While Industry and a section of
the trade are rooting for early implementation of VAT in Tamil
Nadu, it is reported that the Government is yet to take a policy
decision on implementing VAT. It is hoped that the decision
to implement VAT would be announced in the budget session of
the Tamil Nadu Assembly.
Demand for implementation of VAT
from 1st October,2006 has also been put forth. Implementation
of VAT mid year would be administratively inconvenient for the
tax administration and the trade and industry. While two assessments
may have to be made for the year 2006-07, dealers would also
have to prepare accounts for the periods ending 30th September,2006.
There could also be problems in claiming input tax credit on
stock of goods on the date of implementation of VAT with the
need to prepare inventory statement mid year instead of at the
end of the accounting year.
Considering the limited time available
it is doubtful if the administration can gear up for implementing
VAT from 1st October 2006. It is therefore desirable
to implement VAT from 1st April 2007.
As a late starter, Tamil Nadu has
the advantage of learning from the experience of other States
that have implemented VAT. The experience of other States should
be studied and the best practices adopted.
The foremost requisite for effective
implementation is the proper design of the VAT administration
software. VAT being a self assessed tax, with selective audit
and verification, the need for properly designed VAT administration
software cannot be overemphasised. With an initial honeymoon
period when the administration would not be carrying out extensive
checks, the only source of monitoring compliance would be the
Though I could be faulted for emphasising
on the need to have an efficient software as a risk management
tool for monitoring compliance even on the date of implementation
of VAT, the experience of other States that are yet to have
a fully functional administration software should highlight
the difficulties faced.
Every VAT invoice is a cheque issued
on the Government, with an obligation to either allow input
tax credit for set off against Output Tax (subject of course
to restrictions as in the VAT legislation) or to refund to the
dealers the Input Tax Credit not utilized for a period of 24
months which would a recurring deposit to be redeemed after
The software should be capable
of highlighting risk factors and facilitate broad cross verification
of claim of input tax credit of a dealer with output tax paid
by the selling dealer to alert on any misuse or improper availment
of Input Tax Credit facility.
It is learnt that in one of the
States use of bogus invoices for claiming input tax credit has
been recently detected.
The software should provide an
interface for the dealers to check their VAT credit status and
to track the progress of their refund claims. The dealer should
be able to check on the Input Tax Credit claimed on their invoices
by their customers so that they can alert on any bogus claim.
Keeping the population of VAT registered
dealers as low as possible in the initial years would be an
appropriate strategy to monitor VAT compliance. This could be
achieved by fixing a higher threshold for retail dealers and
composition rate of tax lesser than 1% as in West Bengal and
Kerala. A lower percentage of composition tax, say 0.5%, at
least in the initial years, would lessen the resistance of retail
dealers to implementation of VAT. It is learnt that in some
States with lower threshold and composition tax rate of 1%,
the retail dealers are not enthusiastic to opt for composition.
Maybe, the 1% tax is a disincentive.
For instance, if the cost is Rs.1000,
the retailer would have paid VAT at 12.5% of Rs.125/- at the
point of purchase. As a composition dealer the cost would be
Rs.1125/- and assuming a profit margin of Rs.50/- the tax inclusive
cost to the consumer would be Rs.1186.75 (Rs.1125 + Rs.50 margin+1%
As a VAT registered dealer, the
cost to the consumer would be Rs.1181.25 (Rs.1000 +profit of
Rs.50 + VAT at 12.5%)
A lower rate of composition tax,
at least in the initial years, would be an incentive to opt
for composition. The tax contribution by a large population
of small tax payers would be a small proportion of the total
tax revenue. The administration could focus on monitoring compliance
of medium sized enterprises and large tax payers who contribute
a larger proportion of tax revenues.
An effective campaign for educating
the dealers on VAT, distribution of pamphlets on VAT compliance
and continued assistance by establishing help centres across
the State is essential. I have noticed in some of the VAT implementing
States, the non compliance/ short payment of tax is more due
to lack of knowledge and lack of clarity in drafting of VAT
legislation than being deliberate.
Care should also be taken train
all officials on VAT provisions to be able to guide the taxpayers
on at least basic compliance issues. An effective mechanism
for clarifying issues and doubts as the Authority for Advance
Rulings in Andhra Pradesh should function from day 1. It is
essential to build community confidence that the tax system
In Certain States, Industrial Inputs
have been listed. Considering the fact that it is almost impossible
to list all industrial inputs, a view may be taken to incorporate
the provisions of Section 3(3) of the TNGST Act for the purpose
of charging concessional rate of VAT at 4% on industrial inputs.
This would necessitate the submission of a form similar to Form
XVII under the TNGST Act. Haryana has provided for a declaration
for Industrial Inputs.
VAT purists would scoff that Forms
have no place in VAT. It may be appropriate to mention that
international experts opine that No One Size Fits All. Each
country would have to develop the VAT design as appropriate.
It is often written that VAT implementation is more about "Trade
off than truths (concepts)".
Even in Canada where sub national
VAT is successfully implemented, there is disparity between
States in the design of VAT. It is commented by international
experts that Canadian VAT may lack purity but it works. So one
should not be dogmatic but be practical in designing the VAT
system based on the economic ground realities.
Issues like the desirability of
specifying HSN for Schedule entries, desirability of defining
capital goods and treatment of existing tax concessions should
be discussed with industry and trade bodies.
Considering that greater focus
of the administration would be required for effective implementation
of VAT, bold decisions like summary assessment of the returns
of all dealers for the years prior to implementation of VAT
(except perhaps those subject to enforcement action and requirement
of furnishing the Statutory forms) nay have to be taken. The
press reports of a Samadhan Scheme to settle pending disputes
is welcome. The scheme should be such that compliant taxpayers
should not resent.
The focus should be on effective
implementation of VAT and revenue considerations should, in
my opinion, take a second place as an efficient administration
would ensure proper realisation of revenue in the long run.
The design of VAT should be simple, transparent and practical.
It is hoped that the Government
of Tamil Nadu rolls out VAT smoothly and makes compliance easy
for the taxpayer