IMPACT OF SALES TAX, VAT & GST ON THE

PROFITABILITY OF ORGANIZATIONS.
Thesis Submitted to the Padmashree Dr. D. Y .Patil University,
Department of Business Management
in partial fulfillment of the requirements for the award of the Degree of
DOCTOR OF PHILOSOPHY
in
BUSINESS MANAGEMENT
Submitted by
SHASHANK S. DHOND
(Enrollment No. DYP- PhD. - 066100012)

Research Guide
Dr. R. GOPAL
DIRECTOR, DEAN & HEAD OF THE DEPARTMENT
PADMASHREE DR. D.Y. PATIL UNIVERSITY,
DEPARTMENT OF BUSINESS MANAGEMENT,
Sector 4, Plot No. 10,
CBD Belapur, Navi Mumbai 400 614
June 2010

IMPACT OF SALES TAX,

VALUE ADDED TAX
AND GST ON PROFITABILITY
OF ORGANISATIONS

DECLARATION

I hereby declare that the thesis entitled

IMPACT OF SALES TAX, VALUE

ADDED TAX AND GST ON PROFITABILITY OF ORGANISATIONS

submitted for the Award of Doctor of Philosophy in Business Management at the
Padmashree Dr. D.Y. Patil University Department of Business Management is my
original work and the thesis has not formed the basis for the award of any degree,
associate ship, fellowship or any other similar titles.

Place: Mumbai.
Date: 10th June, 2010.

Sign. of the Guide

Sign. of the Head of the dept.

Sign. of the student

CERTIFICATE

This is to certify that the thesis entitled

IMPACT OF SALES TAX, VALUE

ADDED TAX AND GST ON PROFITABILITY OF ORGANISATIONS and

submitted by Mr. Shashank S. Dhond is a bonafide research work for the award of
the Doctor of Philosophy in Business Management at the Padmashree Dr. D. Y.
Patil University Department of Business Management in partial fulfillment of the
requirements for the award of the Degree of Doctor of Philosophy in Business
Management and that the thesis has not formed the basis for the award previously
of any degree, diploma, associate ship, fellowship or any other similar title of any
University or Institution. Also certified that the thesis represents an independent work
on the part of the candidate.

Place: Mumbai.
Date: 10th June, 2010.

Signature of the
Head of the department

Signature of the Guide

ACKNOWLEDGEMENT

In the first place, I am indebted to the Padmashree Dr. D.Y. Patil University
Department of Business Management, which has accepted me for Doctorate
program and provided me with an excellent opportunity to carry out the present
research project.
This dissertation would never be possible without the guidance and support of my
guide Dr. R. Gopal, Director, Dean and Head of the Department of Padmashree Dr.
D.Y. Patil University Department of Business Management, whose kindness and
encouragement personified.
Dr. Pradip Manjrekar, Professor and Head Research and Consultancy and
Extension Centre, Padmashree Dr. D.Y. Patil University Department of Business
Management, Dr. M.S. Deshmukh, Assistant Professor S K. Somaiya College of
Arts, Science and Commerce and Dr. Dilip S. Patil, Professor & Director Life Long
Learning and Extension University of Mumbai have shared the wisdom of their
experience and provided the direction for this research work. The statistical skills
needed to complete this dissertation were learned primarily from Dr. R. Gopal,
whose expertise has added to the quality of this dissertation.
I have many friends to thank for their support and I specially thank my family who
has stood by me throughout the process.

Place: Mumbai.
Date: 10th June, 2010.

Signature of the student

CONTENTS

CHAPTER
NO.

TITLE

PAGE
NO.

List of Tables
List of Figures
List of Abbreviations
EXECUTIVE SUMMARY
INTRODUCTION, OBJECTIVE AND RESEARCH
METHODOLOGY OF THE STUDY
INTRODUCTION
Sales Tax
Value Added Tax
Goods & Service Tax
CONCEPTS & MEANING
Concepts & Meaning of Sales Tax
Concepts, Meaning & Computation of Value Added
Tax
Methods of Computation of VAT
Computation of VAT
Variants of VAT
Concepts & Meaning of Goods & Service Tax
STATEMENT OF PROBLEM
OBJECTIVES OF STUDY
HYPOTHESIS
RESEARCH METHODOLOGY OF THE STUDY
Sample Size of the Study
Statistical Methods/ Techniques Used
Different Models used in Past Study
Importance of the Study
Limitations of the Study
Conclusion

i
ii
iii
v-xix
1-41

Chapter -2

REVIEW OF LITERATURE

42-68

Chapter -3

GLOBAL SCENARIO OF VAT & GST

69-112

Chapter -1
1.1
1.1.1
1.1.2
1.1.3
1.2
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.3
1.4
1.5
1.6
1.6.1
1.6.2
1.6.3
1.7
1.8
1.9

3.1
3.2
3.3
3.3.1
3.3.2
3.3.3
3.3.4
3.3.5

Introduction
Evolution of VAT
Vat Scenario of major Countries in the World.
VAT in European Union
VAT In Mexico
VAT In Canada
VAT In Italy
VAT In France

1
1
3
5
7
7
13
15
17
19
20
28
29
29
30
31
33
33
40
41
41

69
70
72
72
75
77
77
78

3.3.6
3.3.7
3.3.8
3.3.9
3.3.10
3.4
3.4.1
3.4.2
3.4.3
3.5
3.5.1
3.5.2
3.5.3
3.5.4
3.5.5
3.6

VAT In Ireland
VAT In Germany
VAT In U K
VAT In Nigeria
VAT In China
GLOBAL SCENARIO OF GST
Introduction to GST.
How GST Works.
Harmonization of Provincial Sales Tax & GST.
GST SCENARIO OF MAJOR COUNTRIES IN THE
WORLD.
Goods & Service Tax in Canada.
Goods & Service Tax in Australia.
Goods & Service Tax in Hong Kong
Goods & Service Tax in New Zealand
Goods & Service Tax in Singapore
Conclusion

79
80
82
83
84
88
88
89
94
97
97
99
102
105
106
111

4.1.1
4.1.2
4.1.3
4.1.4
4.1.5
4.1.6
4.1.7

INDIAS TAX STRUCTURE

Introduction
VAT in India
Importance of VAT in India
Impact of VAT in India
Value Added Tax
Salient Features of VAT
Advantages of VAT
Disadvantages of VAT
Goods and Service Tax
Conclusion

113-142
113
113
117
118
120
121
123
125
134
141

5.1.1
5.1.2
5.1.3
5.1.4

MAHARASHTRA SALES TAX

Introduction
History of Sales tax
Revenue to Government
Sales tax Function
Historical Background & Basis of Collection in
Maharashtra
Conclusion

143-155
143
143
149
153
154

DATA ANALYSIS
Introduction
Turnover wise Classification of Industries
Profile of Capital Goods Industries
Profile of Consumer Goods Industries
Profile of Infrastructure Goods Industries
Profile of Chemical Industries
Profile of Pharmaceutical Industries

156-192
156
157
157
162
167
171
176

Chapter 4
4.1

4.2
4.3
Chapter 5
5.1

5.2
Chapter 6
6.1
6.2
6.2.1
6.2.2
6.2.3
6.2.4
6.2.5

154

6.2.6
6.2.7
6.2.8
6.2.9
6.3
Chapter 7
7.1
7.2
7.2.1
7.2.2
7.2.3
7.2.4
7.2.5
7.3
7.4
7.5

Profile of All Industries.

Profile of Small Industries
Profile of Medium Industries
Profile of Large Industries
Conclusion

181
184
186
188
190

FINDINGS AND SUGGESTIONS

INTRODUCTION
Existing Tax Policies
Model v/s Reality
Direct Tax Reforms : first wave
V P Singh Reforms
Tax Reforms in the 1990s
Post 2000 Initiatives
Problems/Difficulties In Implementation Of Sales Tax
/ Vat In India
Chapter wise findings of the study
Major Findings and suggestions of the study

193-225
193
193
193
195
198
200
202
203

BIBLIOGRAPHY
WEBLIOGRAPHY
QUESTIONAIRE

226-239
240
241

213
218

LIST OF TABLES
Table No.
1.1
3.1
3.2
3.3
3.4
3.5
3.6

Title
Industry wise and Turnover wise Classification of Industries
VAT rates in Non European Countries
The list of VAT taxable items and the rates in China
Application of the GST at the various stages of a production process
Annual GST revenues of Canada, 1998-1999 ($ billions)
Provincial sales tax and effective tax rate, by province
Country wise statement of Percentage of Tax Revenue to GDP &
Calculation of CGR and CV
Country wise taxes on goods and services (% of revenue) &
Calculation of CGR and CV
Central Government: Direct vs Indirect Taxes in India
State wise sales tax collection of India & calculation of Compound
Growth rate and Co-efficient Variance.
State wise revenue receipt of India 2009-10.
Maharashtra State Division wise Sales Tax Revenue Gross Receipts
for the years 2003-04 To 2009-10

Page No.
31
74
87
91
93
96
108

5.2

Act wise Sales Tax Revenue Gross Receipts in Maharashtra for the
years 01-02 to 09-10

152

6.1
6.2
6.3
6.4
6.5
6.6
6.7

Industry wise and Turnover wise classification of industries

Sales Tax / VAT on Capital Goods industries.
CGR and CV of Capital Goods Industries
Sales Tax / VAT on Consumer Goods industries
CGR and CV of Consumer Goods Industries
Sales Tax / VAT on Infrastructure industries
CGR and CV of Infrastructure industries

157
158
160
162
164
168
170

6.8

Sales Tax / VAT on Chemical industries

171

6.9

CGR and CV of Chemical Industries

173

6.10

Sales Tax / VAT on Pharmaceutical Goods industries

176

6.11

CGR and CV of Pharmaceutical Industries

178

6.12

Sales Tax / VAT on All industries combined.

182

6.13
6.14
6.15

Sales tax / VAT on small industries

Sales tax / VAT on Medium Industries
Sales tax / VAT on Large Industries

184
186
188

3.7
4.1
4.2
4.3
5.1

110
116
128
131
150

LIST OF FIGURES
Figure
No.
1.1
1.2
1.3
3.1
3.2
4.1
4.2
5.1
5.2
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
6.16
6.17
6.18

Title
Methods of computation of VAT
Calculation of VAT through Invoice Method
Different variants of VAT
Country wise percentage of tax revenue to GDP from 2001 to 2008.
Country wise taxes on goods and services (% of Revenue) during 2001 to
2008.
State wise Sales Tax Collection in India -2009-10.
State wise Revenue Receipts of India 2009-10
Division wise Sales Tax Revenue Gross Receipts of Maharashtra 2009-10
Act wise Sales Tax Revenue Gross Receipts in Maharashtra 2009-10
The Value of CGR of Capital Goods Industries during the year 2001-02 to
2008-09
The Value of Regression of Capital Goods Industries during the year 200102 to 2008-09.
The Value of CGR of Consumer Goods Industries during the year 01-02 to
08-09
The Value of Regression of Consumer Goods Industries during the year
2001-02 to 2008-09.
The Value of CGR of Infrastructure Industries during the year 2001-02 to
2008-09
The Value of Regression of Infrastructure Industries during the year 200102 to 2008-09.
The Value of CGR of Chemical Industries during the year 01-02 to 2008-09
The Value of Regression of Chemical Goods Industries during the year
2001-02 to 2008-09.
The Value of CGR of Pharmaceutical Industries during the year 2001-02 to
2008-09
The Value of Regression of Pharmaceutical Industries during the year
2001-02 to 2008-09.
The Value of CGR of All Industries during the year 2001-02 to 2008-09
The Value of Regression of All Goods Industries during the year 2001-02
to 2008-09.
The Value of CGR of Small Industries during the year 2001-02 to 2008-09
The Value of Regression of Small Industries during the year 01-02 to 0809.
The Value of CGR of Medium Industries during the year 2001-02 to 200809
The Value of Regression of Medium Industries during the year 2001-02 to
2008-09.
The Value of CGR of Large Industries during the year 2001-02 to 2008-09
The Value of Regression of Large Industries during the year 2001-02 to
2008-09.

Page
No.
16
17
19
109
111
130
133
151
153
159
159
164
164
169
169
173
173
178
178
183
183
185
185
187
187
189
189

ii

List of Abbreviations
VAT

Value Added Tax

GST

Goods & Service Tax

CST

Central Sales Tax

ST
CenVat

Sales Tax
Central Value Added Tax

CGST

Central Goods & Service Tax

SGST`

State Goods & Service Tax

ITC

Input Tax Credit

CC

CENVAT Credit

EOU

Export Oriented Units

MOU

Memorandum of Understanding

PAN

Permanent Account Number

HST

Harmonius Sales Tax

QST

Quebec Sales Tax

EU

European Union

GSDP
ET
NIPFP
SE
ICMS
UED
OECD
HLE
ModVAT

Gross State Domestic Product

Efficiency of Tax
National Institute of Public Finance and Policy
Sumptuary Excises
Indirect Cost Management System
Urban Economic Development
Organization for Economic Co-operation and Development
High Level Emulation
Modified VAT

PST

Provincial Sales Tax

IRD

Inland Revenue Department

CMIE

Centre for Monitoring Indian Economy

SMRC

South Asian Association for Regional Co-operation

IMF

International Monetary Fund

RNR

Revenue Neutral Rates

CGR

Compound Growth Rate

CV

Co-efficient Variance

SAD

Special Additional Duty

CVD

Counter vailing Duty

IGST

Interstate Goods & Service Tax

RE

Revised Estimates

BE

Budget Estimates

RD

Registered Dealers

URD

Unregistered Dealers

iii

OMS

Out of Maharashtra Sales

MST

Maharashtra Sales tax

PT

Professional Tax

ET

Entertainment Tax

LT

Luxury Tax

BST

Bombay Sales Tax

Regression

PVT

Private

Ltd

Limited

CSO

Central Statistical Organization

NAS

National Accounts Statistics

IGIDR

Indira Gandhi Institute of Development Research

SPSS

Statistical Package for Social Sciences

RST

Resale Sales Tax

iv

EXECUTIVE SUMMARY
1) INTRODUCTION:
India has witnessed substantial reforms in Indirect taxes over the past two
decades and is on the verge of another major reform initiative which will bring this
process to a culmination. As a Progressive and welfare oriented Country India should
balance the requirements of direct and indirect taxes in a fair manner. Therefore too
much dependence on direct taxes will be repressive but at the same time passing a
heavy burden to the general public by way of indirect taxes and will constitute
hardships to the common citizen.
The objective of this study is to find out the impact of tax systems on the profitability
of the organization and growth of the revenue in India and the state of Maharashtra.
The past experience in Maharashtra and elsewhere have shown that half baked
reforms in the name of VAT have done more harm than good in evolving a tax system
required for a competitive environment. It is important to assess how this scenario
changes from Sales tax to VAT and VAT to GST.

Sales Tax:
Sales Tax in India is that form of tax which is imposed by the government on
sale/purchase of a particular commodity within the country. It is imposed under
Central Government (Central Sales Tax) and the State Government (Sales Tax)
Legislation. Normally, each state has its own sales tax act and levies the tax at various
rates. Apart from sales tax, certain states also impose extra charges such as works
contracts tax, turnover tax and purchaser tax. Thus, sales tax plays a major role in
acting as a major generator of revenue for the various State Governments.

Sales tax is levied on the sale of a commodity which is produced or imported and sold
for the first time. If the product is sold subsequently without being processed further,
it is exempt from sales tax. Under the sales tax which is an indirect form of tax, it is
the responsibility of seller of the commodity to collect or recover the tax from the
purchaser. Generally, the sale of imported items as well as sale by way of export is
not included in the range of commodities that require payment of sales tax. Moreover,
luxury items (such as cosmetics) are levied higher sales tax rates. The Central Sales
Tax (CST) Act that comes under the direction of Central Government takes into
consideration all the interstate sales of commodities.

Value Added Tax:

VAT is a multi-point sales tax with set-off for tax paid on purchases. It is
collected in installments at each transaction stage in the production distribution
system. It does not have cascading effect due to the system of distribution or credit
mechanism. VAT is a tax on consumption. The final and total burden of the tax is
fully and exclusively borne by the domestic consumer of goods and services. Value
added tax is, therefore a multi-stage sales tax levied as a proportion of value added. In
simple terms, VAT is tax on sale of commodity at every point in the series of sales by
business firms which the provision of set-off tax already paid on inputs as well as on
previous purchases. Unlike a retailer sales tax or the present sales tax or the present
tax scheme, which are essentially single point taxes, VAT is charged and collected at
each stage of the production/delivery of goods and services.

Goods and Service Tax:

Introduction of Goods and Services Tax (GST) in India is a certainty and its
impact on the retail sector is equally crucial to examine. It is believed that traders,
including retailers, would be one of the biggest beneficiaries of this harmonized
vi

system of taxation. Although retail sector has succeeded in evolving as an organized

revenue generating sector, it still continues to be fraught with some inherent
challenges posed by the current indirect tax regime.

2) STATEMENT OF PROBLEM:
Indirect tax reforms have been an integral part of the liberalization process
since 1991. In the first phase, India has been steadily attempting to move towards a
tax structure that is simple, moderate, rational and easy to administer and comply
with. At the central level, the move has been to bring down the tariffs both excise
and customs, reduce the number of rates, correct anomalies, get rid of the
complexities in the system and on the whole reduce the interface with the
government. In addition to indirect taxes levied by the centre, states are empowered to
levy certain indirect taxes and sales tax forms major part of revenue for almost all
states. There was wide variation in sales tax rates of the same commodity in different
states. In the existing sales tax structure, there are problems of double taxation of
commodities and multiplicity of taxes, resulting in a cascading tax burden. The viable
solution found was to shift to estimations based VAT i.e. Value Added Tax.
Value Added Tax is one of the most radical reforms that have been proposed for the
Indian economy after years of political and economic debate. Revenue growth is the
most important aspect by which to judge the success of VAT in India in general and
Maharashtra in particular. To measure the impact of vat over sales tax, it is essential
to study the various manufacturing sectors and the impact on the profitability of the
sectors since the introduction of Sales tax and VAT.

vii

3) OBJECTIVE OF THE STUDY:

1) To understand the key issues involved in the successful implementation of VAT
and GST.
2) To study the impact of Sales tax, VAT and GST on the profitability of
manufacturing industry.
3) To identify the drivers for the smooth implementation of tax from VAT to GST.
4) To Study the Impact of Sales tax, VAT and GST on the price of the product.
5) To Study the impact of Sales tax, VAT and GST on Government Revenue.

4) HYPOTHESIS:
1) Profitability of manufacturing industry is more in VAT scenario than sales tax.
2) The tax revenue of the Govt. has increased due to implementation of VAT.
3) VAT has lesser cascading effect on firm as compared to sales tax structure.
4) Tax structure under GST will be more simple as compared to VAT and Sales
Tax.

5) RESEARCH METHODOLOGY OF THE STUDY:

Value Added Tax is one of the most radical reforms that have been proposed
for the Indian economy after years of political and economic debate. Revenue growth
is the most important aspect by which to judge the success of VAT in India in general
and Maharashtra in particular. The idea to carry out this research study is to measure
the impact of sales tax value added tax and goods and service tax on profitability of

viii

organizations in India. The present study is partly descriptive and partly explorative.
The data for this study is obtained from secondary sources as well as primary sources.
Primary Data:
Data on total sales and Sales tax/VAT is collected primarily from various
organizations in India, and Maharashtra as well. Primary data of 100 Industries have
been collected through, Observation method, Personal interviews, telephonic
interviews, discussion with experts, Questionnaire and schedule, Case Studies etc.
Data of all the industries were grouped into five major categories, such as
infrastructure industries, capital goods industries, pharmaceutical industries, consumer
goods industries and chemical industries. The present study is based on time series
data for eight years during 2000-01 to 2008-09.
Secondary Data:
Secondary data were collected from referred books, reports, and conference
papers, referred journals, magazines/periodicals, ministry of finance (Economic
Survey) Govt. of India and, Govt. of Maharashtra, Publication of Reserve Bank of
India. In the present study, following statistical tools were used for analysis of data,
simple tabular and percentage method is applied and estimation of annual compound
growth rate and coefficient of variation of total sales and sales tax /VAT for each
organization, state and the country as a whole has been made by using growth rate
formula. Moreover standard statistical package like SPSS is used to calculate the
linear regression and t test to test the hypothesis of the research study.

SAMPLE SIZE OF THE STUDY:

There are a large number of industries in India and particular in Maharashtra.
For our studies we have taken 100 Industries and grouped them in five different types
of Major Industries. The primary data was obtained from the sample respondents who
ix

are associated with manufacturing activity. Field survey covered the hundred
industries, grouped into five major categories. Which are as follows?
1) Capital Goods Industries 18 Industries
2) Consumer Goods Industries 24 Industries
3) Infrastructure Industries 10 Industries
4) Chemical Industries 23 Industries
5) Pharmaceutical Industries- 25 Industries
For our analysis we have further classified industries on the basis of turnover
into small, medium and large industries. Small Industries includes Industries whose
average sales turnover from 2001-02 to 2008-09 is less than two hundred crores.
Medium Industries are those whose average sales turnover during 2001-02 to 2008-09
is more than two hundred crores and less than one thousand crores and large
industries are consists of industries whose average turnover during 2001-02 to 2008-09
is more than one thousand crores.

DATA COLLECTION:
Present research study is based on primary as well as secondary data. With the
help of following techniques, the primary data of 100 industries was collected:
a) Personal Interviews Methods.
b) Telephonic Interviews.
c) Questionnaires.
d) Case Studies, etc.

The questionnaires were designed to collect the information about their Sales and
Sales tax Paid by them after considering the input tax credit from 2001-02 to 2008-09.
The secondary data was collected through Referred journals books, reports, and
conference papers, Referred journals, magazines/periodicals, Publication of Reserve
Bank of India, Ministry of Finance (Economic Survey) Govt. of India and, Govt. of
Maharashtra. Centre of Monitoring Indian Economy (CMIE). Detailed discussion
were held with the knowledgeable personnel who are associated with Indirect Tax
Fields and also with various Tax Consultants, Financial officers of various
Companies.

STATISTICAL METHODS/TECHNIQUES USED:

Appropriate Statistical tools necessary to measure the profitability and growth
of the organizations vis--vis revenue scenario of the state has been
incorporated. The study uses the standard Statistical Package for Social
Sciences (SPSS) for the analysis.
6) IMPORTANCE OF THE STUDY:
The objective of the study of this topic is to find out the impact of Sales tax,
Value Added Tax and Goods and Service tax on the Profitability of the Organizations
and to determine which tax system is beneficial to the Industries, Consumers and also
to find out the effect of Sales tax, Value Added Tax and Goods and service tax on the
Price of the product. This study also results in finding the most beneficial system of
tax structure which is suitable means less complicated from the view point of
Government and Industries. This study will be useful to traders; manufacturers to
analyze its tax burden, at the same time the government will also understand how to
generate the revenue through indirect taxes in the Country.
xi

7) LIMITATIONS OF THE STUDY:

The data collected for this research is collected from the state of Maharashtra.
The result received from this research may or may not be suitable for application to
the other states of India due to geographical limitations.

8) RESEARCH FINDINGS AND RECOMMENDATIONS:

Indirect tax reforms have been as integral part of the liberalization process
since new economic reform. A progressive and welfare oriented nation like India tries
to keep a balance between direct and indirect taxes. This chapter attempts to
understand the concepts and methodological approach required to analyse the impact
of Sales tax, VAT and GST on the profitability of the organization as well as the
revenue growth of the Govt. at state and national level.
Maharashtra being a leading state in most of the aspects this research work has
analyzed the extent to which the Value Added Tax is profitable for different
Industries. The Important findings and recommendations of the research study is as
follows:
1)

VAT and State Autonomy rightly points out that tax coordination and
harmonisation across states can be achieved by floor rates of VAT for
different goods.

