2.34) (2.45) (2.37) (2.35) (2.27)

13.Punjab 2,684 3,072 3,308 3,816 4,627 4,829 5,342 6,530 8,320 14.23 36.19

(3.67) (3.74) (3.55) (3.42) (3.59) (3.14) (3.08) (3.22%) (3.70)

14.Rajasthan 3,069 3,438 3,985 4,798 5,594 6,721 7,751 9,100 10,030 16.81 39.02

(4.19) (4.18) (4.28) (4.30) (4.34) (4.38) (4.47) (4.49) (4.46)

15.Tamil Nadu 8,386 9,590 11,005 12,996 15,555 17,727 18,156 20,906 23,243 13.75 31.81

(11.46) (11.67) (11.81) (11.65) (12.08) (11.54) (10.47) (10.32) (10.33)

16.Uttar 6,163 7,124 7,684 8,888 11,285 13,279 15,023 17,178 20,741 16.64 39.58

129

Pradesh

(8.42) (8.67) (8.25) (7.97) (8.76) (8.65) (8.66) (8.48) (9.22)

17.West Bengal 3,802 4,192 4,831 5,716 6,109 7,079 8,060 9,794 12,047 15.02 37.54

(5.20) (5.10) (5.19) (5.12) (4.74) (4.61) (4.65) (4.83) (5.35)

18. Others 2,623 3,220 3,679 4,714 6,072 7,091 7,826 9,235 10,013 19.00 41.67

(3.58) (3.92) (3.95) (4.23) (4.72) (4.62) (4.51) (4.56) (4.45)

All States 73,181 82,155 93,155 1,11,554 1,28,769 1,53,573 1,73,422 2,02,610 2,25,009 15.73 36.87

(100) (100) (100) (100) (100) (100) (100) (100) (100)

SOURCE: Handbook of Statistics on State Government Finances - 2010, Reserve bank of India

Note: figures in parenthesis represents percentage of total.

Table 4.2 reveals that Chandigarh state rank 1st in India during 2001-02 to 2009-10

related to Compound Growth of Sales Tax Collection in India i.e. to the extent of 20.57%

followed by Orissa (19.3%), Haryana (18.46%) and Andhra Pradesh (18.40%). Whereas

the Compound growth rate of Sales Tax collection of Maharashtra and Bihar during the

same period was least in India i.e.12.00% and 12.47% respectively.

Co-efficient of Variance during 2001-02 to 2009-10 is highest in the state of Andhra

Pradesh (45.41%) in India whereas Lowest in the state of Maharashtra during the same

period i.e. 28.29%. If we compare the growth rate and variation of all the states in India

then Compound Growth rate is 15.73% and Variation is 36.87% which is normal for the

same period in India.

130

Fig. 4.1 State wise Sales tax collection in India 2009-10.

12.3

12

10.33

9.22

56.15

Andhra Pradesh

Maharashtra

Tamil Nadu

Uttar Pradesh

Others

131

TABLE 4.3 STATE WISE REVENUE RECEIPTS OF INDIA 2009-10

(Rs. In Crores)

States 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-

09(RE)

09-

10(BE)

Compou

nd

Growth rate

Co-efficien

t

Varian

ce

1.Andhra Pradesh 21,845 23,003 26,869 28,750 34,851 44,245 54,143 69,686 78,964 18.72 46.46

(8.76) (8.41) (8.69) (7.91) (8.09) (8.34) (8.68) (9.44) (9.81)

2.Bihar 10,219 11,569 13,525 15,714 17,837 23,083 28,210 36,317 41,837 19.97 48.18

(4.10) (4.23) (4.37) (4.32) (4.14) (4.35) (4.52) (4.92) (5.20)

3.Chhattisgarh 4,376 5,417 5,959 7,249 8,839 11,450 13,879 16,778 18,897 20.91 47.84

(1.75) (1.98) (1.93) (1.99) (2.05) (2.16) (2.23) (2.27) (2.35)

4.Goa 1,873 1,833 1,623 1,820 2,169 2,610 2,944 3,806 4,137 12.21 34.19

(0.75) (0.67) (0.52) (0.50) (0.50) (0.49) (0.47) (0.52) (0.51)

5.Gujarat 15,986 17,875 18,248 20,265 25,067 31,002 35,690 39,684 41,815 14.27 34.57

(6.41) (6.53) (5.90) (5.57) (5.82) (5.84) (5.72) (5.38) (5.19)

6.Haryana 7,601 8,657 9,843 11,149 13,853 17,952 19,751 21,771 22,437 16.12 37.04

(3.05) (3.16) (3.18) (3.07) (3.21) (3.38) (3.17) (2.95) (2.79)

7.Jharkhand 6,100 7,406 7,443 7,307 8,203 10,144 11,612 16,107 17,936 14.00 38.65

(2.45) (2.71) (2.41) (2.01) (1.90) (1.91) (1.86) (2.18) (2.23)

8.Karnataka 15,321 16,169 20,760 26,570 30,352 37,587 41,151 42,818 48,389 16.64 36.91

(6.14) (5.91) (6.71) (7.31) (7.04) (7.08) (6.60) (5.80) (6.01)

9.Kerala 9,056 10,634 11,815 13,500 15,295 18,187 21,107 25,063 28,154 15.35 36.90

(3.63) (3.89) (3.82) (3.71) (3.55) (3.43) (3.38) (3.40) (3.50)

10.Madhya Pradesh 11,201 13,390 14,289 19,743 20,597 25,694 30,689 34,949 39,961 17.66 40.79

(4.49) (4.89) (4.62) (5.43) (4.78) (4.84) (4.92) (4.74) (4.96)

11.Maharashtra 30,093 31,103 34,371 41,013 48,438 62,195 79,583 82,870 89,061 16.91 40.11

(12.07) (11.37) (11.12) (11.28) (11.24) (11.72) (12.76) (11.23) (11.06)

12.Orissa 7,048 8,439 9,440 11,850 14,085 18,033 21,967 26,810 26,550 19.89 45.05

(2.83) (3.08) (3.05) (3.26) (3.27) (3.40) (3.52) (3.63) (3.30)

13.Punjab 8,929 11,071 12,139 13,807 16,966 16,795 19,238 22,919 24,072 12.88 30.40

(3.58) (4.05) (3.93) (3.80) (3.94) (3.17) (3.08) (3.11) (2.99)

14.Rajasthan 12,153 13,082 15,424 17,764 20,839 25,592 30,781 34,383 38,268 16.64 39.06

(4.87) (4.78) (4.99) (4.89) (4.83) (4.82) (4.93) (4.66) (4.75)

15.Tamil Nadu 18,818 20,837 23,706 28,452 33,960 40,913 47,521 55,410 58,271 16.59 38.44

(7.54) (7.61) (7.67) (7.83) (7.88) (7.71) (7.62) (7.51) (7.24)

16.Uttar Pradesh 25,598 27,821 31,638 37,617 45,349 60,600 68,672 85,146 94,440 19.33 45.32

(10.26) (10.17) (10.23) (10.35) (10.52) (11.42) (11.01) (11.54) (11.73)

132

17.West Bengal 14,538 14,525 16,609 19,918 23,726 25,828 30,167 40,777 42,312 15.84 39.22

(5.83) (5.31) (5.37) (5.48) (5.50) (4.87) (4.84) (5.53) (5.26)

18. Others 28,668 30,842 35,487 41,025 50,595 58,645 66,644 82,571 89,442 16.42 38.98

(11.49) (11.27) (11.48) (11.29) (11.74) (11.05) (10.68) (11.19) (11.11)

All States 2,49,423 2,73,673 3,09,188 3,63,513 4,31,021 5,30,555 6,23,749 7,37,865 8,04,943 17.05 40.23

(100) (100) (100) (100) (100) (100) (100) (100) (100)

SOURCE: Handbook of Statistics on State Government Finances - 2010, Reserve bank of India

Note: Figures in parenthesis represents % contribution to Total Revenue.

Table 4.3 reveals that Chhattisgarh state rank 1st in India during 2001-02 to 2009-10

related to Revenue Growth i.e. to the extent of 20.91% followed by Bihar (19.9%), Orissa

(19.9%) and Uttar Pradesh (19.3%). Whereas the revenue growth of Goa, Punjab during

the same period was least in India i.e.12.21% and 12.88% respectively.

Co-efficient of Variance during 2001-02 to 2009-10 is highest in the state of Bihar

(48.18%) in India whereas Lowest in the state of Punjab during the same period.

If we compare the growth rate and variation of all the states in India then Compound

Growth rate is 17.05% and Variation is 40.2% which is normal for the same period in

India.

133

Fig. 4.2 State wise revenue receipt of India 2009-10

"More than 550 items would be covered under the new Indian VAT regime of which 46

natural and unprocessed local products would be exempt from VAT", a PTI report quoted

West Bengal Finance Minister and VAT panel chairman Asim Dasgupta as saying.

About 270 items including drugs and medicines, all agricultural and industrial inputs,

capital goods and declared goods would attract four per cent VAT in India.

The remaining items would attract 12.5 per cent VAT. Precious metals like gold and

bullion would be taxed at one per cent. Considering the difficulties faced by the tea

industry, it was decided that tea-producing states would be given an option to levy 12.5

per cent or four per cent subject to review in 2006. Petrol and diesel would be kept out of

11.73

11.06

9.81

7.24

60.16

Uttar Pradesh

Maharashtra

Andhra Pradesh

Tamil Nadu

Others

134

VAT regime in India, which covers only marketable items. Dasgupta was quoted as

saying that the panel was yet to take a view on CNG.

Following opposition from some of the states, it was decided that states would have

option to either levy four per cent or totally exempt food grains but it would be reviewed

after one year. Three items - sugar, textile and tobacco - covered under Additional Excise

Duties, will not be under VAT regime for one year but the existing arrangement would

continue. The Indian VAT panel relaxed the threshold limit for traders coming under

VAT regime from Rs 5-50 lakh of turnover from the previous stance of Rs 5-40 lakh.

Traders within this limit can pay a composite VAT rate of one per cent but would not be

entitled to input tax credit.

4.2 GOODS AND SERVICE TAX.

Goods and Services Tax (GST) is a part of the proposed tax reforms that center

round evolving an efficient and harmonized consumption tax system in the country.

Presently, there are parallel systems of indirect taxation at the central and state levels.

Each of the systems needs to be reformed to eventually harmonize them.

In the Union Budget for the year 2006-2007, Finance Minister proposed that India should

move towards national level Goods and Services Tax that should be shared between the

Centre and the States. He proposed to set April 1, 2011 as the date for introducing GST.

World over, goods and services attract the same rate of tax. That is the foundation of a

GST. The first step towards introducing GST is to progressively converge the service tax

rate and the CENVAT rate. The goods and service tax (GST) is proposed to be a

135

comprehensive indirect tax levy on manufacture, sale and consumption of goods as well

as services at a national level. Integration of goods and services taxation would give India

a world class tax system and improve tax collections. It would end the long standing

distortions of differential treatments of manufacturing and service sector. The

introduction of goods and services tax will lead to the abolition of taxes such as octroi,

Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees,

turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods

and services, and eliminate the cascading effects of multiple layers of taxation. GST will

facilitate seamless credit across the entire supply chain and across all states under a

Common tax base.

Roadmap-to-GST:

As we have parallel systems of indirect taxation at the central and state levels, each of the

systems needs to be reformed to eventually harmonise them. The central excise duty

should be converted into a full fledged manufacturing stage VAT on goods and services

and the states sales tax systems should be transformed into a retail stage destination based

VAT, before the two are integrated. At the central level, beginning has been made by

converging widely varying tax rates and extending input tax credit to convert excise

duties into a CENVAT.

The reformed indirect tax system GST-Goods and service tax is proposed to implement

on 1st April 2011 in India. Several countries implemented this tax mechanism followed

by France, the first country introduced GST. Goods and service tax is a new version of

VAT which gives a comprehensive setoff for input tax credit and subsuming many

136

indirect taxes from state and national level. The GST Implementation is not yet declared

by government and the drafting of GST law is still under process and a clear picture will

be available only after announcement of Implementation. As the name denotes the goods

and service tax is integrated in GST for setoff benefit of Input tax credit.

FACTORS FOR IMPLEMENTATION OF GST IN INDIA:

i. Avoid cascading effect of taxation:

One of the main reasons of the introduction of GST is to avoid cascading effect of taxes

in India. For example manufacturing of a product attract CENVAT. The manufacturer

pays CENVAT on goods produced. So the CENVAT element is loaded on the product.

According VAT rules, the sales tax is payable on the aggregate selling price which

include CENVAT. Here there is no set off benefits available. Likewise there are many

situations in the nature of cascading effect for instance, State VAT on CST, Entry tax on

VAT etc. Now Govt. has decided to abolish tax on tax effect by implementing GST.

ii. Shortfall of Existing VAT:

Indirect taxes like luxury tax, entertainment tax, are yet to be included in the VAT. These

taxes are still existing and payable.

iii. Shortfall of Existing CENVAT:

Several taxes like additional customs duty, surcharges not included under CENVAT.

Input tax and service tax set off is out of reach to the manufacturer and dealers.

137

Benefits of GST:

1. GST provide comprehensive and wider coverage of input credit setoff, you can

use service tax credit for the payment of tax on sale of goods etc.

2. CST will be removed and need not pay. At present there is no input tax credit

available for CST.

3. Many indirect taxes in state and central level subsumed by GST, You need to pay

a single GST instead of all.

4. Uniformity of tax rates across the states

5. Ensure better compliance due to aggregate tax rate reduces.

6. By reducing the tax burden the competitiveness of Indian products in international

market is expected to increase and there by development of the nation.

7. Prices of goods are expected to reduce in the long run as the benefits of less tax

burden would be passed on to the consumer.

8. Overall tax compliance cost will reduce for government and can concentrate on

GST

Indirect taxes subsumed under GST:

The following indirect taxes from state and central level is going to integrated with GST

State taxes:

1. VAT/Sales tax

2. Entertainment Tax ( unless it is levied by local bodies)

138

3. Luxury tax

4. Taxes on lottery, betting and gambling.

5. State cesses and surcharges in so far as they relate to supply of goods and

services.

6. Entry tax not on in lieu of octroi.

7. Purchase tax ( This is not sure still under discussion )

Central Taxes:

1. Central Excise Duty.

2. Additional Excise Duty.

3. The Excise Duty levied under the medical and Toiletries Preparation Act

4. Service Tax.

5. Additional Customs Duty, commonly known as countervailing Duty ( CVD)

6. Special Additional duty of custums-4% ( SAD)

7. Surcharges

8. Cessess

The above taxes dissolve under GST; instead only CGST & SGST exists.

The GST model in India:

Many countries are following single GST. But it is proposed that dual GST is suitable for

federal country like India. The end user, i.e. consumer cannot recover taxes but a business

can recover by claiming input tax setoff.

