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VALUE ADDED TAX

VALUE ADDED TAX - ISSUES & CONCERNS -. VALUE ADDED TAX. Timir Baran Chatterjee Vice President & Company Secretary DIC India Ltd . Presentation for : XLRI,IIT,KGP,ICSI,ICAI,CII,BCCI,DIC,TISCO,MITSUBISHIPTA. WHY THERE IS A CONCEPT OF VAT:.

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VALUE ADDED TAX

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  1. VALUE ADDED TAX- ISSUES & CONCERNS - VALUE ADDED TAX Timir Baran Chatterjee Vice President & Company Secretary DIC India Ltd. Presentation for : XLRI,IIT,KGP,ICSI,ICAI,CII,BCCI,DIC,TISCO,MITSUBISHIPTA

  2. WHY THERE IS A CONCEPT OF VAT: • No way different from LST with respect to the fundamentals • Method of levy differs in the two system The traditional system of levying tax- FIRST POINT TAX - NEXT POINT TAX LAST POINT TAX - MULTIPOINT TAX

  3. The Traditional System of Levying Tax • First Point Tax - Avoid cascading effect but Govt. loses its control on last point sales with added value - leakage of revenue due to various tax management in the subsequent salesafter First Point. • Next Point Tax(especially for banded goods)- Burden of tax is shifted to the next point • Last Point Tax-Govt. gets revenue on value addition upto last point but loses its control on origin of manufacture- possibility for leakage of revenue / escaped taxation – Not popular with Govt.

  4. The existing system of levying tax Contd.Multipoint Tax- The Govt. keeps control on overall sales but cost increases due to cascading nature of taxation VAT is a solution to overcome all the above problems and acceptable both to the Assessor (Govt.) and the Assessee (Dealer)

  5. MEANING OF VAT • VAT in common man's language • “is a tax levied on the value added to any product or service AT EVERY STAGE” • Destination based tax system • Sales to Registered Dealer by a Registered Dealer • Provision for input tax credit tax Credit paid at the previous point of purchase. • The tax paid by a registered dealer is netted. • Tax is ultimately borne by the consumer

  6. UNDERSTANDING VAT How VAT would work is best illustrated hereafter which indicates that everybody becomes happier under VAT regime with multi-point taxation but with lesser tax burden.

  7. Goods Manufacturer Raw Material Producer Sale Rs 100 (VAT Rs 10) Sale Rs 150 Gross VAT Rs 15 Net VAT Rs 5 (15-10) ASSUMING A VAT OF 10% Happy Consumer Wholesaler Sale Rs 180 Gross VAT Rs 18 Net VAT Rs 3 (18-15) Sale Rs 200 Gross VAT Rs 20 Net VAT Rs 2 (20-18) Retailer

  8. TAX RATE UNDER VAT · essential commodities, capital goods, basic inputs and declared goods >> 4%-PRINTING INK COVERED UNDER 4% · agricultural products and sea goods >> 0% · gold >> 1% · cigarettes, liquor, petrol, diesel >> 20% · Floor rate of 12.5% (Revenue Neutral Rate)

  9. VAT IS A SCIENTIFIC SYSTEM OF CHARGING TAX • Govt. keeps full control on all stages of value addition • No escape from tax net • It sets up lamp posts all along the value chain, thus bringing to light the entire geography of economic activity. • No Cascading effect and thereby reduces overall cost • Reduction of Raw Material cost- sales tax is no more an input cost to the manufacturer • Ultimate consumer is satisfied due to low cost

  10. ULTIMATE OBJECT OF VAT IS NOW FULFILLED INCREASED TAX BASE MAKES INDIA SINGLE ECONOMY TRANSPARENCY NO CASCADING EFFECT COMPETITIVE PRICES VAT RESULTS REWARDS PRODUCTIVITY NEUTRALITY IN INDIRECT TAXES NO REVENUE LEAKAGE

  11. PRE-REQUISITES FOR EFFECTIVE VAT REGIME: India needs to take following steps to introduce VAT without further delay- · Application of information technology · Wide spread computerization · Bringing all registered dealers into tax net · Avoiding exemptions and incentives · Granting rebate on already paid tax · Phasing out of Central Sales Tax