2)

It would be in the interest of both state governments and taxpayers to have

uniform laws and procedures for tax administration. In the medium term, a
consensus Tax Administration Act will greatly reduce the cost and it will lead
to increase the profitability of a organization.

xii

3)

Tax buoyancy estimates, which measure the percentage response of tax

revenue to a one per cent change in the tax base, usually provided by the gross
domestic product, are a routine requirement for fiscal projection purposes. The
elasticity of tax revenue is more stringently defined as the underlying revenue
response, holding constant all parameters of tax policy.

4)

Universally VAT and GST has been adopted for correcting the fiscal
imbalances as it works well within all political and legal constraints. The
existing VAT system would also increase the tax revenue as well as the
profitability of the organization.

5)

Vat has an inbuilt device for reducing the cascading effect by restricting the
levy to actual value addition. It encourages growth by confining tax burden to
the net economic contribution of the taxpayers results in no double taxation.

6)

Introduction of VAT has brought more transparency in the tax structure. At

every stage of transaction, VAT indicates the quantum of tax payable after
adjusting tax credits. Therefore the taxpayer, the ultimate consumer and
administrators created more awareness about the details of payment.

7)

The important objective of Tax policy in India was to improve the tax to GDP
ratio. Therefore VAT has earned the reputation of being a dependable revenue
raising instrument. It can easily access the incremental income generated by
the expanding economic activities without altering the rates or base in every
budget.

xiii

8)

There have been serious apprehensions about the inflationary impact of VAT.
The price effect of VAT depends mainly on the elasticity of demand and
supply of the taxable products and conditions in the factor markets. Therefore
it suggests that, if VAT substituted an existing tax with no additional revenue
objective in the short run, it would not have any inflationary impact. Moreover
sometimes, a reverse effect takes place due to input tax relief, which was not
available during sales tax policy.

9)

The distributional impact of tax burden across various income groups of the
organization and commodity wise the tax is imposed. Therefore, it is
suggested that to reduce the regressive impact of commodity taxes, VAT rate
has to be less than that of the substituted taxes. In comparison to conventional
indirect taxes, VAT can be more equitable by exempting articles of essential
consumption. Moreover it is also suggested that the tax policy should be
adjusted to the requirements of the country having regard to the existing
patterns of distribution of income.

10)

It is understood that conventional commodity taxes are highly prone to tax

evasion. Therefore it is suggested that Vat with tax credit method of collection
does not give much scope for tax evasion to the tax payer

11)

VAT is regressive with respect to income therefore if full fledged VAT is

levied at a single rate with no exemptions would be equivalent to a
proportional tax on consumption. However it is suggested that to reduce the

xiv

regressivity and to make VAT proportional extent by having excises at higher

rates on a few goods largely consumed by the richer sections of the society.

12)

The existing trend in the sales tax system was to push the tax base as close to
imports/manufacture if possible. This was considerably reduced the incomeelasticity of the tax system. In sales tax it implemented that (a) the requzisite
set-off is given for the taxes paid on raw materials; and (b) the states adopt a
structure of 'two-points-with-set off recommended in an earlier study.
However in the VAT system the input tax credit was given to manufacturers.
The said policy of input tax credit was continued to increase the profit of
organization.

13)

One of the important components of VAT reform was that instead of multiple
rates of taxes there will be three or four rates of taxes all over the economy.
Therefore, from the consumers point of view the existing three rates of VAT
as per categories of the goods is to be continued.

14)

The analytical framework of taxes on international borrowing could be used to

examine the effects of a removal of impediments on capital movements in the
country.

15)

Sales taxes in India has taken place in varying circumstances in the different
states, the existing structure is thus heterogeneous and multifarious. Various
forms include single-point tax, double-point tax and multi-point tax.
However, there is a pronounced movement towards a single-point tax and a

xv

predominant reliance on the first-point tax. Also there exist additional sales
tax and surcharge on the sales tax. The effective rate has thus gone up
considerably and varies from one state to another.

16)

From the point of growth, equity, administrative expediency and coordination, it is necessary that the states have as few rates as-possible. There
should be uniformity of rates especially in the neighboring states. Raw
materials should be exempted to avoid the -problem of cascading. However, if
the tax is levied, the rate should not be higher than that of the Central sales tax
(CST).

17)

As the sales taxes are having a significant role in the fiscal structure of the
states, it is of paramount importance that the sales taxes are reformed on the
above lines so that the structure is economically rational and administratively
expedient too. It is important to note that the proposed tax structure would not
only be fulfilling the economic criteria set out in Section II of the paper, but
would also' go a long way to check the evasion of the tax.

18)

It is obvious from the above analysis that the rationality does not lie in taxing
stock transfers. Besides, other anomalies arise because of the fact that the tax
rate on inter-state transactions under the CST is too high; the rate of tax in the
inter-state transactions has not been kept in tune with its basic philosophy.

19)

It is extremely important that a proper organization is developed as a

precondition to have a sound system of taxation. Countries that have earlier

xvi

experience with administering a turnover tax do not encounter serious

problems in switching over to VAT. For others, it is important to have
suitable machinery. With a view to understanding the administrative problems
for the introduction of VAT in the Indian context, it is essential to
comprehend the existing administrative procedures for MODVAT as well as
for sales taxes in the country.

20)

The rate rationalisation into four floor rates should be done taking account of
all supplementary levies like surcharge on sales tax and turnover tax. If these
supplementary levies arc continued and if their rates too are differentiated
depending on the turnover range of the dealers, there will be much more rate
differentiation than what is intended and the purpose of minimizing rate
differentiation will be defeated.

21)

It is important to work out the revenue neutral rates as the tax base is
expanded in order to demonstrate the advantages of the VAT to the tax
payers. The emphasis should be on long term revenue productivity coming
from better tax compliance.

22)

In a federal country like India, it may be ideal to have state and central VATs
substituting the current state and central taxes on goods and services
respectively.

23)

An important step in the introduction of VAT, however, is the need for all
taxpayers to understand that VAT will be levied on their value added only and

xvii

not on the gross turnover. Such an understanding will not cause any resistance
and compliance problems from taxpayers. This requires that the government
should vigorously campaign for the case of VAT.

24)

The management of VAT in India calls for a separation of duties of different

functionaries of VAT department. For example, the work related to revenue
receipts and follow up action of the defaulters is an important component of
VAT management. It requires special attention on faulters.

25)

It is of paramount importance in India that we concentrate on this area of

activity to reduce interaction of the dealers with the department. Availability
of authentic information should be a matter of right for the dealers. Requisite
publicity of their rights and duties with dos and donts and use of telephone
and electronic means would help developing proper provisions for
introducing VAT in India.

26)

The Integrated GST (IGST) model for taxation of inter-State transaction of

goods and services has been adopted. According to this model, centre would
levy IGST which would be CGST plus SGST on all inter-State transactions of
taxable goods and services with appropriate provision for consignment or
stock transfer of goods and services.

27)

The Central GST and the State GST would be applicable to all transactions of
goods and services except the exempted goods and services, goods which are

xviii

outside the purview of GST and the transactions which are below the
prescribed threshold limits.

28)

It is suggested that under the proposed dual GST model, States would be
allowed to charge and collect SGST on all the supplies under their jurisdiction.
The role of the Centre would be to charge and collect CGST, administer IGST
and work as the clearing house for IGST.

29)

It is suggested to prepare the infrastructural setup requisite for adequate

automation in tax administration and engineer the business processes before
the GST implementation.

30)

It is suggested that the Special Economic Zones (SEZs) would also be given
same benefits as those given to the exporters, though such benefits would be
allowed only to the processing zones of SEZs. Further, sales made by SEZ
units to Domestic Tariff Area will come within the purview of GST.

xix

CHAPTER - 1
INTRODUCTION, OBJECTIVE AND RESEARCH METHODOLOGY
OF THE STUDY
1.1 INTRODUCTION:
India has witnessed substantial reforms in Indirect taxes over the past two decades
and is on the verge of another major reform initiative which will bring this process to
a culmination. As a progressive and welfare oriented country should balance the
requirements of direct and indirect taxes in a fair manner. Therefore too much
dependence on direct taxes will be repressive but at the same time passing a heavy
burden to the general public by way of indirect taxes and will constitute hardships to
the common citizen.
The objective of this study is to find out the impact of tax systems on the profitability
of the organization and growth of the revenue in India and the state of Maharashtra.
The past experience in Maharashtra and elsewhere have shown that half baked
reforms in the name of VAT have done more harm than good in evolving a tax system
required for a competitive environment. It is important to assess how this scenario
changes from Sales tax to VAT and VAT to GST.

1.1.1. SALES TAX:

Sales tax can be levied either by the Central or State Government. State sales taxes,
that apply on sales made within a State, have rates that range from 4 to 15 per cent.
Sales tax is also charged on works contracts in most states and the value of contracts
subject to tax and the tax rate vary from state to state. However, exports and services

are exempt from sales tax. Sales tax is levied on the seller who recovers it from the
customer at the time of sale.

Sales Tax in India is that form of tax which is imposed by the government on
sale/purchase of a particular commodity within the country. It is imposed under
Central Government (Central Sales Tax) and the State Government (Sales Tax)
Legislation. Normally, each state has its own sales tax act and levies the tax at various
rates. Apart from sales tax, certain states also impose extra charges such as works
contracts tax, turnover tax and purchaser tax. Thus, sales tax plays a major role in
acting as a major generator of revenue for the various State Governments.

Sales tax is levied on the sale of a commodity which is produced or imported and sold
for the first time. If the product is sold subsequently without being processed further,
it is exempt from sales tax.

Under the sales tax which is an indirect form of tax, it is the responsibility of seller of
the commodity to collect or recover the tax from the purchaser. Generally, the sale of
imported items as well as sale by way of export is not included in the range of
commodities that require payment of sales tax. Moreover, luxury items (such as
cosmetics) are levied higher sales tax rates. The Central Sales Tax (CST) Act that
comes under the direction of Central Government takes into consideration all the
interstate sales of commodities.
Hence, we see that sales tax is to be paid by every dealer when he sells any
commodity, during inter-state trade or commerce, irrespective of the fact that there
may be no liability to pay tax on such a sale of goods under the tax laws of the

appropriate state. Sales tax is to be paid to the sales tax authority of the state from
which the movement of the commodities starts or commences.

1.1.2. VALUE ADDED TAX:

VAT is a multi-point sales tax with set-off for tax paid on purchases. It is
collected in installments at each transaction stage in the production distribution
system. It does not have cascading effect due to the system of distribution or credit
mechanism. VAT is a tax on consumption. The final and total burden of the tax is
fully and exclusively borne by the domestic consumer of goods and services. Value
added tax is, therefore a multi-stage sales tax levied as a proportion of value added. In
simple terms, VAT is tax on sale of commodity at every point in the series of sales by
business firms which the provision of set-off tax already paid on inputs as well as on
previous purchases. Unlike a retailer sales tax or the present sales tax or the present
tax scheme, which are essentially single point taxes, VAT is charged and collected at
each stage of the production/delivery of goods and services.
VAT is an acronym for Value Added Tax. It is basically known as a tax on
consumption because its ultimate effect is borne by the consumer it is also known as
Goods and Service Tax (GST). In European Union it is known as VAT while in
Australia, Canada, New Zealand and Singapore it is known as GST. In Japan it is
known as Consumption Tax.
However, most of the states in India, from April 01, 2005, have supplemented the
sales tax with the new Value Added Tax (VAT). VAT in India is classified under the
following tax slabs:

0% for the essential commodities

1% on gold as well as expensive stones

4% on capital merchandise, industrial inputs, and commodities of mass

consumption

12.5% on all other items

Variable rates (depending on state) are applicable for tobacco, liquor,

petroleum products, etc.

Value Added Tax is distinctly different from the sales tax levied on exchanges. The
Value Added Tax is a form of indirect tax that is imposed at different stages of
production on goods and services. VAT is levied on the import goods as well and the
same rate is maintained as that of the local produce. Most of the European and nonEuropean countries have adopted this system of taxation. The transparent and neutral
nature of taxation has prompted VAT to emerge as one of the robust revenue raisers
in these countries. Sales tax, as compared to VAT is the percentage of revenue
imposed on the retail sale of goods. Unlike VAT, sales tax is levied on the total value
of goods and services purchased. The value added tax system, unlike the conventional
sales tax system, efficiently addresses the problems of cascading and input tax credit
that causes an automatic hike in the consumer price level. The incidence of cascading
is avoided in VAT as the tax is imposed on the value addition at every stage of
production. The final consumers are the ultimate bearers of the burden. This indirect
yet coherent form of taxation involves transparency and is therefore easily
comprehensible. The economic effect of VAT falls on the final prices of the goods
and services while sales tax relies on the final sale to the customers. The value added
tax system requires an effective accounting. To deal with this disadvantage, the same
4

tax is charged to each member involved in the production of the goods and services.
The implementation of the tax remains indifferent to the position of the member in the
production cycle or its position with respect to the customers. The system of taxation
under VAT is also successful in avoiding tax evasions that is frequent in sales tax.
Sales tax is often considered a burden if the percentage charged goes beyond 10% and
is subjected to evasion by the consumers who engage in buying products through the
internet and other activities such as buying at wholesale or through an employer.
Although tax evasion is not possible in VAT, it is subjected to other fraudulent
practices such as carousel fraud. This is one of the prominent practices of theft of the
value added tax. It is prevalent in the nations where the movement of goods between
jurisdictions is exempt from VAT. VAT is one of the newest instruments of the global
economy and is widely accepted and implemented in most of the nations. However,
VAT poses constraints in developing countries such as India. The predominance of
low per capita income in these nations poses a difficulty for the governments to earn
revenue through income tax. As compared to VAT, sales tax is a major revenue earner
for the regional governments in such countries.

1.1.3. GOODS AND SERVICE TAX:

Introduction of Goods and Services Tax (GST) in India is a certainty and its impact
on the retail sector is equally crucial to examine. It is believed that traders, including
retailers, would be one of the biggest beneficiaries of this harmonized system of
taxation. Although retail sector has succeeded in evolving as an organized revenue
generating sector, it still continues to be fraught with some inherent challenges posed
by the current indirect tax regime.

CENVAT credit of input taxes - Inability to offset the input excise duty (on
procurement of goods) and service tax (on procurement of services viz rentals, freight,
advertisement, other business related services) against the output tax (possible only
value added tax), leads to cascading of taxes. Given that the output VAT can be
(currently) discharged only through utilizing the input VAT, the input service tax
(largely on account of rentals) becomes a cost in the system. The ability to pass on
this additional cost to the final consumers depends on market dynamics and therefore,
may lead to reduction in margins. This issue of inability to offset the input taxes
should get resolved once GST is introduced in India. This is for the reason that under
GST, in the form in which it is currently contemplated, taxes on services would be
available for set off against taxes on goods.

Even in case of retailers involved in provision of services, the quantum of input

service tax credit available is unclear, since the regulation recognizes only
manufactures and service providers. It is expected that GST would remove this
anomaly since the taxable event for levy of GST would shift to 'sale of goods' from
the current 'manufacture of goods', resulting in re-design of input credit regulations to
include any buy-sell arrangement. Lack of uniformity in State VAT laws - Another
challenge currently faced by retail stores pertains to State VAT laws. The lack of
uniformity in these laws with respect to rates of taxes, threshold limits, compliance
requirements, etc lead to unnecessary compliance burden on the retailers.
Goods and Services Tax (GST) is a part of the proposed tax reforms that center round
evolving an efficient and harmonized consumption tax system in the country.
Presently, there are parallel systems of indirect taxation at the central and state levels.

Each of the systems needs to be reformed to eventually harmonize them.

In the Union Budget for the year 2009-2010, Finance Minister proposed that India
should move towards national level Goods and Services Tax that should be shared
between the Centre and the States. He proposed to set April 1, 2011 as the date for
introducing GST. World over, goods and services attract the same rate of tax. That is
the foundation of a GST. The first step towards introducing GST is to progressively
converge the service tax rate and the CENVAT rate.
The goods and service tax (GST) is proposed to be a comprehensive indirect tax levy
on manufacture, sale and consumption of goods as well as services at a national level.
Integration of goods and services taxation would give India a world class tax system
and improve tax collections. It would end the long standing distortions of differential
treatments of manufacturing and service sector. The introduction of goods and
services tax will lead to the abolition of taxes such as octroi, Central sales tax, State
level sales tax, entry tax, stamp duty, telecom license fees, turnover tax, tax on
consumption or sale of electricity, taxes on transportation of goods and services, and
eliminate the cascading effects of multiple layers of taxation. GST will facilitate
seamless credit across the entire supply chain and across all states under a common
tax base.

1.2. CONCEPTS AND MEANING:

1.2.1 CONCEPTS AND MEANING OF SALES TAX:
Sales Tax Act, 1956 is basically a single point taxation system where tax is
payable, at the point of first sale as per the Second schedule, a single point
purchase tax at the point of levy specified in the third schedule, a single point
7

tax in respect of declared goods at the point of levy specified in the fourth
schedule, tax on works contract as per the sixth schedule, tax on lease as per
seventh schedule, tax at the point of last sale as per eighth schedule and goods
which are subjected to tax on second or subsequent sale as per ninth schedule..
Goods, which are exempt from payment of tax under the ST Act, are listed in
the fifth schedule.
Under Rule 26 (9)(a) and 26(9)(b) of the ST Rules every dealer who wishes to
claim that he is not liable to tax in the State is required to file a declaration in
Form No.32 obtained from the registered dealer who sold or purchased the
goods to or from him.
In respect of goods manufactured by a dealer other than raw materials,
component parts and packing materials for a brand owner the brand owner is
the person who is deemed to be a first dealer in the State. It implies that the
sales tax is payable by such owner. However, if such manufacturer has
charged sales tax the brand owner is eligible for a setoff of such tax paid
subject to production of proof.
In cases where a dealer assigns the brand name or trademark after purchase of
goods, the dealer selling the goods after affixing such trade mark or brand
name shall be deemed to be the first seller in the State. However, if such
manufacturer has charged sales tax the brand/ trademark owner is eligible for a
set-off of such tax paid subject to production of proof.

Dealer:
The definition of "dealer" which forms the cornerstone for the levy of sales tax
is quite exhaustive;

He must be a person.

He must be carrying on a business.

The business may be of selling, buying, supplying or distributing

goods as defined in Section 2(1) (m).

The consideration for the activity may be for cash or for deferred
payment, or for remuneration, commission or other valuable
considerations.

Goods:
In terms of section 2(m) of the Sales Tax Act goods means all kinds of
movable properties and excludes newspapers, auctionable claims, stock and
shares and securities. Sale of Lottery tickets/Import licences/ exim scrips/
Vabals have been held to be sale of goods taxable under the ST Act.
Price:
Price is the amount of consideration which a seller charges the buyer for
parting with the title to the goods, the expenditure which he had to incur for
transporting these from the place of purchased by him, the octroi, his margin
of profit, handling charges including interest on the capital invested, the sales
tax component, and other incidental expenses, constitutes the price of goods.
Business:
The definition of "Business" is an important one in any Sales Tax Law,
because it has an interlink with the definition of "dealer" in Section 2(1)(k)
9

which, in turn, is crucial to the determination of the eligibility of Sales tax levy
under the charging provisions.
The first part of the definition specifies the following items as included in the
definition of "business":

Any trade, commerce or manufacture

Any adventure or concern in the form of trade, commerce or

manufacture

It is also made clear that profit motive is not relevant to determine whether an
activity amounts to business or not, and it is also not necessary that any profit
should actually arise from that activity.

The second part of the definition

ropes in any incidental or ancillary transaction connected with any trade,

commerce, manufacture, adventure or concern.
Sale:
In order to constitute a Sale all the following conditions should be
cumulatively present.

A bargain or agreement of sale;

The payment or promise of payment of price;

The delivery of goods, and

The transfer of property from the seller to the buyer

The definition of a sale includes a works contract, a transfer of right to use

goods and a hire purchase transaction.
A sale or purchase of goods is said to take place within the State in case of
specific or ascertained goods at the time the contract is entered into and in case
10

of unascertained or future goods at the time of their appropriation to the

contract.
In terms of explanation 4 to the definition of sale two sets of sales are said to
have taken place in respect of agency transactions in the following
circumstances:

When the agent purchases/ sells the goods at one rate and transfers the
goods/ sale proceeds to the principal at another rate; or

When the agent does not account to his principal the entire collections/
deduction/ purchases effected by him; or

When the agent acts on behalf of a fictitious or non-existent principal.

Taxable Turnover:
Means "taxable turnover" as the turnover on which the dealer becomes liable
to pay tax. Such turnover has to be determined by allowing the deductions
prescribed in Rule 6 from the "total turnover" as defined in section 2(1)(u-2).
Such turnover should, however, not include the turnover of purchase or sale in
the course of inter-state trade or commerce or in the course of export of goods
outside India, or in the course of import of goods into India.
Total turnover:
Means the aggregate turnover in all goods of a dealer at all places of business
in the State, whether or not the whole or any portion of such turnover is liable
to tax, including the turnover of purchase or sale in the course of interstate
trade or commerce or in the course of export of the goods out of the territory
of India or in the course of import of the goods into the territory of India;

11

Declared goods:
Goods, which are of special importance in inter-State trade or commerce as
per section 14 of the CST Act, are called declared goods. The rate of tax on
any sale or purchase of such goods inside the State shall not exceed four
percent and such tax shall not be levied at more than one stage. The rate of tax
and point of levy are specified in the Fourth Schedule. The law envisages
refund of tax in cases where such tax paid goods are subsequently sold in the
course of inter-state trade or commerce.
Purchase tax:
Every dealer who purchases taxable goods on which no sales tax is payable on
sale price of such goods is liable to pay purchase tax when such goods are:

Consumed in the manufacture of other goods for sale.

Consumed otherwise.

Disposed off other than by way of a sale within the State or by way of
interstate sales.

In the above scenarios sales tax will be payable on the purchase price of such
goods at the rate at which tax is payable on such sale.
Section 6 relating to purchase tax will not be applicable in respect of declared
goods taxable at the point of purchase/ sale or in respect of goods which have
suffered tax in the State at any earlier stage.
Turnover tax;
Section 6B of the ST act provides for levy of turnover tax on total turnover
at the rate of
12

1.5% if the total turnover is less than Rs. 10 crores in a year or

3% if the total turnover exceeds Rs.10 crores in a year.

Turnover tax will not be payable in the following cases:

On the sale of purchase of goods covered under fourth and fifth

schedule of the ST Act.

1.2.2 CONCEPT AND MEANING AND COMPUTATION OF VAT:

Value Added Tax is a tax on the value added at each stage of production and
distribution process and can be aptly defined as one of the ideal forms of consumption
taxation since the value added by a firm represents the difference between its receipts
and cost of purchased inputs.
I ) Single Point Taxation Systems:
In this, a commodity is taxed only at one point of time in the State. This
system is introduced in order to simplify the taxation system. Based on the stage
at which it is taxed it can be further classified into, into three categories:
a) 1st Point Taxation System:
b) Last Point Taxation System:
c) Taxing any Intermediate Point of Sale:
II) Multi Point Taxation System:
In contrast to single point taxation system, in multipoint taxation system
a commodity is subjected to tax at every point of sale. No deduction is allowed as
resale or second sale. Normally a set-off of taxes paid on purchases is made in
order to avoid cascading effect of taxes.
13

VAT is the perfect example of a multi point taxation system. One of the
objects of introduction of VAT is to increase the revenue of the State. In effect it
is similar to last point of tax in single point tax system, however it has got certain
advantages over the last point of tax system is concerned, from tax compliance
point of view.
Single Point Taxation System V/s. Multi Point Tax System-(merits and demerits):
Advantages of Single Point over Multi Point taxation System;

Single point tax system is very easy to comprehend as compared to

multiple point tax system. There is less calculation for set-off. In a country
like India where illiteracy rate is at the highest, implementation of multi
point tax system is very difficult.

