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Nature and Need Of Value Added Tax: Provisions of Dispute Resolution In U.P.Value Added Tax Act,2008
June 7th, 2008 Posted in Forgery, Bank Robery, Sales Tax, Traffic, Property and legal Advices, Divorce And Faimly, Property Dispute, Step Parent Adoptions, Income Tax | No Comments »In the last fifteen years we have seen a sea change in our Indian Economy. The era of liberalization and opening of Indian Economy have given us a lot of opportunity to usher India from a developing nation to developed nation. The credit of all this growth and prosperity goes to uniqueness of the Indian Constitution.
The Constitution of a country is the supreme law of the land, or in the words of Hans Kelson “grundnorm”for all the norms of the country.
Our Indian Constitution is the fountain head of all the laws in the country. The present paper with the mechanism of value added tax (VAT) under Indian Constitution.
Though India is a Union of states (Article 1), but it has much federal features, which includes the federal revenue system, much similar to that of the federal constitutions of U.S.A, Canada Australia.
The unique feature of the Indian Constitution is that each and every financial matters which were present before the independence (The Government of India Act, 1935) and which could arise in the near future have been incorporated in the Indian Constitution by the Constitution makers. Sovereignty of nation and its function:According to Salmond:
”Sovereignty or supreme power is that which is absolute and uncontrolled within it’s own sphere.”
[1] The classical Economist Adam Smith in his classic work[2] “advocated the concept of laissez faire, and attributed the ”duties of sovereign” into following heads:
·defending the society from the violence and injustice of other independent societies,
·securing internal justice between citizens,
·erecting and maintaining those public institution…and works, which though they may be in the highest degree advantageous to a society, could never repay the expenses to any individual.
However social economist such as John Stuart Mill advocated the role of state action. The concept of the state and its functions are gradually changing. Now the function the state is to maximize the welfare of the state. The present day nations are moving towards state of “welfare estate”
Concept of revenue
The term revenue is defined as” an income, especially the total annual income of the State government departments which collects money for public and funds
[3]. A good revenue system is one which possesses good taxes.
Adam Smith in his book “THE WEALTH OF NATIONS” stated general principle of taxation or canon of taxation.
Adam Smith’s Canons of taxation
(i) The canon of EQUALITY:
The subject of every state ought to contribute towards the support of government, as nearly as possible, in proportion of their abilities,
(ii) THE CANON OF CERTAINITY:
The tax, which an individual is bound to pay, ought to be certain and not arbitrary,
(iii) THE CANON OF CONVENIENCE:
Every tax ought to be so levied at the time or in the manner, in which it is most likely to be convenient for the contributor to pay it,
(iv) THE CANON OF ECONOMY:
Every tax ought to be contrived as both to take out and keep out of the pockets of the people as little as above what it brings the public treasury of the State.”
Concept of revenue and revenue system of KAUTILYA
“All (state) activities depend first on the TREASURY. Therefore, a King shall devote his best attention to it”
[4] The legendary ancient economist and administrator KAUTILYA gave great emphasis on the treasury (kosa) for the production and development of the state. He again cautions the king that he should keep the army and treasury under his own control.
The importance of accumulation of wealth is emphasized throughout the text.
A clear distinction is maintained between taxpayers and tax-exempt persons as well tax-paying and tax-exempt village, a tax–payer was not allowed to settle in a tax –exempt village.
The following are the means of increasing the wealth of the state:
[5] · Ensuring the prosperity of state and enterprise,
· Continuing well tried (and successful )polices,
· Eliminating theft,
· Keeping strict control over government employees
Increasing agricultural product,
·Promoting trade,
·Avoiding troubles and calamities,
·Reducing (tax)exemptions and remissions and
·Increasing cash income.
TAXES IN CASH AND IN KIND mentioned by KAUTILYA[6]
Following are the taxes mentioned in the Arthshastra
1.Customs duty (shulk )which consists of
Import duty(pravesya)
Export duty (nishkramya)
Octroi and other gate tolls (dwarabahikadeya)
2. Transition tax (vyaji) including
Mnavyaji (transaction tax for Crown goods)
3. Share of production (bhag) including
1/6th share (shadbhaga)
4. Tax on (kara) in cash
5. Taxes in kind (PRATIKARA) including
Labour (vishit)
Supply of soldiers (ayudhyia)
6. Countervailing duties or taxes (vaidharana)
Road cess (varani)
7. Monopoly tax (parigha)
8. Royalty (prakriya)
9. Taxes paid in kindby Villages (pindakara)
10. Army maintenance tax (senabhaktham)
11. Surcharges (parsvam)
12. Road cess (vartani)
Economics of taxation
Definition of tax: - “Taxes are compulsory payment to governments without expectation of direct return or benefit to the tax payers.