139

Dual GST:

Dual GST means, the proposed model will have two component called

1. CGST – Central goods and service tax for levied by central Govt.

2. SGST – State goods and service tax levied by state Govt.

There would have multiple statute one CGST statute and SGST statute for every state.

Taxable event:

Supply of goods and supply of services will be considered as taxable event under GST.

Any economic activity which is not supply of goods is treated a supply of service.

Tax payer identification number:

Each tax payer allotted a pan based identification number containing 13 or 15 digit

number.

Payment of tax:

The central GST would be paid to central and state GST paid to state government in the

prescribed account head.

Collection of GST:

It is same as VAT; Tax is collected on the basis of value addition on each stage of sale.

Both CGST and SGST would have to be charged in an every service bill and sale bill and

paid after adjusting input credit available on both.

140

Input tax credit setoff

The input tax credit of SGST can be utilized for the payment of SGST only and input tax

credit on CGST can be utilized for the payment of CGST only. This means that cross

utilization of input tax credit will not be allowed.

Making it clearer; input tax credit of CGST cannot be utilized for the payment of SGST

and vice versa. However there is an exemption for the above in the case of interstate

transaction .For interstate transaction IGST is proposed and would be implemented along

with CGST and SGST.

Constitution amendment for levying service tax by the states

The power of levying service tax is rest with central Government and a constitutional

amendment is necessary for empowering states for levying service tax.

Applicability of CGST and SGST

The applicability of taxes is as usual there would be a prescribed limit of annual turnover,

also some goods and services are exempted under GST. The dealer whose turnover is

below prescribed limit need not pay tax.

Threshold for annual turnover for goods and services would be 10 lakh for SGST and

threshold of CGST for goods may be 1.5 crore and service would have a separate

threshold that too will be appropriately high.

141

GST rates

The rate structure would be as follow; but not final

1. A lower rates for essential commodities

2. Standard rates for general goods

3. Special rates for precious metals

4. For services may be single rates for CGST and SGST.

GST rates is not yet announced by government, however it is assumed that aggregate

total of CGST & SGST would be 14 % to20%.

4.3 CONCLUSION:

VAT has been adopted instead of sales tax in India from 2002 by Central Government of

India, but only seven states has implemented VAT and other shown their inability to

impalement that. Subsequently from 2005 all state in India has adopted VAT and rate of

tax was uniformly accepted which was 1%, 4%, 12.5% & for other products like

petroleum etc discretion was given to state for rate of tax. Initially for few years states

found it very inconvenient and difficult to implement VAT as no proper administrative

machinery was available & large Scale Computerisation was not done even the

manufacturer, trader and retailers were not computer competent. So they were also

finding very difficult to cope up with VAT so there was resistant from business

community, but in due course Government machinery has been improved to cope up with

VAT. At the same time last few years large scale computerisation was done in all sectors

and liberal National Policies to import computers has reduced the computer prices and

142

increase the computer literacy which also help business community and Government to

cope up with VAT. All above factors are giving better result and total indirect tax

revenue has been increased in last few years even after reducing tax rates. Tax evasion in

India has been reduced to the great extent after successful implementation of VAT now

Central Government of India has decided to implement GST from 2011 which is a step

ahead of VAT where excise duty, service tax, octroi will be covered under GST.

143

CHAPTER- 5

SALES TAX IN MAHARASHTRA

5.1 INTRODUCTION:

As per the 2001 census, Maharashtra has a population of 96,752,247 inhabitants making

it the second most populous state in India, and the second most populous country

subdivision in existence, and third ever after the Russian SFSR of the former Soviet

Union. The Marathi-speaking population of Maharashtra numbers 62,481,681 according

to the 2001 census. This is a reflection of the cosmopolitan nature of the state. Only

eleven countries of the world have a population greater than Maharashtra. Its density is

322.5 inhabitants per square kilometer. Males constitute 50.3 million and females, 46.4

million. Maharashtra's urban population stands at 42.4%. Its sex ratio is 922 females to

1000 males. 77.27% of its population is literate, broken into 86.2% males and 67.5%

females. Its growth rate between 1991–2001 was pegged at 22.57%.

5.1.1 HISTORY OF SALES TAXES:

Sales tax was first introduced in India in the province of Bombay, where a tax was

imposed on sales of tobacco within certain very limited urban and suburban areas by the

Bombay Tobacco (Amendment) Act, 1938, which came into force on the 24th March,

1938.

In the Central provinces & levy, again a selective one, on motor spirit and lubricants

alone was introduced in January, 1939. In the province of Bombay, Government took

144

powers by the Bombay Sales Tax Act, 1939 to levy sales tax on motor spirit and

manufactured cloth, at rates not exceeding six and a quarter per cent. Eventually,

however, only motor spirit was notified for taxation under that Act.

It was not until 1945, that an attempt to introduce a general sales tax was made in

Bombay. The Bombay Sales Tax Act of 1946 enacted on 8th March, 1946, provided for

the levy of a tax at the last stage of sale of any goods. The rate of tax under the Bombay

Sales Tax Act, 1946 was six paisa per rupee of the sale price. The exemption list largely

comprised articles of staple diet and other necessities of the common man and other items

such as electrical energy, tobacco, foreign liquor and motor-spirits on which there was

already same form of duty or tax.

On the 1st April, 1948 a tax of one anna in the rupee was levied, for the first time, on 13

specially selected items which included motor cars, refrigerators wireless equipment,

perfumery, firearms, silk and jewellery.

A radical change in the basis of the sales tax was effected on 1st November, 1952 by the

sales introduction of a system of multi-point taxation, that is to say, a uniform levy at

each stage of the sale of any goods, supplemented by a special tax at one anna in the

rupee on selected goods, in addition to the general levy. The limit of turnover for

registration in the case of persons dealing in general goods it was at Rs. 30,000 per year.

The Bombay State introduced from the 1st of April, 1954 the system on tax which has

come to be commonly known as the two point system. Under this system of tax the

turnover limits attracting liability to tax and registration are Rs. 10,000 per year in the

145

case of manufacturers and importers and Rs. 25,000 in the case of all patterns of the lists

under the earlier enactments, generally speaking. The scheme of the Act is broadly that a

sales tax is levied at the first stage of the sales of any goods and a General Sales Tax is

levied in addition to the sales tax.

The BST Act, 1959 was amended by from 1.7.1981, which completely amended the

scheme of taxation under the BST Act, 1959 from 1.7.1981.Prior to 1.7.1981, the BST

Act, 1959 was a schedule oriented Act in as much as the tax liability of a sale or purchase

of a commodity will depend on the schedule in which the goods fall. Thus, prior to

1.7.1981 there were five schedules in which the specific goods in question lie schedule A

Tax free goods No Tax.

Schedule B Part I Declared goods Tax at first stage only at a rate not more than 4%

Schedule B Part II Declared goods Tax at last stage. The last stage being the

stage at which goods pass from a licensed dealer to unlicensed dealer at a rate not more

than 4%

Schedule C Tax at the first stage of sale. The first stage being the stage at which the

goods enter into the stream of sale in the State of Maharashtra. Such first stage one can

visualise as follows:-

a) Where the goods are manufactured.

b) Where the goods are imported from foreign country.

146

c) Where goods are purchased from a dealer from outside the State of Maharashtra.

d) Where goods purchased from an unregistered dealer are resold.

Schedule D Tax at the last stage of sale. The last stage being the stage at which the

goods pass from a licensed to an unlicensed dealer.

Schedule E Tax at first stage and tax at last stage. The stages being stages (first and last)

as explained above. In addition to this in respect of Schedule E goods, additional retail S.

T. at 4% is payable by a dealer who is not a licensed dealer both at the time of purchase

and sale.

To review the present system of Sales Tax in the State, in the light of the system

prevailing in Gujarat, Tamil Nadu, West Bengal and Karnataka and to examine the

system of administration of Sales Tax Law and to suggest improvement therein so as to

simplify the procedure for assessment ensuring avoidance of evasion of taxes, a

Committee under the Chairmanship of Shri. M. R. Yardi was appointed by the

Government in 1975.In view of the recommendation of the Committee on various issues,

the BST Act, 1959 is suitably amended from 1.7.1981.

The first stage tax is called sales tax. In view of this new scheme, the schedules have

now been reduced from 5 in number to 3 viz..

(a) Schedule - A Tax free goods on which no tax is payable under section 5 of the Act.

147

(b) Schedule -B Declared goods on which tax is leviable at the first stage at a rate not

more than 4%.

(c) Schedule -C First stage levy at the rates specified against the entry. This Part I

schedule is covered by items of raw materials which are generally Part II used for

manufacture, liable to 4% S. T.

Thus, under the new amended Act since tax is leviable in the first stage i. e. the stage

at which goods enter the manufacturers, the tax liability of transaction of a sale will

depend upon the character of purchase i. e. whether from R. D. or O. M. S. import or U.

R. D.

Thereafter on important change in the State indirect tax reforms took place from April

1st, 2005 by introduction of VALUE ADDED TAX system.

The Bombay Sales of Motor Spirit Taxation Act, 1958

The act remained in operation from 1958 till 31/03/2005. The act provided a levy of tax

on the sales of Motor Spirits within the State. The following commodities were covered

under the Act.

1 High Speed Diesel Oil

2 Aviation Gasoline (Duty paid)

3 Aviation Gasoline (Banded)

148

4 Aviation Turbine Fuel (Duty paid)

5 Aviation Turbine Fuel (Banded)

6 Any other kind of Motor Spirit

1st April, 2005 the tax on Motor Spirit is being levied under Value Added Tax Act, 2002.

Maharashtra Sales Tax on the transfer of property in goods involved in the

executions of Works Contract Act, 1985.

Historical Background :-

Prior to the enactment of Constitution of India, the provincial Legislatures derived

power to levy taxes on the sale of goods and advertisement by virtue of Entry 48 of List

II in the Seventh Schedule to the Government of India Act, 1935. The power exercised

by the States was not subject to any restrictions or conditions. The then province of

Madras was the first State which attempted to bring within its tax net the transactions of

Works Contract by amending the term 'goods', 'sale' and 'turnover' in the Madras General

Sales Tax Act, 1939. The expression 'sale' was amended so as to bring within its ambit

transfer of property in goods involved in the execution of works contract. The term

'goods' was also amended so as to include materials used in construction, fitting out,

improvements etc. Assessment of taxable turnover arrived at by the authorities in

pursuance of the said Amendment was challenged in the Madras High Court in the Case

of Gannon Dunkerley and Co. (Madras) Ltd. V/s. State of Madras. Similar question

about the liability of contractors who had undertaken to carry on works contract to pay

149

sales tax on transfer property in goods involved in works contract came up for

consideration in different High Courts.

Maharashtra tax on transfer of the right to use any goods for any purpose Act,

1985

Devices by way of leases of films had been resulting in avoidance of sales tax.

The main right in regard to a film related to its exploitation and after that for a certain

period of time ,in most cases, the ceases to have any value. In the year 1982 Parliament

passed the 46th Amendment amending the Constitution in several respect in order to bring

many of the transactions, in which property in goods passed but where not considered as

sales for the purpose of levy of sales tax, within the scope of the powers of the states to

levy sales tax. In pursuance of the amendment to the constitution and in order to cover

such and similar transactions the act was enacted on 1st October 1986 which operated

during the period from 1st October, 1986 till 31st March, 2005. Accordingly, tax was

levied on the leasing transaction at the rate of 4%.

From 1st April, 2005 tax on such lease transaction is being levied under Value Added Tax

Act, 2002.

5.1.2 Revenues of Government from tax:

Table 5.1 Maharashtra State Division wise Sales Tax Revenue Receipts for the

years 2003-04 to 2009-10.

150

Table 5.1 Maharashtra State Division wise Sales Tax Revenue Gross Receipts for the years 2003-04 To 2009-10 (Rs in Crores)

DIVISION 03-04 04-05 05-06 2006-07 2007-08 2008-09 2009-10

Compo

und Growth rate

Co-efficient Variance

Mumbai 15,315.54 13,745.25 14,998.65 17,727.20 19,806.05 21,632.95 22,383.10 8.65 20.15

(71.07) (67.07) (66.77) (64.24) (64.00) (63.06) (60.60)

Thane 849.52 939.57 981.00 1,230.18 1,099.01 1,270.46 1,425.87 8.45 19.53

(3.94) (4.58) (4.37) (4.46) (3.55) (3.70) (3.86)

Raigad 457.48 461.86 431.72 584.60 545.99 733.73 802.29 10.70 26.60

(2.12) (2.25) (1.92) (2.12) (1.76) (2.14) (2.17)

Pune 2,107.47 2,445.74 2,828.85 3,697.51 4,201.59 4,603.61 5,451.93 17.49 35.72

(9.78) (11.93) (12.59) (13.40) (13.58) (13.42) (14.76)

Nasik 800.74 883.65 942.89 977.87 1,151.95 1,203.76 1,430.44 9.57 21.84

(3.72) (4.31) (4.20) (3.54) (3.72) (3.51) (3.87)

Kolhapur 472.44 473.27 525.14 658.73 706.20 827.34 974.63 13.66 30.39

(2.19) (2.31) (2.34) (2.39) (2.28) (2.41) (2.64)

Nagpur 1,023.50 1,035.16 942.43 1,151.19 1,378.77 1,459.40 1,587.48 8.89 21.50

(4.75) (5.05) (4.20) (4.17) (4.45) (4.25) (4.30)

Aurangabad 524.55 510.40 655.56 847.05 908.69 929.79 1,011.93 13.30 28.06

(2.43) (2.49) (2.92) (3.07) (2.94) (2.71) (2.74)

Others - - 158.24 720.08 1,150.99 1,646.44 1,868.91 77.98 55.93

- - (0.70) (2.61) (3.72) (4.80) (5.06)

TOTAL 21,551.24 20,494.90 22,464.48 27,594.41 30,949.24 34,307.48 36,936.58 8.65 17.63

100% 100% 100% 100% 100% 100% 100%

Total Revenue receipts of

Maharashtra

34,371.00 41,013.00 48,438.00 62,195.00 79,583.00 82,870.00 89,061.00

% of Sales

tax to Total revenue

62.70% 49.97% 46.38% 44.37% 38.89% 41.40% 41.47%

SOURCE: www.mahavat.gov.in


151

Table 5.1 reveals that Pune Division rank 1st In Maharashtra during 2003-04 to 2009-10

related to revenue growth i.e. to the extent of 17.49% followed by Kolhapur (13.66%)

and Aurangabad (13.30%). Whereas revenue growth of Thane and Mumbai during the

same period was least in Maharashtra i.e. 8.45% and 8.65% respectively.

Co-efficient of Variance duri2003-04 to 2009-10 is highest in the division of Pune

(35.72%) whereas lowest in the division of Mumbai (20.15%).

If we compare the Growth rate and Variation of All Divisions of Maharashtra then

Compound Growth Rate is 8.65% and Variation is 17.63%.

