By

S.Sridharan, VAT Consultant, Madurai

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 1^st 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 1^st October 2006. It is therefore desirable to implement VAT from 1^st 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 administration software.

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 24 months.

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% composition tax).

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 is efficient.

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