[7] Professor E .A .R. Selligman defined tax as “a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all, without reference to special benefits conferred.”
[8] From above definitions we can say that a tax possesses three characteristics:
1-A tax is a compulsory contribution to the state from citizens or even from aliens subject to the jurisdiction for reasons of residence or property and this contribution is for general or common use.
2-A tax imposes a personal obligation on the tax payer,
3-The contribution received from the tax payers, may not be incurred for their benefit alone, but for the general and common benefit.
Legal Definition of Tax[9]
The term tax has been defined in the as follows:
“Tax is a tribute or imposition laid upon the subject, which being certainly an orderly rated, was wont to be paid into the kings exchequer if differs from what is commonly called is a subsidy in this, that it is always certain as it is set down in the exchequer book (Tomlins Law Dic). Again, quoting the Supreme Court of India on page 1864, “A tax is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered.”
[10] The difference between direct and indirect taxation
The difference was succinctly laid down by Lord Merrivale of Privy Council as follows:
“A direct tax……is one which is demanded from the very person who it is intended or desired should pay it. Indirect taxes are those which are demanded from one person in the expectation and the intention that he shall indemnify himself at the expense of another.”
[11] Purpose of Taxation
The primary purpose of taxation is to collect revenue. Power to tax may be exercised for the purpose of regulating an industry, commerce or any other activity, the purpose of levying such tax, or an impost, the exercise of sovereign power for the purpose of effectuating regulation though incidentally the levy may contribute to the revenue.
There is nothing like and implied power to tax. The source of power does not specifically speak of taxation and cannot be so interpreted by expanding it with as to include therein the power to tax by implication or by necessary implication.
Learned author Cooley observed:
“There is no such thing as taxation by implication. The burden is always upon the taxing authority to point to the act of assembly which authorizes the imposition of the tax claimed.”
[12] Power to taxation
Power to tax is not an incidental power. Learned author Seervai observed that- “although legislative powers include all incidental and subsidiary powers, the power to impose a tax is not such a power under our Indian Constitution. It is for this reason that it was held that the power to legislate in respect of inter-State trade and commerce (Entry 42 List 1, Schedule Seven did not carry with it the powers to tax the sale of goods in inter-State trade and commerce before the insertion of entry 92A in List I and such powers belong to the State under entry 54 in List II. Entry 97 in List I also militated against the contention that the power to tax is an incidental power under our Constitution.”
[13] “In a taxing act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in. Nothing is to be implied. One can only look fairly at the language used.”
[14] Authority of taxation. under India Constitution
“Art. 265: No tax to be levied or collected except by authority of law.”
The power to tax is an attribute of sovereignty of a country. Parliament of our country is allowed more freedom of choice in taxation in comparison to other laws. Taxation is not merely a means to raise revenue but a means to reduce inequalities. In taxation matters, it is not a question of power, but one of constraints of the policies the interest of economy, of trade, profession and industry, the justness of the burden, its acceptability and other similar considerations.
A tax can be imposed only by a Statute and not by a rule or regulation, unless the status authorizes this to be done.
(1) Within the legislative competence of the legislature being covered by the entries in Schedule. VII of the constitution, (Art.246)
(2) The law should not be prohibited by any particular provision of the constitution, such as – Arts.276 (2), 286 etc.
(3) The law on the relevant portion thereof should not be invalid under Art.13 for repugnancy to those freedoms which are guaranteed by Part.III of the constitution (Fundamental Rights) which are relevant to the subject matter of the law.
Constitutional limitations on taxing authorities.
(1) the law made in exercise of the taxing power of the State must be covered by the Entries in the legislative List assigned to it.
(2) The law should not bypass the prohibition imposed by various provisions of the Constitution, viz., Arts. 276, 285, 286, 289, etc.
(3) The law must not contravene Art. 13 of the Constitution.
(4) The law must not be in conflict with the fundamental rights of a citizen or must not put unreasonable restrictions on the freedom of trade or business guaranteed under Art. 19 (1) (g) of the Constitution.
(5) The purpose of taxation is not only to raise revenue but is also to reduce inequalities. Parliament is allowed more freedom of choice in matter of taxation vis-à-vis other laws.