Fig.5 .1 Division wise Sales Tax Revenue Gross Receipts of Maharashtra 2009-10

152

Table 5.2 Actwise Sales Tax Revenue Gross Receipts in Maharashtra for the years 01-02 to 09-10

Rs. Crore

Year BST/VAT MST CST SCPT PT ET LT Total

1 2 3 5 6 8 9 10 11

2001-02 7,144.70

3,282.19

2,059.50

82.97 982.07

4.41

136.86

13,692.70

(52.18) (23.97) (15.04) (0.61) (7.17) (0.03) (1.00) (100)

2002-03 8,232.17

3,867.87

1,742.14

24.84

1,029.06

4.92

144.22

15,045.22

(54.72) (25.71) (11.58) (0.17) (6.84) (0.03) (0.96) (100)

2003-04 9,736.00

3,478.62

2,530.95

3.98

1,018.97

4.22

136.36

16,909.10

(57.58) (20.57) (14.97) (0.02) (6.03) (0.02) (0.81) (100)

2004-05 12,066.13

4,950.41

2,234.02

6.58

1,084.02

11.70

142.05

20,494.91

(58.87) (24.15) (10.90) (0.03) (5.29) (0.06) (0.69) (100)

2005-06 13,170.98

5,705.09

2,261.75

56.50

1,150.92

5.24

113.99

22,464.47

(58.63) (25.40) (10.07) (0.25) (5.12) (0.02) (0.51) (100)

2006-07 17,076.79

6,496.98

2,572.09

41.67

1,246.72

3.86

156.29

27,594.40

(61.88) (23.54) (9.32) (0.15) (4.52) (0.01) (0.57) (100)

2007-08 20,270.95

6,780.80

2,402.62

3.46

1,488.57

3.52

264.13

31,214.05

(64.94) (21.72) (7.70) (0.01) (4.77) (0.01) (0.85) (100)

2008-09 22,238.00

7,570.81

2,623.22

50.95

1,556.62

5.24

262.66

34,307.50

(64.82) (22.07) (7.65) (0.15) (4.54) (0.02) (0.77) (100)

2009-10 24,774.31

7,379.32

2,822.92

122.41

1,613.65

10.07

213.92

36,936.60

(67.07) (19.98) (7.64) (0.33) (4.37) (0.03) (0.58) (100)

Compound Growth rate

17.68 12.12 4.30 9.19 7.12 3.42 8.70 14.20

Co-efficient Variance

40.28 28.72 13.07 86.58 18.87 46.43 30.92 33.30

SOURCE: www.mahavat.gov.in


153

Fig. 5.2 Act wise Sales Tax Revenue Gross Receipts in Maharashtra 2009-10

5.1.3 SALES TAX FUNCTIONS:

Maharashtra State is one of the leading states in India. Mumbai the capital city of state is

internationally recognized as financial capital of India. State is rich with a long stretch of

coastline, mountains, plains and full of natural resources. States progressive attitude has

attracted national as well as international investors in a big way especially because of

atmosphere conducive to the trade and commerce.

Sales Tax Department is a major revenue earning body for the state Government.

Department's share to the state exchequer is whopping 58%. Government has adopted a

single point tax structure. Tax range is fixed between 1% to 20% depending on the

154

commodity. Apart from Bombay Sales Tax Act 1959, Sales Tax Department is entrusted

to implement some other Acts of Tax recovery.

Sales Tax is the single largest contributor of revenue to the State Government. Monitoring

the collection of taxes as per law is the main function of the department. Registration,

Assessment, Appeals and Enforcement are some of the major activities including

Establishment, Administration, Audit, Legal etc.

5.1.4 HISTORICAL BACKGROUND AND BASIS OF COLLECTION IN

MAHARASHTRA STATE:

Maharashtra, from 1.7.1981, adopted single point first stage taxation system. It broadly

means manufacturers/ importers in Maharashtra will be liable to pay taxes on their first

sale in the state, while resellers are normally exempted from paying taxes.

Sales Tax in Maharashtra was introduced way back in 1946. Bombay Sales Tax Act,

which is, present enactment, came into existence w.e.f. 1-1-1960 as a first stage single

point levy. This Act has under gone major changes in 1981 and 1995 when VAT (Value

Added Tax) was made applicable on resellers of all taxable commodities except declared

goods on the basis of Annual Turnover of Sales. As per recent amendment Turnover Tax

Surcharge is levied i.e. while VAT is discontinued.

5.2 CONCLUSION:

Maharashtra Government has replaced the sales tax and accepted VAT from 2005.

Initially for two years revenue has been reduced due to non proper implementation and

155

some other factor but then onwards revenue has been increased substantially every year

and in the year 2009-10 Maharashtra not only achieved the target but also exceed the

revenue collection with successful implementation of VAT and also succeeded in 100

percent computerisation of return and going towards paperless era which is the basic

requirement for the success of VAT regime. Even business communities has also well

wost with the VAT systems and they are now ready to welcome GST which will reduce

their administrative work and where they will be entitle to get input tax credit (setoff)

even on the tax paid on services and where tax on Goods and Services will be uniform.

156

CHAPTER – 6

DATA ANALYSIS

6.1 INTRODUCTION:

Value Added Tax is one of the most radical reforms that have been proposed for

the Indian economy after years of political and economic debate. Revenue growth is the

most important aspect by which to judge the success of VAT in Maharashtra. To measure

the revenue growth, it is essential to study the various factors undertaken by government

of Maharashtra since introduction of VAT. Therefore VAT in Maharashtra is an

important segment of the economy of Maharashtra state in particular and Indian economy

in general. Maharashtra is the third largest state which is contributing in to the exchequer.

It contributed 12 per cent per cent revenue through VAT in India in 2009-10. This study

undertakes the impacts of VAT on the profitability of manufacturing units in

Maharashtra, based on the primary surveys and secondary surveys that covered the

financial information of various companies in the state of Maharashtra, thus it provides

an integrated view of the industrial sector of the state.

6.2 INDUSTRY WISE AND TURNOVER WISE CLASSIFICATION OF

INDUSTRIES:

The primary data was obtained from the sample respondents who are associated with

manufacturing activity. Field survey covered the hundred industries, which are grouped

into five major categories. Which are as follows.


157





For our analysis, in Table 6.1 we have classified industries on the basis of turnover into

small, medium and Large Industries. Small Industries includes Industries whose average

sales turnover from 2001-02 to 2008-09 is less than two hundred crores. Medium

Industries are those whose average sales turnover during 2001-02 to 2008-09 is more

than two hundred crores and less than one thousand crores and large industries are

consists of industries whose average turnover during 2001-02 to 2008-09 is more than

one thousand crores.

TABLE 6.1 INDUSTRYWISE AND TURNOVERWISE CLASSIFICATION OF

INDUSTRIES

Turnover (Rs. In Crores)

A) Capital

Industries

B) Consumer

Industries

C) Infrastructure

Industries

D) Chemical

Industries

E) Pharma

Industries. Total

1-200 11 10 04 16 13 54

201-1000 07 09 02 03 10 31

1000 & Above 00 05 04 04 02 15

Total 18 24 10 23 25 100

Source: Field Survey.

6.2.1 Profile of Capital Goods Industries:

This section covers the information of 18 capital goods industries regarding turnover,

Sales Tax/ Value Added Tax since 2001-02 to 2008-09.

158

Table 6.2 SALES TAX / VAT ON CAPITAL GOODS INDUSTRIES

(Rs in Crores)

Year Sales Sales Tax

/ VAT

Sales

tax VAT

% of

Sales

tax on

Sales

% of

VAT

on

Sales

2001-02 1,501.14 25.09 25.09 - 1.67 -

2002-03 1,693.51 29.97 29.97 - 1.77 -

2003-04 2,086.83 34.52 34.52 - 1.65 -

2004-05 2,428.78 40.10 40.10 - 1.65 -

2005-06 2,874.55 42.39 - 42.39 - 1.47

2006-07 3,282.58 48.22 - 48.22 - 1.47

2007-08 3,662.61 46.78 - 46.78 - 1.28

2008-09 3,990.74 42.45 - 42.45 - 1.06

CGR 15.67 8.65 16.75 0.26

CV 31.82 19.70 17.12 5.76

Co-efficient 0.008 0.015 0.00

Std. Error 0.002 0.001 0.004

T-Test 4.61 10.89 -0.012

R 0.88 0.99 0.009

R2 0.78 0.98 0.00

Source: Field Survey (2009-10)

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09. 3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression

Table 6.2 reveals that Compound Growth Rate of capital goods industries since 2001-02

to 2008-09 regarding total sales is 15.7 per cent and Sales Tax/ Value Added Tax is 8.65

per cent. Whereas coefficient of variation about total sales is 31.82per cent and Sales

Tax/ VALUE ADDED TAX is 19.7 per cent during same period. But compound growth

rate of capital goods industries only for Sales tax was16.75 per cent and coefficient of

variation was 17.2per cent during 2001-02 to 2004-05. Moreover compound growth rate

of capital goods industries only for Value Added Tax was 0.26 per cent and coefficient of

159

variation was 5.76 per cent during 2005-06 to 2008-09. Therefore it states that Capital

Goods Industries are More Beneficial under Value Added Tax system as CGR of Value

Added Tax is 0.26 per cent whereas CGR for Sales Tax is 16.75 per cent. So we can say

that The Profit of capital goods industries is increased under VAT system than Sales Tax.

Regarding capital goods industry Regression analysis shows that there is positive

relationship between sales and Sales Tax as well as Sales and Value Added Tax of an

Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover

the co-relation between sales and Sales Tax is closely related with 1 (0.99) whereas co-

relation between Sales and Value Added Tax is far below 1 (0.009) during the same

period.

Fig. 6.1 The Value of CGR of Capital goods Fig. 6.2 The Value of regression of Capital

Industries during 2001-02 to 2008-09. Goods Industries during 2001-02 to 2008-09.

0

2

4

6

8

10

12

14

16

18

Sales tax VAT

Compound Growth

Rate

160

TABLE 6.3 CGR AND CV OF CAPITAL GOODS INDUSTRIES

Sr

No. Name of the Industry Period

Compound

Growth Rate

Co-efficient

Variance

1 A1 Total Yearly 13.31 28.34

Sales Tax/ VAT 8.52 22.50

Sales tax 11.11 12.74

VAT -7.04 8.74


Sales Tax/ VAT -0.48 6.60

Sales tax 0.28 2.82

VAT -3.36 8.90



Sales tax 252.36 68.06

VAT 5.44 6.95



Sales tax -31.12 42.11

VAT 24.24 26.53



Sales tax -17.43 56.10

VAT -8.25 22.35



Sales tax 38.09 44.84

VAT -4.74 18.82



Sales tax 39.58 38.83

VAT 39.58 9.51



Sales tax -21.08 30.62

VAT 51.76 68.11

161



Sales tax -10.19 31.18

VAT 14.87 74.23

10 A10 Total Yearly -41.32 108.30


Sales tax -19.53 23.54

VAT -42.57 71.49

11 A11 Total Yearly 19.49 38.79


Sales tax 16.86 17.94

VAT 5.98 13.34

12 A12 Total Yearly -1.83 9.63


Sales tax 5.48 9.05

VAT -2.30 12.65

13 A13 Total Yearly 19.30 42.07


Sales tax 38.09 44.84

VAT -4.74 18.82

14 A14 Total Yearly 19.49 38.79


Sales tax 16.86 17.94

VAT 5.98 13.34

15 A15 Total Yearly 12.31 26.22


Sales tax -10.19 31.18

VAT 14.87 74.23

16 A16 Total Yearly 17.92 37.26


Sales tax -17.43 56.10

VAT -8.25 22.35

17 A17 Total Yearly 13.31 28.34


Sales tax 11.11 12.74

VAT -7.04 8.74

18 A18 Total Yearly 19.49 38.79

162


Sales tax 16.86 17.94

VAT 5.98 13.34

Source : Field Work

6.2.2 Profile of Consumer Goods Industries:

This section covers the information of 24 Consumer Goods Industries regarding turnover,

sales tax/ Value Added Tax since 2001-02 to 2008-09.

Table 6.4 SALES TAX / VAT ON CONSUMER GOODS IND.

(Rs In Crores)

Year

Sales

Sales Tax /

VAT

Sales tax

VAT

% of Sales

tax on Sales % of VAT

on Sales

2001-02 10,178.20 136.53 136.53 - 1.34 -

2002-03 10,862.87 147.06 147.06 - 1.35 -

2003-04 11,072.90 167.45 167.45 - 1.51 -

2004-05 11,701.01 184.26 184.26 - 1.57 -

2005-06 14,151.54 248.78 - 248.78 - 1.76

2006-07 17,452.41 396.63 - 396.63 - 2.27

2007-08 20,706.69 469.38 - 469.38 - 2.27

2008-09 23,109.12 486.93 - 486.93 - 2.11

CGR 13.34 23.30 10.84 24.40

CV 31.08 49.51 11.59 23.44

Co-efficient 0.03 0.03 0.02

Std. Error 0.002 0.007 0.006

T-Test 15.86 4.76 4.7

R 0.98 0.95 0.95

R2 0.97 0.919 0.917



2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09. 3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression.

163

Table 6.4 reveals that Compound Growth Rate of Consumer goods industries since 2001-

02 to 2008-09 regarding total sales is 13.34 per cent and Sales Tax/ Value Added Tax is

23.30 per cent. Where as coefficient of variation about total sales is 31.08 per cent and

Sales Tax/ VAT is 49.51 per cent during same period. But Compound Growth Rate of

Consumer goods industries only for Sales tax was 10.84 per cent and coefficient of

variation was 11.59 per cent during 2001-02 to 2004-05. Moreover Compound Growth

Rate of Consumer Goods industries only for VAT was 24.40 per cent and coefficient of

variation was 23.44 per cent during 2005-06 to 2008-09. Therefore it states that

Consumer Goods Industries are More Beneficial under Sales Tax system as CGR of Sales

Tax is 10.84 per cent whereas CGR for VAT is 24.40 per cent. So we can say that The

Profit of Consumer goods industries is reduced under VAT system than Sales Tax.

Regarding Consumer Goods industry Regression analysis shows that there is positive

relationship between sales and Sales Tax, Sales and VAT of an Organization during

2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover the co-relation

between sales and Sales Tax is closely related with 1 (0.95) and co-relation between

Sales and Value Added Tax is also close to 1 (0.95) during the same period.

164

Fig. 6.3 the Value of CGR of Consumer goods Fig. 6.4 the Value of regression of consumer

Industries during 2001-02 to 2008-09. Goods Industries during 2001-02 to 2008-09.

