Tuesday October 9, 04:24 AM
Vat for small retailers
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It has been more than two years now since the introduction of value-added tax (Vat), which was implemented by the Indian government after extensive deliberations and study of international taxation frameworks. It was believed that the Indian tax structure needed to be rationalised in the light of various shortcomings of the system back then. Despite the initial apprehension of industry in general and traders in particular, the levy seems to have found general acceptability. Vat, being a multi-point tax, is passed on from the manufacturer to the wholesaler, then to retailers and finally to end customers. It brings the entire value addition chain, all through the system down to distribution, under its ambit. It is the final retail price that is subjected to Vat, as opposed to the price representing the first sale within the state, which was subjected to sales tax earlier. Thus, most retailers have come within the ambit of Vat. However, under most state Vat laws, small retailers with a gross annual sales turnover not exceeding Rs 5 lakh are typically kept out of the tax net. The intention is to avoid unnecessary paperwork for such retailers and also to reduce the administrative cost for the government. Most states have introduced simplified legal provisions for retailers with an annual gross turnover not exceeding Rs 50 lakh, with an option to pay Vat at a flat rate (generally 1-2%) on the gross sales turnover. This scheme is subject to certain specific conditions, such as the procurement of goods only from within the state of operation, no facility for availing Vat credit, and so on. These retailers are not required to maintain detailed records and books of accounts, as they cannot claim input Vat credit. Retailers, therefore, have a choice to either opt for a simplified composition scheme or the regular scheme by which they are entitled to input Vat credit and effectively pay tax on their profits. Unlike the erstwhile sales tax regime, the Vat regime offers a much simplified tax mechanism that encourages "self-assessment". This dispenses with the strenuous burden of periodic dealer assessments. Such self-assessment processes shelter dealers, especially small retailers, from the hassles involved in the compliance process. However, self-assessment places an obligation on retailers in terms of record keeping, as they may be required to furnish detailed information/ documents for the purpose of periodical Vat audits conducted by the authorities. The Vat regime has also resulted in reducing the burden of undertaking various compliance procedures like obtaining statutory declarations on account of first point/last point sale, as also furnishing the same at the time of assessment, which often resulted in disputes with the sales tax authorities. Another advantage of Vat is the simplified rate structure, by which most of the products are subjected to tax at basic rates of 4% and 12.5% across most states. There are some instances of rates varying across states, but given the pace of harmonisation, it is reasonable to expect that over a period of a year or two, there would be a greater convergence in terms of rates amongst various states. So, while Vat has resulted in an additional tax compliance burden for Indian retailers, this was certainly a positive step towards the broader goal of tax rationalisation. Vat has made the system of taxation more transparent for retailers as well as customers. They now know the tax incidence on them, and this is an important gain. Tax payers must always know exactly what they owe the government. -Pratik Jain is director, indirect tax & Vat, and Siddharth Mehta is manager, indirect tax, tax & regulatory services, KPMG India. These are their personal views
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