Source of the taxing power
1. The entries in the Legislative Lists are divided into two groups-one relating to the power to tax and the other relating to the power of general legislation relating to specified subjects. Taxation is considered as a distinct matter[15] for purpose for legislative competence. Hence the power to tax cannot be deducted from a general legislative Entry as an ancillary power. Thus, the power to legislate on inter-State trade and commerce under Entry as an ancillary power[16]. Thus, the power to legislate on inter-State trade and commerce under Entry 42 of List I does not include a power to impose tax on sales in the course of such trade and commerce.
2.There is not Entry as to tax, in the Concurrent List; it only contains an Entry relating to levy of fees in respect of matters specified in List III other than court-fees. It follows therefore that it is not competent for Parliament to intrude upon the exclusive power of a State Legislature to levy a tax on the sale or purchase of goods, by making a law under Entry 33 of List III
[17]. The ambit of taxing power
1. If the power to impose a tax is established, the power to collect the same is necessarily implied. The Legislature having the power to impose a tax has also the power to prescribe the means by which the tax shall be collected and to designate officers by whom it shall be enforced; the obligation and indemnity of those officers; the means to ensure proper realization of the tax; e.g., demanding security form the class of persons liable to pay the tax
[18].
2. If follows form the above that the method and machinery for the collection of a tax is no criterion for judging the vires of the tax law.
3. The following powers flow from the power to impose a tax, as ancillary powers-
(i) To provide for refund of a tax illegally or improperly collected and to impose restriction upon the right to claim such refund[19].
(ii) To provide for the prevention of evasion of the tax imposed[20].
(iii) To levy a penalty for the proper enforcement of the taxing statute, or for collection any amount wrongly under colour of that statute, whether by way of fine or forfeiture.
4. On the other hand, in exercise of taxing power conferred by exercise of a legislative Entry, the Legislature cannot provide for the following, which cannot be said to be ‘ancillary’ to the legislative power in question:
(i) That any money collected by a person by a wrong application of a taxing law would still be recoverable by the State as if it were a tax imposed under its legitimate powers, even though the Legislature may penalize such illegal collection[21].
(ii) The result would be the same if the law required the dealer who has recovered an illegal sum which was not recoverable under the taxing law to deposit it with the State so that the State might refund to the person from whom the money had been illegally recovered, because the requirement of deposit with the State is an exercise of the taxing power (say, sales tax) over a subject which was outside that power (i.e. recovery of a money which could not be collected as sales tax).
Delegation of taxing legislation
The power to impose and assess a tax is essentially a legislative function[22].
It is essential for the legislature, either prescribe the rate of taxation itself or formulate a policy for taxation of the rate by a subordinate authority[23].
The legislature may fix a maximum rate of imposition (Example: a tax as such) and authorizes the executive to determine the rate not exceeding the maximum prescribed by the legislature, according to the exigencies of the public revenues[24].
The delegation of power to tax, fix the rate of taxation will be valid if the statute gives guidance to the delegate as to –
(a) how the powers to be exercise.[25]
(b) the legislative policy is laid down.[26] or
(c) checks are provided to ensure that reasonable rates are fixed by the local bodies.[27]
(d) the rate is to be fixed by the delegate with the approval of the government or after consulting the wishes of the local inhabitant’s.[28].
Following are the non-essential functions with respect to taxation which may be delegated to the Executives:
(a) the power to select the persons, goods or transactions on which the tax is to be laid.[29]
(b) the power to amend the schedule of exemptions[30].
(c) The termination of the rates at which it is to be charged in respect of the trade of different classes of goods.[31]
(d) The choice of the particular tax suited to the purposes of act and within the competence of the legislature concerned.[32]
(e) Setting of a machinery for collection of such taxes
(f) To determine the details relating to the working of the Taxation laws.[33]
The division of sources of revenue has been provided in VII Schedule of the constitution of India. (Article 246).