Multi point taxation system adds complexity in record keeping and

increases cost of compliance. Elaborate records of purchase and sales are
required to be kept in order to claim set-off.

In a single point taxation system very few dealers are required to pay tax
and they comprise of generally big dealers having goods infrastructure
facilities. While in multi point tax system even small dealers are required
to pay tax, who have hardly got any necessary infrastructure.

Advantages of Multi Point over Single Point System:

Multi point taxation system enjoys international appeal over single point
taxation systems. All over the world, countries are switching over to multi
point taxation system.

14

Multi tax system eliminates pyramiding effect as there is no retention

money and full set-off is granted.

Multi tax system is self-regulatory as it creates incentives for compliance.

Since incidence of tax on individual dealer is very negligible, especially
after considering incentive in the form of set-off ,at the same time the base
of tax payer is very broad which make less likely to evade tax. In a single
point tax system taxpayer base is comparatively very small and incidence
of tax is very high and there is comparatively very small and incidence of
tax is very high and there is hardly any incentives in the form of set-off ,
which make more prone to tax evasion

III) Hybrid System:

There could be a hybrid system having characteristics of both single point tax
system as well as multi point tax system. For example certain commodities may be
taxed at a certain rate at the first level. Therefore on a second stage it may be taxed
again with the lesser rate of tax. In old Bombay Sales Tax Act, there was sales tax and
general sales tax. Now also, in many states, there is a concept of resale tax/turnover
tax which is the example of such hybrid tax. The only it differs with VAT is that there
is no set-off available for resale tax/turnover tax paid.

1.2.3 Methods of Computation of VAT:

There are several methods to calculate the value added to the goods for levy of tax.
The three commonly used methods are:
(a)

Addition method,

(b) Invoice method and

15

(c)

Subtraction method.

Fig. 1.1 Methods of computation of VAT1

Addition Method
Aggregating all the factor
payments and profit.

Invoice Method

Subtraction Method

Deducting tax on inputs

from tax on sales.

Deducting aggregate value of purchase exclusive of

tax from the aggregate value of sales exclusive of
tax.

Addition Method:
This method aggregates all the factor payments including profits to arrive at the total
value addition on which the rate is applied to calculate the tax. This type of
calculation is mainly used with income variant of VAT. Addition method does not
easily accommodate exemptions of intermediate dealers. A drawback of this method
is that it does not facilitate matching of invoices for detecting evasion.
Invoice Method:
This is most common and popular method for computing the tax liability under
VAT system. Under this method, tax is imposed at each stage of sales on the entire
sale value and the tax paid at the earlier stage is allowed as set-off. In other words, out
of tax so calculatd, tax paid at the earlier stage i.e. at the stage of purchases is set-off,

Manoharan T N (2010): Taxation, Ketan Thakkar for Snow White Publications Pvt. Ltd. Mumbai.

16

and at every stage the differential tax is being paid. The most important aspect of this
method is that at each stage, tax is to be charged separately in the invoice. This
method is very popular in western countries. In India also, under the VAT law as
introduced in several states and under the central Excise law this method if followed.
This method is also called the Tax Credit Method or Voucher Method.
Subtraction Method:
Under this method, the tax is charged only on the value added at each stage of the sale
of goods. Since, the total value of goods sold is not arise. This method is normally
applied where the tax is not charged separately. \

1.2.4 Computation of VAT:

The Value Added Tax (VAT) is a multistage tax levied as a proportion of the value
added (i.e. sales minus purchase) which is equivalent to wages plus interest, other
costs and profits. To illustrate, a figure of transaction is given below:
Fig. 1.2 Calculation of VAT through Invoice Method.
Manufacturer A
Wholesaler B
Sale Price

Rs.300

Gross VAT Rs, 37.50

Net VAT

Rs. 21

Sale Price

Rs. 400

Gross VAT

Rs. 50

Net VAT

Rs. 12.50

(50-37.50)

Product X

Product Y
Retailer C

Sale Price

Rs. 100

Sale Price

Rs. 100

Gross VAT

Rs. 12.50

Gross VAT

Rs. 4

Net VAT

Rs. 12.50

Net VAT

Rs. 4

Sale Price

Rs. 500

Gross VAT

Rs. 62.50

Net VAT

Rs. 12.50
17

(62.50 50)

Note : The rate of tax is assumed to be 12.5% on the transaction relating to goods
manufactured by A.
For a manufacturer A, inputs are product X and product Y which are purchased from
a primary producer. In practice, even these producers use inputs. For example, a
farmer would use seeds, feeds, fertilizer, pesticides, etc. However, for this example
their VAT impact is not considered. B is a wholesaler and C is a retailer.
The inputs X and Y are purchased at Rs. 100 each on which tax is paid @12.5 % and
4% respectively. The manufacturer A would, therefore, take the credit for tax paid by
him for the use of such inputs. The input price of Rs. 200 plus tax would include
wages, salaries and other manufacturing expenses. To this, entire he would also add
his own profit. Assuming that after the addition of all these costs his sale price is Rs.
300, the gross tax (at the rate of 12.5 per cent) would be Rs. 37.50. As manufacturer A
has already paid tax on Rs. 200, he would get credit for this tax (i.e. 12.50+4=16.50).
Therefore, his net VAT liability would be Rs. 37.50 minus Rs. 16.50. Thus,
manufacturer A would pay Rs. 21 only (because of this he would take the cost of his
inputs to be only Rs. 200)
Similarly, the sale price of Rs. 400 fixed by wholesaler B would have net Vat liability
of Rs. 12.50 (Rs. 50-37.50 = Rs. 12.50) and the sales price of Rs. 500 by Retailer C
would also have net VAT liability of Rs. 12.50 (Rs. 62.50-50=Rs. 12.50). Thus, VAT
is collected at each stage of production and distribution process, and in principle , its
entire burden falls on the final consumer, who does not get any tax credit. Thus, VAT

18

is a broad-based tax covering the value added to each commodity by parties during
the various stages of production and distribution.

1.2.5 VARIANTS OF VAT :

VAT has three varints, viz., (a) gross product variant, (b) income variant and (c)
consumption variant. These variants are presented in a schematic diagram given
below:
Fig 1.3 Different variants of VAT2

Gross Product Variant

Tax is levied on all sales

and deduction for tax
paid on inputs excluding
capital inputs is allowed.

Income variant

Tax is levied on all sales

with set-off for tax paid
on inputs and only
depreciation on capital
goods.

Consumption variant

Tax is levied on all sales

with deduction for tax
paid on all business
inputs(including capital
goods).

The gross product variant allows deductions for taxes on all purchases of raw
materials and components, but no deduction is allowed for taxes on capital inputs.
That is, taxes on capital goods such as plant and machinery are not deductible from
the tax base in the year of purchases and tax on the depreciated part of the plant and
machinery is not deductible in the subsequent years.
The income variant of VAT on the other hand allows for deductions on purchases of
raw materials and components as well as depreciation on capital goods. This method
provides incentives to classify purchases as current expenditure to claim set-off. In
2

Manoharan T N (2010): Taxation, Ketan Thakkar for Snow White Publications Pvt. Ltd. Mumbai

19

practice, however, there are many difficulties connected with the specification of any
method of measuring depreciation, which basically depends on the life of an asset as
well as in the rate of inflation.
Consumption variant of VAT allows for deduction on all business purchases
including capital assets. Thus, gross investment is deductible in calculating value
added. It neither distinguishes between capital and current expenditure nor specifies
the life of assets or depreciation allowances for different assets. This form is neutral
between the methods of production; there will be no effect on tax liability due to the
method of production (i.e. substituting capital for labour or vice versa). The tax is also
neutral between the decision to save or consume.
Among the three variants of VAT, the consumption variant is widely used. Several
countries of Europe and other continents have adopted this variant.

1.2.6 CONCEPTS AND MEANING OF GOODS AND SERVICE TAX:

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on the
supply of goods or services. France was the first country to introduce this value added
tax system in 1954 devised by a public servant. In India, due to non consensus
between central and state government, the proposal is to introduce a Dual GST regime
i.e. Central and State GST.

Dual GST:- Many countries in the world have a single unified GST system i.e. a
single tax applicable throughout the country. However, in federal countries like Brazil
and Canada, a dual GST system is prevalent whereby GST is levied by both the
federal and state or provincial governments. In India, a dual GST is proposed whereby
a Central Goods and Services Tax (CGST) and a State Goods and Services Tax
20

(SGST) will be levied on the taxable value of every transaction of supply of goods
and services.

Impact on Prices of Goods and Services:-The GST is expected to foster increased

efficiencies in the economic system thereby lowering the cost of supply of goods and
services. Further, in the Indian context, there is an expectation that the aggregate
incidence of the dual GST will be lower than the present incidence of the multiple
indirect taxes in force. Consequently, the implementation of the GST is expected to
bring about, if not in the near term but in the medium to long term, a reduction in the
prices of goods and services. The expectation is that the dealers would start passing
on the benefit of the reduced tax incidence to the customers by way of reduced
prices. As regards services, it could be that their short term prices would go up given
the expectation of an increase in the tax rate from the present 10% to approximately
14% to 16%.

Benefits of Dual GST: The Dual GST is expected to be a simple and transparent tax
with one or two CGST and SGST rates. The dual GST is expected to result in:-

Reduction in the number of taxes at the Central and State level

Decrease in effective tax rate for many goods

Removal of the current cascading effect of taxes

Reduction of transaction costs of the taxpayers through simplified tax compliance

increased tax collections due to wider tax base and better compliance

21

Who would be impacted: All businesses, whether engaged in sales / supply of goods
or supply of services, would be impacted by GST. The impact would be on supply
chains, ERP, product pricing, dealer margins etc.

Applicability to service providers :-Unlike the transition from the sales tax regime
to the VAT, where only businesses dealing in goods were affected, in the case of
GST, as the name suggests, both goods and service providers will be impacted. Thus,
even pure service providers need to plan for the transition to the GST.

Time to Plan for GST:-The draft laws will clarify finer aspects of GST such as rates,
classification and compliances. However, based on the material in the public domain,
one can begin with spreading awareness among various stakeholders within the
organization and identifying broad areas of action before the draft laws are published.
Experience of VAT implementation suggests that there may not be enough lead-time
available between the date of announcement of GST implementation and the actual
date of GST implementation.

Taxable event: - The Taxable event will be the supply of goods and the supply of
services. Hence, the current taxable events such as manufacture of goods, sale of
goods and rendition of services will not be relevant under the GST regime.

Applicability of both CGST and the SGST on all transactions: - A transaction of

supply of goods will attract both the CGST and SGST as applicable on
goods. Similarly, a supply of service will attract both the CGST and SGST as
applicable on services.

22

Applicability of other indirect taxes: It is proposed that the taxes to be subsumed

under CGST will include Central Excise Duty (CENVAT), Service Tax and
Additional Duties of Customs and the taxes to be subsumed under the SGST will
include Value Added Tax, Central Sales Tax, Purchase Tax, Entertainment Tax,
Luxury Tax, Octroi, Lottery Taxes, Electricity Duty and State surcharges relating to
supply of goods and services.
GST collection model: - GST is collected on the value added at each stage of sale or
purchase in the supply chain. The tax on value addition is ensured through a tax credit
mechanism throughout the supply chain. GST paid on the procurement of goods and
services is available for set-off against the GST payable on the supply of goods or
services. The idea is that the final consumer will bear the GST charged to him by the
last person in the supply chain. It is thus a consumption based indirect tax.

Applicability of taxes on imports of goods:- It must be understood that customs

duties will remain outside the GST regime. Thus, the applicable basic customs duty
will continue to be leviable on import of goods. In addition, both the CGST and the
SGST are expected to be levied on imports of goods. Thus, the additional duty of
customs in lieu of excise (CVD) and the additional duty of customs in lieu of sales tax
/ VAT will both be subsumed in the import GST.

Tax on import of services and person liable to pay:- Importation of services will be
taxed and both the CGST and the SGST will apply on such imports. The tax will be
payable on a reverse charge mechanism and the importer of services will hence need
to self declare and pay the tax. As to which State will have authority to collect the

23

relevant SGST, this will be determined based on the place of supply rules that the
government is expected to notify for this purpose.

Separate enactments for the Central and State GST:-There will be separate
enactments. The CGST will be a common code throughout India. Further, each State
will legislate its own enactment to levy and collect the SGST. However, it is
understood

that

white

paper

will

be

released

by

the

Federal

Government/Empowered Committee of State Finance Ministers based on which each

State will legislate. The expectation is therefore is that a majority of the provisions
will be uniform across the States.

Expected aggregate rate of GST:-The aggregate rate of GST, across the Central and
State GST, is expected to be approximately 16%. This is currently the subject matter
of discussion within the Empowered Committee.

Different rates for goods and for services:- It is expected that there will be one
single rate of GST on services at the Central and State level and the understanding is
that there would be not one but a few rates of Central and State GST for goods.

Carry forward of Input Tax Credits (ITC) and CENVAT Credit (CC)
balances:-Going by the precedence at the time of VAT implementation, it is believed
that the accumulated ITC and CC will both be allowed to be carried forward under the
GST regime, albeit upon fulfillment of prescribed conditions, if any.

Refund of un-utilized CC on inputs and input services:-It is envisaged that under

the proposed Dual GST model there would be refund of unutilized accumulated CCs

24

at the end of each fiscal year and that refunds would not be restricted only to those
relating to exports.

Cross utilization of credits between goods and services:- Under the GST regime,
the incidence of tax will be on supplies, be it supplies of goods or services. The taxes
will be levied in parallel by the Centre and the States who will levy the CGST and
SGST respectively on each supply of goods/services. Accordingly, the cross
utilization of credits for goods and services would be allowed subject to the fact that
cross utilization of credits between the CGST and SGST would not be permissible.

Threshold limits for e levy of GST:-No threshold limits have been prescribed as yet.
However, it has been indicated that the thresholds will be uniform and will be based
on the cumulative turnover of goods and services. Dealers with turnover below these
thresholds will not be covered under the ambit of the GST.

Uniformity under the various indirect tax legislations: - The Dual GST model
envisages uniform threshold limits under both the Central and the State GST.

Exemptions from GST, lists of exempted goods and exempted services:- Under
the GST, exemptions are expected to be minimal. Further, a common list of
exemptions for both the Central and State GST with little flexibility for States to
deviate there from is envisaged.

Benefits availed presently by EOUs (exemption from excise duty and Central
Sales Tax (CST) on domestic procurement of goods):-CST will be phased out and
will have no place in the GST regime. It is expected that the benefits presently availed

25

by the EOUs by way of exemptions would continue to be available in the GST regime
as well.

Status of Software Technology Parks/ 100% Export Oriented Units/Special

Economic Zone units:-Typically, in view of the common list of exemptions, the
exemption would extend to both the CGST and the State GST. With regard to the
position on the Software Technology Parks/ 100% Export Oriented Units/Special
Economic Zone units, it is envisaged that the status quo will remain.

Continuation of exemption currently available:-In view of the fact that under the
GST scheme, exemptions would be minimal, it may not be correct to proceed on the
assumption that the present exemptions would continue under the GST dispensation.

Position with regard to investors who enjoy area-based exemptions or who have
entered into a Memorandum of Understanding with the Governments in respect
of exemption, subsidy etc.:-All exemption schemes are proposed to be converted to
post-tax cash refund schemes. However, it is advised that companies approach the
Government to negotiate their MOUs so that their interests are not jeopardized and
that the incentives granted under the present tax regime are protected.

Taxation of Inter-State sale transactions: Presently, inter-State sales are subject to

Central Sales Tax (CST), which is origin based. However, the GST regime would
work under a destination / consumption based concept and hence the tax on interstate sale transactions will accrue to the destination state. As a corollary, it will be
zero rated in the origin state.

26

Treatment of stock transfers:-The taxable event will be the supply of goods and
therefore the stock transfers could be taxed. However, certainty will only emerge once
the GST law is finalized.

Taxation of inter State supply of services: - Detailed place of supply rules will be
framed for such transactions. Taxation of such supplies will however continue to pose
a challenge. Practices currently being followed in the European Union, Canada and
Brazil are being studied. Policymakers are also looking at different options of taxing
inter State supplies of services based on whether they are Business to Business (B2B)
or Business to Customer (B2C)

Fresh registrations and registration of existing VAT and Service tax dealers :The position in this regard is not clear at present. However, the rules are expected to
be assessee- friendly in this regard with appropriate soft-landing provisions for the
transition phase.

Single return or multiple returns:-It is expected that a single return will be required
to be prepared by the assessee and copies filed with the Central GST and State GST
authorities. The draft GST laws / Rules will provide further details.

Process of assessment under the dual GST:-The dual GST is expected to be a self
assessed tax. The Tax administration would have powers to audit and re-assess the
taxpayers on a selective basis.

Relevancy of concepts / principles surrounding manufacture?, MRP based

valuation works contracts etc. under the GST:- As GST is on all economic value

27

addition involving all supplies of goods and services, the above concepts / principles
could lose relevance under the GST.

Refunds on exports: In view of the Government policy that no taxes should be

exported, refund of GST paid on inputs should be available in case of exports of
goods and services, which will both be zero rated.

Uniformity in classification of goods, procedures, forms etc. across the States: Based on the current discussions in the Empowered Committee, it is expected that
there should be uniformity in classification of goods, procedures and forms across
States.

1.3 STATEMENT OF PROBLEM:

Indirect tax reforms have been an integral part of the liberalization process since
1991. In the first phase, India has been steadily attempting to move towards a tax
structure that is simple, moderate, rational and easy to administer and comply with. At
the central level, the move has been to bring down the tariffs both excise and
customs, reduce the number of rates, correct anomalies, get rid of the complexities in
the system and on the whole reduce the interface with the government. In addition to
indirect taxes levied by the centre, states are empowered to levy certain indirect taxes
and sales tax forms major part of revenue for almost all states. There was wide
variation in sales tax rates of the same commodity in different states. In the existing
sales tax structure, there are problems of double taxation of commodities and
multiplicity of taxes, resulting in a cascading tax burden. The viable solution found
was to shift to estimations based VAT i.e. Value Added Tax.

28

Value Added Tax is one of the most radical reforms that have been proposed for the
Indian economy after years of political and economic debate. Revenue growth is the
most important aspect by which to judge the success of VAT in India in general and
Maharashtra in particular. To measure the impact of vat over sales tax, it is essential
to study the various manufacturing sectors and the impact on the profitability of the
sectors since the introduction of Sales tax and VAT.

1.4 OBJECTIVE OF THE STUDY:

1) To understand the key issues involved in the successful implementation of VAT
and GST.
2) To study the impact of Sales tax, VAT and GST on the profitability of
manufacturing industry.
3) To identify the drivers for the smooth implementation of tax from VAT to GST.
4) To Study the Impact of Sales tax, VAT and GST on the price of the product.
5) To Study the impact of Sales tax, VAT and GST on Government Revenue.

1.5 HYPOTHESIS:
1) Profitability of manufacturing industry is more in VAT scenario than sales tax.
2) The tax revenue of the Govt. has increased due to implementation of VAT.
3) VAT has lesser cascading effect on firm as compared to sales tax structure.
4) Tax structure under GST will be more simple as compared to VAT and Sales
Tax.

29

1.6 RESEARCH METHODOLOGY OF THE STUDY:

Value Added Tax is one of the most radical reforms that have been proposed
for the Indian economy after years of political and economic debate. Revenue growth
is the most important aspect by which to judge the success of VAT in India in general
and Maharashtra in particular. The idea to carry out this research study is to measure
the impact of sales tax value added tax and goods and service tax on profitability of
organizations in India. The present study is partly descriptive and partly explorative.
The data for this study is obtained from secondary sources as well as primary sources.
Primary Data:
Data on total sales and Sales tax/VAT is collected primarily from various
organizations in India, and Maharashtra as well. Primary data of 100 Industries have
been collected through, Observation method, Personal interviews, telephonic
interviews, discussion with experts, Questionnaire and schedule, Case Studies etc.
Data of all the industries were grouped into five major categories, such as
infrastructure industries, capital goods industries, pharmaceutical industries, consumer
goods industries and chemical industries. The present study is based on time series
data for eight years during 2000-01 to 2008-09.
Secondary Data:
Secondary data were collected from referred books, reports, and conference papers,
referred journals, magazines/periodicals, ministry of finance (Economic Survey)
Govt. of India and, Govt. of Maharashtra, Publication of Reserve Bank of India. In the
present study, following statistical tools were used for analysis of data, simple tabular
and percentage method is applied and estimation of annual compound growth rate and
coefficient of variation of total sales and sales tax /VAT for each organization, state
30

and the country as a whole has been made by using growth rate formula. Moreover
standard statistical package like SPSS is used to calculate the linear regression and t
test to test the hypothesis of the research study.

1.6.1 SAMPLE SIZE OF THE STUDY:

There are a large number of industries in India and particular in Maharashtra. For our
studies we have taken 100 Industries and grouped them in five different Types of
Major Industries. The primary data was obtained from the sample respondents who
are associated with manufacturing activity. Field survey covered the hundred
industries, which are grouped into five major categories. Which are as follows.
1) Capital Goods Industries 18 Industries
2) Consumer Goods Industries 24 Industries
3) Infrastructure Industries 10 Industries
4) Chemical Industries 23 Industries
5) Pharmaceutical Industries- 25 Industries
TABLE 1.1 INDUSTRY WISE AND TURNOVER WISE CLASSIFICATION
OF INDUSTRIES
A)
Capital
Industries

B)
Consumer
Industries

C)
Infrastructure
Industries

D)
Chemical
Industries

E)
Pharma
Industries.

Total

11
07

10
09

04
02

16
03

13
10

54
31

00

05

04

04

02

15

Total
18
Source: Field work

24

10

23

25

100

Turnover
(Rs. In Crores)

1-200
201-1000
1000 and
Above

31

For our analysis, in Table 1.1 we have classified industries on the basis of turnover
into small, medium and Large Industries. Small Industries includes Industries whose
average sales turnover from 2001-02 to 2008-09 is less than two hundred crores.
Medium Industries are those whose average sales turnover during 2001-02 to 2008-09
is more than two hundred crores and less than one thousand crores and large
industries are consists of industries whose average turnover during 2001-02 to 200809 is more than one thousand crores.

COLLECTION OF DATA
Present research study is based on primary as well as secondary data. With the help of
following techniques or methods. The Primary Data of 100 Industries were collected:
a) Personal Interviews Methods
b) Telephonic Interviews
c) Questionnaires
d) Case Studies, etc.
The questionnaires were designed to collect the information about their Sales and
Sales tax Paid by them after considering the input tax credit from 2001-02 to 2008-09.
The secondary data was collected through Referred journals books, reports, and
conference papers, Referred journals, magazines/periodicals, Publication of Reserve
Bank of India, Ministry of Finance (Economic Survey) Govt. of India and, Govt. of
Maharashtra. Centre of Monitoring Indian Economy (CMIE). Detailed discussion
were held with the knowledgeable personnel who are associated with Indirect Tax
Fields and also with various Tax Consultants, Financial officers of various
Companies.
32

1.6.2 STATISTICAL METHODS/TECHNIQUES USED:

Appropriate Statistical tools necessary to measure the profitability and growth
of the organizations vis--vis revenue scenario of the state has been
incorporated. The study uses the standard Statistical Package for Social
Sciences (SPSS) for the analysis.
Data Analysis and Findings:
Standard tools were used to analyze the data, presentation of the Findings,
conclusions and recommendations. Based on the above analysis certain conclusions
were drawn.

