CLE::VAT

Barring some aborted experiments, sales tax is generally levied on the gross invoice value of the commodity without any input tax credit. This means that tax is also levied on tax already collected, resulting in a spiraling effect on the eventual price. According to a background paper prepared by ASSOCHAM, the cost disadvantage could be as high as 20 to 25% which is a substantial cost impacting the consumer price and industry competitiveness. Competitiveness, not only within India but also on the exporting front. This is brought out by way of two illustrations, the first illustration with specific reference to Declared goods in the state of Tamilnadu, and the second illustration comparing the Single Point system with the Multipoint system of taxation.

Illustration 1: Local Purchase of raw hide-conversion to dressed hides-manufacture of leather garments and eventual sale as leather garments in Tamilnadu:

Transactions	Value of Output	Tax due	Cascading Tax
Value of input	1,00,000
Add: TNGST 4%-Last point	4,000	4,000
Cost inclusive of TNGST	1,04,000
Cost of Conversion to Finished leather	25,000
Profit on Sale	10,000
Sale Value of Finished leather	1,39,000
Add: 0% tax-First Sale point
Invoice amount	1,39,000
Cost of conversion into Finished Garments including material costs.	1,00,000
Profit on Sale	45,000
Sale Value of finished Garments	2,84,000
Add: 12% tax-First Sale point		34,080	480
Invoice Amount	3,18,080
Total tax paid		38,080	480

While the production and distribution chain between the purchase of rawhides and sale of leather garments has resulted in tax revenue of Rs. 38,080/- the cascading effect on taxes apparently works out to Rs.480/-. Actually, the cascading effect is much more if one considers the tax of 12% on the tax embedded in the other inputs used for manufacture of leather garments.

The second illustration contrasts the position of a multipoint regime going through the production and distribution chain against the First Point Tax regime.

Illustration 2⁶: Deals with chemicals and other ancillary raw materials used for conversion:

Description	First Point Tax, say 10%		Multi-point Tax, say 10%
	Value of Output	Tax due	Value of Output	Tax due
MANUFACTURER
Value of Input	100	10	100	10
Value of output inclusive of tax	110		110
Value added	50		50
Value of Output	160	16	160	16
WHOLESALER
Purchase Costs	176		176
Profit-20% mark-up	35.20		35.20
Value of Output	211.20		211.20	21.10
RETAILER
Purchase costs	211.20		232.30
Profit-10% mark-up	21.12		23.20
Value of Output	232.32		255.60	25.60
Total tax collected		26		72.70
Value of goods at final point of sale	232.32		281.10
Tax yield as proportion of final sale price		11.2%		25.8%
Contribution of cascading to tax revenue		1		4.7
Additional impact on prices due to cascading (excluding tax cascading)	232.30-198-26=8.30		281.10-72.70-198=10.40
Total impact on prices of cascading as a percentage of the value of output excluding taxes	9.3 as a percentage of 198=4.7%		15.10 as a percentage of 198=7.6%

It is to be noted that the effect of cascading is more on the price than on the revenue accruing to the government as borne out by the fact that the additional revenue under the First point system is just Re.1/- while its impact on price is Rs. 8.30. Similarly under the Multi-point system, the effect of cascading on the revenue is only Rs. 4.70 while that on the prices is Rs. 10.40. If the above illustration were worked at a retail tax basis at the same 10% rate, the total burden of tax would be Rs. 19.80 making the final cost Rs. 217.80. What is even more important is that under the First Point tax system, a reduction in tax rate to 7.68% will restore the same revenue to the Government, but yet the eventual cost to the consumer is higher at Rs. 224.10 as against Rs. 217.80 under the Retail tax system. This brings out the adverse effect of a First point sales tax regime. However, as for the Retail Tax System, it is certainly the best way of taxation, causing least distortion because of the absence of the cascading effect, and also the ability to capture the entire value addition at the retail stage. However it has been found to be practically not feasible to administer the system, given the presence of millions of retailers over whom control has to be exercised.