The taxing entries in List I :Union List
1. Taxes on income other than agriculture income (E.82)
2. Duties of customs including export duties (E.83)
3. Duties of excise on tobacco and other goods manufactured or or product in India except-
(a) Alcoholic liquor for human consumption,
(b) Opium, Indian hemp and narcotic drugs and narcotics, but including medicinal and toilet preparation containing alcohol or any substance included in paragraph (b) of this entry (E.84)
4- Corporation tax, (E.85)
5- Taxes on capital value assets, exclusives of agricultural land, of individual and companies; taxes on capital of companies. (E.86)
6- Estate duty in respect of property other than agricultural land. (E.87)
7- Duties in respect of succession to property other than agricultural land. (E.88)
8- Terminal taxes on good or passengers, carried by railway, sea or air; taxes on railway fares and frights. (E.89)
9- Taxes other than stamp duties on transactions in stock exchanges and futures markets. (E.90)
10- Rates of stamp duties in respect of bills of exchange , promissory notes ,bills lading ,letters of credit, policies of insurance ,transfer shares ,debentures ,proxies ,and receipts . (E.91)
11- Taxes on sale or purchase of newspaper and advertisements published therein. (E.92
12- Taxes on the sale or purchase on sale and purchase of goods other than newspapers, where such sale or purchase takes place in the course inter-state trade and commerce (E.92 A)[34]
13- Taxes on consignment take place in course of inter-state trade or commerce. (E.92 B)[35]
14- Taxes on services (E.92 C)[36]
15- Any other matter not mentioned in List II or List III including any tax not mentioned in either of those list. (E.97)
The taxing entries in the List II :State List
1.Taxes on agricultural income (E 46).2.Estate duty in respect of agricultural land (E48).
3.Taxes on lands and buildings (E 49)
4.Taxes on mineral rights subject to any limitation imposed by parliament by law relating mineral development (E 50)
5.Duties of excise on the following goods manufactured or produced in the state and countervailing duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:(E 51)
(a)Alcoholic liquors for human consumptions ;opium , Indian hemp and other narcotic drugs and narcotics; but not including medicinal and toilet preparation containing alcohol or any substance including in sub paragraph (b) of this entry (E 51)
6.taxes on the entry of goods into local area for consumption ,use or sale therein (E 52)
7.taxes on the consumption or sale of electricity (E 53)
8.taxes on sale or purchase of goods other than on newspaper , subject to provision92-A of list I (E 54)
9.taxes on advertisements other than advertisement published in newspapers and advertisements broadcast by radio or television (E 55)
10.taxes on goods ands passenger carried by road or on inland waterways
(E 56)
11.taxes on vehicles , whether mechanically propelled or not ,suitable for use on roads , including tramp cars subject to the provision of entry 35 of list III(E 57)
12.Taxes on animals and boats (E 58)
13.Tolls (E 59)
14.Taxes on profession , trades callings , and employments (E 60)
15.Capitation taxes (E 61)16.Taxes on luxuries ,including taxes on entertainments , amusements , betting and gambling (E 62)
17.Rates of stamp duty in respect of documents other than those specified in the provisions of list I with regard to rates on stamp duty (E 63)
18.Offences against law with respect to any of the matter in this list (E 64)
19.Fees in respect of any of the matter in this list , but not including fees taken in any court
(E 65)Value Added Tax
Introduction
VAT was invented by a French economist in 1954 as taxe sur la valeur ajoutée (TVA in French). Maurice Lauré, joint director of the French tax authority, the Direction générale des impôts, was first to introduce VAT with effect from 10 April 1954 for large businesses, and it was extended over time to all business sectors. In France, it is the most important source of state finance,
and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer.
It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
In other words, it is a multi-stage tax, lavied only on value added at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. The objective is to avoid ‘cascading’, which can have a snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked, resulting in higher revenues to the government.
Over 130 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.
India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods. VAT would, however, be collected in stages (installments) from one stage to another.
The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value-addition done - leading to a total tax burden exactly equal to the last point tax.
India, particularly the trading community, has believed in accepting and adopting loopholes in any system administered by the state or the Centre. If a well-administered system comes in, it will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases.
Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes.
Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax levied on the inputs can be claimed back from the tax authorities.
At a macro level, there are two issues, which make the introduction of VAT critical for India.
Industry watchers say that the VAT system, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government.
The International Monetary Fund (IMF), in its semi-annual World Economic Outlook released on April 9, expressed its concern over India’s large fiscal deficit - at 10 per cent of the GDP.
Further any globally accepted tax administrative system, will only help India integrate better in the World Trade Organisation regime.
Certain features of VAT
1.VAT is levied on all goods & services while sales tax is only levied on goods. Thus, a lower tax rate is needed to collect the same amount as sales tax. VAT has no cascading effect. The VAT mechanism of auto-control reduces tax evasion, therefore enhancing income tax collection. VAT is levied at import.
2.Input tax
Input generally mean goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture, processing, packing/storing of other goods or any other business use. The tax paid on inputs is known as Input Tax. It has been defined in Section 2(xvii) of the Model VAT Bill, 2003 thus: “Input tax means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods in the course of business for resale or for manufacture of taxable goods or for use as containers or packing material or for the execution of works contract.”
