Timir Baran ChatterjeeVice President & Company Secretary

DIC India LtdDIC India Ltd.Presentation for :

XLRI,IIT,KGP,ICSI,ICAI,CII,BCCI,DIC,TISCO,MITSUBISHIPTA

VALUE ADDED TAXVALUE ADDED TAXVALUE ADDED TAXVALUE ADDED TAX

- - ISSUES & ISSUES & CONCERNS CONCERNS --

WHY THERE IS A CONCEPT OF VAT:

No way different from LST with respect to the fundamentals

Method of levy differs in the two system

The traditional system of levying tax- FIRST POINT TAX - NEXT POINT TAXFIRST POINT TAX - NEXT POINT TAX

LAST POINT TAX - MULTIPOINT TAXLAST POINT TAX - MULTIPOINT TAX

The Traditional System of Levying Tax

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

subsequent sales after First Point.

• Next Point Tax (especially for banded goods)- Burden of tax is shifted to the next point

• Last Point Tax- Govt. gets revenue on value addition upto last point but loses its control on origin of

manufacture- possibility for leakage of revenue / escaped taxation – Not popular with Govt.

The existing system of levying tax

Contd.

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

VAT is a solution to overcome all the above problems and acceptable both to

the Assessor (Govt.) and the Assessee (Dealer)

MEANING OF VAT

• VAT in common man's language “is a tax levied on the value added to any

product or service AT EVERY STAGE”

Destination based tax system

Sales to Registered Dealer by a Registered Dealer

Provision for input tax credit tax Credit paid at the previous point of purchase.

The tax paid by a registered dealer is netted.

Tax is ultimately borne by the consumer

UNDERSTANDING VAT

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

Raw Material Raw Material ProducerProducer

GoodsGoodsManufacturerManufacturer

WholesalerWholesaler

RetailerRetailer

HappyHappyConsumerConsumer

Sale Rs 150Sale Rs 150Gross VAT Rs 15Gross VAT Rs 15

Net VAT Rs 5Net VAT Rs 5(15-10)(15-10)

Sale Rs 100Sale Rs 100(VAT Rs 10(VAT Rs 10))

Sale Rs 180Sale Rs 180Gross VAT Rs 18Gross VAT Rs 18

Net VAT Rs 3Net VAT Rs 3(18-15(18-15)

Sale Rs 200Sale Rs 200Gross VAT Rs 20Gross VAT Rs 20

Net VAT Rs 2Net VAT Rs 2(20-18)(20-18)

ASSUMING A VAT OF 10%

ASSUMING A VAT OF 10%

TAX RATE UNDER VAT

essential commodities, capital goods, basic

inputs and declared goods >> 4%-PRINTING INK COVERED UNDER 4%

agricultural products and sea goods >> 0%

gold >> 1%

cigarettes, liquor, petrol, diesel >> 20%

Floor rate of 12.5% (Revenue Neutral Rate)

VAT IS A SCIENTIFIC SYSTEM OF CHARGING TAX

Govt. keeps full control on all stages of value addition

No escape from tax net

It sets up lamp posts all along the value chain, thus bringing to light the entire geography of economic activity.

No Cascading effect and thereby reduces overall cost

Reduction of Raw Material cost- sales tax is no more an input cost to the manufacturer

Ultimate consumer is satisfied due to low cost

ULTIMATE OBJECT OF VAT IS NOW FULFILLED

MAKES INDIAMAKES INDIASINGLESINGLE

ECONOMYECONOMYTRANSPARENCYTRANSPARENCY

INCREASEDINCREASEDTAX BASETAX BASE

NO NO CASCADINGCASCADING

EFFECTEFFECT

NEUTRALITY NEUTRALITY ININ

INDIRECT INDIRECT TAXESTAXES

NO REVENUENO REVENUELEAKAGELEAKAGE

REWARDSREWARDSPRODUCTIVITYPRODUCTIVITY

COMPETITIVECOMPETITIVEPRICESPRICES

VATVATRESULTSRESULTS

PRE-REQUISITES FOR EFFECTIVE VAT REGIME:

