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After three years of missed deadlines, the system of Value Added Tax has finally replaced the earlier Sales Tax regime in as many as 21 States and Union Teritorries. Nine states are yet to integrate themselves into the new regime, and whatever be the reasons, political or economic, there can be little doubt that the compulsions of a superior system of taxation will drive them towards eventual integration.
In March 2003, a Handbook on Value Added Tax was prepared at the initiative of the Council for Leather Exports, Chennai. The handbook was fairly detailed, covering the historical background of indirect taxation in the country, the drawbacks of the existing regime, comparative evaluation of the existing regime vis- a- vis the VAT regime and so on. A special feature of the Handbook was the comparison of the VAT provisions of five prominent leather/leather product producing States, not only to understand the impact of these provisions, but also to facilitate the Council to represent before various State Governments to ensure uniformity throughout India.
Two years later, we have had to revisit the handbook for a number of reasons, chiefly due to the revisions effected by almost all State Governments over this period. It was also felt that additional models to bring out the features of VAT would be required to educate members about how prices will change in the VAT regime. The section on Frequently Asked Questions also needed to be revisited given the revision to the various provisions of the State VAT Acts.
Additions have been made to the section on “Issues on VAT” by incorporating new issues raised in various forums and in the Press. Considering the various modifications in the original draft VAT laws over the last two years, a complete overhaul of the section on State-wise Analysis of VAT Laws has been effected.
The main purpose of the Study Report continues to be one of familiarising the reader about the concepts and working of the VAT Regime. The Handbook starts with providing some outlook on the global and historical perspective of VAT as a system of taxation, followed by the structure and evolution of indirect taxation in the country. Against this background, the Handbook takes the reader into the concept of VAT and its features.
Later sections focus on VAT Acts of various States, extracting some of the important provisions of each State Act and placing them in comparison with like provisions of other States. The States covered are Delhi, Maharashtra, West Bengal and Punjab. The provisions thus covered include those relating to Registration and incidence of Taxes, Input Credit-Eligibility/Ineligibility/Reverse Credit, Composition Scheme, Treatment of Capital Goods, Transitional issues and a number of other issues.
However, at this stage a caveat is considered necessary. As in the case of any new legislation, the Government, Assessees, Commercial Taxes department and Tax practitioners go through a learning process during the initial phase. It is probable that the present law may be found inadequate in dealing with some situations, or may need refinement. The Chairman of the Empowered Committee also has mentioned that States will review their respective VAT Acts by 30th of April for any refinements. Therefore, we urge the Council and its members to constantly check for any revisions, to avoid pitfalls. Once this report is hosted on the Web, we will endeavour to keep updating the same from time to time.
Though this work is commissioned by an Export Promotion Council, it was considered necessary that the Handbook should not be restricted only to export transactions. After all, every exporter runs separate companies to cater to the domestic market, or is not really a 100% exporter. Knowledge of VAT at the overall level therefore was considered necessary.
Different models have been drawn up to bring out the impact of VAT on Prices as well as to enable members to understand the methodology of taking credit of input taxes. These are general models, and the actual facts and circumstances encountered in real business scenarios are bound to be quite different, as well as complex. Therefore, no general deductions have been made, either from the discussions, or from the models, lest they should mislead decision-makers in the business community.
To provide additional information to those interested, we have provided by way of Annexure, models showing different kind of transactions through the Production and Distribution Chain, Model showing the price effect of Composition Scheme, besides the Schedule of 4% VAT rates of Delhi, Maharashtra, West Bengal and Punjab. The rate classification for finished products and inputs used by the Leather Industry can be ascertained by looking up these schedules. It may be borne in mind that where items are not found in the 4% schedule, such items are taxed at 12.5%. Links to important websites have been given in the Bibliography.
Of course, the reader should view this Handbook only as an educational tool, and professional advice would be necessary for companies seeking to strategise under the VAT regime. We have not attempted to explain the procedural formalities of registration, assessments etc since the purpose of the Study Report has been to familiarize the Members with the concepts and workings of the new regime, rather than to serve as a Procedure Manual.
We thank the Council for Leather Exports for this opportunity to revise and update the Handbook on VAT and do hope that members will benefit from this initiative.
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