3.Input tax credit
It is the credit for tax paid on inputs. Every dealer has to pay output tax on the taxable sale effected by him. The basic formula of VAT is that every dealer pays tax only on the value addition in his hands. In simple words input tax credit is the mechanism by which the dealer is enabled to set off against his output tax, the input tax. Dealers are not eligible for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as it is stipulated in the respective State legislation.
4.Sales’ not liable to tax under the VAT Act
Since the VAT Act applies only to sales within a State, the following sales shall not be governed by the VAT Act:
a) sale in the course of inter-State trade or commerce which shall continue to be liable to tax under the Central Sales Tax Act, 1956;
b) sale which takes place outside the State; and
c) sales in the course of export or import.
5.Retail dealer
Retail dealer is not specifically defined in most of the draft VAT legislation of States. To some extent, a dealer will be considered to be engaged in the business of selling at retail if 9/10ths of his turnover of sales consists of sales made to persons who are not dealers and if any question arises as to whether any particular dealer is a retailer, then the officer in charge shall be refered for.
In the VAT regime, will stock transfer be more beneficial than inter-State sale?
In so far as a decision as to whether goods should be stock transferred and then sold to customers by the branch or should direct inter-State sales be effected, there can be no generalisation. The decision has to be taken on a VAT impact analysis of each individual business.
The tax implications to be considered are:
In the case of inter-State sale, the buying dealer has to pay a non-VATable CST while the selling dealer will get the benefit of input tax credit.
In the case of stock transfer, though there is no tax on the inter-State movement, the input tax credit will be restricted to the tax paid on inputs in excess of 4 per cent
Advantages of VAT
In the advantages part we will first look after the broad coverage of VAT in the Indian market. Then we will consider the level of security the Indian VAT is having on our revenues. Obviously the selection of items to be covered by VAT in India will be given a bullet to think upon and at last we will check out the co-ordination VAT in India will be having with our existing direct tax system.
1) Coverage
If the tax is carried through the retail level, it offers all the economic advantages of a tax that includes the entire retail price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms instead of being concentrated on particular groups, such as wholesalers or retailers.
If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime.
2) Revenue security
VAT represents an important instrument against tax evasion and is superior to a business tax or a sales tax from the point of view of revenue security for three reasons.
In the first place, under VAT it is only buyers at the final stage who have an interest in undervaluing their purchases, since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases. Therefore, tax losses due to undervaluation should be limited to the value added at the last stage. Under a retail sales tax, on the other hand, retailer and consumer have a mutual interest in underdeclaring the actual purchase price.
Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, the government will at least have collected the VAT paid at stages previous to that at which the tax was avoided; while if evasion takes place at the final stage the state will lose only the tax on the value added at that point.
If evasion takes place under a sales tax, on the other hand, all the taxes due on the product are lost to the government.
A significant advantage of the value added form in any country is the cross-audit feature. Tax charged by one firm is reported as a deduction by the firms buying from it. Only on the final sale to the consumer is there no possibility of cross audit.
Cross audit is possible with any form of sales tax, but the tax-credit feature emphasises and simplifies it and is likely to make firms more careful not to evade because they know of the possibility of cross check.
3) Selectivity
VAT may be selectively applied to specific goods or business entities. We have already addressed essential goods and small business. In addition the VAT does not burden capital goods because the consumption-type VAT provides a full credit for the tax included in purchases of capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates the tax that has been imposed on them.
4) Co-ordination of VAT with direct taxation
Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate income taxes. The operation of a VAT resembles that of the income tax more than that of other taxes, and an effective VAT greatly aids income tax administration and revenue collection. It is interesting to note that when Trinidad and Tobago set out to introduce VAT it chose one of its top income tax administrators as the VAT Commissioner.
It must be stressed once again that if properly implemented VAT can ultimately lead to a reduction in overall rates of tax.
Revenues will not be sacrificed but would in fact be enhanced as a consequence of the broadened tax base. This does not seem to be a bad idea at all.
Disadvantages of VAT
The main disadvantages which have been identified in connection with the Value Added Tax are:
1) VAT is regressive
It is claimed that the tax is regressive, ie its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world and even Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort.
Further, there is now a tendency in most countries to reduce this progressivity of taxes as has been done in Guyana where a flat rate of income tax has been introduced. In any case VAT recognises and makes room for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties. 2) VAT is too difficult to operate from the position of both the administration and business.