1.6.3 DIFFERENT MODELS USED IN PAST STUDY:

1.6.3.1 GST MODELS:
1.6.3.1.1 GST MODEL IN INDIA:
It is important to take note of the significant administrative issues involved in
designing an effective GST model in a federal system with the objective of having an
overall harmonious structure of rates. Together with this, there is a need for upholding
the powers of Central and State Governments in their taxation matters. Further, there
is also the need to propose a model that would be easily implementable, while being
generally acceptable to stakeholders.

Salient features of the GST model:

Keeping in view the report of the joint working group on goods and services tax, the
views received from the States and Government of India, a dual GST structure with
defined functions and responsibilities of the Centre and the States is recommended.
33

An appropriate mechanism that will be binding on both the centre and the states
would be worked out whereby the harmonious rate structure along with the need for
further modification could be upheld, if necessary with a collectively agreed
constitutional amendment. Salient features of the proposed model are as follows:
(i) The GST shall have two components: one levied by the Centre (hereinafter
referred to as Central GST), and the other levied by the States (hereinafter referred to
as State GST). Rates for Central GST and State GST would be prescribed
appropriately, reflecting revenue considerations and acceptability. This dual GST
model would be implemented through multiple statutes (one for CGST and SGST
statute for every State). However, the basic features of law such as chargeability,
definition of taxable event and taxable person, measure of levy including valuation
provisions, basis of classification etc. would be uniform across these statutes as far as
practicle.

(ii) The Central GST and the State GST would be applicable to all transactions
of goods and services made for a consideration except the exempted goods and
services, goods which are outside the purview of GST and the transactions which are
below the prescribed threshold limits.
(iii) The Central GST and State GST are to be paid to the accounts of the
Centre and the States separately. It would have to be ensured that account-heads for
all services and goods would have indication whether it relates to Central GST or
State GST (with identification of the State to whom the tax is to be credited).
(iv) Since the Central GST and State GST are to be treated separately, taxes
paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for
34

the Central GST and could be utilized only against the payment of Central GST. The
same principle will be applicable for the State GST. A taxpayer or exporter would
have to maintain separate details in books of account for utilization or refund of
credit. Further, the rules for taking and utilization of credit for the Central GST and
the State GST would be aligned.
(v) Cross utilization of ITC between the Central GST and the State GST
would not be allowed except in the case of inter-State supply of goods and services
under the IGST model which is explained later.

(vi) Ideally, the problem related to credit accumulation on account of refund of

GST should be avoided by both the Centre and the States except in the cases such as
exports, purchase of capital goods, input tax at higher rate than output tax etc. where,
again refund/adjustment should be completed in a time bound manner.

(vii) To the extent feasible, uniform procedure for collection of both Central
GST and State GST would be prescribed in the respective legislation for Central GST
and State GST.

(viii) The administration of the Central GST to the Centre and for State GST
to the States would be given. This would imply that the Centre and the States would
have concurrent jurisdiction for the entire value chain and for all taxpayers on the
basis of thresholds for goods and services prescribed for the States and the Centre.

(ix) The present threshold prescribed in different State VAT Acts below which
VAT is not applicable varies from State to State. A uniform State GST threshold
across States is desirable and, therefore, it is considered that a threshold of gross
35

annual turnover of Rs.10 lakh both for goods and services for all the 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 at Rs.1.5 crore 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. 10 lakh) and
goods (Rs. 1.5 crore) in the Service Tax and CENVAT.

(x) The States are also of the view that Composition/ Compounding Scheme
for the purpose of GST should have an upper ceiling on gross annual turnover and a
floor tax rate with respect to gross annual turnover. In particular, there would be a
compounding cut-off at Rs. 50 lakh of gross annual turnover and a floor rate of 0.5%
across the States. The scheme would also allow option for GST registration for
dealers with turnover below the compounding cut-off.

(xi) The taxpayer would need to submit periodical returns, in common format
as far as possible, to both the Central GST authority and to the concerned State GST
authorities.

(xii) Each taxpayer would be allotted a PAN-linked taxpayer identification

number with a total of 13/15 digits. This would bring the GST PAN-linked system in
line with the prevailing PAN-based system for Income tax, facilitating data exchange
and taxpayer compliance.

36

(xiii) Keeping in mind the need of tax payers convenience, functions such as
assessment, enforcement, scrutiny and audit would be undertaken by the authority
which is collecting the tax, with information sharing between the Centre and the
States.
It is widely expected that this Budget will chart a roadmap and indicate which model
of Goods and Services Tax will be introduced in the country. GST has been declared
to be the goal for 2010 in the last Budget. There are several models of GST, each with
its own merit and demerit. A look at some of the models in circulation:
1.6.3.1.2 Australian Model: In Australia GST is a federal tax, collected by the Centre
and distributed to the states. But India is a heterogeneous country and there is no
chance that states will allow the Centre to collect all the taxes while they become just
spending institutions.
1.6.3.1.3 Canadian Model: The GST in Canada is dual between the Centre and the
states and has three varieties:
(i) Federal GST and provincial retail sales taxes (PST) administered separately followed by the largest majority.
(ii) Joint federal and provincial VATs administered federally (Harmonious Sales Tax
- HST).
(iii) Separate federal and provincial VAT administered provincially (QST) - only for
Quebec as it is like a breakaway province.
The first variety is fundamentally the Canadian model, which is similar (though not
the same) to the existing situation in India.

37

1.6.3.1.4 Kelkar-Shah Model: This model of a unified goods and services tax is
based on a "grand bargain" to merge Central Excise, Service Tax and State VAT into
one common base. Two different rates of tax are to be levied by the Centre and the
states. The collection will be by the Centre. This is like the HST model in Canada.
Ajay Shah wants the collection from big industries to be done by the Centre while the
states collect it from the smaller industries. They want the model to be introduced
straightaway.
This exposition does not even take into account the Constitution in the country. The
Constitution allows Central Excise and Service Tax to be collected by the Centre and
the VAT (sales tax) to be collected by the states. If the Constitution does not allow
such an amalgam, how the model can be operative is not indicated in the model.
1.6.3.1.5 Bagchi-Poddar Model: This model, just like Kelker-Shah's, envisages a
combination of Central Excise, Service Tax and VAT to make it a common base of
goods and services tax to be levied both by the Centre and the states separately. This
means that the Central Excise Act will be abolished and the goods tax will be only on
the sale of goods. It will merge in it the service tax.
To put this in legal lingo, the taxable event" for the GST will be the act of sale of
goods and services. The concept of manufacture will simply vanish. The difference
between the Bagchi-Poddar and Kelker-Shah models is that in the former, the
collection is at two levels, by the Centre and the states, while in the latter the
collection is only by the Centre.
So while the Kelkar-Shah model is like the Canadian HST, the Bagchi-Poddar one is
like the Quebec model.
38

Although the model says that it is based on the Quebec model, it is actually not fully
so as this model envisages collection both by the Centre as well as the states, whereas
the Quebec model envisages collection only by the state of Quebec.
The Bagchi-Poddar model also clearly envisages that a Constitutional amendment is
necessary to bring the taxing powers on goods and services under the Concurrent List
and to abolish the present division of taxing powers between the Centre and the states.
My arguments against the combined GST in the Bagchi-Poddar model are the
following:
(i) The amendment of the Constitution as envisaged in this model will not be
practicable immediately and it will in any case create a huge political upheaval in the
country.
(ii) The Supreme Court also may not allow the change in the basic structure of the
Constitution because it compromises the fiscal federalism ingrained in the
Constitution.
(iii) Revenue: Total collection of revenue will remain the same. There is no reason
why we should create such an upheaval for merely a theoretical pursuit.
(iv) Combining the service tax with VAT at the state level is fraught with innumerable
problems.
(v) At present the service tax collected at any change is given credit with goods at the
central level against duty on goods cleared from any other states. Such
interchangeability will not be possible in case the service taxes are collected by the
states.

The

free flow of a common Indian market will be hindered.

(vi) The states may impose different rates of service tax on the same service.
(vii) A service having an all-India character will get different treatment in different

39

states. Even the model itself admits that its success assumes complete similarity of
rates and procedures in all the states, which is most unlikely to happen. The states
could not even enact the same VAT laws recently.
1.6.3.1.6 The Practical Model: The same result with no upheaval/without upsetting
the present setup can be achieved by a dual VAT or parallel GST at the central as well
as the state levels. At the central level we can have, as we have now, a combination of
Cenvat and Service Tax. At the state level we can have VAT alone without Service
Tax. There is no need to combine Cenvat and VAT which envisages the complete
abolition of Central Excise Act, which gives the power to the Centre to charge tax on
manufacture. At the Centre the merging of Cenvat and Service Tax has been already
done to a large extent by allowing interchangeability of input credit for both goods
and services. The rate of tax can be made 14 per cent for both goods and services in
the next Budget or the one after that. At the state level, VAT can be perfected by
abolishing CST and allowing inter-changeability of input credit between states. This
will work administratively as well as revenue-wise. Realising that India is a federal
country with disparate states, this dual or parallel GST and VAT is a most practical
proposition. There is no need to serve a doctrinaire approach and create mayhem to
get the same revenue.

1.7 IMPORTANCE OF THE STUDY:

The objective of the study of this topic is to find out the impact of Sales tax, Value
Added Tax and Goods and Service tax on the Profitability of the Organizations and to
determine which tax system is beneficial to the Industries, Consumers and also to find
out the effect of Sales tax, Value Added Tax and Goods and service tax on the Price
of the product. This study also results in finding the most beneficial system of tax
40

structure which is suitable means less complicated from the view point of
Government and Industries. This study will be useful to traders, Manufacturers to
analyze its tax burden, at the same time government will also understand how to
generate the revenue through indirect taxes in the Country.

1.8 LIMITATIONS OF THE STUDY:

The data collected for this research is collected from the state of Maharashtra. The
result received from this research may or may not be suitable for application to the
other states of India due to geographical limitations.

1.9-CONCLUSION:
Indirect tax reforms have been as integral part of the liberalization process since new
economic reforms. A progressive and welfare oriented nation like India tries to keep a
balance between direct and indirect taxes. In this chapter we have made an attempt to
understand the concepts and methodological approach required to analyse the impact
of Sales tax, VAT and GST on the Profitability of the organization as well as the
revenue growth of the Govt. at State and National level.

41

CHAPTER - 2

REVIEW OF LITERATURE:
2.1 INTRODUCTION:
This chapter includes the study of the various Literature related to tax structure in
general and Sales Tax and VAT in particular & critically understands the same with
the object whether there has been any similar study in the past. Research made in the
past identifies various gaps in the studies.
Bagchi Amresh (2005)1: According to the research conducted by him, it is
inappropriate to impose a uniform tax structure in VAT on the states for it goes
against the principles of fiscal autonomy. It is a pity that erosion of the federal
foundations of the polity is taking place at a time when there is need to strengthen
them. Anything that hurts Indias federalism should be jealously guarded against. One
wonders whether the states while surrendering the most vital part of their fiscal
autonomy thought through the implications of what they were agreeing to.
A uniform rate of sales tax (of which VAT is the modern variant) across the
country has an obvious appeal, particularly to business. That is why there has been
pressure on the EU to have a uniform rate of VAT throughout the Union7 and
proposals were put forward for a single rate of VAT for all countries in the EU. But
the proposal has not found favor primarily because of its implication for the fiscal
sovereignty of the member countries. There is however no Indication that the EU
intends to move away from its current regime of rates varying across countries subject
to a floor.

Bagchi Amarshi(2005): (Economic & Political Weekly, Vat & State Autonomy, April 30th)

42

Bird Richard (2007)2: The author points out that the principal reasons for rapid
spread and success of VAT are two fold. The first reason is undoubtedly the early
adoption of Vat in the EU and the perceived success of both the EU and its Vat. The
second is the key role played by the IMF in spreading the word to developing
countries. The consistent support and advocacy of this form of taxation by the IMF in
emerging countries introduced the idea of VAT and facilitated its adoption even by
countries with much less developed economic and administrative structures.
VAT has been an enormous success. It has swept away other contending
general sales taxes in most of the world.
Burgess Robin, Howes Stephen and Stern Nicholas (2003)3: The writers state that
VAT, in essence, is a tax on domestic final consumption. It can be levied at all stages
between production to the point of final sale. The VAT is an attractive tax, and has
proved to be successful tax from the point of view of revenue raising and has in the
last three decades, been introduced into a wide variety of developed and developing
countries.
They have paid attention to the problems arising from the introduction of vat
concerning the centre-state relations, which have been categorized into
a] Harmonised, centrally run system,
b] Non harmonized State run system and
c] Dual Centre- State System.
They conclude stating that the successful introduction of Vat into a large and
heterogeneous country like India will require close Centre-State co-operation.
2

(Bird Richard(2007): (The Vat in Developing and Transitional Countries Cambridge University
Press)
3
Burgess Robin, Howes Stephen and Stern Nicholas: (Options for VAT)

43

Burgess Robin and Stern Nicholas (2005)4: The authors present options for reform
of the Indirect in terms of different versions of a VAT designed for a federal context.
It must be emphasized that these constitute only an agenda and the objectives are
limited to a review of theory and experience in a way which points to this agenda.
They have outlined the principles of VAT, examined the experience of four
federal economies, reviewed the Centre State relations in India, and have proceeded
further to set out an agenda for India.
They have argued that the pressure on the Indian domestic indirect tax system,
both for revenue and in terms of complexities and inefficiencies are warrant to serious
considerations. It is important to develop early in the reform process a picture of
where the structure should settle. They argue that there are a number of serious
contenders for a domestic VAT based system which takes into account various
aspects of Indias federal structure.
Chelliah Raja, Aggarwal Pawan, Purohit Mahesh and Rao Kavita(2001)5: The
authors state that value is created or added not only at the stage of manufacturing but
also at all subsequent stages of activities i.e. until the commodity reaches the hands of
the final consumer. So, they consider a tax which covers value added at all
transactions better to that which cover value added only at the stage of manufacture
and sale by an importer. They have further studied the various options for Vat in
regards to the International experience, have undertaken experiments with Vat in
Indian States, design of Vat for major states, issues in administration of Vat and also
studied the options for reforms in CST.

Burges Robin and Stern Nicholas: (Programme of Research into Economic Transformation and
Public Finance)
5
Chelliah Raja, Aggarwal Pawan,Purohit Mahesh and Rao Kavita (2001): (NIPFP, Primer on VALUE
ADDED TAX)

44

Das - Gupta Arindam (2005)6 : India has not implemented a transparent destination
based consumption tax and not even a value added tax. Instead, Indias state VAT
cascades; has roughly an income rather than a consumption base; will not implement
the destination principle even if the central sales tax on interstate sales is removed;
and is far from transparent. Despite its weaknesses, however, implementation of state
VAT deserves support because of the strengthening of tax administration and the
lowering of taxpayer compliance costs that it will bring about.
The VAT should be judged as a success say three years from now, if revenues
improve, compliance and administration costs per rupee of revenue fall, and exports,
including national exports, increase. Sales tax buoyancy with respect to GSDP at
factor cost, for all states taken together for 1993-94 to 2001-02 was 1.05. Unless VAT
revenue buoyancy exceeds this, it will have failed on revenue grounds. Sales tax
administration costs vary across states from below 1 to around 4 per cent of
collections, a second VAT benchmark. It is harder to suggest quantitative
performance benchmarks for compliance costs and exports given data limitations and,
for trade, modeling problems.

Frenkel Jacob, Razin Assaf, Symansky Steve (1991)7: The authors highlight the
macroeconomic issues pertinent to the understanding of the international and
domestic effects of international Vat harmonization. It outlines elements of the
policies of vat harmonization envisaged for Europe of 1992, and develops a basic tax
model which is suitable for the analysis of the incentive effects of various tax policies
and their welfare implications.
6

Das-Gupta Arindam (2005): (Economic & Political Weekly, Will State deliver Vat? , September 3rd)
Frenkel Jacob, Razin Assaf, Symansky Steve (1991) : (National Bureau of Economic Research,
International VAT Harmonisation, March 1991)
7

45

They analyse the dynamic mechanism associated with changes in the time
profile of taxes. Since Vat harmonization involves changes in the competition of
taxes, they examined the dynamic consequences of revenue- neutral tax conversions
between income and consumption (VAT) tax systems undertaken by a single country.
Reflecting their emphasis on the saving-investment balance we demonstrate
analytically that the effects of such changes in the composition of taxes depend
critically on international differences in saving and investment propensities which in
turn govern the time profile of balance of payments.
They have suggested the Tax Model, studied the simulations of Vat
Harmonisation and alternative Tax systems; current Account Imbalances, Tax
conversions: Revenue Neutrality and current Account Imbalances

Glaeser, et al. (1992): He examines agglomeration impacts by estimating the impact

that local industrial specialization and diversity has on a citys growth. In order to
measure specialization of an industry in an area, they used a location quotient for
industry
i, measured as
e it /
specialization

Eit

it

st/

Est
Where e is the number of jobs in an industry, E is the total number of jobs and the
subscripts i, s and t denote counties, the United States and year, respectively. The

46

variable measures how specialized an industry is in a county relative to how it would

be if the industry was randomly spread across the U.S.8
Hicks9 & Joseph (1939)10: They believed that the lump sum taxes are the most
neutral and that the income tax is superior to commodity taxes (such as VAT) in terms
of neutrality. Hicks and Joseph, using technique of ordinal welfare economics
unequivocally demonstrated this. Further, it is shown that VAT is likely to distort the
coparison of benefits and thereby, choices via increase in costs. This in turn
influences the pattern of resource allocation. Hicks- Joseph demonstration of excess
burden of such a tax using the technique of ordinal welfare economics, however,
assumes that the objective of taxation is to maximize tax revenue. On the contrary, in
present times, commodity taxes do have the objective of curtailing consumption of
taxed items. Hence as Kaldor11 state, economic efficiency of tax (ET) can be defined
as changes in private expenditure (c ) over changes in revenue (R ) i.e ET =C/R .
Morag`s reversal theorem, when the assumption of fixed revenue is dropped
and when we compare taxes creating same reduction in the consumption of the
commodity in question. Even in terms of the theory of optical taxation propounded by
Ramsey and others, VAT fulfills the criterion that there is no loss of technical
production efficiency when the rates are optimally determined and that there should
be no taxation of inputs into the production process12.

An identical measure was calculated with county employment relative to Tennessee employment.
Models discussed below were conducted with the measure and results remained consistent with those
discussed in the paper. The national ratio was used to remain consistent with the majority of the
literature (Glaeser, et al (1992) and Gabe (2005)).
9
Hicks J.r.1939. Value and Capital, London: Oxford University Press.
10
Review of Economic Studies, 1939, pp 226-231.
11
Kaldor , N. 1956An Expenditure Tax. London: Allen & Unvin.
12

Atikson, A. B. and J.E. Stiglitz. 1990 Lectures on public Economics. New York: McGraw Hill.

47

A study concluded on optical tax & VAT concluded that the optimal tax is that
there is no loss of technical production efficiency consequent upon imposition of
commodity taxes, if such taxes are designed optimally. A necessary condition for
taxes to be designed optimally is to have a tax on inputs going into the production 13.
Since VAT is a system of commodity taxation designed to avoid tax on inputs being
used for the production process, it is eminently suitable for adoption as an optimal tax
structure.
Kautilya`s Arthasastra14: His works state that the taxes are often perceived to be a
measure for raising resources for the government. In the primitive barter economies
of the medieval period in Europe and even in ancient India, the primary objective of
taxation was to raise resource for the economy.

Keen Michael and Smith Stephen(2007)15: According to their study the key claim
made by advocates of the VAT is that it is a particularly effective way of raising tax
revenue: Cnossen(1990) argues that purely from a revenue point of view, VAT is
probably the best tax ever invented. Advocates have also long recognized that VAT,
like any other tax, is vulnerable to evasion and fraud but stress distinctive features of
the vat make it less vulnerable than other forms of taxation. The author reviews the
exposure of VAT to revenue losses through noncompliance, with a particular focus on
fraud and evasion.

13

Diamond, Peter A., and Mirrlees . 1971. optimal Taxation and Public Production and Efficiency
Economic Review 61: 8-26
14

Reference of tax on sale and citation of rules thereof provide ample evidence of a first point sales tax
being in existence in ancient India. See for a details Purohit, Mahesh C. 1975.Sales taxation in
India,pp 12-18.New Delhi: S Chand & Co
15

Keen Michael and Smith Stephen(2007): ( IMF Working Papers, Vat Fraud and Evasion, February)

48

There is no doubt that VAT is susceptible to evasion and fraud, running all the
occasional concealed sale to sophisticated and large scale attacks by organizations.
All taxes face problems of noncompliance take a particularly striking form, with fraud
potentially leading not merely to an inappropriate reduction in tax towards zero but
outright cash payment to the fraudster.
There is no mystery as to how one might sole the current difficulties of
carousel and related frauds. The deep solution is well known: to fix the VAT chain by
ending the zero rating of trade between member states.

Krugmans (1991)16 study of the new economic geography led to renewed interest
in the notion of agglomerations and led to several studies that recognized the potential
for agglomeration economies to alter the general findings from the tax competition
literature (Kind, et al (1998 and 2000), Ludema and Wooton (2000) and Baldwin and
Krugman (2004)). These papers recognized that the capital mobility driving the tax
competition models also potentially leads to the formation of agglomerations. The
earning of rent in an agglomeration then offers governments an opportunity to
forestall the race to the bottom in capital tax rates. Given that there is evidence of
firms earning rents in the presence of agglomerations, it follows that governments
might then attempt to raise the tax rates paid by the firms to capture a portion of the
rents. This will offset the race to the bottom that is predicted in the standard tax
competition models. The following sections present the standard tax competition
model followed by some insights from tax competition in the presence of
agglomeration economies. In contrast, the presence of the agglomerations may
expedite the race to the bottom in capital tax rates. The jurisdiction without the
16

Krugman, Paul. 1991a. Geography and Trade. Cambridge: MIT Press.

49

agglomeration benefits may compete more vigorously for the capital. Because too
great gap, in tax rates will cause capital outflow, the jurisdiction with the
agglomeration will have to lower its rates as well to maintain the gap.

It is also possible that counties consider other demographically or economically

similar counties when setting tax rates as opposed to just physical neighbors.

Marshall (1920): He studied the incentives for firms to locate near each other and
form what is called an agglomeration. Agglomeration economies are thought to
benefit a firm to the extent that locating within the agglomeration lowers the cost of
operating the firm because of positive externalities from the agglomeration. This is
usually thought to occur through a number of avenues. The presence of a trained labor
force, or labor market pooling, makes the cost of hiring and training new employees
relatively cheaper. Knowledge spillovers exist to the extent that technological
advancements developed in one firm spread to surrounding firms at a lower cost than
transmitting over greater distances. The proximity of firms to producers of
intermediate inputs and to the final demanders of a firms output lowers the cost of
production as well. One of the most commonly disputed dimensions of agglomeration
economies is the scope of the externality. The literature has generally labeled the
scope of the agglomerations into three categories: (1) internal economies of scale, (2)
economies of scale external to the firm but internal to the industry (localization
economies) and (3) economies of scale that are external to the firm and the industry
(urbanization economies)17 An additional line of disagreement is over the geographic
scope of the externality with some arguing that any benefits from externalities occur

17

See Eberts and McMillen (1999) for a discussion of the different scopes of agglomerations.

50

at a very localized level, thus discussions of agglomeration economies should not

extend to too great a geographic size (Rosenthal and Strange (2003b). Localization
economies are often attributed to Marshall who envisioned local clusters of industries:
When an industry has thus chosen a locality for itself, it is likely to stay there long: so
great are the advantages which people following the same skilled trade get from near
neighborhood to one another. Employers are apt to resort to any place where they are
likely to find a good choice of workers with the special skill they require. (Marshall
(1920), p. 271)

METRIC18 & A Korean study (1977) 19: The METRIC studies referred to in the
Brookings as well as in the Sixth Report of the Tax Council suggest that a reduction
in VAT by 1 percent would reduce prices by 0.7 percent. A Korean study, however,
suggest that the introduction of VAT did not have any markedly unstable impact on
prices. It shows that in 1977, the wholesale price in Korea increased by 9 percent and
the consumer price by 1.7 percent when VAT was introduce in July 1977.