TABLE 6.5 CGR AND CV OF CONSUMER GOODS INDUSTRIES

Sr


Compound

Growth

Rate

Co-

efficient

Variance

1 B1 Total Yearly 24.82 49.99


Sales tax 10.05 11.71

VAT 15.53 15.92



Sales tax 37.20 32.41

VAT 30.26 30.59



Sales tax 62.04 47.34

VAT 29.43 27.13

165



Sales tax -28.45 51.77

VAT -52.40 75.87



Sales tax -21.56 29.14

VAT 26.32 85.84



Sales tax 38.19 36.49

VAT -12.40 14.82



Sales tax 22.77 23.27

VAT 90.03 142.56



Sales tax -23.30 29.24

VAT 40.87 38.70



Sales tax 8.51 22.13

VAT 136.22 88.78



Sales tax -17.28 24.49

VAT 7.18 34.64

11 B11 Total Yearly 14.30 29.68



VAT -20.31 31.43

12 B12 Total Yearly 13.23 31.72


Sales tax -2.04 26.73

VAT -21.80 43.01


166


Sales tax 35.35 49.32

VAT 14.17 21.12

14 B14 Total Yearly 19.11 40.52


Sales tax 14.30 15.13

VAT 8.90 14.58

15 B15 Total Yearly -8.47 23.59


Sales tax -16.02 20.88

VAT -26.94 38.97

16 B16 Total Yearly 18.89 39.27


Sales tax -23.30 29.24

VAT 40.87 38.70

17 B17 Total Yearly -3.88 29.13


Sales tax -40.41 58.94

VAT -1.81 17.46




VAT -69.30 74.05

19 B19 Total Yearly 16.30 36.24


Sales tax 35.57 30.87

VAT 4.98 8.09

20 B20 Total Yearly 27.82 53.67


Sales tax -23.83 31.07

VAT 61.20 43.73

21 B21 Total Yearly 24.82 49.99


Sales tax 10.05 11.71

VAT 15.53 15.92



167

Sales tax 37.20 32.41

VAT 30.26 30.59

23 B23 Total Yearly 29.33 59.97


Sales tax 62.04 47.34

VAT 29.43 27.13



Sales tax -21.56 29.14

VAT 26.32 85.84

Source: Field Work

6.2.3 Profile of Infrastructure Industries:

This section covers the information of 10 Infrastructure Industries regarding turnover,


168

Table 6.6 SALES TAX / VAT ON INFRASTRUCTURE IND.

(Rs In Crores)


/ VAT Sales tax VAT

% of

Sales

tax on

Sales

% of

VAT

on Sales

2001-02 48,250.43 271.47 271.47 - 0.56 -

2002-03 53,250.00 533.80 533.80 - 1.00 -

2003-04 59,880.85 876.49 876.49 - 1.46 -

2004-05 78,823.94 618.22 618.22 - 0.78 -

2005-06 95,561.16 2,754.85 - 2,754.85 - 2.88

2006-07 126,093.51 1,235.43 - 1,235.43 - 0.98

2007-08 149,126.95 675.42 - 675.42 - 0.45

2008-09 156,641.73 370.09 - 370.09 - 0.24

CGR 20.72 7.24 34.51 (48.45)

CV 42.19 81.71 37.56 72.90

Co-efficient 0.001 0.009 -0.038

Std. Error 0.008 0.012 0.004

T-Test 0.168 0.735 9.03

R 0.06 0.46 0.98

R2 0.005 0.213 0.976




Table 6.6 reveals that Compound Growth Rate of Infrastructure industries since 2001-02

to 2008-09 regarding total sales is 20.72 per cent and Sales Tax/ VALUE ADDED TAX

is 7.24 per cent. whereas coefficient of variation about total sales is 42.19 per cent and

Sales Tax/ VAT is 81.71 per cent during same period. But Compound Growth Rate of

Infrastructure industries only for Sales tax was 34.51 per cent and coefficient of variation

was 37.56 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of

169

Infrastructure industries only for Value Added Tax was (48.45) per cent and coefficient

of variation was 72.90 per cent during 2005-06 to 2008-09. Therefore it states that

Infrastructure Industries are More Beneficial under Value Added Tax system as CGR of

Sales Tax is 34.51 per cent whereas CGR for Value Added Tax is (48.45) per cent. So we

can say that The Profit of Infrastructure industries is increased Value Added Tax system

than Sales Tax. Regarding Infrastructure Industry Regression analysis shows that there is

less positive relationship between sales and Sales Tax then Sales and VALUE ADDED

TAX of an Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09

respectively. Moreover the co-relation between sales and Value Added Tax is closely

related with 1 (0.98) and co-relation between Sales and Sales Tax is far below 1 (0.46)

during the same period.

Fig. 6.5 The Value of CGR of Infrastructure Fig. 6.6 The Value of regression of

Infrastructure Ind. during 2001-02 to 2008-09. Industries during 2001-02 to 2008-09.

-50

-40

-30

-20

-10

0

10

20

30

40

Sales tax VAT

Compound Growth

Rate

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Sales tax VAT

Regression

170

TABLE 6.7 CGR AND CV OF INFRASTRUCTURE INDUSTRIES

Sr


Compound

Growth

Rate

Co-

efficient

Variance

1 C1 Total Yearly 14.16 33.48


Sales tax -6.82 8.45

VAT 1.97 6.31



Sales tax 12.24 27.48

VAT -27.17 39.15



Sales tax -7.36 25.07

VAT 72.24 56.30



Sales tax 32.10 43.01

VAT -56.48 83.64



Sales tax 57.89 112.97

VAT 71.53 50.44



Sales tax 49.26 57.99

VAT 11.69 12.21



Sales tax -66.17 85.06

VAT 17.59 51.80



Sales tax 51.54 45.24

VAT 8.78 25.88

171



Sales tax 49.26 57.99

VAT 11.69 12.21



Sales tax -66.17 85.06

VAT 17.59 51.80

Source: Field Work

6.2.4 Profile of Chemical Industries: This section covers the information of 23

Chemical Industries regarding turnover, sales tax/ Value Added Tax since 2001-02 to

2008-09.

Table 6.8 SALES TAX / VAT ON CHEMICAL INDUSTRIES

(Rs In Crores)


/ VAT Sales tax VAT

% of Sales

tax on

Sales

% of

VAT

on Sales

2001-02 4055.57 33.18 33.18 - 0.82 -

2002-03 4501.83 45.04 45.04 - 1.00 -

2003-04 5637.18 51.14 51.14 - 0.91 -

2004-05 7757.77 81.78 81.78 - 1.05 -

2005-06 10923.98 80.57 - 80.57 - 0.74

2006-07 14361.72 117.37 - 117.37 - 0.82

2007-08 17999.84 120.31 - 120.31 - 0.67

2008-09 21370.67 125.81 - 125.81 - 0.59

CGR 24.67 22.02 32.75 14.59

CV 56.31 41.72 33.99 16.07

Co-efficient 0.005 0.12 0.004

Std. Error 0.001 0.001 0.002

T-Test 7.62 8.29 2.47

R 0.95 0.29 0.86

R2 0.906 0.972 0.753


172



Table 6.8 reveals that Compound Growth Rate of Chemical industries since 2001-02 to

2008-09 regarding total sales is 24.67 per cent and Sales Tax/ Value Added Tax is 22.02

per cent.where as coefficient of variation about total sales is 56.31 per cent and Sales

Tax/ Value Added Tax is 41.72 per cent during same period. But compound growth rate

of these industries only for Sales tax was 32.75 per cent and coefficient of variation was

33.99 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of these

industries only for Value Added Tax was 14.59 per cent and coefficient of variation was

16.07 per cent during 2005-06 to 2008-09. Therefore it states that Chemical Industries are

More Beneficial under Value Added Tax system as CGR of Sales Tax is 32.75 per cent

whereas CGR for Value Added Tax is 14.59 per cent. So we can say that The Profit of

Chemical industries is increased under Value Added Tax system than Sales Tax.

Regression analysis shows that there is less positive relationship between sales and Sales

Tax then Sales and Value Added Tax of an Organization during 2001-02 to 2004-05 and

2004-05 to 2008-09 respectively. Moreover the co-relation between sales and Value

Added Tax is closely related with 1 (0.86) and co-relation between Sales and Sales Tax

is far below 1 (0.29) during the same period.

173

Fig. 6.7 The Value of CGR of Chemical Fig. 6.8 The Value of regression of Chemical

Industries during 2001-02 to 2008-09. Industries during 2001-02 to 2008-09.

Table 6.9 CGR AND CV OF CHEMICAL INDUSTRIES

Sr


Compound

Growth

Rate

Co-

efficient

Variance

1 D1 Total Yearly 15.59 34.30


Sales tax -19.89 38.52

VAT 15.59 40.55

2 D2 Total Yearly -1.95 22.90


Sales tax 21.34 21.12

VAT -23.32 30.26



174

Sales tax 26.95 35.91

VAT 25.00 28.05



Sales tax 19.74 20.25

VAT 4.02 11.68



Sales tax 92.05 63.74

VAT 14.84 19.73



Sales tax 14.90 17.49

VAT 5.38 8.61




VAT -38.40 68.85



Sales tax 43.18 43.50

VAT -26.61 54.43



Sales tax 53.78 66.97

VAT 31.33 28.22

10 D10 Total Yearly 24.13 45.55


Sales tax 41.65 40.91

VAT 9.70 13.72

11 D11 Total Yearly 15.59 34.30


Sales tax -19.89 38.52

VAT 15.59 40.55

12 D12 Total Yearly -1.95 22.90


Sales tax 21.34 21.12

175

VAT -23.32 30.26

13 D13 Total Yearly 19.19 38.40


Sales tax 26.95 35.91

VAT 25.00 28.05



Sales tax 92.05 63.74

VAT 14.84 19.73



Sales tax 92.05 63.74

VAT 14.84 19.73



Sales tax 14.90 17.49

VAT 5.38 8.61




VAT -38.40 68.85

18 D18 Total Yearly 33.64 65.89


Sales tax 43.18 43.50

VAT -26.61 54.43

19 D19 Total Yearly 51.85 71.41


Sales tax 31.33 66.97

VAT 31.33 28.22

20 D20 Total Yearly 51.85 71.41


Sales tax 53.78 66.97

VAT 31.33 28.22

21 D21 Total Yearly 24.13 45.55


Sales tax 41.65 40.91

VAT 9.70 13.72

176

22 D22 Total Yearly 51.85 71.41


Sales tax 53.78 66.97

VAT 31.33 28.22

23 D23 Total Yearly 33.64 65.89


Sales tax 43.18 43.50

VAT -26.61 54.43

Source: Field Work

6.2.5 Profile of Pharmaceutical Industries:

This section covers the information of 25 Pharmaceutical Industries regarding turnover,


TABLE 6.10 SALES TAX / VAT ON PHARMACEUTICALS IND.

(Rs In Crores)


/ VAT Sales tax VAT

% of Sales

tax on

Sales

% of

VAT

on Sales

2001-02 7,088.87 243.24 243.24 - 3.43 -

2002-03 8,380.98 336.22 336.22 - 4.01 -

2003-04 9,082.50 328.15 328.15 - 3.61 -

2004-05 10,888.76 368.69 368.69 - 3.39 -

2005-06 11,839.56 326.71 - 326.71 - 2.76

2006-07 13,748.98 332.26 - 332.26 - 2.42

2007-08 17,134.96 356.75 - 356.75 - 2.08

2008-09 15,681.99 344.78 - 344.78 - 2.20

CGR 13.26 3.21 13.01 2.35

CV 28.50 10.74 14.52 3.42

Co-efficient 0.006 0.03 0.006

Std. Error 0.003 0.01 0.001

T-Test 1.8 2.9 6.9

R 0.59 0.89 0.98

R2 0.352 0.809 0.960


177



Table 6.10 reveals that Compound Growth Rate of Pharmaceutical Industries since 2001-

02 to 2008-09 regarding total sales is 13.26 per cent and Sales Tax/ VAT is 3.21 per cent.

where as coefficient of variation about total sales is 28.50 per cent and Sales Tax/ Value

Added Tax is 10.74 per cent during same period. But compound growth rate of these

industries only for Sales tax was 13.01 per cent and coefficient of variation was 14.52 per

cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of Pharmaceutical

Industries only for Value Added Tax was 2.35 per cent and coefficient of variation was

3.42 per cent during 2005-06 to 2008-09. Therefore it states that Pharmaceutical

Industries are More Beneficial under Value Added Tax system as CGR of Sales Tax is

13.01 per cent whereas CGR for Value Added Tax is 2.35 per cent. So we can say that

The Profit of Pharmaceutical Industries is increased under Value Added Tax system than

Sales Tax. Regression analysis shows that there is positive relationship between sales and

Sales Tax as well as Sales and Value Added Tax of an Organization during 2001-02 to

2004-05 and 2004-05 to 2008-09 respectively. Moreover the co-relation between sales

and Value Added Tax is closely related with 1 (0.98) and co-relation between Sales and

Sales Tax also closely related to 1 (0.89) during the same period.

178

Fig. 6.9 the Value of CGR of Pharmaceutical Fig.6.10 Value of regression of pharmaceutical


0.84

0.86

0.88

0.9

0.92

0.94

0.96

0.98

Sales tax VAT

Regression

TABLE 6.11 CGR AND CV OF PHARMACEUTICAL

INDUSTRIES

Sr No. Name of the Industry

Compound

Growth

Rate

Co-

efficient

Variance

1 E1 Total Yearly 8.82 20.74


Sales tax 7.92 8.59

VAT 11.02 11.80

2 E2 Total Yearly -0.08 17.88



VAT -5.17 35.25



179

Sales tax 11.33 17.37

VAT -10.32 15.67

4 E4 Total Yearly -7.46 29.56


Sales tax -11.91 19.92

VAT -22.82 30.57



Sales tax 15.74 16.57

VAT 8.00 9.88



Sales tax 15.97 48.49

VAT -3.79 32.25



Sales tax 15.93 16.63

VAT 3.97 4.65



Sales tax 15.15 15.74

VAT -7.76 13.86



Sales tax -11.72 24.72

VAT 5.43 16.49



Sales tax 19.03 22.12

VAT -9.81 11.51

11 E11 Total Yearly 13.03 31.68


Sales tax -5.98 11.78

VAT 5.74 14.24

12 E12 Total Yearly 35.60 70.53


Sales tax -39.41 49.76

180

VAT 11.70 57.85


3 Sales Tax/ VAT 4.67 62.18

Sales tax -67.77 80.33

VAT 47.70 41.50



Sales tax -31.98 47.08

VAT 6.44 8.41

15 E15 Total Yearly 15.01 34.69


Sales tax 13.40 19.58

VAT -14.03 19.59



Sales tax 7.92 8.59

VAT 11.02 11.80

17 E17 Total Yearly -0.08 17.88



VAT -5.17 35.25

18 E18 Total Yearly 16.57 33.66


Sales tax 11.33 17.37

VAT -10.32 15.67

19 E19 Total Yearly -7.46 29.56


Sales tax -11.91 19.92

VAT -22.82 30.57

20 E20 Total Yearly 24.13 53.74


Sales tax 15.74 16.57

VAT 8.00 9.88



Sales tax 15.97 48.49

VAT -3.79 32.25

181



Sales tax 15.15 15.74

VAT -7.76 13.86



Sales tax -67.77 80.33

VAT 47.70 41.50

24 E24 Total Yearly 13.03 31.68


Sales tax -5.98 11.78

VAT 5.74 14.24



Sales tax 19.03 22.12

VAT -9.81 11.51

Source: Field Work

6.2.6 Profile of All Industries Combined:

This section covers the information of all 100 Industries regarding turnover, sales tax/

Value Added Tax since 2001-02 to 2008-09.