(a) The administration
It is often argued that VAT places a special burden on tax administration. However, it is worth noting that wherever VAT was introduced one of its effects was the rationalisation and simplification of the previous indirect tax system and its administration. Each of the previous indirect taxes such as customs duties, purchase tax and excise duties replaced by VAT had its own rate structure as well as a different tax base and separate administrative procedure. The consolidation and incorporation of numerous indirect taxes into the VAT would simplify the rate structure, tax base, and administration of the indirect tax system, thereby eliminating the overlapping auditing practices that had plagued those systems.
In addition, the abolition of a number of alternative indirect taxes releases experienced personnel to focus on a single tax. It also means reduction in the number of forms used, legislation to be applied and returns and accounts with which the business person has to contend.
(b) Business
It is true that the VAT is collected from a larger number of firms than under any form of income tax or single state sales tax; to the typical smaller firms the complexities of the tax and the need for more extensive records (for example, to justify deductions) are likely to prove serious.
However, it is often overlooked that businesses already function with considerable administrative responsibility for a number of laws including the National Insurance Act and the Income Tax Act.
Under the Income Tax (Accounts and Records) Regulations of 1980 every person, without exception is required to maintain detailed and extensive records of all its transactions. Compliance with this will certainly ensure compliance with VAT regulations, and since there is an actual benefit to be derived from accounting for VAT paid on input there is an incentive for proper record-keeping.
As we have noted before, VAT also allows for the exemption of small businesses from the system.
Under any form of sales taxation, small businesses have to be granted special treatment because of their inability to cope with the requirements of keeping adequate records which larger enterprises can handle at a reasonable cost. The intent of the special treatment is to reduce the administrative burden on small enterprises, but not the taxes that normally would be charged on the goods and services they supply. The revenue loss at the final link in the commercial cycle is limited only to the value added at that stage ,whereas in the case of income tax or sales tax the entire tax is lost. To recover the loss from exemptions, a flat tax on turnover may be applied.
In the larger businesses with proper staff and computers, the task is really one of double entry book-keeping and any additional work is hardly ever noticed.
3. VAT is inflationary
Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead to a reduction in income tax, any price increases may be offset by increases in take-home pay.
In any case, any price consequence is one time only and prices should stabilise thereafter.
4. VAT favours the capital intensive firm
It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capital- intensive competitor, since the ratio of value added to selling price is greater for the former. This is a real problem for labour-intensive economies and industries.
Comparison with a sales tax
VAT differs from a conventional sales tax in that VAT is levied on every business as a fraction of the price of each taxable sale they make, but they are in turn reimbursed VAT on their purchases, so the VAT is applied to the value added to the goods at each stage of production. Value added taxation has been gaining favour over traditional sales taxes worldwide. In principle, value added taxes apply to all commercial activities involving the production and distribution of goods and the provision of services. VAT is assessed and collected on the value added to goods in each business transaction. Under this concept the government is paid tax on the gross margin of each transaction. VAT proposes to replace sales tax which in most developing countries trying to shift to some variant of VAT, like India, is the ‘only’ major revenue source for the regional governments since low per capita income and unemployment render income tax inadequate as a revenue source. Thus the process of implementation of VAT in place of sales tax in developing federal countries (like India) is likely to face constraints since it entails revenue loss and loss of autonomy for sub central levels. (Sharma, 2005: 916 quoted in Muller, 2007:64).
Sales taxes are normally only charged on final sales to consumers: because of reimbursement, VAT has the same overall economic effect on final prices. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status.
The basic provisions of Uttar Pradesh Value Added Tax Act,2008
The Section 2., which give definitions of the terms used in the Act, some of the important definitions are:
(p) “Input tax”, in relation to a registered dealer who has purchased any goods from within the State, means the aggregate of the amounts of tax, -
(i) Paid or payable by such registered dealer to the registered selling dealer of such goods in respect of purchase of such goods; and
(ii) Paid directly to the State Government by the purchasing dealer himself in respect of purchase of such goods where such purchasing dealer is liable to pay tax under this Act on the turnover of purchase of such goods;
(y) “purchase price” means the amount payable by a purchaser to a seller as consideration for the purchase of any goods made by or through him after deducting the amount, if any refunded to the
Purchaser by the seller in respect of any goods returned to such seller within such period as may be prescribed. Explanation: Purchase price does not include
(i) the amount representing the cost of outward freight or cost of installation, charged by the seller from the purchaser of goods if such amount has been shown separately on sale invoice or tax invoice issued by the seller;
(ii) Amount of tax if such amount is shown separately on the sale invoice or tax invoice.
