The biggest challenge for the Federal Board of Revenue (FBR) in smooth implementation of value-added tax (VAT) is to determine actual turnover ie, Rs 7.5 million and above, of any shopkeeper/retailer for bringing him into the VAT net from July 1, 2010.
Tax experts told Business Recorder here on Saturday that the department can determine actual turnover of any business unit on the basis of last 12 months sales, issuing FBR''s cash memo books to big stores'' chains, making it compulsory to issue them to the customers on purchase of any item. Secondly, total transactions made on credit cards and else could be tallied with bank statement of the store from where purchases are made.
Third, a procedure could be put in place to determine the actual sales/turnover of unit by assessing the tax returns of last five years for getting idea of average income of a particular outlet. These measures would give a fair idea about the retailers having actual turnover of Rs 7.5 million or above.
The FBR can register all those persons declaring Rs 7.5 million turnover or more with the income tax department. Another method is to analyse the sales/purchase summaries to check the selling mechanism at any business outlet. Under section 38 of the Sales Tax Act, the tax officials have the authority to check documents available at the business premises.
Referring to Indian experience, tax experts said that India is in the process of rolling out general sales tax (GST) by April 2011, for which the indirect tax administrations at the Centre and the States are being revamped, based on the use of information technology.
The present thresholds, prescribed in different states VAT Acts vary from state to state. A uniform State GST threshold across states is desirable and, therefore, Indian tax department has recommended that a threshold of gross annual turnover of Rs 1 million, both for goods and services, for all states and Union territories may be adopted with adequate compensation for the states (particularly, the states in north-eastern region and special category states) where lower threshold had prevailed in the VAT regime.
Keeping in view the interest of small traders and small scale industries and to avoid dual control, the states also considered that the threshold for Central GST for goods may be kept Rs 15 million and the threshold for Central GST for services may also be appropriately high.
It may be mentioned that even now there is a separate threshold of services (Rs 1 million) and goods (Rs 15 million) in the Service Tax and CENVAT (Central VAT). About justification of levying GST in India, tax experts pointed out there are still certain shortcomings in the structure of VAT both at the Central and at the State level in India.
The shortcoming in CENVAT of the Government of India lies in non-inclusion of several Central taxes in the overall framework of CENVAT, such as additional customs duty, surcharges, etc, and thus keeping the benefits of comprehensive input tax and service tax set-off out of reach for manufacturers/dealers. Moreover, no step has yet been taken to capture the value-added chain in the distribution trade below the manufacturing level in the existing scheme of CENVAT.
The introduction of GST at the Central level will not only include comprehensively more indirect Central taxes and integrate goods and service taxes for the purpose of set-off relief, but may also lead to revenue gain for the Centre through widening of the dealer base by capturing value addition in the distributive trade and increased compliance.
In the existing State-level VAT structure there are also certain shortcomings as follows. There are, for instance, even now, several taxes which are in the nature of indirect tax on goods and services, such as luxury tax, entertainment tax, etc, and yet not subsumed in the VAT.
Moreover, in the present State-level VAT scheme, CENVAT load on the goods remains included in the value of goods to be taxed under State VAT, and contributing to that extent a cascading effect on account of CENVAT element. This CENVAT load needs to be removed.
Furthermore, any commodity, in general, is produced on the basis of physical inputs as well as services, and there should be integration of VAT on goods with tax on services at the State level as well, and at the same time there should also be removal of cascading effect of service tax.
In the GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a continuous chain of set-off from the original producer''s point and service provider''s point upto the retailer''s level is established which reduces the burden of all cascading effects.
This is the essence of GST, and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax. However, for this GST to be introduced at the State-level, it is essential that the States should be given the power of levy of taxation of all services. This power of levy of service taxes has so long been only with the Centre.
A Constitutional Amendment will be made for giving this power also to the States. Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be removed. The GST at the State-level in India is justified for (a) additional power of levy of taxation of services for the States, (b) system of comprehensive set-off relief, including set-off for cascading burden of CENVAT and service taxes, (c) subsuming of several taxes in the GST and;
(d) removal of burden of CST. Because of the removal of cascading effect, the burden of tax under GST on goods will, in general, fall, analyst said. Tax experts said that the GST at the Central and at the State level will thus give more relief to industry, trade, agriculture and consumers through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several taxes in the GST and phasing out of CST.
With the GST being properly formulated by appropriate calibration of rates and adequate compensation where necessary, there may also be revenue/resource gain for both the Centre and the States, primarily through widening of tax base and possibility of a significant improvement in tax compliance.
In other words, the GST may usher in the possibility of a collective gain for industry, trade, agriculture and common consumers as well as for the Central Government and the State Governments. The GST may, indeed, lead to the possibility of collectively positive-sum game, tax experts added.
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