182

TABLE 6.12 SALES TAX / VAT ON ALL COMBINED INDUSTRIES

(Rs In Crores)


/ VAT Sales tax VAT

% of Sales

tax on

Sales

% of

VAT

on Sales

2001-02 71,074.21 709.51 709.51 - 1.00 -

2002-03 78,689.18 1,092.08 1,092.08 - 1.39 -

2003-04 87,760.25 1,457.75 1,457.75 - 1.66 -

2004-05 111,600.26 1,293.04 1,293.04 - 1.16 -

2005-06 135,350.78 3,453.29 - 3,453.29 - 2.55

2006-07 174,939.21 2,129.90 - 2,129.90 - 1.22

2007-08 208,631.06 1,668.64 - 1,668.64 - 0.80

2008-09 220,794.25 1,370.05 - 1,370.05 - 0.62

CGR 19.65 11.10 23.23 -26.04

CV 40.58 47.50 24.53 36.96

Co-efficient 0.004 0.012 -0.24

Std. Error 0.006 0.010 0.003

T-Test 0.788 1.249 -7.229

R 0.306 0.662 0.981

R2 0.094 0.438 0.963




Table 6.12 reveals that Compound Growth Rate of all Industries since 2001-02 to 2008-

09 regarding total sales is 19.65 per cent and Sales Tax/ Value Added Tax is 11.10 per

cent. Whereas coefficient of variation about total sales is 40.58 per cent and Sales Tax/

Value Added Tax is 47.50 per cent during same period. But compound growth rate of

these industries only for Sales tax was 23.23 per cent and coefficient of variation was

24.53 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of all these

Industries only for Value Added Tax was (26.04) per cent and coefficient of variation

183

was 36.96 per cent during 2005-06 to 2008-09. Therefore it states that All Industries

taken together are More Beneficial under Value Added Tax system as CGR of Sales Tax

is 23.23 per cent whereas CGR for Value Added Tax is (26.04) per cent. So we can say

that the profit of all industries is increased under Value Added Tax system than Sales

Tax. Regression analysis shows that there less is positive relationship between sales and

Sales Tax then Sales and Value Added Tax of an organization during 2001-02 to 2004-05

and 2004-05 to 2008-09 respectively. Moreover the co-relation between sales and Value

Added Tax is closely related with 1 (0.98) and co-relation between sales and sales tax far

away from 1 (0.66) during the same period.

Fig. 6.11 the Value of CGR of All Fig.6.12 Value of regression of all


-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

Sales tax VAT

Compound Growth

Rate

184

6.2.7 Profile of Small Industries:

This section covers the information of 54 Small Industries regarding turnover, sales tax/


TABLE 6.13 SALES TAX /VAT ON SMALL INDUSTRIES (Rs in Crore)

Year Sales Sales

Tax/VAT

Sales

tax VAT

% of Sales

tax on

sales

% of

VAT on

Sales

2001-02 2,250.43 67.70 67.70 3.01

2002-03 2,438.23 76.43 76.43 3.13 2003-04 2,828.91 83.61 83.61 2.96

2004-05 3,453.68 98.13 98.13 2.84 2005-06 4,014.58 100.86 100.86 2.51

2006-07 4,588.87 128.62 128.62 2.80

2007-08 5,274.65 136.77 136.77 2.59 2008-09 5,579.70 147.33 147.33 2.64

CGR 15.10 12.20 12.79 12.73 CV 31.29 26.29 13.68 13.41

Co-efficient 0.23 0.24 0.27

Std. Error 0.001 0.002 0.005 T-Test 16.513 10.338 5.024

R 0.98 0.99 0.96

R2 0.97 0.98 0.92




Table 6.13 reveals that Compound Growth Rate of small industries since 2001-02 to 2008-09

regarding total sales is 15.10 per cent and Sales Tax/ Value Added Tax is 12.20 per cent.

Whereas coefficient of variation about total sales is 31.29 per cent and Sales Tax/ Value Added

Tax is 26.29 per cent during same period. But compound growth rate of these industries only

for Sales tax was 12.79 per cent and coefficient of variation was 13.68 per cent during 2001-02

185

to 2004-05. Moreover Compound Growth Rate of all small industries only for Value Added

Tax was 12.73 per cent and coefficient of variation was 13.41 per cent during 2005-06 to

2008-09. Therefore it states that all small industries taken together are Beneficial under Value

Added Tax system as CGR of Sales Tax is 12.79 per cent whereas CGR for Value Added Tax

is 12.73 per cent. So we can say that The Profit of All small industries is slightly increased

under Value Added Tax system than Sales Tax. Regression analysis shows that there is

positive relationship between sales and Sales Tax as well as Sales and Value Added Tax of an

organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover the

co-relation between sales and Sales Tax is closely related with 1 (0.99) and co-relation

between Sales and Value Added Tax is 0.96 during the same period.

Fig. 6.13 the Value of CGR of small Fig.6.14 Value of regression of small


186

6.2.8 Profile of Medium Industries:

This section covers the information of 31 Medium Industries regarding turnover, sales tax/


TABLE 6.14 SALES TAX /VAT ON MEDIUM INDUSTRIES

(Rs in Crore)

Year Sales Sales

Tax/VAT

Sales

tax VAT

% of

Sales tax

on sales

% of

VAT on

Sales

2001-02 8,600.44 277.74 277.74 3.23 2002-03 10,640.41 370.61 370.61 3.48

2003-04 11,263.95 387.50 387.50 3.44

2004-05 13,413.60 480.52 480.52 3.58 2005-06 16,342.45 521.44 521.44 3.19

2006-07 19,711.25 661.70 661.70 3.36 2007-08 23,269.74 750.79 750.79 3.23

2008-09 24,573.47 764.45 764.45 3.11 CGR 16.93 15.77 18.40 13.59

CV 35.19 32.38 18.98 14.35

Co-efficient 0.3 0.42 0.3 Std. Error 0.001 0.001 0.004

T-Test 21.62 29.27 7.76 R 0.99 0.99 0.98

R2 0.98 0.99 0.96




Table 6.14 reveals that Compound Growth Rate of Medium Industries since 2001-02 to 2008-

09 regarding total sales is 16.93 per cent and Sales Tax/ Value Added Tax is 15.77 per cent.

Whereas coefficient of variation about total sales is 35.19 per cent and Sales Tax/ Value Added

Tax is 32.38 per cent during same period. But compound growth rate of these industries only

187

for Sales tax was 18.40 per cent and coefficient of variation was 18.98 per cent during 2001-02

to 2004-05. Moreover Compound Growth Rate of All medium Industries only for Value

Added Tax was 13.59 per cent and coefficient of variation was 14.35 per cent during 2005-06

to 2008-09. Therefore it states that All Medium Industries taken together are More Beneficial

under Value Added Tax system as CGR of Sales Tax is 18.40 per cent whereas CGR for Value

Added Tax is 13.59 per cent. So we can say that The Profit of All Medium Industries is

increased under Value Added Tax system than Sales Tax. Regression analysis shows that there

is positive relationship between sales and Sales Tax as well as Sales and Value Added Tax of

an Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover

the co-relation between sales and Value Added Tax is closely related with 1 (0.98) and co-

relation between Sales and Value Added Tax is 0.99 during the same period.

Fig. 6.15 the Value of CGR of medium Fig.6.16 Value of regression of medium


188

6.2.9 Profile of Large Industries:

This section covers the information of 15 Large Industries regarding turnover, sales tax/ vat

since 2001-02 to 2008-09.

TABLE 6.15 SALES TAX /VAT ON LARGE INDUSTRIES

(Rs in Crore)

Year Sales Sales

Tax/VAT

Sales

tax VAT

% of

Sales tax

on sales

% of

VAT on

Sales

2001-02 60,223.33 364.07 364.07 0.60

2002-03 65,610.55 645.04 645.04 0.98 2003-04 73,667.40 986.64 986.64 1.34

2004-05 94,732.99 714.39 714.39 0.75 2005-06 114,993.76 2,830.99 2,830.99 2.46

2006-07 150,639.09 1,339.58 1,339.58 0.89

2007-08 180,086.67 781.08 781.08 0.43 2008-09 190,641.07 458.27 458.27 0.24

CGR 20.20 5.96 27.73 -45.13 CV 41.64 73.23 32.69 67.28

Co-efficient 0.001 0.008 -0.31 Std. Error 0.006 0.011 0.004

T-Test 0.131 0.716 -7.995

R 0.54 0.45 0.98

R2 0.003 0.204 0.97




Table 6.10 reveals that Compound Growth Rate of large Industries since 2001-02 to

2008-09 regarding total sales is 20.20 per cent and Sales Tax/ Value Added Tax is 5.96

per cent. Whereas coefficient of variation about total sales is 41.64 per cent and Sales

Tax/ Value Added Tax is 73.23 per cent during same period. But compound growth rate

of these industries only for Sales tax was 27.73 per cent and coefficient of variation was

32.69 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of All

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Large Industries only for Value Added Tax was (45.13) per cent and coefficient of

variation was 67.28 per cent during 2005-06 to 2008-09. Therefore it states that All Large

Industries taken together are More Beneficial under Value Added Tax system as CGR of

Sales Tax is 27.73 per cent whereas CGR for Value Added Tax is (45.13) per cent. So

we can say that The Profit of All Large Industries is increased under Value Added Tax

system than Sales Tax. Regression analysis of all large shows that there is positive

relationship between sales and Sales Tax as well as Sales and Value Added Tax of an

Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover

the co-relation between sales and Value Added Tax is closely related with 1 (0.98) and

co-relation between Sales and Sales taxis 0.45 during the same period.

Fig. 6.17 the Value of CGR of large Fig.6.18 Value of regression of large


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6.3 CONCLUSION:

Maharashtra is a leading state in most of the aspect for which this chapter has analyzed

what extent Value Added Tax is profitable to different Industries. The above analysis

reveals that

Capital goods industries were paying more sales tax (16.75) to the government

during 2001-02 to 2004-05. However after introduction of the value added tax the same

industries were contributing less revenue (0.26) to the government. Therefore it indicates

that introduction of value added tax has been become profitable to capital goods

industries.

Consumer goods industries were paying less sales tax (10.84) to the government


industries were contributing more revenue (24.40) to the government. Therefore it

indicates that introduction of value added tax has been reduced the Profit of Consumer

goods industries.

Infrastructure industries were paying more sales tax (34.51) to the government


industries were contributing less revenue (-48.45) to the government. Therefore it

indicates that because of introduction of value added tax Infrastructure Industries has

become more Profitable.

Chemical Industries were paying more sales tax (32.75) to the government during

2001-02 to 2004-05. However after introduction of the value added tax the same

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industries were contributing less revenue (14.59) to the government. Therefore it

indicates that introduction of value added tax has been become profitable to chemical

industries.

Pharmaceutical industries were paying more sales tax (13.01) to the government



that introduction of value added tax has been become profitable to Pharmaceutical

industries.

A study reveals that all industries were paying more sales tax (23.23) to the

government during 2001-02 to 2004-05. However after introduction of the value added

tax the same industries were contributing less revenue (-26.04) to the government.

Therefore it indicates that introduction of value added tax has been become profitable to

these organisation.

Small industries were paying more sales tax (12.79) to the government during



indicates that introduction of value added tax has been become slightly profitable to small

industries.

Medium industries were paying more sales tax (18.40) to the government during



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indicates that introduction of value added tax has been become profitable to Medium

industries.

Large industries were paying more sales tax (27.73) to the government during



indicates that introduction of value added tax has been become profitable to Large

industries.

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Chapter 7

FINDINGS and SUGGESTIONS

7.1 Introduction

Indirect tax reforms have been as integral part of the liberalization process since new

economic reforms. Value Added Tax / Sales Tax is the type of indirect taxes. Since past

two decades the major reforms which are introduced in the indirect tax structure of India.

A progressive and welfare oriented nation like India tries to keep a balance between

direct and indirect tax structure. This chapter contains the major findings and suggestions

of the research work related to present taxation policies, Problems associated with the

implementation of sales tax and value added tax in India.

7.2 Existing Tax Policies:

7.2.1 Model versus Reality:

The world over tax reform has been an ongoing process, influenced by economic theory,

evolving economic structure, exigencies of practical tax administration and the lessons of

experience. The quarter century between 1965 and 1990 witnessed an unusually strong

wave of tax reforms as most countries of the world reduced their reliance on foreign trade

taxes, introduced some form of value added taxation (VAT) in domestic taxes on goods

and services and streamlined income and company taxes, partly in response to the

imperatives of increasing global economic integration. By the late 1980s there was a

substantial consensus on the principal desiderata of a national tax system. Its features

included.

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(i) A broad-based, consumption VAT, with a primary rate in the range of 10 to 20

per cent, with crediting provisions and zero rating of exports. This was to be the main

revenue earner among indirect taxes.

(ii) For equity, a consumption VAT buttressed by luxury taxes at two or three

rates on a small number of income-elastic luxury goods, applicable to both imports and

domestic products.

(iii) Low import tariffs that were as uniform as possible, with well-functioning

export rebate or duty drawback schemes to compensate exporters for duties suffered on

inputs. There were to be no export duties.

(iv) Personal income taxes that fell on a broad base, uneroded by numerous

exemptions and tax preferences. A rate structure that was moderately progressive with

three or four slabs and the top marginal rate in the range of 30 to 40 per cent to promote

compliance. Withholding (tax deduction at source) was to be widely prevalent on

incomes from wages, interest and dividends.

(v) Company taxation at a single rate comparable to the maximum personal

income tax rate. Exemptions and tax preferences were to be strictly limited.

(vi) Tax law and administration that were simple and effective, with strong

reliance on modern systems and technology for information gathering, collation and

analysis and transparent procedures for penalties and appeals. Judged by this six-point,

received wisdom on tax policy, displayed similar, massive variance, ranging from zero to

over 200 per cent. Their economic impact was made even more opaque by the prevailing

regime of detailed and tight quantitative restrictions on imports through a complex

system of import licensing. The tax structure for personal income and wealth was, if

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anything, even more bizarre. Income tax rates were progressive with a vengeance. In

1973-74 there were 11 different tax slabs with rates ranging from an entry level of 10 per

cent and climbing inexorably to the top marginal rate of 85 per cent. With a prevailing

surcharge of 15 per cent, the effective top marginal rate was actually 97.75 per cent!

Since there were significant taxes on net wealth, the combined marginal incidence of

income and wealth taxes at the higher income brackets was frequently in excess of 100

per cent. The predictable result was widespread evasion and avoidance of such taxes.