Mukhopadhyay Sukumar (2005)20: His study reveals that Revenue growth is the
most important aspect by which to judge the success of VAT in Haryana. The deemed
growth of revenue estimated by the Commercial Tax Department of Haryana,
however, has not taken into account a number of positive factors. As Haryana

18

Aaron Henry J., ed 1981. Value Added Tax: Lesson from Europe. Washington DC: Brooking
Institution.
19
The ministry of finance 1980. The Survey Report on the Practice of value Added Tax in Korea, (In
Korean) pp 168-170 quoted in Han, Seung Soo. 1987. The value Added Tax in Korea DRD 221 World
Bank pp 29-31
20

Mukhopadhyay Sukumar(2005): (Economic & Political Weekly, Vat in Haryana, February 19th)

51

implemented VAT only in 2003, one year is too short a period to judge its efficiency
from a revenue point of view.
The conclusion is that the design of VAT introduced in Haryana is
unexceptional.
For revenue, here an attempt has been made to disaggregate all the possible
parameters concerned. However, it also has to be admitted that, in the first year, there
can be initial problems and that the situation is uncertain. Just one year is too short a
period to judge the efficiency of VAT from the revenue point of view. When VAT
was introduced in Canada in January 1991, even in September 1992, Robin Burgess
and P Stern (VAT in India-Problems and Prospects, p 30) called the revenue result
uncertain. The idea of writing this treatise is to put the whole issue into proper
perspective.

Murthy M N (1995)21: His study discusses various types of VAT and their
application in a federal country or a country with governments at many levels. In
particular, it takes up a detailed examination of a comprehensive VAT covering the
full chain of business activities from manufacturing to retailing. A case for having a
comprehensive VAT at central and state levels in India is discussed. It finds that such
a tax system supplemented by specific excises and subsidies to deal with the problems
of equity, environment and social needs is ideal for India.
A comprehensive VAT with consumption base covering the full chain of
business activities from manufacturing to retailing is identical to a tax on retail sales.
Given a choice between a VAT and a tax on retail sales, a developing country has to

21

Murthy M N (1995): (Economic & Political Weekly, Value Added Tax in A Federation : Commodity
Tax Reforms in India, March 18th)

52

opt for VAT, because retail sales departments are small, unstable and informal in
those countries.
A comprehensive VAT with the consumption base, the tax credit method, and
the destination principle to determine VAT on international and inter-state trade flows
can form an ideal commodity tax structure for India.
In a federal country like India, it may be ideal to have state and central VATs
substituting the current state and central taxes on goods and services respectively.
There can he two types of tax regimes with the state and central VATs: (a) the parallel
state and central VATs on the same base covering business from manufacturing to
retailing stage and (b) the central VAT up to the manufacturing stage and the state
VAT at wholesaling and retailing stages. Tax regime (b) may be ideal for India.
A VAT with one or two rates has to be supplemented by the special excises
and subsidies to deal with the problem of equity, environment and social bads like
tobacco and alcohol.
Musgrave (1986)22: The effects of VAT are felt all over the economy. This is
because this tax influences several macro economic variables such as savings,
investment, employment, distribution prices, and efficiency of resources. VAT
affects some of these variables directly and others indirectly. According to Musgrave
the second alternative might be the most realistic one. Hence, it is expected that an
absolute price level increase is the most likely result. VAT would be inflationary if it
is shifted forward so that the consumer maintains real consumption and there exist an
accommodative credit policy. In fact it would be necessary to have sufficient increase
22

Musgrave, R.A. Effect of business Taxes on International Commodity flows. In collected papers
of Richard A. Musgarve. 1986. Public Finance in a Democratic society Vol. I, Social Goods Taxation
and Fiscal and policies. New York: University Press.

53

in wages (to offset increase in prices due to VAT) to help the consumer maintain his
present consumption level. Such an increase in wages will cause an inflationary
spiral, for the business cost will trigger a price increase. The studies involving partial
equilibrium analysis do not, however, capture the adjustment among taxed and non
taxed commodities. Moreover, such studies attribute the effect of taxes replaced and
the new VAT to different commodities consumed by different consumer groups.
However these studies do not examine the effect on substitution of taxed
commodities.
NIPFP (1989) 23: A study conducted by NIPFP reveals that the central VAT in India
indicates that during April 1986 to September 1987, the level of wholesale prices of
all commodities. The study shows that, at the disaggregated level, the price impact is
significant but marginal in respect of a few, basically intermediate inputs and capital
goods. For all the intermediate goods, the decline in price level was about 0.4 percent.
A similar result is also arrived at in the case of capital goods. More importantly, the
price impact was negligible even for consumer goods. Hence, it would be correct to
state that VAT is generally not inflationary.
NIPFP(1989): A study conducted by NIPFP found similar result in the case of capital
goods. More importantly, the price impact was negligible even for consumer goods.
Hence, it would be correct to state that VAT is generally not inflationary.
The effect of VAT on prices is significant and direct. The effect, however,
depends upon whether VAT is a new levy (intended to mobilize additional resources)

23

National Institute of public Finance and policy 1989. The operation of MODVAT New Delhi :
NIPFP.

54

or simply a replacement for the existing taxes to recover the lost revenue from other
taxes reduced or replaced by VAT.
The central government needs excess revenue to carry out its allocative and
distributive roles (Via intergovernmental transfers) to influence state actions and
achieve both incentive compatibility and horizontal equity.
Purohit Mahesh (1993)24: His research concluded that the adoption of the Value
Added Tax (VAT) by a rapidly growing number of countries has been one of the most
remarkable events in the evolution of commodity taxation in this century. He
examines the general trends in the structure of VATrates, tax base and
exemptionsin the countries which have adopted it. The author then presents his
assessment of the existing system of commodity taxation in India and, against that
background, discusses the likely problems in introducing VAT in the context of the
country's federal structure.
The analysis of the existing structure of the three important taxes suggests that
the present system of commodity taxes in India is an un-integrated one. It is not a
system in itself but a juxtaposition of a number of systems. Also, services are
generally excluded from the purview of taxation.

Purohit Mahesh (1994)25: His Study revealed that one of the factors responsible for
proper enforcement of a VAT is organization of the tax administration. Another
important aspect related to the management of a VAT is its operations commencing

24

Purohit Mahesh(1993): (Economic & Political Weekly, Adoption of VAT in India : Problems and
Prospects, March 6th )
25
Purohit Mahesh(1994): (National Institute of Public Finance and Policy New Delhi, Management of
VAT in France, February)

55

with registration of taxable persons. All the issues related to the administration of the
tax system as well as the compliance costs are equally important.
Management of VAT commences with the registration of taxable persons,
once registered, the taxpayers obligations in submitting the returns and procedures in
maintaining books of accounts differ on the basis of the activities and volume of
turnover. Methods of assessment also change according to the category of the
taxpayers. The system of lumpsum taxation is relatively complex but offers various
advantages to the taxpayers regarding their obligations.
Purohit Mahesh (1997)26: His study stated that although more than 100 countries
have gone in for a system of Value Added Tax (VAT), it is not a sheer coincidence
that most of the federations have not adopted it. Brazil has the distinction of being the
only federal country in the world with independent value added taxes (VATs) at the
federal and state levels.
The existing system of taxation in Brazil is based on tax reforms enacted as
part of the 1988 constitutional reforms which aimed at strengthening the structure of
value added tax at the state level. The existing indirect tax system of Brazil is
characterised by a variety of taxes. The taxes are levied by all the three tiers of
government. The federal government levies the IPI - a federal VAT on
manufacturing; the state governments levy the ICMS - a state VAT on agriculture,
industry, and many services; and the municipal governments levy ISS - a tax on
services which is not included in the ICMS. Notwithstanding various limitations with
the VAT at the two levels of government in Brazil, VAT of Brazil could be followed
by the other federations. However, the issues of significance for the other federations

26

Purohit Mahesh (1997): (Economic & Political Weekly, Value Added Tax in a Federal Structure: A
Case Study of Brazil, February 15th )

56

included (i) the structural strength of the ICMS, and (ii) the operational efficiency of
the state-VAT, especially in the context of equity and efficiency of the tax system. As
regards the structural strength of the ICMS, the mechanism of interstate adjustments
based on the principle of 'origin' creates interstate inequity. Also, the rate variations
for interstate flows (i e, to have varying rates for different states based on the stage of
economic development) have given rise to malpractice by the rich states (such as
offering of special tax deferrals). Such practices have attained increasing importance
in recent years.
Purohit Mahesh (2000)27: He studied the allocative and distributive functions of the
Centre, and proposed that the center should levy, in addition to the CENVAT,
Sumptuary excises (SEs) on a few select commodities. Theses commodities would be
at the most a dozen in number. The center would retain to the Center approximately
half the revenue from the UEDs. The central kitty would, therefore, not be affected by
the proposed change in the system.
As regards assignment of tax powers between the different layers of
government, the fiscal federalism thermo demonstrates that highly progressive and
mobile tax bases should be assigned to the national government and the sub national
governments should levy mainly the benefit taxes and taxes on static/ immobile tax
bases (Musgrave, 1959; Oates, 1972, 1999). This is because a mobile tax base can
migrate across jurisdictions in response to favorable/unfavorable tax treatment given

27

Purohit , Mahesh C. 2000.Assignment of taxing Powers for Fiscal Balance. In fiscal

Federalism in India: Contemporary Challenges Issues Before the Eleventh Finance Commission , ed.
D.K. srivastava , pp 312-329. New Delhi: NIPFP.

57

by the various sub national jurisdictions. Such migration produces an excess burden
and may lead to low or zero tax rates in equilibrium at the sub-national level 28
A key feature of the aforesaid Constitution assignment of responsibilities and
tax powers has been the in-built imbalance between expenditure requirements and
revenue over expenditure needs, the states in general have revenue shortages. The
presence of such vertical fiscal imbalance 29 is a characteristics feature of the Indian
federation and occurred because of historical and political factors30. To mitigate the
fiscal imbalance, the Indian Constitution provides four channels of resource flows
from the center to the states viz., revenue assignment, revenue distribution, revenue
sharing and grants- in aid from center. For details and nature of these transfers, see
Rao and Sen (1996) Vithal and Sastry (2001) and Shome (2002)31.

28

For instance , if one sub-national government unit increases its tax rate , then the
neighboring units will have an incentive to reduce /retain their rates in order to increase the
tax base by way of attracting mobile tax bases into their territories.

29

Besides there exist horizontal imbalance among the states , because of difference among
States in their levels of development (due to difference in endowment of natural resource),
and standard of public services (due to their historical background and factors) .

30

(Rao and Sen 1996.) The historical-cum political rational that shaped the Constitutional

arrangements was the need to ensure and protect the unity, integrity and sovereignty , of
the country which owing to historical circumstances , the framers of the Constitution
Of India 1988) moreover , the government of India Act, 1935 based on which the many
aspects of Constitutional assignments were decided upon , was designed to keep firm
administrative control of the country with the center believed could be ensured only by a
functionally and financially strong center (Government
31

The other major channels of resource transfers from the center to State are the Commission
and central government ministries (See Rao and Sen, 1996 and Sury, 1998).

58

Evidence collected from different countries show that VAT is either partially
progressive or proportional. In Dutch countries, the VAT was designed in such a way
that it would be distributionally neutral32. In France, VAT was to be proportional or
mildly regressive when taken in relation to consumption and regressive in relation to
income33. In the United Kingdom, VAT is progressive mainly because of zero- rating
for food, housing and children clothing.34. The results of the studies relating to
Denmark (1981) , Netherlands (1983) , Sweden (1985) and United Kingdom (1985) ,
35

as given in table 2.2, show that in all these countries, when measured against

consumption, VAT is roughly proportional but has tendency to moderate progression

in the Netherlands and moderate regression in Denmark. When we measure incidence
against disposable income, it is highly regressive in Denmark and less so in Sweden.
When the incidence is measured against gross income, it is highly regressive in
Denmark and Sweden. Here it is important to note that the result of Denmark would
have been less regressive if account had been taken of the indirect VAT influence on
housing costs and of the progressive automobile registration fee36.
The results of study done in Korea suggest that the effective burden on the
lowest income decline was higher (9.4 percent) and it decline (3.8 percent) as the
income increased. The regressive nature of VAT is also shown in the study for Korea

32

Conssen , S.1981. Dutch Experience with the value Added Tax Finanzarchiv 39(2) :223- 54.
Lienard Messere and Owens. 1987. Franace In Comparative Tax system Europe , Canada and Japan
Joseph A. pechman , pp 1980- 81 Arlington , Arlington , Virginia ; Tax Analysts.
34
Hemming and Kay The United Kingdom. In The Value Added Tax : Lesson from Europe , ed.
Henry J. Aaron , 1981 pp. 83-85. Washington, dc; Brooking Institution.
35
The figure within parentheses indicates the year for which the data are collected for the
analysis of incidence of VAT in the country concerned.
36
OECD. 1988. Taxing Consumption, pp 122-45. Paris: OECD.
33

59

in the case of farm households.37 Studies presented by OECD, 38brooking,

39

and tax

Council 40 have found VAT to be mildly progressive when measured with reference to
consumption. These results are confirmed in a later study by Adams41, which suggest
that VAT is somewhat more regressive than the results presented in studies
undertaken in the early and mid-seventies.
The results of distributional effects indicate that VAT is not a useful instrument to
mitigate. In Ireland, for example, it is found that although the poor spend relatively
more of their income on groceries than the rich, in absolute amounts the rich spend
twice as much the poor.42 The same has been found for Canada in an official study
relating to family Expenditure Surveys. The study shows that in 1986 people earning
$ 10,000 to $15, 000p.a. spent $ 2,500 (with all taxes including Federal Sales Tax) on
food purchased from stores, compared with $4,900 spent by people in the $ 50,000 to
60,000 income class.

43

Abolition of standard rate on groceries benefits single people

with higher incomes.44 To estimate the total distributional effect of VAT, we must
simultaneously look into the distributional impact of government expenditure which is

37

Heller, Peter S.1981. Testing the Impact of value added and Global Income Tax reforms on Korean
Tax Incidents in 1976: An Input-Output and Sensitivity Analysis. IMF staff papers (June) 28(2) : 375410
38
OECD. 1981. The impact of Consumption Taxes at Different Income Levels. Paris :
OECD
39
Balladur, Jean Pierre and Antoine Coutiere .1981. France In The Value Added Tax :
Lessons from Europe, ed. Henry J. Aaron, 1981. Washington, DC: Brookings institution.
40
Tax Council. 1983 .sixth report of the Tax Council to the President of the Republic. Paris.
41
Adams, D.W. 1980. The Distributional Effects of VAT in the United Kingdom , Ireland,
Belgium and Germany. The three Review 128 (December).
42
Commission on taxation 1984. Third Report: Indirect Taxation . Dublin: Stationery Office.
43
Statistics , Canada, Family Expenditures in Canada :1986 , Catalouge No. 62-555, 34-39,
Table 2.
44
Skall Matmomsen Slopas? (Should the VAT be removed on Food?) SOU, 1983: 54
(stockholam, 1983) , quoted in Cnossen, S.1989. What rate Structure for a goods and
Services Tax? The European Experience. Canadian Tax Journal (September- October)
:1167-1181

60

a major policy variable to influence the redistributive which is a major policy variable
to influence the process.45
Purohit Mahesh (2001)46: His study concluded that Indias unique indirect tax
system with the central government imposing a broad spectrum of excise duties on
production and manufacture, and the states assigned the power to levy sales tax on
consumption and on services has meant that the adoption of a European-style VAT
has been slow in India. The author examines the problems and prospects of
introducing VAT taking account of the experience of states experiments in adopting
VAT in some form or other.
With the withdrawal of the centre from the field of commodity taxes, there
would be no dichotomy of taxing powers between the centre and the states. States
would be able to levy a comprehensive state-VAT. As a next step, it should be useful
to combine all the taxes on Commodity and services levied by the states. Finally, as
already recommended by the empowered committee of state finance ministers, when
the state governments are authorised by the centre to levy tax on some of the localised
services, including sales tax related services (such as service component of works
contract), these also could be integrated in to the state-VAT.

Purohit Mahesh (2002)47: The authors study points out that though VAT has been
introduced in a large number of countries, it has not been possible to introduce a fully
harmonized VAT in any of the federations. The key difference in introducing VAT in

45

Reddy , K.N., and S. Sudhakar. 1988. Distribution of benefits of public Expenditure :A case
Study of Andhra Pradesh. New Delhi: NIPFP
46
Purohit Mahesh (2001): (Economic & Political Weekly, National and Sub-National VATs: A Road
Map for India, March 3rd)
47
Purohit Mahesh(2002): (National Institute of Public Finance and Policy New Delhi, Harmonising
Taxation of Inter-State Trade under a Sub National Vat: Lessons from International Experience, July)

61

a unitary form in a federal country lies in designing a destination based national

VAT. The important issue that needs to be addressed in designing a sub-national VAT
relates to treatment of inter-state trade.
As in most federations, India also faces the problem of harmonizing tax on
inter-state trade in the context of introducing VAT. A study of Canada and EU
suggests that there should be no tax on the basis of origin, while that of Brazil
suggests that if the tax is levied on the basis of origin the set-off needs to be served
as an equalising mechanisation in a federal structure. The other models available in
the literature suggest that the central and state VATs could collaborate each other in
carrying the tax of the origin state to the destination state. However, the other two
models are quite useful i.e. prepaid destination VAT and destination based central
purchase tax.
In all the models, the revenue of the CST becomes nil as the tax becomes
destination based. The states need to be compensated for the loss of revenues through
various measures including the power to tax services and compensation to the states
through the Finance Commission.
Rajaraman Indira, Goyal Rajan, Khundrakpam Jeevan (2006)48: The authors
have laid down Tax buoyancy estimates, which measure the percentage response of
tax revenue to a one percent change in the tax base, usually proxied by the gross
domestic product, are a routine requirement for fiscal projection purposes. The
elasticity of tax revenue is more stringently defined as the underlying revenue
response, holding constant all parameters of tax policy. In developing countries,
where tax policy parameters are changed every year, the elasticity of tax revenue is

48

Rajaraman Indira, Goyal Rajan, Khundrakpam Jeevan (2006): (Economic and Political Weekly, Tax
Buoyancy estimates for Indian States.)

62

virtually impossible to estimate with any appreciable degree of accuracy. In such a

fiscal context, where tax policy parameters are in a state of constant flux, the
buoyancy coefficient may provide the only feasible alternative to estimate the
underlying revenue generating properties of the system. If estimated over a
sufficiently long period of time, the buoyancy coefficient essentially estimates the
revenue response with endogenised tax policy.
With the introduction of the a destination based Vat in all but eight states
starting from April 2005, there is a need for a good indicator of tax buoyancies in
states in the period immediately preceding. The authors here, attempt to provide such
a base, with buoyancies in states in the period estimated over a 23 year span starting
in 1980-81.

Rao Govind M, Sharma J V M (1997)49: Their study concluded the need for
coordinated development of domestic trade taxes in the Indian federal polity has
shifted the focus to reforms in the states' sales tax systems. Detailed deliberation has
led to a consensus on the need to transform the prevailing sales taxes into a
destination based consumption type value added tax. However, attempts to reform
sales taxes have not always been in the right direction and, in addition, have met with
resistance from traders.
The fear of losing revenue is likely to weigh heavily in any rationalisation
measure leading to the introduction of the VAT. Unless the bureaucrats are assured
that they will not be penalised in the case of short term revenue loss, they are likely to
develop cold feet. It is therefore important for the centre to create a fund to

49

Rao Govinda M& Sharma J V M (1997): (Economic & Political Weekly, Value Added Tax in States
: Challenges ahead, February 1)

63

compensate the states in the event of a significant shortfall in revenue. The detailed
modalities of compensation can be worked out and the multilateral institutions can
also be asked to assist the fund as they have shown a keen interest in the sales tax
reform in recent years.
Sthanumoorthy R (2006)50: The results of his study reveal that a major defect of the
present state level VAT system, in India, has been the variations in tax rates between
states. It is expected to result in diversion of trade, rate wars and a race to the bottom
in rates. Hence, total uniformity in rates among the states has been stressed. However,
this has attracted criticism because full uniformity would curb rate autonomy of
states. A suggested alternative has been a uniform floor rate system. However, this
may be ineffective in eliminating rate differentials among states. An appropriate
solution might involve rate autonomy for the states on commodities which are not
prone to trade diversion and rate wars. In the case of others, states should apply
uniform rates. Unfortunately, this has been hampered by the lack of empirical
evidence on rate wars and a race to the bottom among the states. This paper makes a
modest attempt to provide empirical evidence on these phenomena in the context of
tax rate setting behavior of the southern states under the previous sales tax regime.
The conclusions of the study are useful to arrive at an appropriate VAT rate structure
for the states.
Rate wars and the resulting race to the bottom are not generalized phenomena
but commodity specific. Given this result, application of uniform rates for
commodities that are not subject to rate wars would serve no useful purpose. Rather
they deny the states a productive revenue source. Therefore, states can be allowed to

50

Sthanumoorthy R (2006): (Economic & Political Weekly, Rate War, Race to the Bottom and uniform
state Vat Rates: An Empirical foundation for a difficult policy issue, June 17th)

64

maintain their autonomous status with respect to LLD commodities. For such
commodities, each state should be allowed to choose the rates according to their
economic conditions, revenue needs and the rate elasticities. Such an arrangement, to
a larger extent, does not impinge on the states freedom to levy their own rates. At
the same time, application of uniform rates on HLE commodities would help to
achieve desired level of results in terms of controlling trade diversion and rate wars.
It was pointed out by the referee that commodities likely to be subject to trade
diversion and rate wars may vary from state to state. However, as demonstrated in
this study, such commodities by and large appear to be common across the states. In
any case, the ideal step would be to identify a common set of commodities that are
prone to trade diversion across all states in consultation with the states. If there are
any discrepancies in the list of commodities which are prone to trade diversion
between the states, the policy options in their order of choice could be (a) application
of uniform rates among those states which perceive a threat of trade diversion in
respect of a particular commodity. For instance, if Tamil Nadu and Kerala claim
diversion of trade in respect of a particular commodity whereas Andhra Pradesh and
Karnataka are not, then the former states can be asked to apply uniform rates, and (b)
exemption of such commodities from the purview of uniform rates. In this context,
what is perplexing is the decision of the ECSFM to enforce total uniformity in rates
among the states across commodity groups. This only points to the absence of an
empirical basis for such a major policy initiative. An analysis of the present rate
structure in the southern states reveals that although full uniformity in the rates of a
majority of the commodities selected for the study have been attained among the
VAT states, the lower sales tax rates present in the non-VAT states, particularly in
respect of a number of HLE commodities, have the potential to cause trade diversion
65

in favour of non-VAT states and a resulting rate war. The recent threat by the Delhi
government to reduce its VAT rate on bullion from 1 per cent to 0.25 per cent present
in the non-VAT states of Rajasthan and Uttar Pradesh is a case in point. Hence nonVAT states must be persuaded to join the VAT system without further delay. Finally,
on the downside, the study is region specific as it covers only the southern states. A
study covering all the states and many more commodities may help to gain further
insight into the issue. Any future research, therefore, should be on these lines.
However, this does not prevent us from generalizing the findings of this study for
other states.
Tait, Alan A. (1988)51 : He studied the that the review of policies in different
countries suggest that government in several have adopted extra- ordinary
interventionist policies to cope with the sensitive problem of price change at the time
of introduction of VAT . Studies relating to the impact of VAT on prices confirms
that the exact effect would depend upon whether it is a new tax or a substitute for
another tax. The overall experiences suggest that this tax is not inflationary.
Tax Council (1988): Studies presented in the Sixth Report of the Tax Council to the
President of the republic 52 (Paris) suggest that rate changes do not have an automatic
impact on prices but the degree of impact depends upon the general economic
situation and on the other measures taken by the government. VAT

would be

inflationary depends not only on the possible offsetting changes in other taxes and on

51
52

Tait, Alan A. 1988. Value Added Tax: International Practice and Problems Washington, DC: IMF.
Tax council 1983. Sixth Report to the President of the Republic on Value Added Tax, Paris.

