This is the latest buzz word in the Indian business scenario. VAT stands for value added tax. I would like to throw some light on what is VAT. The VAT payable on an asset is usually determined by the first use of that asset. The VAT Capital Goods Scheme adjusts the VAT due in some circumstances if the use of an asset changes. All these taxes viz, entry tax, purchase tax and turnover tax is burdened on the consumers. But because of VAT, now each and every member in the supply chain has to pay their corresponding tax based on their output. This ensures that the tax is equally shared by all the members in the supply chain. So VAT is a tax levied on a firm as a percentage of its value added, to avoid the multiplying effect of taxes as the product passes through different stages of production. The tax is based on the difference between the value of the output and the value of the inputs used to produce it. The aim is to tax a firm only for the value added by it to the inputs it is using for manufacturing its output. In principle, although the tax is levied on the value added at each stage of production, it is intended to tax only the final consumer. For producers, the VAT they pay on the inputs they buy from other companies is recouped when they sell their own output. I hope you are cleared about how VAT works. Now what we have to see is that whether the VAT system will work in India.
VAT basically replaces state taxes in the forms of sales tax, entry tax,purchase tax and turnover tax. The basic difference being that sales tax has a single-point levy, while VAT has a multiple-point entry. While sales tax is origin-based (sellers pay tax), in VAT consumers pay tax. Sales tax does not offer input tax credit, VAT facilitates input tax credit, meaning you can credit the tax paid on purchase of raw material as it would be offset against other taxes one is liable to pay. In sales tax, assessment is book-based that will be checked by tax officials; in VAT it is self-assessment and the dealer's self-assessment would be audited. While there are incentive schemes in sales tax, VAT has no incentive schemes. In this multiple system of taxation, the tax is passed on from the manufacturer to the wholesalers who then transfer it to retailers and then finally to customers. Businesses will not bear the burden as it is finally transferred to the customers. Exports are also zero-rated; goods for export will not be taxed. There could be losses initially. The Centre has said that the state governments would be compensated if found incurring losses. Under VAT, the government must also ensure that false invoices are not made by the traders as this could lead to a major scam. This is very much pronounced in India where the retail market is largely unorganised and also the attitude of the consumers who do not press for a bill on their product. VAT has been implemented in 130 countries around the world. It was first implemented in 1954. It is a proven system that is globally accepted. Australia also joined the VAT regime last year. All these countries have proved that VAT pays off in the long run.
Retailers are against VAT because till now they could evade tax as there were loopholes in the system. In the new system, there is no way they can evade tax. But I believe that retailers should think about it in the larger perspective, that their businesses will grow and sooner or later they too will join the big league of traders. It will turn out to be beneficial to them in the long run. The input tax credit, which forms the core of VAT, enables dealers to claim credit of the tax paid or payable on the purchase of any goods made from a dealer registered in the state.
The input tax credit can also be carried forward to the next year. The manufacturing sector will benefit the most from VAT especially the auto industry because it depends on various ancillary units for spare parts. But we have to keep one thing in our mind. Whatever may be the negative results of the VAT at the adolescent stage, it should be given a long run and the traders and the consumers should give a chance to the VAT to prove its full potential, in India ofcourse.