Company tax rates were also high at around 60 per cent, with rate differentials across

‘widely-held’ and ‘closely-held’ companies. There were complicated tax preferences for

new industrial ventures in particular sectors. This complex tax structure spawned equally

complex systems of tax administration. In sum, India’s tax system in the mid-1970s had

none of the desirable features of a good national tax system noted above. Tax rates were

extremely high and varied with no justification. Inputs were taxed indiscriminately. The

implications for economic efficiency were unequivocally negative. The system had low

built-in revenue elasticity since it encouraged widespread evasion and avoidance. Equity

was ill-served by the heavy dependence on indirect taxes with opaque incidence. Tax

administration procedures and practices were complex and frequently arbitrary. The

system was badly in need of serious reform.

7.2.2 Direct Tax Reforms: The First Wave

The direct tax structure of 1973-74 was the product of two decades of tax policy changes

to bring about a ‘a socialistic pattern of society’ and raise tax revenues to finance a public

investment led strategy of planned economic development. The Taxation Enquiry

Commission report of 1954 [GoI 1954] emphasised the need to raise more revenues

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through higher taxes, including through greater progressivity of direct taxes. Its

recommendations were largely implemented. This approach gained further impetus from

Kaldor’s (1956) prescriptions, which ushered in a set of ‘integrated direct taxes’,

including an expenditure tax, a wealth tax and a gift tax in addition to the already extant

taxes on income, capital gains and estates. As Thimmaiah (2002) observes, “The system

of direct taxes introduced on the advice of Kaldor encouraged the emergence of the black

money phenomenon in India ”In ensuing years the scope of these taxes was expanded and

the rates were inexorably raised. One gets a flavour of the prevailing tax ideology of the

times from perusing the budget speeches of those years. Thus, Indira Gandhi, presenting

the budget for 1970-71, said “ Taxation is also a major instrument in all modern societies

to achieve greater equality of incomes and wealth. It is, therefore, proposed to make our

direct tax system serve this purpose by increasing income taxation at higher levels as well

as by substantially enhancing the present rates of taxation on wealth and gifts. The

marginal rates of income taxation will be increased progressively on all personal incomes

above Rs 40,000 per year. With the addition of the surcharge at 10 per cent, the

maximum rate of 93.5 per cent will now be reached in the slab over Rs 2 lakhs as against

82.5 per cent in the slab over Rs 2 ½ lakhs at present”. Not to be outdone, the next

finance minister, Y B Chavan, raised the surcharge on income taxes to 15 per cent in

1971-72 , thereby taking the effective top marginal income tax rate 97.75 per cent. He

also upped the rates of capital gains tax. The zeal in raising tax rates was not matched by

income tax revenue collections, which remained stuck at about 1 per cent of GDP

Fortunately, these absurd levels of income taxation had reached their zenith. The

Wanchoo Direct Taxes Enquiry Committee Report [Go I 1971] took a forthright position

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on the matter. It pointed out when “the marginal rate of taxation is as high as 97.75 per

cent, the net profit on concealment can be as much as 4,300 per cent of the after tax

income. We will not be surprised that placed in such a situation, it would be difficult for a

person to resist the temptation to evade taxes.” The committee blamed the extraordinarily

high income tax rates as the principal cause of tax evasion and recommended a reduction

of the effective top marginal rate to 70 per cent. In the budget for 1974-75 finance

minister Chavan reversed his earlier stance and implemented this recommendation by

reducing the top rate to 70 per cent and the surcharge 9 to 10 per cent.Somewhat

unfortunately, Chavan combined this sensible reduction in income tax rates with another

hike in wealth tax rates. The income tax rate-cutting precedent was continued in three of

the budgets in the ensuing decade, although the budgets of the Janata period (1977-80)

witnessed setbacks. Buoyed by the strong increase in income tax revenues in 1974-75 and

1975-76, Chavan’s successor C Subramanium, attributed much of it to improved

compliance and cut the effective top rate further to 66 per cent (60 per cent plus the 10

per cent surcharge) in his budget for 1976-77. In contrast to Chavan, he also reduced the

rates of wealth taxation. During the Janata government both H M Patel and Charan Singh

increased the income tax surcharge and the wealth tax rates. By 1979-80 the effective top

marginal rate of income tax was back up to 72 per cent and the top wealth tax rate was

increased to a peak (by Charan Singh) of 5 per cent for net wealth over Rs 15 lakhs. With

the return of the Congress to power, R Venkataraman reverted the top effective tax rate to

66 per cent by cutting the surcharge back to 10 per cent and gave some relief on wealth

tax slabs. His successor, Pranab Mukherjee, displayed some ambivalence in his first two

budgets; indeed, in the second he

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raised the surcharge form 10 to 12.5 per cent. However, in his third and final budget, for

1984-85, Mukherjee lowered the top effective rate to 62 per cent by cutting the top

marginal rate to 55 per cent, while leaving the surcharge unchanged at 12.5 per cent. This

first wave of direct tax reforms brought a semblance of sanity to top personal income tax

rates. But the large number of slabs and relatively narrow bands continued. Even in 1984-

85 there were still eight income tax slabs. Furthermore, there were no major initiatives in

regard to company taxation. As for indirect taxation, the far-reaching recommendations

of the 1978 the committee continued to languish on the finance ministry’s shelves

7.2.3 V P Singh’s Reforms (1985-87)

Modern tax reform was really launched in India during V P Singh’s two year stewardship

of the finance ministry in the Rajiv Gandhi Congress government. As Acharya (1988)

points out, there were several reasons to support this overall assessment.

First, the reforms addressed both direct and indirect taxes in a reasonably integrated

manner. Second, for the first time, a mediumterm tax reform strategy was explicitly

articulated and presented to Parliament in the form of the Long Term Fiscal Policy

(LTFP) policy paper of December 1985 [GoI 1985]. Third, in formulating tax policy,

serious weight was accorded to issues of resource allocation efficiency. Fourth, tax policy

also recognised the importance of stability and predictability. Fifth, there was a conscious

and explicit effort to shift the weight of economic management in favour of non-

discretionary, fiscal and financial policies and away from discretionary physical controls.

Finally, there was a concerted and serious effort to improve tax administration. In V P

Singh’s first budget, for 1985-86, the focus was on direct taxes. Despite the rate

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reductions of the previous decade, the combined burden of income and wealth taxes was

still very high for honest tax payers. As the Economic Administration Reforms

Commission’s Report No 22 [GoI 1983] pointed out, if the pre-tax return on wealth was

assumed at 10 per cent, then a person with net wealth of 12 lakhs (and no other income)

suffered a combined marginal tax of 97.5 per cent on his income, even though the top

income tax rate was 62 per cent. And if his net wealth was 18 lakhs or higher, the

combined marginal tax rate rose effectively to 117.5 per cent! Little wonder that for

1980-81 Acharya and Associates (1986) estimated the scale of tax-evaded income to be

over double the amount actually declared for tax. Against this background, V P Singh cut

the top marginal income tax rate from 62 to 50 per cent and that for wealth taxfrom 5 to 2

per cent. He also reduced the number of income tax slabs from eight to four. Estate duty

was abolished. At the same time he brought down the basic rate of company tax (for

widely held companies) to 50 per cent and unified the several rates applicable for

different categories of closely held companies at 55 per cent. Taken together, these

measures constituted the most comprehensive reform of direct taxes in India to date. A

few months later, in December 1985, V P Singh placed the LTFP in Parliament. For its

time it was a remarkable document in many ways. First, it was a completely novel

initiative to bring out a medium-term fiscal policy strategy as a public document (indeed,

nothing similar would happen for almost another 20 years). Second, it embedded tax

policy intentions within an explicit macro fiscal framework. Third, the tax policies

proposed were both comprehensive and specific. In particular, the LTFP committed the

government to sweeping reforms of both central excise and customs duties. For the

former, it recommended the phased induction of VAT principles (especially crediting of

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taxes paid on inputs) in excise taxation and conferred the name ‘MODVAT’ (short for

modified VAT) for the new system. In effect it was a commitment to implement the

‘MANVAT’ (manufacture’s VAT) recommended by the Jha Committee eight years

earlier. For customs duties, the LTFP appreciated the economic and administrative ideal

of a modest uniform tariff across all commodities but, bowing to the realities of the day,

it plumped for a three-tier customs duty structure.10 In his second budget, for 1986-87, V

P Singh delivered on many of the policy promises of the LTFP. Most importantly,

MODVAT was implemented in 37 chapters of the Central Excise Tariff, with a clear

commitment to extend the system to the remainder of the manufacturing sector. This was

a huge forward step in the reform of India’s indirect taxes. In the words of the LTFP, The

proposed reform of customs duties did not, unfortunately, find a place in the 1986-87

budget. Indeed, customs duties continued to be raised in the next few years, largely for

revenue reasons. Given the tight regime of import controls prevailing, this was not an

altogether bad thing, since it effectively transformed the scarcity premia associated with

import controls into public revenues. As a result, the share of customs duties in central

government revenues continued to increase in the latter half of the 1980s

7.2.4 Tax Reform in the 1990s

If the mid-1980s saw the launch of modern tax reform in India, the 1990s witnessed its

fruition. Shortly after coming to power in mid-1991, the Narasimha Rao/Manmohan

Singh Congress government made comprehensive tax reform one of its main reform

planks. The Tax Reforms Committee (TRC), chaired by the country’s leading public

finance authority, Raja Chelliah, was swiftly established and it quickly gave an Interim

Report (December 1991), followed by a two-part Final Report (August 1992 and January

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1993). Taken together, these three volumes of the Chelliah Committee Report [GoI 1991-

93] constitute the finest treatment of tax policy and reform issues in India in the past 30

years. The report provided an excellent combination of lucid, theoretical analysis,

empirical supporting evidence and practical policy recommendations. Among its major

tax policy recommendations were:

(i) A simple three-tier personal income tax structure, with an entry rate of 20 per cent and

a top rate of 40 per cent.

(ii) A phased reduction of the corporate tax rate to 40 per cent, with the abolition of the

distinction between widely-held and closely-held companies.

(iii) The abolition of wealth tax on all assets except certain clearly specified

‘unproductive’ assets.

(iv) A phased reduction of the extraordinarily high import duties (many above 200 per

cent in 1991) to a range of 15 to 30 per cent for manufactures and 50 per cent for certain

agricultural items by 1997-98.

(v) A wholesale restructuring of central excise to cover all manufactures, reduction of

multiple tax rates to three in the range of 10 to 20 per cent and extension of MODVAT

credit to all inputs including machinery.

(vi) Selective excises at higher rates on non-essential (luxury) consumption items.

(vii) Systematic elimination of the numerous prevailing exemptions and tax preferences

in both direct and indirect taxes to broaden the base of the major taxes.

(viii) Far-reaching reforms of the systems of tax administration, including the deployment

of modern information technology and online linkage of new tax identification numbers

to a national network. The resemblance of these policy prescriptions with the six point

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‘model’ outlined in Section I is quite striking. Perhaps far more heartening, in hindsight,

is the extent to which these TRC recommendations were actually implemented in the

decade of the 1990s.

7.2.5 Post-2000 Initiatives

Tax policy changes have continued in the new millennium. But to some extent they seem

to have lost the unifying vision and coherence of the TRC. In part this may be due to the

advent of new views advocated in some fresh government reviews and reports on tax

policy. The first of these, the Shome report of the Advisory Group on Tax Policy and Tax

Administration for the Tenth Plan [GoI 2001a], was broadly in the TRC tradition and

provided the very useful service of highlighting the agenda for the future. Shortly

thereafter came the Kelkar reports of Task Forces on Direct and Indirect Taxes [GoI

2002a, 2002b]. While they contained much good advice, especially on revamping of tax

administration, they also struck some discordant notes. In particular, the

recommendations to double the exemption limit for personal income taxation and to

abolish taxes on equity capital gains and dividends received by individuals were severely

criticized by public finance specialists such as Bagchi (2002), Chelliah (2002) and

Acharya (2003). So were the recommendations to move to a dual rate structure in excise

and customs [Mukhopadhya 2002 and Acharya 2003]. In any case, the ‘consensus’

among ‘authorities’ had been breached, making it easier for ad hoc-ery to flourish in tax

policy. The main new initiatives, not all retrograde, are briefly reviewed here.

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7.3 Problems / Difficulties of Implementing Sales tax/ VAT in India:

1) Multiplicity of Levies and Complexity of Structure: The system is

characterized by multiplicity of levies on the same base. Not only do these levies

fall on the very same products but also there is no single authority that looks into

their cumulative effect. While individually each tax does pay regard to

progression as well as to economic factors, the overall objectives of the country's

tax policy are not adequately sub served due to their cumulative effect.

Consequently, taxes not only fall on the final products but also on imports. In

addition, the existing structure of all the three important taxes is complex. The

rate categories are enormous and show large variations in structures among

individual industries which could cause distortion of tax incentives.

2) Cascading Effects: Various taxes fall on the taxes levied earlier causing

escalation of costs and profits at each stage. As inputs are subjected to excise

and/or sales tax, the manufacturer needs a larger amount of working capital to

maintain the necessary stock of the inputs. Consequently, the cost of his final

product gets raised. Besides, when the manufacturer works out his own profit

margin as a percentage of his costs and arrives at a price, he adds a mark-up

which is a higher quantum of profit. This phenomenon of snowballing or

cascading effect raises consumer prices by more than what accrues to the

exchequer by way of additional revenue.

3) Lack of Transparency: The existing system results in uncontrolled incidence of

various taxes. The overall cumulative incidence lacks transparency for an

economic analysis. As the cumulative incipience on commodities becomes

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fortuitous, it is difficult to grade different commodities according to progressivity.

The lack of transparency hinders exact calculations of tax-incidence.

4) Vertical Integration: The phenomenon of widespread taxation of inputs

promotes vertical integration. That is, it militates against ancillary industries and

encourages industries to produce more and more of the inputs needed rather than

purchase them from ancillary industries. To discourage this trend, the Modified

VAT (MODVAT) scheme was introduced in the year 1986 in respect of goods

covered by 37 specified chapters of the Central Excise Tarrif. This scheme was

extended to cover practically all chapters except those relating to petroleum

products, textile products, tobacco products, cinematographies films and matches.

However, as explained in Annexure 1, the coverage of MODVAT is not

complete. Also, at the state level, the sales tax system does not provide any such

mechanism.

5) Manufacturers' and Importers' Sales Tax: An important problem in the sales

tax structure relates to the point of levy. There has been a tendency for the states

over the years to switch over the point of levy to the origin, i e, the import or the

manufacturing stage. Most of the states raise between 70 and 90 per cent of

revenue from the first-point tax which has all the weaknesses of the excise

system. In addition, it lacks the advantage of capturing additional value added and

deviates from its destination principle.