Section 3(3) has given the classification of dealers who shall be liable to pay tax on sales or purchases or both, as the case may be, where such sales or purchases of goods are made by them on or after the date mentioned in column 3 against the same serial no. of the table in the s.3
Section 4 provides the slabs of taxes on different dealers given in section 3.Shedule I to IV provide different rate of taxs Section 6 provides the composition of tax liability either in lump sum or at agreed rate, subject to annual turn over does not exceed Rs.50 Lakhs.
Section 7.exempt the following heads from VAT,
7. No tax under this Act shall be levied and paid on the turnover of–
(a) sale or purchase where such sale or purchase takes place -
(i) in the course of inter-state trade or commerce; or
(ii) outside the State; or
(iii) in the course of the export out of or in the course of the import into, the territory of India;
(b) sale or purchase of any goods named or described in column 2 of the Schedule I or;
(c) such sale or purchase; or sale or purchase of such goods by such class of dealers, as may be specified in the notification issued by the State Government in this behalf:
Provided that while issuing notification under clause (c), the State Government may impose such conditions and restrictions as may be specified.
S.20. Quoting of Taxpayers’ Identification Number
21. (1) Every taxable dealer shall keep and maintain a true and correct account showing the value of the goods sold and bought by him, and in case the accounts maintained in the ordinary course do not show the same in an intelligible form, he shall maintain true and correct account in such form, as may be prescribed in this behalf
22. (1) In respect of all taxable goods, except non-vat goods, in the circumstances mentioned below, every registered dealer except a dealer who opts for payment of tax or a lump sum under section 6,where such dealer is liable for payment of tax on sale of any such goods, shall, while making sale of the goods, issue to the purchaser, a tax invoice in the prescribed form
s.23 no person shall, in respect of a sale or purchase of any goods, realise any amount either in the name of tax or by giving it a different name or colour.
s.40 Refund and adjustment the assessing authority shall in the manner prescribed, refund to the dealer an amount of tax, fee, or other dues paid in excess of the amount due from him under this Act.
Provided that amount found to be refundable shall first be adjusted towards tax or any other amount outstanding against the dealer under this Act or under The Central Sales Tax Act 1956 or
under the erstwhile Act and only the balance if any shall be refunded.
s.40(2) refunded within thirty days from the date of order of refund passed by the assessing authority or where order giving rise to refund is passed by any other authority or court, from
the date of receipt of such order by the assessing authority by due process, the dealer shall be entitled to simple interest on such amount at the rate of twelve percent per annum from the date of such order passed by the assessing authority or from the date of receipt of the order giving rise to refund passed by any other authority or Court, till the date refund is made
Section 54 in Chapter VIII deals with the provisions of penalty in cases of tax evasion by the dealers.
S. 55 Appeal: Any dealer or other person aggrieved by an order made by the assessing authority, other than an order mentioned in sub-section (7) of section 48 may, within thirty days from the date of service of the copy of the order, after serving a copy of appeal memo on the assessing authority or the Commissioner, appeal to such authority s.56 Revision by the Commissioner: officer not below the rank of Joint Commissioner, as may be authorised in this behalf by the State Government by notification, may call for and examine the record relating to any order, passed by any officer subordinate to him, for the purpose of satisfying himself as to the legality or propriety of such order and may pass such order with respect thereto as he thinks fit.
S..57.Tribunal:The persons who are qualified to be the judge of the High Court;
(b) the persons belonging to the Uttar Pradesh Trade Tax Services or the Uttar Pradesh Commercial Tax Services who hold or have held a post not below the rank of Joint
Commissioner
S.58 Revision by High Court in special cases :Any person aggrieved by an order made under sub-section (7) or subsection (8) of section 57, other than an order under sub-section (4) of that section summarily disposing of the appeal, may, within ninety days from the date of service of such order, apply to the High Court for revision of such order on the ground that the case involves any question of law.