India needs to take following steps to

introduce VAT without further delay-

Application of information technology

Wide spread computerization

Bringing all registered dealers into tax net

Avoiding exemptions and incentives

Granting rebate on already paid tax

Phasing out of Central Sales Tax

VAT: Issues and concerns:Proposed VAT is not truly an ideal VAT system of taxation since-

No input Tax credit on Central Purchases of Raw Materials and Capital goods is available

No input tax credit for Branch Transfer is available

( Credit available in excess of 4% ) CST would continue ; CST is an origin based tax system

Exemption/Remission will continue for CST Transactions

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

Most of the Governments not ready with IT systems

COMMERCIAL ISSUES TO BE TACKLED BY THE

INDUSTRY AFTER IMPLEMENTATION OF

PRESENT FORM OF VAT

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

INTER STATE PURCHASES WOULD BE COSTLY-

MAJOR SUFFERER – EASTERN & SOUTHERN BASED INDUSTRIES BOTH IN TERMS OF PURCHASE AND SALES [70% RAW MATERIALS ARE SOURCED FROM OUTSIDE THE STATE]

CUSTOMERS WOULD BE ASKING TO SET UP A LOCAL DEPOT/BRANCH/DISTRIBUTOR- COST WOULD INCREASE

COST MISMATCH BETWEEN DEVELOPED MARKET AND UNDERDEVELOPED MARKET

UNFAVOURABLE PRICING EFFECT DUE TO COST MISMATCH AND AVAILABILITY OF INCENTIVES

IT WILL LEAD TO UNEVEN COMPETITION

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

Companies having centralized manufacturing system and selling through Depots/Branches would be highly affected.

Sales through outstation C & A system will also be affected since materials transferred to C&A would be considered as branch transfer

A FEW TAX MANAGEMENT SOLUTIONS

SLOGAN IN A POSITIVE NOTE

“ ENHANCE LOCAL PURCHASE, INCREASE DIRECT SALES – LOCAL OR CENTRAL”

SLOGAN IN A NEGATIVE NOTE

“REDUCE CENTRAL PURCHASE, STOP BRANCH TRANSFER AND AVOID SELLING THROUGH

OUTSTATION DEPOTS/C & F AGENTS”

While framing Management Objective, a Company ought to

reckon that - Business is not solely guided

by Tax advantages; Other Commercial issues are

equally important.

SOME ACTION PLANS

Analyze existing sources of Purchases – Central and State

Explore possibilities to convert the existing central purchases to local purchases – Ask supplier to open Branch, Depots or ask them to match the price considering VAT impact.

Analyze existing sales through Branch Transfer

SOME ACTION PLANScontd.

Explore the possibilities for direct sales to customers instead of selling through outstation Branches/Depots

Less dependence on Centralised purchase system- Units to buy materials directly and from local sources

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

SOME ACTION PLANS VAT Credit is available on Opening Stock on

1.4.2005- Keep Costing system ready to calculate the LST included in the opening stock, finished goods and work-in- progress. Refund to be made in 6 monthly instalments and to start after 3 months from the date of filing of the claim. Keep minimum stock as on 31.3.2005 to minimize claim; Buying on 1.4.05 would immediately allow credit

Make necessary Impact Analysis based on existing system of Purchase and Sales- (Local Purchase - VAT is available; Central Purchase - No Vat is available; Branch Transfer- No VAT credit is available)

SOME ACTION PLANScontd.

Companies enjoying Remission / Exemption Scheme to re-work their Cash Flow and Profitability system considering that benefits for local purchases and sales may be withdrawn in due course.

- Benefits under CST would be pahsed out in next two years

VAT accounting and software system would be in place

Designing of VAT Invoice - Start Using TIN

T H A N K Y O UT H A N K Y O UT H A N K Y O UT H A N K Y O U