6) Out-of-state Sales: Taxation of out-of-state sale (hereinafter referred to as inter-

state sale) creates many formidable problems. Presently, these sales are taxable at

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the rate of 4 per cent under the Central Sales Tax (CST) Law. Although the tax

was levied to avoid unnecessary movement of roods among states. If does cause

the phenomenon of cascading. Also; a high rate of 4 per cent in increases the

incidence of tax and forces the states to surrender their autonomy in deciding their

sales tax rates. The CST at present is levied on inter-state sales only;

consignments are exempt. It is now proposed that the CST be levied on all these

exempted transactions too which comprise three-fourths of the base Hence,

taxation of all the transactions would be inflationary, inequitous and distortionary.

7) Narrow Base: The existing tax base is confined to commodities only; services are

exempt from taxation due to constitutional limitations. Both the Union List and

the State List do not cover taxation of services. Hence, the union excise duties and

sales tax do not, in general, cover services, although hotel services are specifically

taxed. Also, a few selected services are separately taxed under specific provisions

of the Constitution. Since services constitute a fast growing sector in the Indian

economy, exclusion of services deprives the government of a lucrative source of

revenue. In fact, in most countries either under VAT or under sales tax, the tax

base does include services.

8) Psychological Problem: These problems are related to politicians, administrators

and dealers. Political problems relate to the inertia of the past. Owing to such

inertia, which ensures that the bulk of revenue is drawn from the existing taxes,

most tax laws of future importance take a long time to get implemented. The

politicians avoid big changes in taxation because of the likely adverse comments

that the new legislation could attract from parties with vested interests. Like

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politicians, tax administrators are also risk-averse. They too have apprehensions

of losing revenue and think exclusively of administrative expediency without

regard to any other economic criterion. TV idlers on their part are bothered about

compliance costs in terms of money and time needed for compliance. These

problems being psychological, a rational tax structure like VAT is unlikely to

suffer a major setback in its introduction. However, with a view to avoiding the

above problems the following measures are essential to be implemented.

Psychological problems are primarily related to information gap. This could be

overcome by spending adequate time and money on a publicity campaign aimed

at both tax-payers and consumers. The experience of India who has recently

introduced VAT suggests that it is indeed important that tax-payers fully

comprehend the new legislation. This will help to overcome resistance and

compliance problems. It is useful to learn, for example, that the Korean

government campaigned with the help of the Chamber of Commerce and

Industry, daily newspapers, television, radio and other mass media. Similarly,

Taiwan also made sincere efforts to educate the masses in general and the dealers

in particular. Thus an important requirement for a successful introduction of VAT

is an adequate information campaign aimed both at tax-payers and consumers.

10) Lead-in Time: Equally important is the requirement of lead-in time. Although it

varies according to the circumstances peculiar to each country concerned, in

general, sufficient time is needed to prepare legislation and rules. The length of

lead-in time could vary from a few months in a country like Chile which had prior

experience of a turnover tax.

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11) Structure of Tax : The assessment of the existing structure of commodity taxes

suggests that the reforms in the overall structure would necessitate harmonisation

of all these taxes in the context of the following constraints in the federal

structure. Federal Constraints to be Recognised: Four important constraints

appear to affect any quick solution to rationalise the tax system. First, the

division of tax powers between the centre and the states provides both the tiers of

governmental powers to levy taxes falling on the same base. However, 45 per

cent of the revenue from excises collected by the central government is shared

among the states. This has been the practice since the recommendations of the

Eighth Finance Commission.

12) Intermediate Production Inputs : That taxation of intermediate production

inputs leads to inefficient production is known from basic economics. With

competitive markets the optimal commodity tax, like the VAT, would not tax

intermediate inputs, permitting efficient production. Despite production

inefficiency, intermediate input taxation, as prevails under most sales or turnover

taxes, is part of the optimal commodity tax if markets are not competitive, VAT

can be inferior in terms of overall economic efficiency to certain other sales tax

systems. VAT it has also been shown that because its narrower base makes higher

tax rates necessary if markets are not Competitive, revenue, value added and

economic welfare may simultaneously be higher with a turnover tax. Replacing

import tariffs with a VAT in economies with a large informal sector may reduce

economic welfare and government revenue. Unlike most sales taxes there is no

cascading (or tax on tax) under the VAT since tax on inputs is rebated. Cascading

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does create an incentive for vertical integration. India’s state ‘VAT’ does not

eliminate cascading. Theoretical deficiencies of taxes, including the VAT, may be

of limited relevance for practical policy. Comparison with a multi-point sales tax,

by introducing input rebates, the VAT violates now standard practical advice to

have broad-based taxes which facilitate low tax rates.

13) Incomplete Coverage: VAT in practice inevitably differs from a textbook VAT

because of incomplete coverage of goods and services and of coverage only of

‘registered dealers’ or manufacturers and sellers with turnover exceeding a

threshold (Rs 5 lakh in India). Revenue from real world VAT as a percentage of

GDP is 1.1 per cent more than the sales taxes it has replaced.

14) Cascading Effect: India has not implemented a transparent destination based

consumption tax and not evens a VAT. Instead, India’s state ‘VAT’ cascades; has

roughly an income rather than a consumption base; will not implement the

destination principle even if the central sales tax (CST) on interstate sales is

removed; and is far from transparent. There are at least five reasons for continued

cascading. Most importantly, services are still outside the VAT. Second to protect

revenue no rebate is allowed on certain universal intermediates like petroleum

products. Nor are rebates allowed for another 80 odd exempt goods. Third, other

taxes which inputs may be subject to, including central excise and customs duties,

motor vehicles taxes, electricity duty and stamp duty are not integrated into the

VAT. Fourth, small registered dealers with turnover below Rs 50 lakh can choose

to pay a turnover tax without entitlement to rebates. Tax paid on inputs purchased

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by electing dealers will cascade. Fifth, some state legislations provide for refund

of input taxes only if they do not exceed tax paid, a common drawback

internationally Implied delays and ceilings make input tax credits partial, causing

cascading, particularly for zero rated exports.

15) Input on capital Goods: As with intermediate inputs, full tax credit must

immediately be allowed for VAT paid by capital goods suppliers under a

consumption type VAT. Yet some state VAT legislations provide for rebates for

capital goods in installments over three years without interest on deferred rebates.

Inclusion of capital services or investment in the VAT base, albeit only roughly,

makes the tax base closer to income than consumption. If at any intermediate

stage of production of export goods, supplies are exempt or made by small or

unregistered dealers, zero-rating does not achieve complete tax removal. The

destination principle is violated to this extent even if check-post and refund delays

are minimized. As a result, contrary to popular claims, the state VAT is not

transparent.

16) Implementation of Vat: Implementation of the state VAT, despite weaknesses,

deserves support for four reasons. First, in 120 countries VAT works. Whether

better or worse than the sales tax on revenue and efficiency grounds, differences

are likely to be limited. Of far greater importance is the strengthening of tax

administration and lowering taxpayer compliance costs. The few states which

have improved administration and taxpayer services during VAT implementation

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have made a permanent gain, which could have been jeopardized if

implementation had been stalled. As “the key novelty in adopting a VAT is often

less the nature of the tax itself than in the methods of its administration and its

modernizing influence more generally” . Second, by bringing sales after the first

point of sale or import in a state into the tax net, there is tax base broadening,

countering and narrowing due to input rebates. Third, despite problems listed

above, some realignment of production costs with comparative advantage across

states will result, especially when the CST is removed. This should increase the

efficiency with which India’s resources are utilized. Most important, in the

process of VAT introduction, the strengthening of institutions of cooperative

federalism has taken place. Specifically, the empowered committee of state

finance ministers, which played a major role in achieving a multi-state consensus

VAT design, is likely to continue with a more permanent structure.

17) GST Model: The model GST that is being put forward is that of a “dual VAT”

that will be levied at two levels of government, the centre and the states. The

states’ fiscal autonomy will not be impaired. However the dealers who will be

liable to collect and pay the two GSTs, one central and the other of the states will

not have to deal with more than one tax authority. A single return will do,

presumably as in the Canadian model in Quebec, where the provincial

government collects the federal GST along with its own tax, the Quebec sales tax.

The states will collect the tax on behalf of the centre and remit the amounts so

collected to the coffers of the union.

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18) Low rates under GST: It is possible to have a low rate if all goods and services

are taxed without discrimination. A GST at 6 per cent or so by the centre and

around 8 per cent in the states might suffice to secure the same revenue as at

present, if the base is comprehensive and petroleum products, tobacco and alcohol

are taxed separately under an excise regime.

19) Moving towards a GST provides a great opportunity to simplify the system of

trade taxation in the country provided the base is truly comprehensive and the tax

is levied at a low rate on both goods and services under a common legislation. It

would be a pity if this opportunity is lost.

20) The two outstanding developments in the tax field in the 20th century have been

the emergence of income tax in the first half and the value added tax (VAT) in the

second half as the preferred instrument of taxation across the world. The ascent of

VAT in just 50 years beginning with France replacing its turnover tax with a tax

on value added in the mid-1950s has been truly remarkable. With the European

Commission (now European Union, the EU) in the lead, the tax spread rapidly

and is now operating in over 130 countries of the world.

21) Current VAT in the Dominican Republic is very progressive. The analysis is

detailed and thorough, in the sense we examine carefully whether the tax is levied

and indeed collected by vendors in the economy. In prior studies of the incidence

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of the VAT the assumption has been made that when the tax law is enacted

specifying a rate of tax on a particular good and service then that rate of tax is

collected an all sales of the item. No differentiations are made between sales to

poor or well off households. This, however, is not the case in reality, especially in

a developing country such as the Dominican Republic.

22) The distribution of the burden of the VAT holds up almost as strong in a large

modern city such as Santa Domingo as it does in the countryside. This evidence

indicates that the variation in the degree of tax compliance across households of

different income levels is a very fundamental determinant of the distributive

burden a VAT

23) National GST, which is to be achieved by combining central GST and state GST,

has no special advantage. There is no reason to think that a combined GST is

better than two parallel GSTs. Those who are arguing for a combined GST must

prove how a combined GST is better than two parallel GSTs. The total collection

of revenue will remain the same. The Constitution does not permit the centre to

charge sales tax. If the Constitution is amended to allow the centre to charge sales

tax, it will completely ruin fiscal federalism, which is the cornerstone of the

Indian polity.

213

24) VAT is more complicated than a simple cascading first point tax. The tax payer

has to keep accounts not only of sales but also of purchases and taxes paid on

those purchases. Since the tax liability will be based not merely on value of the

total turnover but also the tax paid on the inputs, there is more administrative

work involved.

7.4 Chapter wise findings of the study:

Chapter one reveals that Indirect tax reforms have been as integral part of the

liberalization process since new economic reforms. A welfare oriented nation like India

tries to keep a balance between direct and indirect taxes. In this chapter we have made an

attempt to understand the concepts and methodological approach required to analyze the

impact of Sales tax, VAT and GST on the Profitability of the organization as well as the

revenue growth of the Govt. at State and National level.

Chapter two states about the different types of literature which have been referred

by the researcher related to tax in general and Sales tax and Vat in Particular.

Chapter Three reveals that Nowadays VAT/ GST is globally accepted tax system.

France the first European country who implemented VAT on an extensive scale in 1954.

Since then VAT has been adopted by a large number of countries in the world. Value

Added Tax is perceived by many as means to promote neutrality and uniformity of tax

burden and to provide incentives for increased productivity and industrialization. Despite

the widespread proclamation of VAT, there have been difficulties in implementing VAT

in its true spirit like in the case of Argentina, Brazil, Canada and India. There have also

been attempts to introduce Value Added Tax in USA, which however has preferred to

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retain the retail sales tax system. If VAT is centrally administered, the tax base is quite

wide, comprising imports, production and different stages of sales. If the base is divided

between the Centre and states, the chain is broken, making tax evasion easier and

affecting the states' tax base. Those countries where VAT is administered by a federal

government, revenue collection on imports accounts for a larger portion of total VAT

revenues. A study conducted by IMF of 22 developing countries, discovered that about

two-third of them, more than half the VAT revenue was collected from imports. In

Pakistan and Bangladesh, VAT collection from imports was 64 per cent of the total

proceeds from the tax. As tax evasion on bulk imports is difficult, it also helps in

checking tax evasion at subsequent stages of the tax chain.

Thus it prove that is a indirect tax which has help the world to increase revenue by

reducing tax rate and broadening tax base with minimum tax evasion. GST is a next step

of VAT, where more taxes are merged and procedure is simplified by reducing

administrative procedures

Chapter four reveals that VAT has been adopted instead of sales tax in India from

2002 by Central Government of India, but only seven states has implemented VAT and

other shown their inability to impalement that. Subsequently from 2005 all state in India

has adopted VAT and rate of tax was uniformly accepted which was 1%, 4%, 12.5% and

for other products like petroleum etc discretion was given to state for rate of tax. Initially

for few years states found it very inconvenient and difficult to implement VAT as no

proper administrative machinery was available and large Scale Computerisation was not

done even the manufacturer, trader and retailers were not computer competent. So they

were also finding very difficult to cope up with VAT so there was resistant from business

215

community, but in due course Government machinery has been improved to cope up with

VAT. At the same time last few years large scale computerisation was done in all sectors

and liberal National Policies to import computers has reduced the computer prices and

increase the computer literacy which also help business community and Government

cope up with VAT. All above factors are giving better result and total indirect tax

revenue has been increased last few years even after reducing tax rates. Tax evasion in

India has been reduced to the great extent after successful implementation of VAT now

Central Government of India has decided to implement GST from 2011 which is a step

ahead of VAT where excise duty, service tax, octroi will be covered under GST

Chapter five reveals that Maharashtra Government has been replaced the sales tax

and accepted VAT from 2005. Initially for two years revenue has been reduced due to

non proper implementation and some other factor but then onwards revenue has been

increased substantially every year and in the year 2009-10 Maharashtra not only achieved

the target but also exceed the revenue collection with successful implementation of VAT

and also succeeded in 100 percent computerisation of return and going towards paperless

era which is the basic requirement for the success of VAT regime. Even business

communities has also well wost with the VAT systems and they are now ready to

welcome GST which will reduce their administrative work and where they will be entitle

to get input tax credit (setoff) even on the tax paid on services and where tax on goods

and services will be uniform

Chapter six concludes that Maharashtra is a leading state in most of the aspect for

which this chapter has analyzed what extent Value Added Tax is profitable to different

Industries. The above analysis reveals as follows :-

216

Capital goods industries were paying more sales tax (16.75) to the government



that introduction of value added tax has been become profitable to capital goods

industries.

Consumer goods industries were paying less sales tax (10.84) to the government


industries were contributing more revenue (24.40) to the government. Therefore it

indicates that introduction of value added tax has been reduced the Profit of Consumer

goods industries.

Infrastructure industries were paying more sales tax (34.51) to the government



indicates that because of introduction of value added tax Infrastructure Industries has

become more Profitable.

Other Industries were paying more sales tax (32.75) to the government during



indicates that introduction of value added tax has been become profitable to chemical

industries.

Pharmaceutical industries were paying more sales tax (13.01) to the government


217


that introduction of value added tax has been become profitable to Pharmaceutical

industries.