66

the current money supply but also on the reaction of wages, transfer payments,
liquidity and psychological effects.53
Vishwanathan Renuka (2005)54: Her study stated that the most significant tax
reform at the state level since independence is clearly the introduction of value added
tax (VAT).
Movement towards a more rational and economically neutral system of
consumption taxation in a federal country in which sub-national governments are
constitutionally empowered to levy taxes on goods and some services calls for
consultation and compromise, consensus and conflict resolution among states as a
group as well as between federal and provincial governments.
Administrative and procedural requirements for introducing VAT have been
laid out in some detail. Modifications in present procedures are essential to respond to
legitimate fears of harassment expressed by dealers, which have proved to be a major
barrier in introducing the tax. Hands off, account-based administration, from
registration through assessment and audit is possible under the self-policing VAT
structure. Unfortunately, much still needs to be done on this count as well as in IT
based networking and governance.
Standard Tax Competition. The standard theoretical explanation for capital tax
competition arises because of capital mobility.55 Zodrow and Mieszkowski (1986)
and Wilson (1986) were among the first to formally examine tax competition for
53

Tanzi, Vito. 1983. Taxation and Price Stabilization . In Comparative tax Studies: Essaya in
honour of Richard Goode, ed. Sijbren Conossen. Amesterdam: North Holland.
54
Vishwanathan Renuka(2005): (Economic & Political Weekly, The Economic of Value Added Tax,
December 10th)
55
Because this paper is primarily concerned with tax competition for capital, discussion of commodity
tax
competition is excluded. For important contributions to the literature, see Mintz and Tulkens (1986)
and
Kanbur and Keen (1993).

67

capital between governments. In the case of capital tax competition, governments

compete for a fixed level of capital by luring capital into the jurisdiction with lower
capital tax rates. The end result of the theory is a race to the bottom between
governments with respect to capital tax rates. Because of the assumption of fixed
capital supply, an outflow of capital resulting from an increase in tax rates from one
jurisdiction represents an inflow into the other jurisdiction. Thus, the optimization
problem for the government consists of the tax rates of its own jurisdiction as well as
tax rates of the other jurisdiction. In other words, government behave strategically
when setting capital tax rates.

68

CHAPTER - 3
GLOBAL SCENARIO OF VAT AND GST
3.1 INTRODUCTION:The origin of Value added tax (VAT) can be traced as far back as 1918 when
F Von Siemens proposed it as a substitute for the then newly established German
Turnover Tax. Since then numerous economists have recommended it in different
contexts. In 1921, VAT was suggested by Prof. Thomas S. Adams for the United
States of America who Recommended Sales tax with a credit of refund for taxes
paid by the producer of Dealer (as purchaser) on goods bought for resale or for
necessary use in the production of goods for sales. VAT was recommended by the
Shoup Mission for the reconstruction of the Japanese economy in 1949. However, the
tax was not introduced by any county till 1953. France led the way in 1954 by
adopting a VAT that covered the industrial sector alone and the tax was limited up to
the whole sales level. The tax was limited to the boundaries of France until the fifties.
VAT has however, been spreading rapidly since the sixties. The Ivory Coast followed
France by adopting VAT in 1960. The tax was introduced by Senegal in 1961 and by
Brazil and Denmark in 1967. The tax gathered further momentum as it was made a
standard form of sales tax required for the countries of the European Union. In 1968,
France extended Vat to the retail level while the federal Republic of Germany
introduced it in its tax system. The Netherlands and Sweden imposed this tax in 1969
while Luxembourg adopted it in 1970, Belgium in 1971, Ireland in 1972, and Italy,
the United Kingdom and Australia in 1973. Of the other members of the European
Union, Portugal and Spain introduced VAT in 1987, while this tax was adopted by
69

Finland in 1994. Many other European countries have adopted VAT. Similarly, many
countries in the north and South America, Africa and Oceania have introduced VAT.
VAT has been spreading in the region as well. The Republic of Vietnam adopted vat
briefly in 1973. South Korea introduced vat in 1977, china 1984, Indonesia in 1985,
Taiwan in 1986, Philippines in 1988, Japan In 1989, Pakistan in 1990, Bangladesh In
1991, Thailand in 1992, Singapore in 1994, Sri Lanka In 1998, while Mongolia has
been implementing this tax since 1998. In the South Asian Association for regional
Cooperation (SMRC) region, VAT has been considered in great depth in India. In
1986, India introduced VAT In different way under the name Modified Value Added
Tax (MODVAT). Unlike the VAT system of other countries, the Indian MODVAT
system was designed to cover manufacturing of goods by giving credit of excise duty
paid on inputs. The scope of MODVAT has been extended over the years and has
been renamed as Central Value Added Tax (CENVAT), which covers services also.

3.2 EVOLUTION OF VAT:

France became the first European country to implement VAT on an extensive
scale in 1954. Since then VAT has been adopted by a large number of countries.
Today, VAT exists in 136 countries. Value Added Tax is perceived by many as means
to promote neutrality and uniformity of tax burden and to provide incentives for
increased productivity and industrialization. The spread of VAT to the developed and
the developing countries alike certainly, makes for an interesting study. The VAT has
been described as Mata Hari of the tax world. According to Tait (1988), many are
tempted, many succumb some tremble on the brink, while others leave only to return,
eventually the attraction appears irresistiblethe history of taxation reveals that no
other tax that has swept the world in some thirty years from theory to practice, that
has carried along with it academics who were dismissive and countries that once
70

rejected it. Financial Times (London) too stressed the growing importance of VAT
when it observed in its centennial review The economic and technological changes
of the second half of the century have made VAT the quintessential modern tax. It
will not be an exaggeration if one were to say that the emergence of the VAT as an
important and elastic source of revenue over the last four decades is unparalleled in
the history of taxation. Despite the widespread proclamation of VAT, there have been
difficulties in implementing VAT in its true spirit like in the case of Argentina, Brazil,
Canada and India. There have also been attempts to introduce Value Added Tax in
USA, which however has preferred to retain the retail sales tax system. Yet, those
difficulties notwithstanding, it can be said that Value Added Tax system definitely has
its advantages and is certainly recommended for most economies, particularly the
developing ones. Globally, VAT is regarded as a tax that is best levied by the Central
government a condition that is difficult to meet in a federal finance system such as
ours. VAT is a centrally administered tax with a revenue sharing mechanism. It is
hard to visualize VAT as a revenue-neutral measure, or one where the states will not
lose out in relation to the present system, in a federal setup.
If VAT is centrally administered, the tax base is quite wide, comprising
imports, production and different stages of sales. If the base is divided between the
Centre and states, the chain is broken, making tax evasion easier and affecting the
states' tax base. In countries where VAT is administered by a federal government,
revenue collection on imports accounts for a larger portion of total VAT revenues. In
an IMF study of 22 developing countries, it was discovered that in about two-third of
them, more than half the VAT revenue was collected from imports. In Pakistan and
Bangladesh, VAT collection from imports was 64 per cent of the total proceeds from

71

the tax. As tax evasion on bulk imports is difficult, it also helps in checking tax
evasion at subsequent stages of the tax chain.

3.3 VAT SCENARIO OF MAJOR COUNTRIES IN THE WORLD:

3.3.1 VAT IN EUROPEAN UNION:
Since the common VAT system was introduced in the 1970s, its declared objective
has been to create the conditions necessary for the establishment of an internal market
characterized by competitive atmosphere under which the taxation of imports and the
non-taxation of exports in intra-Community trade would be abolished in European
Countries. The VAT system which was tailored to the internal market and operated
within the EU area in the same way as it would within a single country, i.e. to
introduce a system of taxation, where goods and services would taxed in the Member
State of origin. However, in practice, such a radical change has not secured the
necessary support from Member States. Foremost amongst the reasons for this are
reservations about the efficiency of the necessary clearing mechanism for the
distribution of VAT receipts, and the degree of harmonization of rates that such a
regime would necessitate. The elimination of custom controls within the EU area in
1993 made it necessary to reform the VAT system operating up to then according to
the destination principle. The origin principle implies the taxation of goods and
services where produced, regardless of where they are consumed. It is better because
it can be applied without border controls and exports would not travel tax-free and the
potential for tax fraud would be lower. However, the origin principle introduces the
possibility for the tax system to discriminate between domestically produced goods
and imports. The full move from the destination to origin principle would also induce
significant changes in the distribution of VAT revenues across countries.
72

Transitionaldual-systems:
Transitional dual system attempts to fulfill the requirements of an internal market
without frontiers whilst allowing room for manoeuvre at the national level as regards
the establishment of VAT rates and the collection and auditing of the tax. The
transitional regime replaced custom controls by the obligation, for all EU firms
exporting to another EU-country. Under current VAT rules, public sector bodies are
subject to a special VAT treatment, which potentially distorts competition. One key
exemption case of public sector bodies applies to the supply of postal services, which
have been traditionally operated by monopolistic public agencies and are increasingly
operating in competitive markets. So the special VAT treatment granted to public
bodies, in place in some countries, may operate to distort competition. It may also
introduce a bias for public authorities towards self-supply of goods and services
versus contracting out to the private sector since they may not claim back the VAT
paid on their inputs provided by the private sector.

73

Table 3.1 VAT RATES IN NON EUROPEAN COUNTRIES

Country
Argentina
Australia
Bulgaria
Canada
China, People's Republic of2
Croatia
Dominican Republic
Ecuador
Iceland
India
Israel
Malaysia
Mexico
New Zealand
Norway
Philippines
Romania
Russia
Serbia
Singapore
South Africa
Sri Lanka
Switzerland
Denmark
Finland
Germany
France
Netherlands
Portugal
Spain
Sweden
United Kingdom
Poland

Rate
Standard
21%
10%
20%
7% or 15%
17%
22%
6%
11%
24.50%
12.50%
16.50%
5%
15%
12.50%
25%
10%
19%
18%
18%
5%
14%
15%
6.50%
25%
22%
19%
19.6%
19%
20%
16%
25%
17.5%
22%

Reduced
10.5% or 0%
4.50%
6% or 3%
12% or 0%
14%
4%, 1%, or 0%
0%
11% or 7%
9%
10% or 0%
8% or 0%
7% or 4%
3.6% or 2.4%
none
17% or 8%
7%
5.5% or 2.1%
6% or 0%
12% or 5%
7% or 4%
12% or 6%
5% or 0%
7%, 3% or 0%

Source: www.wikipedia.com
Value added tax in UK has been imposed on the final consumption of particular goods
as well as services in the national market. At the same time, VAT in the UK is levied
74

at various production phases. This tax is also imposed on the distribution phases of
the products. According to this rule, almost all the goods and services in the United
Kingdom are charged with Value Added Tax. Recently, the VAT rules have been
revised in the United Kingdom. The government has decided to collect VAT at a
standard rate of 17.5%. The VAT registration threshold has also been raised from
64,000 to 67,000. These new rules and regulations have been implemented from
April 2008. Further, these rules have made it mandatory for the companies to register
for value added tax if the company's taxable supplies have crossed the maximum limit
of VAT threshold. Again, if any company has found that its taxable supplies is under
the UK VAT threshold, but is expected to cross the same within a month, the
company has to register itself for the value added tax. There are instances where the
businessmen have registered themselves for VAT although the business turnover has
been well under the threshold. This is done because registering for VAT provides a
number of additional benefits.
The businesses have to pay this tax for every kind of purchase as well as sell of
products or services. Taxes that are paid for purchasing products or services are
known as input tax and the taxes paid for selling products and services are termed as
output tax. There are certain situations when a VAT registered business' output is
higher than the input tax. In these conditions the difference between the two is paid to
the customs and excise. In certain situations the businesses receive less VAT than it
pays. This extra amount is paid back to the businesses by the C&E.

3.3.2 Value Added Tax in Mexico:

In Mexico value added taxes are imposed on the sale of goods as well as services. The
general rate of value added taxation in Mexico is 15%. The same rate is also
75

applicable as far as importing of goods and services are concerned. However the rates
of value added taxes in Mexico is lower in the areas that are located on the
international border of Mexico. In these areas the rate of the value added taxes is
10%. However, certain commodities are excluded from the value added taxes in
Mexico. For example, the non residential real estate properties are subjected to the
value added taxes but the land upon which the particular property has been
constructed is exempted from taxation. The value added taxes in Mexico are part of
the Federal Tax Structure of Mexico. It may also be regarded as one of the principal
taxes in Mexico. The various items that are exempted from value added taxes in
Mexico are sales of land, financial services, books, medical services, credit
instruments like equity shares, education, residential construction, rental expenses of
residential properties and raw materials for residential construction. However there is
an exemption made in case of the medical services. The interest that is earned by the
credit card providers in case of medical services is subjected to value added taxes.
The taxes that are paid by the business organizations when they buy goods are
normally adjusted against the tax that they pay when they sell any goods or services.
The tax on sales is applicable for all the customers as well. In case there is an excess
amount of credit it may be paid back by the tax authorities to the concerned business
organization.
There are a lot of transactions that are exempted from value added taxes in Mexico.
However the money that is paid on buying raw materials, services and supplies may
be recovered by through either direct refund or by adjusting the amount against the
value added tax the particular individual is supposed to pay. The categories that are
included in this list are rentals, export of goods. sale of specific basic foodstuffs,
76

export of services, agricultural goods, sales to maquilodras, who are in-bond assembly
plants of Mexico, agricultural services and sales to companies that deal exclusively in
the export of goods. There are also certain other minor transactions that are included
in this list.

3.3.3 Value Added Tax in Canada:

Value added tax in Canada is known as Goods and Services Tax. The goods and
services tax was introduced in Canada on the 1st of January 1991. It was introduced
by Brian Mulroney, who was the Prime Minister at that time and Michael Wilson,
who was the finance minister. The goods and services tax in Canada replaced the
manufacturers' sales taxes. The main purpose behind introducing the goods and
services tax was that the manufacturers' sales tax was having a negative impact on the
export prospects of the manufacturing sector in Canada. The manufacturers' sales tax
was hidden and the rate of taxation was 13%. The goods and services tax could be
called a multi-level tax. The introductory rate of the value added taxes in Canada was
7%. At present the rate is 5%. In Canada the value added taxes are taken along with
the sales taxes that are applicable for the particular provinces.

3.3.4 Value Added Tax in Italy:

Value Added Tax or VAT as it is popularly called is an indirect tax that is levied on
business transactions. VAT is applicable on all business deals that include the transfer
of services and goods. VAT is imposed on the additional value resulting out of such a
business transaction. It is also known as Goods and Services Tax or GST. VAT is
paid by the final consumer. Goods that are exported are usually exempted from VAT
in order to avert double taxation. Even if VAT is charged it is subject to refund.
77

Since VAT is also applied to one's assets, the tax rates are fixed in between 4%-8% of
the total asset value. Apart from the VAT, the Inheritance tax is also in place in Italy
after its re introduction in 2007. The Value Added Tax system in Italy is in line with
the European Union Value Added Tax rules and regulations. According to it, the VAT
is paid by the final consumer only. At the production and distribution level, the
suppliers of various services and goods deduct the input VAT. The tax is levied on
any and every service or article that forms a part of a business transaction in Italy.

3.3.5 Value Added Tax in France :

The system of value added tax was formulated by a French economist in the year
1954. The version of VAT that is used in France is called taxe sur la valeur ajoutee or
VAT. It was put into effect for the first time on April 10, 1954 by Maurice Laure, the
then joint director of tax authority of France. The value added tax system has been a
great success in France since the very beginning. In the later years, VAT was imposed
on all other business activities in the French economy. At present, the value added tax
contributes substantial share of the state finance in France. The revenues collected
from VAT make up 45% of the French state revenues.
In France, the value added tax is imposed on all types of general consumption. VAT
is popular for two reasons. The first reason is that it is imposed at each stage of value
addition. Unlike sales tax, there is no scope of cascading in the value added tax.

The VAT system is also helpful in avoiding the incidence of double taxation. Another
major advantage of value added tax is that under this system all traders are dealt
equally. It also involves minimum distortionary effects on economic activities.
78

The standard rate of value added tax in France is 19.6 percent; while the reduced rate
being 5.5 percent or 2.1 percent. The President of France, Nicolas Sarkozy, is hopeful
about raising the issue of VAT rate cut at the upcoming meeting of the European
Council. The demand of France to cut the value added tax rate allover in Europe aims
to check the hike in fuel prices in the global market. The French president has also put
stress on the fact that the call for cut in VAT on fuel needs to be strictly European.

3.3.6 Value Added Tax in Ireland:

In Ireland the general rate of value added taxation is 21% but there are also other rates
of 13.5% and 4.8%. In Ireland value added taxes are imposed on the assets owned by
various entities as well as the different services that are provided throughout Ireland.
Value added taxes are also imposed on all goods that are imported into Ireland.
Value added tax in Ireland may be called a retail sales tax. In case of the luxury items
bought in Ireland the tax paid is 21%. However, the tax rate that is imposed on the
non-luxury products is 12.5%. People, who are from countries that are non members
of the European Union are allowed to claim certain amounts of the value added taxes
paid by them upon purchasing goods while staying in the country. This plan allows
the costs of goods to be brought down by 17.36%. The reduction is not applicable for
services like meals and bills of hotels for example. Rather goods that are bought in the
country and exported outside the European Union within a period of three months
come under the purview of the value added taxes in Ireland. The visitors have to
provide various papers that show that the goods have been merchandised. An example
of such documentation would be the invoice bearing the stamp of the Ireland customs
department.

79

There are certain rates that are applicable in these. In cases where the disposer of the
property has held an interest in the property for a decade or more the rate of value
added tax imposed is 13.5%. The rate of value added taxes imposed on the short term
leases is 21% on rents in cases where exemptions have been made. The rate of value
added taxes imposed on construction activities are 13.5% and in case of fittings the
rate of value added taxes to be paid is 21%.

3.3.7 Value Added Tax in Germany:

The value added tax in Germany is levied on the production of goods and services in
the country. All business entities are subject to the payment of tax on performing
production processes in Germany. The current rate of VAT in Germany is 19%,
enforced from 1st January, 2007. In Germany, a reduced tax of 7% is collected from
the sale of particular items such as foods, magazines and books. The rate of VAT is
set according to the parameters of the European Union Value Added Tax system. The
value added tax in Germany effectively earns high revenue for the country in the form
of income through taxation. VAT is generally known as Umsatzsteuer in Germany.
Formerly, the value added tax was referred to as the Mehrwertsteuer. This term is still
prevalent in some parts of the country.
Procedure of Taxation The business entities in Germany add VAT prior to the pricing of the product and
services. The gross price of goods in Germany includes the 19% VAT charges. The
business enterprises submit the reports of taxation monthly and are required to pay the
taxes on a monthly, quarterly or yearly basis. The reports also comprise of
computation of tax for the ensuing quarter. The period of tax payments is dependent
80

on the annual turnover of the company. The amount for tax is paid in advance to the
tax office. Most of the large scale producers are required to submit their advance on a
monthly basis.
Returns on VAT The value added taxes payable by the business entities in Germany include the taxes
paid by the companies on purchase of goods and services. This is balanced through
returns on VAT. This is known as input VAT or Vorsteuerabzug in Germany. In most
occasions, the business entities pay more tax than what they receive. In later stages
the authorities return the excess tax paid as soon as the computations are complete.
This situation is frequent in the start-up phase where the company's expenditure is
more than its income from sale. No VAT is charged on intra-community shipments
such as a sale of goods to another commercial organization among the members of the
European Union. However, the recipient entrepreneur is subject to acquisition tax that
is payable to the authorities. This is similar to the input VAT and is refundable.
Provisions for small and medium sized companies -

Some of the small undertakings expecting an annual business turnover less than EUR
50,000 in the current year or with less than EUR 17,500 turnover in the previous
financial year are exempted from the payment of value added tax in Germany.
However, these small enterprises are not allowed to deduct the input tax through
billing.
The small and medium sized companies in Germany can also opt for actual receipts
taxation or Istbesteuerung. This allows the companies to pay after they receive their
payments. This method is preferred by the small companies to the imputed tax
payments which may cause cash flow problems. The ceiling for actual receipts
81

taxation in the eastern states of Germany is EUR 500,000 till the end of 2009 while
for the rest of the country, the ceiling is EUR 250,000.

3.3.8 Value Added Tax in UK:

Value added tax in UK has been imposed on the final consumption of particular goods
as well as services in the national market. At the same time, VAT in the UK is levied
at various production phases. This tax is also imposed on the distribution phases of
the products. According to this rule, almost all the goods and services in the United
Kingdom are charged with Value Added Tax. Recently, the VAT rules have been
revised in the United Kingdom. The government has decided to collect VAT at a
standard rate of 17.5%. The VAT registration threshold has also been raised from
64,000 to 67,000. These new rules and regulations have been implemented from
April 2008. Further, these rules have made it mandatory for the companies to register
for value added tax if the company's taxable supplies have crossed the maximum limit
of VAT threshold. Again, if any company has found that its taxable supplies is under
the UK VAT threshold, but is expected to cross the same within a month, the
company has to register itself for the value added tax. There are instances where the
businessmen have registered themselves for VAT although the business turnover has
been well under the threshold. This is done because registering for VAT provides a
number of additional benefits.
The businesses have to pay this tax for every kind of purchase as well as sell of
products or services. Taxes that are paid for purchasing products or services are
known as input tax and the taxes paid for selling products and services are termed as
output tax. There are certain situations when a VAT registered business' output is
82

higher than the input tax. In these conditions the difference between the two is paid to
the customs and excise. In certain situations the businesses receive less VAT than it
pays. This extra amount is paid back to the businesses by the C&E.

3.3.9 Value Added Tax in Nigeria:

The value added taxes in Nigeria were created as replacements or substitutions for the
sales taxes that were in operation before. They were imposed on all goods that were
manufactured in the country as well as goods that had been made outside the country
and were selling there. As per the VAT Decree No. 102 made on the 24th of August,
1993 in Abuja by the President and Commander-in-Chief of Nigeria, General I.
Babangida certain goods and services have been exempted from the purview of value
added taxation. As per the specifications laid down in the above mentioned decree
goods such as all exported goods, medical and pharmaceutical products, products
meant for kids, basic food items, commercial vehicles and their spare parts, books and
other educational materials, fertilizer, farming machines, agricultural products,
farming transportation equipments and veterinary medicines and magazines and
newspapers.
As per the above mentioned decree a number of services have been declared
exempted from value added taxation in Nigeria. These services are all the services
that are exported, medical services, plays and performances that are run by
educational institutions for educational purposes and services that are provided by
community banks, mortgage organizations and people's banks. In Nigeria the
companies or business organizations that function on a no profit making basis are
required to pay value added taxes.