S..59 Determination of disputed question by the Commissioner-
Determination of disputed question by the Commissioner:
S.45(10).-liability of payment of tax exceed Rs.one Lkh and notice issued,
S.48 (4)-duirng seizure serve notice of penalty,
Penalty under s.54
S.60 Orders against which no appeal or revision shall lie
S.61 of chapter X provides Constitution of the Settlement Commission
Reference of case to the Settlement Commission under section 62
Fees in certain cases-provided in section 72
Tax to be first charge on property provided by section 77
Section 78 establish with effect from such date as may be specified in the notification, a Board to be known as the Uttar Pradesh State Tax Board to perform the functions conferred on it, by or under this Act or the rules made there under
Justification of VAT and Background
In para 1.1 the A White Paper On State-Level Value Added Tax-The Empowered Committee of State Finance Ministers (Constituted By the Ministry of Finance,Government of India On the Basis of Resolution Adopted in the Conference of the Chief Ministers on November 16, 1999),dated 17, 2005 gave following justifications in favour of vat:
1.a set-off will be given for input tax as well as tax paid on previous purchases
2.other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished
3.overall tax burden will be rationalized
4.prices will in general fall
5.there will be self-assessment by dealers
6.transparency will increase
7.there will be higher revenue growth
The main purpose of the VAT is to minimize the tax evasion by some dealers; they are in habit of not issuing the invoice /cash-memo to the buyer. By the VAT regime every commercial transaction has to recorded and must be accounted for the purpose of taxation.
[1] Salmonds on Jurisprundence 12th edn. By P.J. Fitzgerald (1966) Sweet & Maxwell
[2]Wealth of Nations”(1776)
[3] Oxford Awarded Learners Dictionary of Current English, Hornby, A.S. (Oxford University Press, Delhi) Page 725.
[4] (2.8.1.,2) Arthashatra, Kaultilya
[5] (2.8.3) ) Arthashatra, Kaultilya
[6] Arthashatra, Kaultilya
[7]P.E. Taylor, The Economics of Public Finance ,page 259
[8] Essays on Taxation,P.432)
[9] Law of Lexicon by P.Ramanatha Aiyer, second edition, third paper 2002 at page No.1864
[10] Commissioner H.R.E. v/s. Shri Laxmindira Tirtha Swamiar of Sri Srirur Mutt. (AIR 1954, SC 282,295).[11] Eribeach Co. Ltd. v Attorney General of Ontario (AIR 1930 PC 10)
[12] Taxation…Vol.I 4th edition para 122 at page 278)
[13] Seervai, H.M.: Constitutional Law of India, 4th Silver Jubilee edition, Vol.III, para 22.20
[14] Principles of Statutory interpretation – G.P.Singh, J. VIII edition 2001 page 635
[15] Hoechst Pharmaceuticals Ltd. v State of Bihar AIR 1983 SC 1019;
[16] Sundaramier, M.P.V. & Con. v State of A.P. AIR 1958 SC 468;[17] Hoechst Pharmaceutical LTd. (supra);
[18] M.D. Central Co-Op. Bank v 3rd I.T.O AIR 1975 SC 2016
[19] Burmah Constructions Co. v State of Orisa; AIR 1962 SC 1320
[20] Balaji v ITO AIR 1962 SC 123;
[21] R.S. Joshi v Ajit Mils Ltd. AIR 1977 SC 2279;
[22] Raj Narain Singh v Chairman Patna Administration, AIR 1954 SC 569.
[23] G.K.Trivedi and sons v State of Gujarat (AIR 1986 SC 1323.Corporation of Calcutta v Liberty Cinema, AIR 1965 SC 1107
[24] Ram Bachan Lal v State of Bihar, AIR 1967 SC 1404.
[25] Devidas Municipal Board v Raghavendra Kripal, AIR 1956 SC 693
[26] Municipal Corporation, Delhi v Birla Cotton, Spinning and Weaving Mills, AIR 1968 SC 1232
[27] Municipal Corporation, Delhi v Birla Cotton, Spinning and Weaving Mills, AIR 1968 SC 1232
[28] Avinder Singh v State of Punjab, AIR 1979 SC 321;
[29] Hiralal Ratanlal v State of UP, AIR 1973 SC 1034;
[30] Banarasida Bhanot v State of MP, AIR 1958 SC 909;
[31] Banarasida Bhanot v State of MP, AIR 1958 SC 909;
[32] Western India Theatre Ltd v Municipal Corp, City of Poona, AIR 1959 SC 58;
[33] Commissioner of IT v Ramgopal Mills, Diwan Bahadur, AIR 1961 SC 338;
[34] Ins. by the Constitution (Sixth Amendment) Act, 1956, sec. 2 (w.e.f. 11-6-1956);
[35] Ins. by the Constitution (Forty-sixth Amendment) Act, 1982, sec. 5 (w.e.f. 2-2-1983);
[36] Ins. by the Constitution (Eighty Eighth Amendment) Act, 2003;