  12. VAT: Issues and concerns: Proposed VAT is not truly an ideal VAT system of taxation since- • No input Tax credit on Central Purchases of Raw Materials and Capital goods is available • No input tax credit for Branch Transfer is available ( Credit available in excess of 4% ) • CST would continue ; CST is an origin based tax system • Exemption/Remission will continue for CST Transactions • Not withdrawal of other taxes like Entry Tax, Octroi, Service Tax etc and no input tax credit is available- As per White Paper Entry Tax to be vatable. • Most of the Governments not ready with IT systems

  13. COMMERCIAL ISSUES TO BE TACKLED BY THE INDUSTRY AFTER IMPLEMENTATION OF PRESENT FORM OF VAT

  14. A. CONTINUTATION OF CST AFTER VAT ADOPTION IS A MAJOR ANOMALY- IMPACT • INTER STATE PURCHASES WOULD BE COSTLY- • MAJOR SUFFERER – EASTERN & SOUTHERN BASED INDUSTRIES BOTH IN TERMS OF PURCHASE AND SALES [70% RAW MATERIALS ARE SOURCED FROM OUTSIDE THE STATE] • CUSTOMERS WOULD BE ASKING TO SET UP A LOCAL DEPOT/BRANCH/DISTRIBUTOR- COST WOULD INCREASE • COST MISMATCH BETWEEN DEVELOPED MARKET AND UNDERDEVELOPED MARKET • UNFAVOURABLE PRICING EFFECT DUE TO COST MISMATCH AND AVAILABILITY OF INCENTIVES • IT WILL LEAD TO UNEVEN COMPETITION

  15. B. NO VAT CREDIT IS AVAILABLE IN CASE OF BRANCH TRANSFER- IMPACT • Companies having centralized manufacturing system and selling through Depots/Branches would be highly affected. • Sales through outstation C & A system will also be affected since materials transferred to C&A would be considered as branch transfer

  16. A FEW TAX MANAGEMENT SOLUTIONS SLOGAN IN A POSITIVE NOTE “ ENHANCE LOCAL PURCHASE, INCREASE DIRECT SALES – LOCAL OR CENTRAL” • SLOGAN IN A NEGATIVE NOTE “REDUCE CENTRAL PURCHASE, STOP BRANCH TRANSFER AND AVOID SELLING THROUGH OUTSTATION DEPOTS/C & F AGENTS”

  17. While framing Management Objective, a Company ought to reckon that - Business is not solely guided by Tax advantages; Other Commercial issues are equally important.

  18. SOME ACTION PLANS • Analyze existing sources of Purchases – Central and State • Explore possibilities to convert the existing central purchases to local purchases – Ask supplier to open Branch, Depots or ask them to match the price considering VAT impact. • Analyze existing sales through Branch Transfer

  19. SOME ACTION PLANScontd. • Explore the possibilities for direct sales to customers instead of selling through outstation Branches/Depots • Less dependence on Centralised purchase system- Units to buy materials directly and from local sources • Need for re-alignment of production facilities to maximise VAT benefits (In case of multi unit manufacturing facilities)

  20. SOME ACTION PLANS • VAT Credit is available on Opening Stock on 1.4.2005- Keep Costing system ready to calculate the LST included in the opening stock, finished goods and work-in- progress. Refund to be made in 6 monthly instalments and to start after 3 months from the date of filing of the claim. Keep minimum stock as on 31.3.2005 to minimize claim; Buying on 1.4.05 would immediately allow credit • Make necessary Impact Analysis based on existing system of Purchase and Sales- (Local Purchase - VAT is available; Central Purchase - No Vat is available; Branch Transfer- No VAT credit is available)

  21. SOME ACTION PLANScontd. • Companies enjoying Remission / Exemption Scheme to re-work their Cash Flow and Profitability system considering that benefits for local purchases and sales may be withdrawn in due course. - Benefits under CST would be pahsed out in next two years • VAT accounting and software system would be in place • Designing of VAT Invoice - Start Using TIN

  22. T H A N K Y O U

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