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S. Sridharan

S. Sridharan on the need for readiness to usher in value-added tax

WILL VAT be postponed yet again? This is the question uppermost in the minds of trade and industry. Though news reports talk of the likely postponement of VAT till the issue of compensation of revenue loss to States is resolved, the West Bengal Finance Minister and Chairman of the Empowered Committee, Mr Asim Dasgupta, has confidently announced that the April 2003 deadline will be met. With 24 States having finalised their VAT legislation there is no room for further misgivings.

VAT is going to change the way business is conducted. Under the current single-point system of tax levy, the manufacturer or the importer of goods into a State is liable to sales tax. There is no levy of sales tax on the further distribution channel. The only tax element that needs to be factored in for pricing decisions is the first-point levy of tax.

VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set off of input tax, that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. The set-off of input tax will be available only on purchases effected from within the State from a VAT registered dealer. Credit of tax paid on inter-State purchase will not be available.

Though in the VAT scenario one has to redefine business strategy, one important issue is pricing. Owing to the multipoint levy under VAT, the price to the ultimate buyer will be higher than at present with the levy of tax on the value addition at each point of sale and resale. The possibility of passing on the additional cost to the ultimate buyer depends on the elasticity of supply and demand. If the price increase cannot be passed on to the ultimate buyer, the manufacturer or the trader will have to absorb the price increase depending again upon supply/demand elasticity.

The impact of VAT is illustrated in the Table.

The Table presents a simple model to avoid complication and facilitate easy understanding. In reality, a host of other factors, besides the set-off of input tax credit, need to be considered. Though there may be certain common factors relevant to all trade and industry, the impact of VAT needs to be analysed specific to the business model of the individual business.

For instance, with the non-availability if input tax credit on inter-State purchase, it may be profitable to look for alternative sources of supply from within the State.

Besides sound knowledge of the VAT law applicable to the individual business model, a reorientation of the procurement and distribution system is required for a smoother transition to VAT.

In this era of e-governance and transparency, there is the opportunity of studying the draft legislation before it becomes law. This would have been unthinkable a decade back. The opportunity should not be lost.

The legislation has been drafted by tax administrators and bureaucrats who are likely to have their own prejudices. Trade and industry should make strong representations to ensure that the VAT that is to be implemented is fair and practical.

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