A study reveals that all industries were paying more sales tax (23.23) to the

government during 2001-02 to 2004-05. However after introduction of the value added

tax the same industries were contributing less revenue (-26.04) to the government.

Therefore it indicates that introduction of value added tax has been become profitable to

these organisation.

Small industries were paying more sales tax (12.79) to the government during



indicates that introduction of value added tax has been become slightly profitable to small

industries.

Medium industries were paying more sales tax (18.40) to the government during



indicates that introduction of value added tax has been become profitable to Medium

industries.

Large industries were paying more sales tax (27.73) to the government during



218

indicates that introduction of value added tax has been become profitable to Large

industries.

7.5 Major Findings and Suggestions of the Study:

1) VAT and State Autonomy’ rightly points out that tax coordination and

harmonisation across states can be achieved by floor rates of VAT for different

goods.

2) It would be in the interest of both state governments and taxpayers to have

uniform laws and procedures for tax administration. In the medium term, a

consensus Tax Administration Act will greatly reduce the cost and it will lead to

increase the profitability of a organization.

3) Tax buoyancy estimates, which measure the percentage response of tax revenue

to a one per cent change in the tax base, usually proxied by the gross domestic

product, are a routine requirement for fiscal projection purposes. The elasticity of

tax revenue is more stringently defined as the underlying revenue response,

holding constant all parameters of tax policy.

4) Universally VAT and GST has been adopted for correcting the fiscal imbalances

as it works well within all political and legal constraints. The Existing VAT

system would also increase the tax revenue as well as the profitability of the

organization.

219

5) Vat has an inbuilt device for reducing the cascading effect by restricting the levy

to actual value addition. It encourages growth by confining tax burden to the net

economic contribution of the taxpayer’s results in no double taxation.

6) Introduction of VAT has bought more transparency in the tax structure. At every

stage of transaction, VAT indicates the quantum of tax payable after adjusting tax

credits. Therefore the taxpayer, ultimate consumer and administrators created

more awareness about the details of payment.

7) The important objective of Tax policy in India was to improve the tax to GDP

ratio. Therefore VAT has earned the reputation of being a dependable revenue

raising instrument. It can easily access the incremental income generated by the

expanding economic activities without altering the rates or base in every budget.

8) There have been serious apprehensions about the inflationary impact of VAT. The

price effect of VAT depends mainly on the elasticity of demand and supply of the

taxable products and conditions in the factor markets. Therefore it suggests that, if

VAT substituted an existing tax with no additional revenue objective in the short

run, it would not have any inflationary impact. Moreover sometimes, a reverse

effect takes place due to input tax relief, which was not available during sales tax

policy.

220

9) The distributional impact of tax burden across various income groups of the

organization and commodity wise the tax is imposed. Therefore, it is suggested

that to reduce the regressive impact of commodity taxes, VAT rate has to be less

than that of the substituted taxes. In comparison to conventional indirect taxes,

Vat can be more equitable by exempting articles of essential consumption.

Moreover it is also suggested that the tax policy should adjusted to the

requirements of the country having regard to the existing patterns of distribution

of income.

10) It is understood that conventional commodity taxes are highly prone to tax

evasion. Therefore it is suggested that Vat with tax credit method of collection

does not give much scope for tax evasion to the tax payer

11) VAT is regressive with respect to income therefore full fledged if it is VAT levied

at a single rate with no exemptions would be equivalent to a proportional tax on

consumption. However it is suggested that to reduce the regressivity and to make

VAT proportional extent by having excises at higher rates on a few goods largely

consumed by the richer sections of the society.

12) The existing trend in the sales tax system was to push the tax base as close to

imports/manufacture if possible. This was considerably reduced the income-

elasticity of the tax system. In sales tax it implemented that (a) the requzisite set-

off is given for the taxes paid on raw materials; and (b) the states adopt a structure

221

of 'two-points-with-set off recommended in an earlier study. However in the VAT

system the input tax credit was given to manufacturers. The said policy of input

tax credit was continued to increase the profit of organization.

13) One of the important components of VAT reform was that instead of multiple

rates of taxes there will be three or four rates of taxes all over the economy.

Therefore, from the consumers point of view the existing ‘3’ rates of VAT as per

categories of the goods is to be continued.

14) The analytical framework of taxes on international borrowing could be used to

examine the effects of a removal of impediments on capital movements in the

country.

15) Sales taxes in India has taken place in varying circumstances in the different

states, the existing structure is thus heterogeneous and multifarious. Various

forms include single-point tax, double-point tax and multi-point tax. However,

there is a pronounced movement towards a single-point tax and a predominant

reliance on the first-point tax. Also there exist additional sales tax and surcharge

on the sales tax. The effective rate has thus gone up considerably and varies from

one state to another.

16) From the point of growth, equity, administrative expediency and co-ordination, it

is necessary that the states have as few rates as-possible. There should be

222

uniformity of rates especially in the neighboring states. Raw materials should be

exempted to avoid the -problem of cascading. However, if the tax is levied, the

rate should not bo higher than that of the Central sales tax (CST).

17) As the sales taxes are having a significant role in the fiscal structure of the states,

it is of paramount importance that the sales taxes are reformed on the above lines

so that the structure is economically rational and administratively expedient too.

It is important to note that the proposed tax structure would not only be fulfilling

the economic criteria set out in Section II of the paper, but would also' go a long

way to check the evasion of the tax.

18) It is obvious from the above analysis that the rationality does not lie in taxing

stock transfers. Besides, other anomalies arise because of the fact that the tax rate

on inter-state transactions under the CST Is too high; the rate of tax in the inter-

state transactions has not been kept in tune with its basic philosophy.

19) It is extremely important that a proper organization is developed as a

precondition to have a sound system of taxation. Countries that have earlier

experience with administering a turnover tax do not encounter serious problems

in switching over to VAT. For others, it is important to have suitable machinery.

With a view to understanding the administrative problems for the introduction of

VAT in the Indian context, it is essential to comprehend the existing

administrative procedures for MODVAT as well as for sales taxes in the country.

223

20) The rate rationalisation into four floor rates should be done taking account of all

supplementary levies like surcharge on sales tax and turnover tax. If these

supplementary levies arc continued and if their rates too are differentiated

depending on the turnover range of the dealers, there will be much more rate

differentiation than what is intended and the purpose of minimizing rate

differentiation will be defeated.

21) It is important to work out the revenue neutral rates as the tax base is expanded in

order to demonstrate the advantages of the VAT to the tax payers. The emphasis

should be on long term revenue productivity coming from better tax compliance.

22) In a federal country like India, it may be ideal to have state and central VATs

substituting the current state and central taxes on goods and services respectively.

23) An important step in the introduction of VAT, however, is the need for all

taxpayers to understand that VAT will be levied on their value added only and

not on the gross turnover. Such an understanding will not cause any resistance

and compliance problems from taxpayers. This requires that the government

should vigorously campaign for the case of VAT.

24) The management of VAT in India calls for a separation of duties of different

functionaries of VAT department. For example, the work related to revenue

224

receipts and follow up action of the defaulters is an important component of VAT

management. It requires special attention on delinquents.

25) It is of paramount importance in India that we concentrate on this area of activity

to reduce interaction of the dealers with the department. Availability of authentic

information should be a matter of right for the dealers. Requisite publicity of their

rights and duties with dos and don’ts and use of telephone and electronic means

would help developing proper provisions for introducing VAT in India.

26) The Integrated GST (IGST) model for taxation of inter-State transaction of goods

and services has been adopted. According to this model, Centre would levy IGST

which would be CGST plus SGST on all inter-State transactions of taxable goods

and services with appropriate provision for consignment or stock transfer of

goods and services.

27) The Central GST and the State GST would be applicable to all transactions of

goods and services except the exempted goods and services, goods which are

outside the purview of GST and the transactions which are below the prescribed

threshold limits.

28) IT is suggested that under the proposed dual GST model, States would be allowed

to charge and collect SGST on all the supplies under their jurisdiction. The role of

225

the Centre would be to charge and collect CGST, administer IGST and work as

the clearing house for IGST.

29) It is suggested to prepare the infrastructural setup requisite for adequate

automation in tax administration and engineer the business processes before the

GST implementation.

30) It is suggested that the Special Economic Zones (SEZs) would also be given same

benefits as those given to the exporters, though such benefits would be allowed

only to the processing zones of SEZs. Further, sales made by SEZ units to

Domestic Tariff Area will come within the purview of GST.

226

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WEBLIOGRAPHY

1) www.google.com

2) www.rbi.org.in

3) www.mahavat.gov.in

4) www.cmie.com

5) www.imf.org

6) www.taxguru.in

7) www.worldbank.org

8) www.wikipedia.com

9) www.finmin.nic.in

10) www.proquest .com

11) www.sciencedirect .com

1

2

3

4

5

6

7

8

_________________________________________________________________________

____________________________________________________________________________________

9

_________________________________________________________________________

_____________________________________________________________________________________

10

__________________________________________________________________________

____________________________________________________________________________________

11 Mention your convenience to Work in VAT regime:_______________________________

___________________________________________________________________________

_____________________________________________________________________________________

12 Details about Sales, Sales Tax & VAT from 2001-02 to 2008-09.

Sales Tax / VAT (Rs Lakh)

Name of the Company : ____________________________________________________

Address of the Company : ____________________________________________________

________________________________________________________________________

Name of the Concerned Person : _____________________________________________

Contact no. of the Concerned Person : _________________________________________

2002-03

2003-04

2004-05

State the Nature of Activity & Main Product :____________________________________

Mention your Major Market area : ____________________________________________

Who are your Target Customers? _____________________________________________

How much Administrative Cost did you incur during Sales Tax regime?

How much Administrative Cost did you incur during VAT regime?

Mention your convenience to Work in Sales Tax regime:___________________________

QUESTIONNAIRE

2005-06

2006-07

2007-08

2008-09

Sales (Rs Lakh) Year

2001-02

241

13 What are the Problems or Difficulties encountered regarding tax policy by your

organization in the past? _____________________________________________________

__________________________________________________________________________

__________________________________________________________________________

14 What are your suggestions for the better implementation of Sales Tax / VAT

Policy in India?_______________________________________________________________________

___________________________________________________________________________

__________________________________________________________________________

242

CHAPTER 1CHAPTER 1CHAPTER 1CHAPTER 1

INTRODUCTIONINTRODUCTIONINTRODUCTIONINTRODUCTION, , , , OBJECTIVE OBJECTIVE OBJECTIVE OBJECTIVE AND RESEARCH AND RESEARCH AND RESEARCH AND RESEARCH

METHODOLOGY METHODOLOGY METHODOLOGY METHODOLOGY OF THE STUDYOF THE STUDYOF THE STUDYOF THE STUDY

1.1

INTRODUCTION

1.2 CONCEPTS & MEANING 1.3 STATEMENT OF PROBLEM 1.4 OBJECTIVES OF STUDY 1.5 HYPOTHESIS 1.6 RESEARCH METHODOLOGY

OF THE STUDY

1.7 IMPORTANCE OF THE STUDY 1.8 LIMITATIONS OF THE STUDY 1.9 CONCLUSION


REVIEW OF LITERATUREREVIEW OF LITERATUREREVIEW OF LITERATUREREVIEW OF LITERATURE


GLOBAL SCENARIO OF VAT AND GSTGLOBAL SCENARIO OF VAT AND GSTGLOBAL SCENARIO OF VAT AND GSTGLOBAL SCENARIO OF VAT AND GST

3.1 INTRODUCTION 3.2 EVOLUTION OF VAT 3.3 VAT SCENARIO OF MAJOR

COUNTRIES IN THE WORLD.

3.4 GLOBAL SCENARIO OF GST 3.5 GST SCENARIO OF MAJOR

COUNTRIES IN THE WORLD. 3.6 CONCLUSION


INDIA’S TAX STRUCTUREINDIA’S TAX STRUCTUREINDIA’S TAX STRUCTUREINDIA’S TAX STRUCTURE

4.1 INTRODUCTION 4.1.1 VAT IN INDIA 4.1.2 IMPORTANCE OF VAT IN INDIA 4.1.3 IMPACT OF VAT IN INDIA

4.1.4 VALUE ADDED TAX 4.1.5 SALIENT FEATURES OF VAT 4.1.6 ADVANTAGES OF VAT 4.1.7 DISADVANTAGES OF VAT

4.2 GOODS AND SERVICE TAX 4.3 CONCLUSION


SALES TAXSALES TAXSALES TAXSALES TAX IN MAHARASHTRAIN MAHARASHTRAIN MAHARASHTRAIN MAHARASHTRA

5.1 INTRODUCTION 5.1.1 HISTORY OF SALES TAX 5.1.2 REVENUE TO GOVERNMENT 5.1.3 SALES TAX FUNCTION

5.1.4 HISTORICAL BACKGROUND & BASIS OF COLLECTION IN MAHARASHTRA

5.2 CONCLUSION


DATA ANALYSISDATA ANALYSISDATA ANALYSISDATA ANALYSIS

6.1 INTRODUCTION 6.2 INDUSTRY WISE & TURNOVER WISE

CLASSIFICATION OF INDUSTRIES 6.2.1 PROFILE OF CAPITAL GOODS INDUSTRIES 6.2.2 PROFILE OF CONSUMER GOODS

INDUSTRIES 6.2.3 PROFILE OF INFRASTRUCTURE GOODS

INDUSTRIES 6.2.4 PROFILE OF CHEMICAL INDUSTRIES 6.2.5 PROFILE OF PHARMACEUTICAL

INDUSTRIES 6.2.6 PROFILE OF ALL INDUSTRIES. 6.2.7 PROFILE OF SMALL INDUSTRIES 6.2.8 PROFILE OF MEDIUM INDUSTRIES 6.2.9 PROFILE OF LARGE INDUSTRIES 6.3 CONCLUSION


FINDINGS AND SUGGESTIONSFINDINGS AND SUGGESTIONSFINDINGS AND SUGGESTIONSFINDINGS AND SUGGESTIONS

7.1 INTRODUCTION 7.2 EXISTING TAX POLICIES 7.3 PROBLEMS/DIFFICULTIES IN

IMPLEMENTATION OF SALES TAX /

VAT IN INDIA 7.4 CHAPTER WISE FINDINGS OF THE

STUDY 7.5 MAJOR FINDINGS AND SUGGESTIONS

OF THE STUDY

BIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHYBIBLIOGRAPHY

EXECUTIVE SUMMARYEXECUTIVE SUMMARYEXECUTIVE SUMMARYEXECUTIVE SUMMARY

1

INTRODUCTION

2 STATEMENT OF PROBLEM 3 OBJECTIVES OF STUDY

4 HYPOTHESIS 5 RESEARCH METHODOLOGY

OF THE STUDY 6 IMPORTANCE OF THE STUDY 7 LIMITATIONS OF THE STUDY

8 REASERCH FINDINGS & RECOMMENDATIONS

WEBLIOGRAPHY

QUESTIONAIRE