The Value Added Tax (VAT) is a type of indirect tax and is one of major source of revenue to the state. The VAT system was introduced in India by replacing the General Sales Tax laws of each state. The VAT system of taxation was adopted by Indian States and Union Territories in the Year 2005 by replacing the General Sales Tax Laws with New Value Added Tax Acts and the supporting Value Added Tax Rules for proper administration and collection of Tax. Each state or union territory has its own methods to assess the tax liability and collection methods from the dealers who fall under the purview of VAT. 

 

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. Sales tax is levied on the sale of movable goods. Most of the Indian States have replaced Sales tax with Value Added Tax (VAT) from 1 April 2005. VAT is imposed on goods only and not services and it has replaced sales tax.

 

The commercial tax department introduced a new method of levying tax called as the Composition Scheme especially after considering the small dealers whose turnover was low and were unable to maintain the records as per the requirements of VAT Act. These dealers have to pay a lump sum as VAT on the sale value of goods. The VAT paid will not be shown in the invoices. They can account for the total turnover and pay VAT on the same at the end of the return period.

 

In India's prevalent sales tax structure, there have been problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in this structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. Hence, the VAT has been introduced to replace such sales tax structure. Moreover, it seeks to phase out the Central Sales Tax (CST) and several efforts are being made in this regard. 

 

The main motive of VAT has been the rationalization of overall tax burden and reduction in general price level. Thus, it seeks to help common people, traders, industrialists as well as the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system. The main benefits of implementation of VAT are:- 

 

Minimizes tax evasion as VAT is imposed on the basis of invoice/ bill at each stage, so that tax evaded at first stage gets caught at the next stage; 

 

• A set-off is given for input tax as well as tax paid on previous purchases;

• Abolishes multiplicity of taxes, that is, taxes such as turnover tax, surcharge on sales tax, additional surcharge, etc. are being abolished; 

• Replaces the existing system of inspection by a system of built-in self-assessment of VAT liability by the dealers and manufacturers (in terms of submission of returns upon setting off the tax credit);

• Tax structure becomes simpler and more transparent;

• Improves tax compliance; 

• Generates higher revenue growth; 

• Promotes competitiveness of exports; etc.

 

However, if the VAT is considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level, the Goods and Services Tax (GST) will be a further significant breakthrough – the next logical step -towards a comprehensive indirect tax reform in the country. 

 

In the existing State-level VAT structure there are also certain shortcomings as follows. There are, for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. 

 

The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State. The existing threshold of goods under State VAT is Rs. 5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States. A uniform State GST threshold across States is desirable and, therefore, the Empowered Committee has recommended that a threshold of gross 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 considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the threshold for services should also be appropriately high. This raising of threshold will protect the interest of small traders.

 

Implementation of GST will streamline the tax administration between the union and the states as well as goods and services. However, in order to implement it, consensus among the states is required. Easy tax structure will not only help in increasing the tax revenue but also in increasing the business activity.

 

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