Wednesday, August 31, 2011

VAT Spats and the Reality

The spat over the introduction of value added tax (VAT) is
not quite unanticipated. Competing interest groups are
as old as public policy itself. So, if traders oppose VAT,
while manufacturers advocate it, one need not perceive altruistic
or humanitarian underpinnings for the varying postures. Business
dwells on self-interest. It need not rely on any other spur to
react to VAT either. However, what has not been strikingly
obvious to many people in the entire chronology of events so
far is the role emerging for the civil-society movement
in mobilising public opinion in favour of right
Consumer groups can play a significant role
in educating the masses of the need to go for VAT.
It would, otherwise, be difficult for consumers to
learn of the intended benefits of the transition,
particularly how it will usher in a more transparent
tax regime than the current sales tax. Few consumers
know that the current regime taxes inputs multiply,
leading to higher prices of final goods. Besides, the
system is a web of complex provisions and
exemptions leading to mass evasion, not to mention
lobbying for still more concessions. So thick is the
maze of rules and rates that consumers have
hardly any clue about the correct amount they
ought to pay as sales tax.
How would VAT be an improvement?
Under VAT, tax is collected at each point of
sale in the production and distribution chain,
with the seller being entitled to a refund of
the tax paid on his purchases. This not only
does away with double taxation of inputs but also induces dealers
to make sales/purchases against bills, as refunds cannot be
claimed without tax invoices.
It is common to see consumers buying goods without a cash
memo or bill thinking that this would obviate the need for paying
sales tax and fetch them cheaper purchases. Little do they realise
that most products having a high potential for sales-tax revenue
get taxed at the stage where the manufacturer/importer sells his
goods to the wholesaler. So, whether consumers take a bill or
not, the tax is often already built into the price they pay. Retailers
exploit consumers’ ignorance and avoid recording their sales
transactions so that they can hide their actual sales from tax
The salient point of the matter is that since sales tax is
levied at one point only – either at manufacturer-wholesaler

level or at wholesaler-retailer level – there is high scope for tax
evasion. VAT alleviates this scope, as tax is paid at each stage of
sale and carries with it stringent penalties for default. It is precisely
on this account that unscrupulous traders are so stiffly opposed
to the introduction of VAT. On the other hand, honest traders
stand to gain, as VAT would minimise unfair competition from
dishonest traders engaged in underhand business. Moreover,
with only two basic rates, VAT would make it easy for consumers
to compute their exact tax liability.
Now, why should manufacturers, honest or
dishonest, find it in their interest to have a VAT
regime in place? Manufacturers are canny
enough to perceive a plus for themselves
in the transition. They know that VAT
would make their goods more competitive
nationally, as well as internationally,
through improvements such as avoidance of
double taxation and tax refunds in exporting
states. Also, VAT would make tax
administration simpler and promote ancillary
Given these advantages and more, the hue
and cry about VAT implementation would
seem quite unjustified. Or does it? In all
likelihood, prices would rise, if VAT were
implemented, at least in the short-tomedium
term, especially as the Central
Sales Tax is phased out in a gradual manner.
Moreover, small traders would be burdened
with extra bookkeeping obligations to be able to
claim refunds. However, this reflects, at best, a medium-term
adjustment, the costs of which would be quite insignificant visà-
vis the potential long-term benefits of the transition to a
simpler and more transparent tax regime. Besides, dealers with
an annual turnover of up to Rs. 500,000 will be totally exempt
from VAT formalities, while those with a turnover between Rs.
500,000 and Rs. 4mn would be able to minimise their accounting
obligations by opting for a flat composition tax at one percent of
their annual turnover.
The deadline for VAT implementation has been repeatedly
put off and so has been a section of the business community
that acknowledges the benefit potential of VAT. Consumers, of
course, have obvious gains to reap. But, the traders’ lobby could
pre-empt them. Herein lies a role for consumer organisations
that can form a counter lobby for the larger social good.


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