83

The Nigerian Federal Government enacted the VAT Amendment Act in 2007. This
act empowered the Federal Government to fix the rate of value added taxes to be
imposed in Nigeria. The rate was increased to 10%. However, discussions regarding
the possibility of a 50% reductions in the rate are on. In Nigeria value added taxes are
also imposed on sale of land, as well as check transactions. The number of payments
to be made is 12 and the amount of time is 160-hrs. The value added taxes are one of
the major sources of financing in a number of economically developing countries
across the world. The situation is similar in Nigeria as well. During 1994 the revenues
earned from value added taxes in Nigeria exceeded the projections. They contributed
4% of the total revenue raised by the Federal Government in that year. In 1995 the
rate of contribution was 5.39%. However, there have been some teething issues as far
as value added taxes in Nigeria are concerned. The members of the organized private
sector in Nigeria have been voicing their reservations regarding the value added taxes
that are taking a toll on the prices of their products as well as the operational prices of
their products. The way the Nigerian Federal Government has looked after issues
related to value added taxes in has attracted a certain degree of criticism. Their
management of the expenditure of the revenues generated from the value added taxes
has faced some flak as well. The fact that no research was conducted into the possible
effects of the value added taxes before they were put to work has only compounded
the problems. All in all the situation of the value added taxes in Nigeria is far from
desirable.

3.3.10 Value Added Tax in China:

Value Added Tax (VAT) was implemented in China in 1984. Initially, the tax was
levied on 24 specified items. The need for constructing a socialist market economy
84

system in China resulted in the proclamation of 'The Provisional Regulation of the

People's Republic of China on Value Added Tax' on January 1, 1994. Value Added
Tax in China is one of the important sources of fiscal revenues for the government,
especially the central government. The implementation of VAT is done by the State
Administration of Taxation while the customs collects the import VAT. The revenue
earned from VAT is divided between the central (75%) and local government (25%).
VAT in China is payable by individuals as well as enterprises who are associated with
selling merchandise, providing services related to processing, repairing and
assembling and import of goods. VAT Taxpayers in China are categorized into two
sections, normal taxpayer and small taxpayer, depending on the turnover of the goods
and services on sale and the accounting system condition.

The amount of VAT payable by the normal taxpayer can be calculated by the
following:

Output tax payable for the current period Input tax payable for the current period =
Tax payable. The amount of VAT payable by the small taxpayer is as follows:

Sales amount x Applicable rate = Tax payable

(The applicable rate is 4% for commercial sectors and 6% for others)

Certain items and services are exempted from VAT. These include the following:

Instruments and equipment imported for direct use in scientific research, experiment
and education

85

 The agricultural production materials as ruled, the self-produced primary

agricultural products sold by Agricultural producing units and individuals

Imported materials and equipment granted, gifted by foreign governments or

international organizations

Contraceptive medicines and devices

Articles imported directly by organizations for the disabled for exclusive use by the
disabled

Materials imported directly to support the poverty relief and charity cause donated
freely by overseas natural persons, legal persons and other organizations

The taxable services provided by individual disabled laborers

Antique books purchased from the public

Certain reforms have been implemented in particular areas of China in 2004 with
regard to the VAT.

86

Table :3.2 The list of VAT taxable items and the rates in China:
Coverage of Collection
1) Exportation of goods

2) Edible vegetable and grain duplicates

Rate
0

13%

3) Agriculture, forestry, aquatic products, products of animal

husbandry
4) Book, magazines, newspapers
5) Tap water, cooling, heating, hot air supplying, gas, hot water,
natural gas, liquefied petroleum gas, coal/charcoal products for
household use
6) Selected non-metal mineral products, Selected metal mineral
products, coal
7) Chemical fertilizers, feeds, agricultural machinery, agricultural
chemicals, plastic converting film for farming
17%
8) Plastic Converting film for farming
9) Crude oil, mine salt and other goods and services not listed above

87

3.4 GLOBAL SCENARIO OF GST:

3.4.1 Introduction of the GST:
In the late 1980s, the federal government, led by Progressive Conservative Prime
Minister Brian Mulroney, again pursed the issue of sales tax reform, announcing its
desire to replace the MST with a new value-added sales tax called the Goods and
Services Tax (GST). Moreover, the federal government intended the new GST to be a
nationally harmonized sales tax. The tax would replace individual provincial sales
taxes (PST), and both levels of government would share the revenues generated.
Subsequent negotiations to harmonize the provincial and national sales taxes proved
unsuccessful. Some provinces even challenged the introduction of national sales tax,
arguing that the federal government was exceeding its constitutional powers by
operating in a taxation field historically reserved for the provinces. As a result, in
1989 the federal government announced it would proceed to implement the national
sales tax without the cooperation of the provinces. In 1990, however, Quebec signed
an agreement with the federal government that transferred full responsibility for
administration of the GST (in Quebec) to the province.

The Quebec Sales Tax (QST) was introduced in the province in January 1991. At the
same time, the federal government introduced the Goods and Services Tax in the
remainder of the country, and repealed the old Manufacturers Sales Tax. With the
exception of Quebec, the GST was introduced as separate and additional to provincial
sales taxes, meaning that consumers were required to pay two sales taxes on their
purchases. When it was first instituted in 1991, the GSTs rate of taxation was set at

88

seven percent, meaning that consumers were charged a tax of seven percent of the
price of the good or service they were purchasing.

The Harmonized Sales Tax:

While initially the federal government was unable to harmonize the GST with
provincial sales taxes (except in Quebec), more recently some provinces cooperated.
In 1996, the federal government, under Liberal Prime Minister Jean Chrtien,
combined the GST with the provincial sales taxes in Newfoundland and Labrador,
Nova Scotia, and New Brunswick to create the Harmonized Sales Tax (HST). The
harmonized tax, which went into effect on April 1, 1997, is collected federally by the
Canada Revenue Agency. Once collected, the appropriate amount is then remitted to
the provinces. Ultimately, the harmonization of the provincial and federal sales taxes
does not affect the costs of goods and services for consumers: harmonization did not
change the amounts of the taxes, only how they were collected by the federal and
provincial governments. As of June 2007, the HST has not been extended outside of
those three Atlantic Provinces.

3.4.2 HOW THE GST WORKS:

A. Taxing Mechanism :
The GST is a sales tax which applies to final consumption at a fixed rate of 7%.
Whereas the former FST was a hidden tax on the manufacture of goods, including
those exported for foreign consumption, the GST is a visible tax on the value added at
each stage of production and distribution of goods and services which makes it a
multi-stage tax and applies only to consumption within Canada.
89

The GST takes into account the cost of inputs the factors used in manufacturing or
production at each stage of the process to avoid double taxation. Input tax credits
enable partnerships, businesses and self-employed workers to recover all GST paid on
goods and services purchased for business purposes by deducting them from their
GST payments. Final consumers are not entitled to such credits, which means that
they pay all the GST on every item purchased. The GST is thus a multi-stage tax on
final consumption.
The application of the GST and input tax credits at each stage of a production process
leading to the purchase of a good (a kitchen stove) by a consumer and shows how it is
ultimately the consumer who pays the GST.

When the government introduced the GST, it decided to exempt two classes of goods
and services: zero-rated goods and services, i.e., goods and services taxed at a nil rate,
but which nevertheless grant entitlement to input credits (for example, exports, basic
food products and medical equipment); and goods and services that are simply taxexempt, i.e., which do not grant entitlement to input tax credits (for example,
residential rents, day care services, public transit and medical care).
It is the class of a good or service which determines whether it grants entitlement to
input tax credits. A dentist, for example, is not allowed to claim input tax credits in
order to obtain a refund of the GST he/she has had to pay to purchase various items or
to pay his/her rent or hydro bills because dental care belongs to the tax-exempt
services class.

90

Table 3.3 Example of the application of the GST at the various stages of a
production process:
Stage

Mining

Transaction

GST (7%)

Input tax credit

GST

(7%)

paid

Sales:

$100

GST collected:

$7

$7

Iron and steel

Purchases:

$100

GST paid:

$7

$7

$14

business

Sales:

$300

GST collected:

$21

Kitchen stove

Purchases:

$300

GST paid:

$21

$21

$7

manufacturer

Sales:

$400

GST collected:

$28

Retailer

Purchases:

$400

GST paid:

$28

$28

$21

Sales:

$700

GST collected:

$49

Purchases:

$700

GST paid:

$49

company

Purchaser

Total GST paid to government

$49

Approximately 2,411 million businesses are registered, i.e., they collect the GST from
their customers, deduct input tax credits, and pay the difference to the government.
Small businesses with annual sales under $30,000 may elect to be subject to the GST
or not. If they decide not to, they do not collect the GST on their sales and are not
entitled to claim input tax credits.

Apart from the input tax credit, a GST credit is granted to low- and modest-income
Canadians which takes into account the number of dependent children.

In 1998-

1999, the total amount of this credit amounted to $2.85 billion for Canada as a whole.

Special rules also apply to charities and certain non-profit organizations,

municipalities, hospitals, schools, colleges and universities. These institutions are
only entitled to a partial refund of the tax they pay on their inputs.
91

Lastly, under the Debt Servicing and Reduction Account Act, all GST revenues are
paid into the public Treasury and constitute the main source of revenue allocated to
debt reduction.

B. GST and Provincial Sales Tax:

A provincial sales tax (PST) is charged in addition to the GST at the retail sale stage
for goods, whereas services are often tax-exempt.

The GST rate and terms of

application vary considerably from province to province.

Alberta is the only province with a no-retail-sales-tax policy. British Columbia,

Saskatchewan, Manitoba and Ontario apply the PST to the selling price and simply
add it to the GST, whereas Prince Edward Island and Quebec apply the PST to the
total amount of the selling price and the GST.

Newfoundland and Labrador, New Brunswick and Nova Scotia apply a single sales
tax of 15% the harmonized sales tax (HST) which includes the PST and GST. It
is collected by the federal government, which pays those provinces their portion. The
HST went into effect on 1 April 1997. Prior to that date, these provinces applied the
PST to the total amount of the selling price and the GST.

When the GST went into effect, Quebec became responsible for collecting its own
sales tax and the GST under an agreement with the federal government in 1990.
Since 1995, the two taxes have been completely harmonized, i.e., they are applied to
the same tax base. The Government of Quebec receives $92.8 million a year from the
federal government to administer the GST. All GST returns and refund claims from
registered businesses, except those of Quebec residents, have been processed in
92

Summer side, P.E.I., since 1993. In his 1999 report, however, the Auditor General of
Canada noted that the federal government had begun to decentralize GST processing.

C. Some Figures:
Figures on annual GST revenues are published in the Public Accounts of Canada.
Table 3.4 contains the latest available data.

Table 3.4Annual GST revenues of Canada, 1998-1999 ($ billion)

Total amount collected

Less

50.174
Refunds

22.162

Rebates

1.909

GST paid by departments and 0.907

agencies

1.662

HST transfers to the provinces

Gross revenues
Less

23.534
Quarterly tax credits

Net revenues

2.850
20.684

Source: Receiver General of Canada

The total amount collected ($50.174 billion) includes the share of the three provinces
that apply the HST ($1.662 billion). Consequently, the federal governments gross
revenues from the GST alone were $48.511 billion before refunds, rebates and other
payments. Less all these cash outflows, net revenues amounted to $20.684 billion for
the 1998-1999 fiscal year.

93

The Department of Finance publishes updates on net GST revenues in its monthly
Fiscal Monitor. The May 2000 issue states that net GST revenues for the 1999-2000
fiscal year (unaudited) had increased 9.8% over those from the previous period to
nearly $23 billion. Highly favourable economic conditions have thus, at last, had an
impact on retail sales, and imports have expanded, thus substantially increasing the
amount of GST collected.

3.4.3 HARMONIZATION OF PROVINCIAL SALES TAXES AND THE

GST:
The introduction of the GST was far from unanimous. The taxs unpopularity, which
may be explained in part by its sudden visibility compared to the former FST, and the
fact that it was introduced during hard economic times, made it a prime target for the
opposition parties.

On 20 June 1994, the Finance Committee published its recommendations. In its

report, it suggested that a VAT (a kind of improved GST) be introduced across the
country, asserting that integration of the federal and provincial sales taxes was the
solution to the problems caused by the existing GST. In addition to simplifying
collection for small businesses through a business transfer tax, the Committees
proposal would make it possible to integrate the federal and provincial tax systems
completely.

The national VAT would thus have a federal component and a provincial component.
It would ideally have applied to a single tax base across the country except in
Alberta, which had no PST and have a single set of standard rules. The Committee
believed at the time that the provinces would agree to harmonize their respective sales
94

taxes with the proposed new national tax because of the benefits afforded by a
national VAT, particularly: a simplified tax system; reduced administrative and
compliance costs; less bureaucracy as a result of the elimination of one complete
order of government; and various economic benefits.
Table 3 provides a summary of the current situation and the changes arising from the
HSTs implementation in April 1997. It shows the effective date of the PST in each
province, the rate of the tax and the effective tax rate (including PST and GST) at
31 March 1997, immediately prior to the introduction of the HST in January 2000.

First, the provinces are reluctant to accept harmonization because this tax is politically
very risky. It is obvious that, by going ahead with harmonization and broadening
their tax bases, the provinces would incur part of the political cost associated with the
GST.

Second, by agreeing to harmonize their respective sales taxes with the federal system,
the provinces would exempt business production inputs. Harmonization would
therefore mean transferring the corporate tax burden to the consumer.

Third, the provinces have always feared giving up significant discretionary powers
over fiscal policy in a harmonized system. Because they could no longer set the tax
base or rate, they would lose any independence and flexibility with regard to their
respective retail sales taxes.

Fourth, the provinces are also opposed to harmonization for reasons of administrative
complexity.

95

Table 3.5 Provincial sales tax and effective tax rate, by province (as a
percentage)

PST
Province

PST

Effective rate (PST and

effective
date

GST)
31 Mar 1997

1-Jan-00

31 Mar 1997

1 Jan. 2000

Newf.

1950

12

19.84

15

N.S.

1959

11

18.77

15

N.B.

1950

11

18.77

15

P.E.I.

1960

10

10

17.7

17.7

Que.

1940

6.5

7.5

13.955

15.025

Ont.

1961

15

15

Man.

1968

14

14

Sask.

1937

14

13

Alta.

1936

n/a

n/a

B.C.

1948

14

14

There is no doubt that a perfectly harmonized system would make tax collection
easier and that compliance costs for businesses (particularly small businesses) would
be reduced. For some of them, however, a system that differed from region to region,
like that of the HST, would lead to problems and increased compliance costs.
Effective tax rates and bases varying from region to region would complicate the tax
treatment of interprovincial transactions.

96

3.5 GST SCENARIO OF MAJOR COUNTRIES IN THE WORLD:

3.5.1 Goods and Services Tax in Canada:
The Canadian Goods and Services Tax (GST) (French: Taxe sur les produits et
services, TPS) is a multi-level value-added tax introduced in Canada on January 1,
1991, by Prime Minister Brian Mulroney and finance minister Michael Wilson. The
GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST); Mulroney claimed
the GST was implemented because the MST hurt the manufacturing sector's ability to
export. The introduction of the GST was very controversial. As of January 1, 2008,
the GST rate was 5%.
GST is levied on supplies of goods or services made in Canada and include most
products, except certain politically sensitive essentials such as groceries, residential
rent, and medical services, and services such as financial services. Businesses that
purchase goods and services that are consumed, used or supplied in the course of their
"commercial activities" can claim "input tax credits" subject to prescribed
documentation requirements (i.e., when they remit to the Canada Revenue Agency the
GST they have collected in any given period of time, they are allowed to deduct the
amount of GST they paid during that period). This avoids "cascading" (i.e., the
application of the GST on the same good or service several times as it passes from
business to business on its way to the final consumer). In this way, the tax is
essentially borne by the final consumer. Unfortunately, this system is not completely
effective, as shown by criminals who defrauded the system by claiming GST input
credits for non-existent sales by a fictional company. Exported goods are exempt

97

("zero-rated"), while individuals with low incomes can receive a GST rebate
calculated in conjunction with their income tax.
In 1997, the provinces of Nova Scotia, New Brunswick and Newfoundland and
Labrador and the Government of Canada merged their respective sales taxes into the
Harmonized Sales Tax (HST). In those provinces, the current HST rate is 13%. HST
is administered by the federal government, with revenues divided among participating
governments according to a formula. All other provinces continue to impose a
separate sales tax at the retail level only, with the exception of Alberta, which does
not have a provincial sales tax. Ontario proposed in its 2009 Budget to harmonize its
8% retail sales tax with the GST effective July 1, 2010. In July, 2009, the province of
British Columbia announced plans to also merge the PST and GST effective July 1,
2010. In PEI and Quebec, the provincial taxes include the GST in their base. The
three territories of Canada (Yukon, Northwest Territories and Nunavut) do not have
territorial sales taxes. The government of Quebec administers both the federal GST
and the provincial Quebec Sales Tax (QST). It is the only province to administer the
federal tax.
Common

zero-rated

items

include

basic

groceries,

prescription

drugs,

inward/outbound transportation and medical devices (GST/HST Memoranda Series

ME-04-02-9801-E 4.2 Medical and Assistive Devices). Certain exports of goods and
services are also zero-rated.
For tax-exempt supplies, the supply is not subject to GST and suppliers do not charge
tax on their exempt supplies. Furthermore, suppliers that make exempt supplies are
not entitled to recover GST paid on inputs acquired for the purposes of making the
exempt good or service. Tax-exempt items include long term residential rents, health
98

and dental care, educational services, day-care services, legal aid services, and
financial services.
Many also argue that a switch towards heavier consumption taxes on the European
model has helped the Canadian economy become more efficient and competitive with
lower-priced goods for the international market. However, the effects of the GST in
this realm are quite modest, and are regularly swamped by large changes in the
exchange rate it can also be claimed that the transparent nature of the GST has kept
Canadians acutely aware of their taxation.
Much of the reason for the notoriety of the GST in Canada is for reasons of an
obscure Constitutional provision. Other countries with a Value Added Tax legislate
that posted prices include the tax; thus, consumers are vaguely aware of it but "what
they see is what they pay". Canada cannot do this because jurisdiction over most
advertising and price-posting is in the domain of the provinces under the Constitution
Act, 1867. The provinces have chosen not to require prices to include the GST,
similar to their provincial sales taxes. As a result, virtually all prices (except for gas
pump prices, taxi meters and a few other things) are shown "pre-GST", at the
merchant's choice.

3.5.2 Goods and Services Tax in Australia:

It was introduced by the Howard Government on 1 July 2000, replacing the previous
Federal wholesale sales tax system and designed to phase out a number of various
State and Territory Government taxes, duties and levies such as banking taxes and
stamp duty.

99

The idea for a broad-based consumption tax was first proposed by then federal
treasurer Paul Keating at the 1985 Tax Summit but was dropped at the behest of then
Labor Prime Minister Bob Hawke after pressure from the ACTU, welfare groups and
business, which did not like its association with proposals for capital gains and fringe
benefits taxes.
The idea was refloated in 1991 by the opposition Liberal-National Coalition, and was
the centre piece of the opposition's Fight back, platform at the 1993 election, when
Keating was Prime Minister.
Howard proposed a GST that would replace all sales taxes, as well as applying to all
goods and services. The Howard Government suffered a 4.61 percent two party
preferred swing against the coalition, gaining 49.02 percent of the vote, but retained a
parliamentary majority of seats in the lower house, describing the victory as a
"mandate for the GST". Lacking a Senate majority, and with Labor opposed to the
introduction of the GST, the government turned to the minor parties for support.
A prominent selling point of the legislation was that all revenues raised the GST
would be distributed to the states. As such, an agreement was enacted with the state
and territory governments of Australia in 1999 that their various duties, levies and
taxes on consumption would be removed gradually over time, with the budget
shortfall being replaced by GST income from the Commonwealth Grants
Commission. Furthermore, (federally levied) personal income tax and company tax
was reduced to offset the GST.
During the 1998 election campaign, the Democrats leader Meg Lees stated that they
were opposed to the GST unless food, books and tourism packages sold offshore were
100

exempt and other tax measures were implemented. The government initially stated
that these exemptions were not possible, and looked more likely to win a compromise
with independent Senator Brian Harradine, but eventually a compromise was reached
with Lees, including most basic food items being exempt from the GST, library
purchases of books being refunded the GST, a temporary 8% refund on school
textbooks, increases to welfare payments, and greater powers to the ACCC. A
proposal was made to exempt tampons from the GST, but it was dismissed by the
Prime Minister. The legislation was passed on 28 June 1999 as A New Tax System
(Goods and Services Tax) Act 1999. It gained assent on 8 July 1999 and came into
operation on 1 July 2000.

Economic and social effects of the GST:

Critics have argued that the GST is a regressive tax, which has a more pronounced
effect on lower income earners, meaning that the tax consumes a higher proportion of
their income, compared to those earning large incomes. Peter Costello, the acting
Federal Treasurer who introduced the GST, counters that, due to the corresponding
reductions in personal income taxes, state banking taxes, federal wholesales tax and
some fuel taxes that were implemented when the GST was introduced, people were
effectively paying no extra tax.
The preceding months before the GST became active saw a spike in consumption as
consumers rushed to purchase goods that they perceived would be substantially more
expensive with the GST. Once the tax came into effect, consumer consumption and
economic growth declined such that by the first fiscal quarter of 2001, the Australian
economy recorded negative economic growth for the first time in more than 10 years.
Consumption soon returned to normal however. The Government was criticized by
101

small business owners over the increased administrative responsibilities of submitting

Business Activity Statements on a quarterly basis to the Australian Taxation Office. A
study commissioned by the Curtin University of Technology, Perth in 2000, argued
that the introduction of the GST would negatively impact the real estate market as it
would add up to 8 percent to the cost of new homes and reduce demand by about 12
percent. The real estate market returned to boom between 2002 and 2004 where
property prices and demand increased dramatically, particularly in Sydney and
Melbourne. During the 2004-2006 period Perth has also witnessed a sharp climb in
real estate prices and demand.

3.2.6 Goods and Services Tax in Hong Kong:

Goods and Services Tax (GST) was a proposed Value Added Tax in Hong Kong.
Consultation over a period of nine months was launched on 2006-07-19 and stirred
considerable controversy.
It launched a fierce debate amongst local taxpayers, lawmakers, journalists,
politicians, who hotly debated the need for the tax, and the shape any taxes should
take. The plan to levy GST was dropped on 2006-12-05.
Objectives:
The Government argued that Hong Kong's tax base was narrow; thus, a single-rate
GST was a viable option for Hong Kong in order to broaden the tax base and secure
the sustainability of tax revenues base and the capacity to meet public expenditure
needs in the long run.

102

According to Denise Yue Chung-yee, 17% of working people paid 80% of the income
tax of Hong Kong, i.e. households with monthly income more than HK$45 000 pay
80% of income tax of Hong Kong. Meanwhile, a signification portion of those 17% of
working people was double income families. The GST would be levied at a flat rate of
5%. The government would undertake to decrease or eliminate other taxes to make it
revenue neutral.
Proposed relief measures:
For individuals:
Reduction in tax rates for all existing taxpayers; an upfront, one-off supplement
would be provided to households Social Security benefits; an annual cash GST
allowance on a per-household basis for low-income households not receiving CSSA;
a universal annual "GST credit" for each household to be used against water and
sewage charges for an initial five-year period; and a universal annual "GST credit" per
household to be used against rates for an initial five-year period.
For businesses:
A cut in profits-tax rates; abolishing the capital fee to encourage more businesses to
incorporate in Hong Kong; reducing the motor vehicle first registration tax and duties
on liquor, petrol, diesel, aircraft fuel and methyl alcohol; cutting charges for import
and export declarations;
Abolishing the 3% hotel accommodation tax; increasing tax-deduction limits for
charitable donations; and one-off set-up assistance to small and medium-sized
businesses that volunteered to register for GST.

