Prasanth Penugonda

THE Centre has finally tabled its White Paper on State-level value-added tax. The tax, which is to come into force from April 1, was being contemplated for the past five years but could not be implemented with several States objecting on the grounds that it would hit their revenues.

Twice the Government had set deadlines for States to create the required infrastructure for VAT, only to defer them.

Statutes and law

The framework for VAT implementation is that each State will have its own VAT Bill which will be placed in the respective legislatures and subsequently sent to the Central Government for Presidential assent. Each State also will draft the VAT Rules, including the books of accounts maintained, which will be as per the broad guidelines issued by the Centre.

The Empowered Committee set up for VAT implementation at the State level should have designed a common VAT rather that allow each State to design its own VAT. The Centre should have steered the Committee and given transition provisions, setting deadlines for each State, considering the revenue loss on account of the change in the tax structure. A Central legislation with additional chapters pertaining to the States would have been the better option.

Also, a Central VAT would have made the integration between the Centre and the States easier.

Input tax credit

The mechanism of taking credit in the proposed VAT regime is similar to what many countries follow. The tax paid on input will be set off against the tax paid at the time of output tax.

The White Paper spells out that the "input tax credit will be given for both manufacturers and traders for purchase of inputs/supplies meant for both sale within the State as well as to other States, irrespective of when these will be utilised/sold."

At present, as per Cenvat rules, there is no need of any input-output correlation to claim credit and a similar procedure has been set out in VAT too.

The White Paper also states that in the case of "stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4 per cent will be eligible for tax credit." This can be misinterpreted to mean that even for stock transfers input credit would be available in other States. This point should be read with the statement wherein the seller will get input credit to the extent of 4 per cent for stock transfer. That means it will be more or less like a Central Sales Tax (CST) sale, as no credit is available for 4 per cent of the input tax paid.

The Paper, in another para, says that the "tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit." It has been clarified that no credit will be available for purchase of goods from other States.

It is, hence, clear that the chain of offsetting input credit is not available once sales are made to other States. Thus, the boundaries between States have not been totally removed.

Carrying over of tax credit

While credit can be taken on the tax paid on input, if the same exceeds the tax payable on sales in a month, the excess unadjusted credit can be carried over up to the end of the next financial year — that is, two years — after which the same will be eligible for refund. This means that the block concept of two years would be followed.

Input tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments, with each State having the option of reducing the number of instalments.

One fails to understand the rationale behind 36 instalments? Under Cenvat credit, the same is adjusted in two years irrespective of the month of purchase. The method used in excise should have been followed in VAT too. Moreover, as the excess credit can be carried forward for two years to claim refund, the same should have been the principle for the maximum number of instalments.

As for exports, tax paid within the State will be refunded in full within three months.

VAT rates

About 550 goods will be covered under VAT. There will be only two basic VAT rates, of 4 per cent and 12.50 per cent, plus a specific category of tax-exempted goods and a special VAT rate of 1 per cent.

This is in line with the basic structure followed in the European Union and the difference is only in the peak rate of 15 per cent followed there against the 12.50 per cent peak rate spelt out in the White Paper.

The Kelkar Committee on taxation reforms had suggested 15 per cent as the ideal VAT rate. The Government may raise the peak rate to 16 per cent, which is the centralised rate followed in other pieces of legislation.

Related matters

On introducing VAT, the Government proposal to abolish turnover tax, surcharge, additional surcharge and special additional tax.

Likewise, if States continued with entry tax, it is to be made VAT-able or abolished. But this will not be applicable to entry tax levied in lieu of octroi.

The intention of continuing with octroi is difficult to comprehend, as this is an outdated tax levied by some States out of political compulsions.

On dealers, the White Paper states that those with a gross annual turnover above Rs 5 lakh must be compulsorily registered.

However, small dealers with an annual gross turnover not exceeding Rs 50 lakh can opt for a composite scheme with payment of tax at a small percentage of gross turnover. Under the scheme, input tax credit will not be applicable.

Coming to regulation, the Paper says that "a regulatory framework in terms of taxation information exchange system is being implemented which will give a comprehensive picture of inter-State sale of all commodities.

"The timeframe for creating the infrastructure and for completion of the set up is one year, which will give a detailed picture on the inter-State sales."

This is similar to the arrangement in the EU and the US. As the idea is good and has been seriously considered at the initial stage of implementation, the setting up of this system should have been outsourced. This would prevent delays and bureaucratic tangles.

Summing up, the White Paper has indeed kick-started the debate for serious implementation of VAT in the country.

With the phasing out of CST, which will be reviewed next year, there will be no major impact in the tax revenues.

The 2003 Budget had said that the CST would be reduced to 2 per cent on implementation of VAT. But because of State pressure, this has not happened.

It is not known whether input credit can at least be claimed against CST liable for a dealer.

Moreover, as the input credit is not available for inter-State sales, it will be more or less like the sales tax regime followed in States. The essence of VAT, which is claiming credit for the whole value-added chain transcending State boundaries, is still not a reality

Nevertheless, the Government needs to be commended for at least making States take VAT seriously and taking effective steps for implementation.

As many countries have already implemented VAT, it is time India drew on their experience.

The Central Government, during implementation, should frame procedures for harmonisation between Central and State VATs in a time-bound manner.

One hopes bold measures will be taken to transform the country's tax system into a world class one and, thereby, help achieve accelerated economic growth.

(The author, a chartered accountant, can be contacted at prasanth@gmrgroup.co.in)

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