VAT is a system of levying taxes on sale of goods and has been introduced nationwide in 21 states of India on April 1, 2005.The only states that have opposed embracing the new system are Uttar Pradesh, Madhya Pradesh, Gujarat , Rajasthan and Tamil Nadu. VAT (Value Added Tax) is a consumption tax that is levied at every point in the distribution chain on the value added at each stage. In the traditional sales tax regime tax was levied at each stage on the total value of goods which in effect led to a cascading of taxes. Below is an illustration outlining the difference in the tax structure under the Sales Tax regime and the Vat system.

We can clearly see that for the same tax rate VAT results in lower taxes which directly impact the end price to the consumer.

Conventional Sales Tax System

Seller	Buyer	Selling Price	Tax Rate	Amount	Total
A (Raw material Supplier)	B	100	12%	12.00	112.00
B (Wants a profit of Rs. 10)	End Consumer	122.00	12%	14.64	136.64
Total Sales Tax collected by the Govt.				26.64

 

Value Added Tax

 

Seller	Buyer	Selling Price (Excluding Tax)	Vat Rate	Tax Payable	Invoice Value (Incl Tax)	Tax credit	Net Tax received by Govt.
A (Raw material Supplier)	B	100	12%	12.00	112.00	0.00	12.00
B (Wants a profit Rs. 10)	Consumer	110.00	12%	13.2	123.2	12.00	1.2
.				Total VAT collected by the Govt.			13.2

 

The difference arises primarily due to the fact that a dealer under the Vat system does not take into account the tax paid by him as a cost .Earlier he would treat the tax paid on his purchases as a cost, added some value/margin to it and then sold it to the customer on which there would be a further tax. Thus effectively there would be a tax on tax resulting in cascading of taxes. Under the VAT system the dealer would get credit equal to the input tax paid by him on the output tax he pays thus effectively only the value added by him is taxed and since he does not treat the input tax paid as a cost the margin is added to the cost of the input and there is no cascading of taxes as a result.

VAT and CST (Central sales tax)

In the existing sales tax system, sale price includes tax paid under the Act, but under VAT, sale price does not include tax paid under the Act. Hence, a dealer will not fix the sale price taking into account the tax paid on purchases. There is provision for set off of tax paid if the goods are exported or sold in course of inter-state trade and commerce. This is applicable to all the State's VAT Law. For example, if a dealer has paid tax Rs.50.00 on his purchases of goods valued Rs.500.00, and adds value to the tune of Rs.450.00, under the sales tax system, he will sell the goods in course of inter-state trade at Rs.1000.00 + CST @4% (Rs.40.00). Under VAT, he will sell the goods at Rs.950.00 + CST @ 4% (Rs.38.00) as he will get input tax credit of Rs.50.00. CST may be phased out completely within two years. Under VAT, a dealer is likely to get the goods at Rs.988.00 instead of Rs.1040.00 and after two years, the goods will be available to the consuming state at Rs.950.00 instead of at Rs.1040.00.

 

Pre-Vat Situation

Even before the nationwide implementation of VAT on April 1, 2005 few states of India already had a VAT system in place. Haryana was the first state to do so in April of 2003 when it passed the Haryana Value Added Tax Act .The implications of VAT are that there will be no difference in the tax payments of a company when it comes to sales within the same state. India has a federal structure and most taxes on sales are collected by the consuming state i.e. in which the sale is made. Thus where the sale is made makes a big difference to the tax payments with respect to the rate applicable and other taxes levied on the movement of goods across states such as Inter-state tax and entry tax. In the present tax structure companies design their logistics in order to minimize tax savings rather than maximize operational efficiency. A company that may be well served by having only one warehouse or stockyard may decide to have as many warehouses in the states of its biggest sales in order to escape Inter-state Sales tax.

 

Post-Vat Situation

Since VAT has not been implemented in each and every state of India the situation has become complicated. Twenty-one states have implemented VAT but they are still at various stages with regard to their implementation programme and it may take upto a year for all of these states to complete the phasing in of the new system. Every state has decided to bring in its own flavor of VAT with varying rates for the same goods even though the white paper on VAT brought out by the government restricts states to only 4 rates 12.5%, 4%, 1% and 20%.

Conclusion

In addition to reducing the tax burden on traders, VAT also helps create a homogenous tax structure and, therefore, a level marketplace. This is essential to India 's plans of becoming a more active international player in world trade.

VAT can create a win-win situation for India , as it has in many countries across the world. Today, the technology exists to help organisations make a smooth transition to VAT, easing the burden of such a fundamental change in taxation. India is ready for VAT.