103

Pledge to maintain revenue neutrality

The Government proposed that, for the first five years after the GST's introduction, all
revenue it would generate after deducting administrative costs would be returned to
the community as tax relief and other compensation measures, for example, salaries or
profits tax reduction, or to increasing public spending on education, health, social
welfare, law and order or infrastructure.
Opposition:
The first protest against GST was held on 7 August 2006 by the Liberal Party. Over
6000 people participated. The second protest against GST was held on 20 August
2006 by the Democratic Party. About 500 people participated.
According to Financial Secretary Henry Tang, the government had collected 2,200
written submissions in the five months of consultations - with 65 percent opposed to
the plan and 30 percent in favour.
Demise:
In a surprise announcement made on 5 December 2006, Henry Tang Ying-yen
withdrew the plan citing lack of public support. "It's clear ... that we've not been able
to convince the majority to accept a GST as the main option to address the tax base
problem," he said. The withdrawal was linked to the comments, three days earlier, of
Chinese state leader Wu Bangguo to senior Hong Kong officials "to keep their fingers
on the pulse of the people" and to foster "social harmony", and to the impending subsector polls for the Election Committee which will pick the new Chief Executive in
March 2007. However, after the announcement, Henry Tang insisted the decision to
withdraw the proposal was "entirely my own," and free of any political consideration.
104

3.5.3 Goods and Services Tax in New Zealand:

Goods and Services Tax (GST) is a value added tax introduced in New Zealand on
October 1, 1986 at 10%, and later increased to 12.5% on June 30, 1989.
End-users pay this tax on all liable goods and services directly, in that the purchase
price of goods and services includes GST.
GST-registered organizations only pay GST on the difference between GST-liable
sales and GST-liable supplies (i.e., they pay GST on the difference between what they
sell and what they buy: income less expenditure). This is accomplished by reconciling
GST received (through sales) and GST paid (through purchases) at regular periods
(typically every 2 months, with some qualifying companies opting for 1 month or 6
month periods), then either paying the difference to Inland Revenue Department
(IRD) if the GST collected on sales is higher, or receiving a refund from IRD if the
GST paid on purchases is higher. Unlike most similar taxation regimes, there are few
exemptions - all types of food are taxed at the same rate, for example. Exceptions
include rents collected on residential rental properties, donations and financial
services.
Businesses exporting goods and services from New Zealand are entitled to "zero-rate"
their products - effectively, they charge GST at zero percent. This permits the
business to claim back the input GST but the eventual, non-New Zealand based
consumer does not pay the tax (businesses that produce GST-exempt supplies are not
able to claim back input GST.)
Because businesses claim back their input GST, the GST inclusive price is usually
irrelevant for business purchasing decisions, other than in relation to cash flow issues.
105

Consequently, wholesalers often state prices exclusive of GST, but must collect the
full, GST-inclusive price when they make the sale and account to the IRD for the GST
so collected.
The headline price must always be GST-inclusive in advertising and stores. The only
exceptions are for businesses which claim a mainly wholesale client-base. Otherwise,
displaying a prominent GST-exclusive price (i.e. larger and more obvious than the
GST-inclusive price), is illegal.

3.5.4 Goods and Services Tax in Singapore:

Goods and Services Tax (Abbreviation: GST; Chinese was introduced in Singapore
on April 1, 1994, at 3%, but later increased to 4% on 1 January 2003, and 5% on 1
January 2004. It was raised again to 7% on 1 July 2007.
Singapores GST is a broad-based consumption tax levied on import of goods, as well
as nearly all supplies of goods and services. The only exemptions are for the sales and
leases of residential properties and most financial services. Export of goods and
international services are zero-rated.
Objectives:
The GST was introduced as part of a larger tax restructuring exercise to enable
Singapore to shift its reliance from direct taxes to indirect taxes. The GST also
enables the country to sustain a lower income tax rate.
The government argues that with an ageing population, Singapores income tax base
is expected to decline. With a broad-based GST, the taxation burden will be more

106

evenly spread among the population. Thus, the GST was introduced as part of a larger
exercise to put in place a tax structure to see the country into the future.
A value-added tax, like the GST, also has several features that make it attractive.
Being a tax on consumption, and not on income, the tax system inherently encourages
savings and investments instead of consumption. The tax also has a self-policing
mechanism that discourages evasion, unlike in a retail sales tax system or an income
tax system where it would be relatively easier to evade.
In Singapore, the tax is broad based which include all essential goods like water,
electricity, rice, etc. Hence, a low income worker who would not pay income taxes
would have to pay GST on his daily living expenses. This can be a burden especially
during times of high inflation when the 7% tax is paid on the increasing price of daily
essentials.
Prime Minister Lee Hsien Loong stated the tax hike is to help the lower income
groups and the elderly. Details of the GST increase were announced on 15 February
2007, (Budget Day) by Second Finance Minister Tharman Shanmugaratnam. The
increase was implemented on 1 July 2007, after a period of increased sales by
Singaporeans attempting to beat the tax increase, and wariness amongst the lowerincome groups. The government also announced a GST offset package consisting of a
set of comprehensive measures to help lower income groups. Citizens have to sign-up
beginning 15 May 2007, in order to receive their GST Credits in their bank accounts.

107

TABLE 3.6 COUNTRY WISE STATEMENT OF PERCENTAGE OF TAX REVENUE TO GDP &
CALCULATION OF CGR AND CV
Country Name

2001

World

15.58

Australia
Austria

2003

2004

2005

2006

2007

14.5

14.51

14.72

15.13

15.98

16.75

23.79

22.7

23.16

23.35

23.68

23.45

23.14

21.69

21.13

21.23

20.96

20.15

19.81

20.21

7.6

7.7

8.07

8.11

8.22

8.17

8.05

Belgium

27.04

26.03

25.45

26.04

26.12

25.77

Bulgaria

17.45

16.78

18.85

21.83

22.97

23.61

Canada

14.51

13.77

13.9

14.07

14.15

13.76

14.17

Bangladesh

China

2002

CGR

CV

1.63

5.10

0.01

1.46

20.14

-1.17

3.04

8.82

1.58

4.26

25.14

25.59

-0.62

2.06

24.63

24.16

6.04

13.79

-0.20

1.75

7.4

8.5

8.54

8.86

8.76

9.38

Colombia

11.73

10.42

11.62

10.84

20.26

11.85

13.58

Denmark

29.67

29.53

29.61

30.93

32.59

31.34

France

22.96

22.38

22.04

22.21

22.32

Germany

11.26

11.25

11.36

10.86

11.06

Hungary

21.51

21.12

20.85

20.67

20.3

Iceland

23.66

23.64

24.67

25.87

28.08

28.07

8.21

8.81

9.23

9.68

10.21

11.47

Ireland

24.13

23.2

23.7

24.78

25.1

26.42

25.37

Italy

22.83

22.08

22.1

21.57

21.21

22.74

23.06

Kenya

17.83

17.29

15.77

16.97

18.67

17.38

Maldives

13.68

13.31

14.31

16.57

17.95

Mauritius

15.4

15.24

16.69

16.73

17.82

Nepal

9.45

8.56

8.65

8.97

9.18

India

2008

3.82

6.98

3.05

22.86

35.63

2.77

6.52

22.44

21.81

-0.49

1.49

11.33

11.84

0.49

2.48

20.05

21.42

23.61

0.70

4.86

27.46

24.58

1.78

6.88

12.39

12.92

6.87

15.52

1.68

4.09

22.56

0.24

2.71

17.86

18.88

1.14

5.24

19.94

21.51

21.02

8.02

18.00

17.31

16.35

18.19

2.03

5.90

8.78

9.77

10.41

1.69

6.40

12.63

Netherlands

22.59

22.52

21.64

21.63

22.64

23.21

23.57

0.84

2.98

New Zealand

29.49

29.11

30.2

30.16

31.29

33.16

31.67

1.84

4.24

Norway

26.88

27.93

26.28

27.96

28.92

29.69

29.1

28.14

1.11

3.78

Pakistan

10.04

10.31

10.78

10.28

9.6

9.43

9.84

9.82

-1.02

4.07

Philippines

13.49

12.52

12.75

12.42

12.96

14.26

14.03

14.13

1.53

5.29

Portugal

20.99

21.48

21.49

20.59

21.31

22.03

22.4

22.16

0.83

2.66

Romania

11.74

12.28

12.3

12.21

11.38

11.81

17.89

4.04

16.41

Singapore

15.29

13.29

13.04

12.17

12.23

12.63

13.89

14.64

-0.21

7.90

South Africa

24.81

24.25

24.23

25.7

27.33

28.74

29.01

27.72

2.71

6.97

Spain

15.83

12.79

12.19

11.76

12.59

13.19

13.93

10.64

-2.41

11.24

Sri Lanka

14.63

13.56

12.71

13.47

13.73

14.58

14.22

0.49

4.59

Switzerland
United
Kingdom

10.04

9.95

9.95

9.98

10.32

10.5

10.18

0.67

1.94

28.21

27.05

26.34

26.61

27.28

28.1

27.74

28.57

0.52

2.71

United States

12.71

10.55

10.01

10.13

11.39

12.09

12.18

10.29

-0.09

8.88

Source: www.worldbank.org

108

Table 3.6 reveals that Maldives is rank 1 st in revenue collection during 2001 to 2008
as Compound Growth rate of Maldives is 8.02 per cent followed by India 6.87 per
cent. Whereas lowest in France (-0.49), Pakistan (-1.02), United States (-0.09).
Co-efficient of Variation during 2001 to 2008 is highest in Colombia (22.86 per cent)
followed by Maldives (18.00) whereas lowest in Australia (1.46 per cent)
Fig. 3.1 Country wise percentage of tax revenue to GDP from 2001 to 2008.

109

Table 3.7 TAXES ON GOODS AND SERVICES ( % OF REVENUE ) & CALCULATION OF

CGR AND CV
Country Name

2001

2002

2003

2004

2005

2006

2007

2008

CGR

CV

World

30.13

30.25

31.41

32.04

32.98

32.46

32.56

1.52

3.31

Australia

24.07

25.16

25.52

25.2

24.11

23.59

23.13

-1.08

3.44

Austria

23.57

24.75

25.18

24.9

24.35

23.61

23.45

22.85

-0.83

3.21

Bangladesh

24.83

25.19

32.36

28.95

27.5

28.61

28.18

27.61

1.06

7.87

Belgium

23.16

23.28

22.61

24.38

24.72

24.85

24.45

23.66

0.83

3.23

Bulgaria

35.33

37.41

38.55

40.06

42.54

45.67

45.56

46.86

4.29

9.69

Canada

16.44

17.92

17.38

17.6

17.09

15.35

15.52

-1.77

5.60

China

65.04

72.91

79.46

79.24

79.04

57.19

-1.15

11.68

Denmark

44.44

45.66

45.07

43.58

42.87

44.07

39.84

-1.59

4.06

Finland

32.6

33.39

35.3

34.91

34.48

33.94

32.42

-0.03

3.05

France

23.97

24.57

24.83

24.58

23.81

23.77

23.3

-0.69

2.12

Germany

21.09

21.53

21.77

21.85

22.24

22.12

23.44

1.41

3.11

Greece

30.82

30.8

29.48

29.61

29.14

29.36

28.83

-1.09

2.45

Hungary

32.95

32.82

34.99

37.08

36.01

33.93

33.31

30.96

-0.57

5.37

India

30.14

30.36

30.19

29.7

30.75

28.47

27.06

26.67

-1.85

5.05

Italy

21.97

22.36

21.5

22.16

22.33

22.16

21.58

20.23

-0.78

3.03

Kenya

40.28

39.24

49.74

40.04

44.16

44.25

42.55

40.57

0.24

7.58

Maldives

12.79

12.49

12.9

13.23

8.55

8.07

8.48

-7.53

20.44

Mauritius

37.05

39.27

42.61

42.22

44.54

44.18

46.55

45.77

3.51

7.11

Moldova

43.79

42

45.61

47.61

47.26

50.03

48.92

50.3

2.60

5.67

Namibia

22.32

19.18

18.82

17.24

24.51

17.65

18.6

-1.59

12.47

Nepal

31.35

30.28

28.92

30.12

31.7

34.45

35.65

2.58

7.28

34.87

Netherlands

27.24

27.53

28.01

28.39

28.08

27.31

27.5

0.05

1.46

New Zealand

28.94

29.22

28.97

29.09

27.26

26.4

25.89

-2.11

4.69

Norway

28.05

28.22

27.52

26.09

24.54

23.19

23.99

20.76

-4.07

9.78

Pakistan

34.83

30.1

32.19

32.92

34.07

32.83

29.7

33.31

-0.34

5.16

Philippines

25.91

26.74

25.33

24.66

23.46

29.19

28.31

26.15

0.87

6.66

Portugal

31.83

32.4

32.35

30.36

33.67

34.07

32.56

31.57

0.75

3.47

Singapore

18.41

18.52

24.75

23.63

23.41

22.21

23.26

21.74

3.67

10.69

South Africa

31.64

32.22

33.44

34.06

32.98

32.39

31.58

29.78

-0.77

3.82

Spain

24.32

18.3

18.21

17.77

17.82

17.39

15.81

14.47

-5.22

14.92

Sri Lanka
Switzerland
Thailand
United
Kingdom
United States

57

56.12

53.67

59.84

55.28

51.13

48.09

-2.35

6.63

32.05

30.34

31.87

32.59

32.6

31.78

31.51

0.23

2.24

40.02

40.06

40.11

39.93

39.76

36.86

-1.24

2.96

29.59

31.1

31.6

30.83

29.06

28.04

28.03

26.74

-1.94

5.48

3.17

3.53

3.55

3.47

3.15

2.83

2.44

2.49

-5.01

52.28

110

Source: www.worldbank.org
Table 3.7 reveals that Bulgaria is rank 1 st in revenue collection during 2001 to 2008 as
Compound Growth rate of Bulgaria is 4.29 per cent followed by Mauritius 3.51 per
cent. Whereas lowest in Maldives (-7.53), United States (-5.01), Spain (-5.22).
Co-efficient of Variation during 2001 to 2008 is highest in United States (52.28 per
cent) followed by Maldives (20.44) whereas lowest in Netherlands (1.46 per cent)
Fig. 3.2 Country wise tax revenue on goods and services in per cent during 2001
to 2008.

CONCLUSION:
Nowadays VAT/ GST is globally accepted tax system. France the first
European country who implemented VAT on an extensive scale in 1954. Since then
VAT has been adopted by a large number of countries in the world. Value Added Tax
111

is perceived by many as means to promote neutrality and uniformity of tax burden and
to provide incentives for increased productivity and industrialization. Despite the
widespread proclamation of VAT, there have been difficulties in implementing VAT
in its true spirit like in the case of Argentina, Brazil, Canada and India. There have
also been attempts to introduce Value Added Tax in USA, which however has
preferred to retain the retail sales tax system. If VAT is centrally administered, the tax
base is quite wide, comprising imports, production and different stages of sales. If the
base is divided between the Centre and states, the chain is broken, making tax evasion
easier and affecting the states' tax base. Those countries where VAT is administered
by a federal government, revenue collection on imports accounts for a larger portion
of total VAT revenues. A study conducted by IMF of 22 developing countries,
discovered that about two-third of them, more than half the VAT revenue was
collected from imports. In Pakistan and Bangladesh, VAT collection from imports
was 64 per cent of the total proceeds from the tax. As tax evasion on bulk imports is
difficult, it also helps in checking tax evasion at subsequent stages of the tax chain.
Thus it prove that is a indirect tax which has help the world to increase revenue by
reducing tax rate and broadening tax base with minimum tax evasion. GST is a next
step of VAT, where more taxes are merged and procedure is simplified by reducing
administrative procedures

112

CHAPTER -4
INDIAS TAX STRUCTURE
4.1 INTRODUCTION
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. Value Added Tax,
or VAT, is levied on top of the cost of a product or service and generates revenue for a
government. Value Added Tax, popularly known as VAT, is a special type of indirect
tax in which a sum of money is levied at a particular stage in the sale of a product or
service.
4.1.1 VAT IN INDIA
VAT will replace the present sales tax in India. Under the current single-point system of
tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is
no sales tax on the further distribution channel.
Only the value addition in the hands of each of the entities is subject to tax. For instance,
if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been
charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax
of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the
difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10.
Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his
113

hands.
VAT levy will be administered by the Value Added Tax Act and the rules made thereunder. VAT can be computed by using either of the three methods detailed below: -

The Subtraction method:- The tax rate is applied to the difference between the
value of output and the cost of input.

The Addition method: The value added is computed by adding all the payments
that is payable to the factors of production (viz., wages, salaries, interest payments
etc).

Tax credit method: This entails set-off of the tax paid on inputs from tax collected
on sales.

India opted for tax credit method, which is similar to CENVAT. States such as
Andhrapradesh, Kerala, Maharashtra, Madhya Pradesh, Delhi and Haryana have
experimented with VAT albeit in a limited manner, covering only limited goods. The
experiments never had the full-fledged features of VAT and were only concoctions.
These states have even called off their experiments owing to different reasons. If one
analyses why VAT or its variant failed in Maharashtra, which was the only state to come
Closer to true VAT regime, the following reasons emerge:
1. Dual methodologies of computation of VAT credit. One for the Manufacturing stage
and the other for the trading
Stage, thus breaking the audit trail. It may be noted that one of the advantages of VAT
system, as we would be dealing later on, is the audit trail that is created in the VAT chain.
114

2. Presence of a large number of tax deferral and holiday schemes, which resulted in a
narrow base. It may again be noted that under VAT, which is multi-point, the tax rates
have to be reasonably low, and lower tax rates presupposes that the tax base is wide.
These two features were not present in the Maharashtra tax regime.
3. Low level of awareness among traders, and even administrators, giving rise to fears
and apprehensions. Owing to this, there was considerable consternation among the trade,
which gave rise to open revolt against the system.
4. Partial implementation of the ideal VAT with the existing system coexisting even
under this regime.
5. Increased burden on retailers of Bookkeeping and compliance.
6. Multiplicity of rates of tax under the VAT regime.
7. Drop in revenue for the State Government, though there are no studies attributing such
reduction to the system of taxation.
Thus States had indeed tried some variations of VAT, but eventually gave up due to a
variety of reasons.

115

Table 4.1 Central Government: Direct Vs Indirect taxed In India.

Year

1990-91

As per Central GDP

Direct
Indirect
Total
11024
46489
57513
1.9

8.2

10.1

15207

52059

67266

2.3

10.3

18132

56434

74566

2.4

7.5

10

20298

55445

75743

2.4

6.5

8.8

26966

65328

92294

2.7

6.5

9.1

33563

77661

111224

2.8

6.5

9.4

69197

117863

187060

5.2

8.2

83085

133181

216266

3.4

5.4

8.8

105082

149266

254348

3.8

5.4

9.2

132761

172197

304958

4.3

5.5

9.8

165201

200949

366150

4.6

5.6

10.2

230192

243320

473512

5.6

5.9

11.5

312198

280949

593157

6.6

5.9

12.6

345000

282949

627949

6.5

5.3

11.8

370000

271079

641079

6.3

4.6

10.9

CGR

31.12

16.03

21.46

CV

19.38

20.67

20.06

1991-92
1992-93
1993-94
1994-95
1995-96
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09 (RE)
2009-10 BE

As percent of Total
Direct
Indirect
19.2

80.8

22.6

77.4

24.3

75.7

26.8

73.2

29.2

70.8

30.2

69.8

37

63

38.4

61.6

41.3

58.7

43.5

56.5

45.1

54.9

48.6

51.4

52.6

47.4

54.9

45.1

57.7

42.3

Source : Reserve Bank of India.

Abbr. : RE : Revised Estimates. BE : Budget Estimates.
Note : figures in parenthesis represents percentage of total
@ : Excluding States' share in Central Taxes as reported in Central
Government Budget Documents.

116

4.1.2 Importance of VAT in India

India, particularly being a trading community, has always believed in accepting and
adopting loopholes in any system administered by State or Centre. If a well-administered
system comes in, it will not only close options for traders and businessmen to evade
paying their taxes, but also make sure that they'll be compelled to keep proper records of
sales and purchases.

Under the VAT system, no exemptions are given and a tax will be levied at every stage of
manufacture of a product. At every stage of value-addition, the tax that is levied on the
inputs can be claimed back from tax authorities.

At a macro level, two issues make the introduction of VAT critical for India
Industry watchers believe that the VAT system, if enforced properly, will form part of the
fiscal consolidation strategy for the country. It could, in fact, help address issues like
fiscal deficit problem. Also the revenues estimated to be collected can actually mean
lowering of fiscal deficit burden for the government.

International Monetary Fund (IMF), in the semi-annual World Economic Outlook

expressed its concern for India's large fiscal deficit - at 10 per cent of GDP.
Moreover any globally accepted tax administrative system would only help India
integrate better in the World Trade Organization regime.
117

Items covered under VAT

All

business

transactions

that

are

carried

on

within

State

by

individuals/partnerships/ companies etc. will be covered under VAT.

More than 550 items are covered under the new Indian VAT regime out of which
46 natural & unprocessed local products will be exempt from VAT

Nearly 270 items including drugs and medicines, all industrial and agricultural
inputs, capital goods as well as declared goods would attract 4 % VAT in India.

The remaining items would attract 12.5 % VAT. Precious metals such as gold and
bullion will be taxed at 1%.

Petrol and diesel are kept out of the VAT regime in India.

4.1.3 The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation. The existing
sales tax structure allows for double taxation thereby cascading the tax burden. For
example, before a commodity is produced, inputs are first taxed, the produced
commodity is then taxed and finally at the time of sale, the entire commodity is taxed
once again. By taxing the commodity multiple times, it has in effect increased the cost of
the

goods

and

therefore

the

price

the

end

consumer

will

pay

for

it.

The transaction chain under VAT assuming that a profit of Rs 10 is retained during each
sale.
118

Various Prices under VAT chain.

SALE 'A' OF CHENNAI

'B' OF

SALE

'C' OF

@ Rs. 100/-

BANGALORE

@ Rs. 114/-

BANGALORE

SALE

'D' OF

SALE

CONSUMER

@ Rs. 124/-

BANGALORE

@ Rs. 134/-

IN

BANGALORE

Tax implication under Value Added Tax Act

Seller

Buyer

Selling Price

Tax Rate

Invoice

Tax

Tax

Net Tax

(Excluding

value (Incl

Payable

Credit

Outflow

Tax)

Tax)

100

4% CST

104

4.00

114

12.5% VAT

128.25

14.25

0*

14.25

124

12.5% VAT

139.50

15.50

14.25

1.25

Consu

134

12.5% VAT

150.75

16.75

15.50

1.25

VAT

16.75

CST

4.00

mer
Total to Govt.

*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same
though it could to be reduced to 2% when VAT is introduced and eventually phased out.
VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases
(inputs) and capital goods. What this means is that dealers can actually deduct the amount
119

of tax paid by him for purchase from the tax collected on sales, thereby paying just the
balance amount to the Government.

4.1.4 VALUE ADDED TAX

In 1954, the value added tax system was initiated by the then joint director of the tax
authority of France, Maurice Laure. VAT came into effect for the first time on 10th April,
1954. From its inception, the value added tax system was imposed on all major sectors of
France the first country to use this system. Once instituted, it was Immediately clear
that revenues collected from the VAT system constituted a substantial share of the
governments revenue in the French economy. Not surprisingly, due to the ease of
payment and ready comprehensibility, the value added tax system has been adopted by
different nations across the world. VAT is intended to be levied or charged whenever
there is some value addition to raw material. The taxpayers on the other hand, will get
credit for the amount of tax paid off at the stages of procurement. The value added tax
system has proven to be effective in avoiding problems that normally might arise out of
the double taxation of goods and services.

The value added tax system is designed to address various problems associated with the
conventional sales tax system. In sales tax, there is no provision for input tax credit,
which means that the end consumer may pay tax on an input that has already been taxed
previously. This is known as cascading and leads to increases the consumer tax and price
levels, which increases the rate of evasion and can be detrimental to economic growth.

120

The value added tax system deals with these problems quite efficiently. As VAT is
imposed on value addition at every single stage there is no incidence of cascading. In
this way, the final consumers bear the burden of paying value added tax. This system
involves absolute transparency at every stage of taxation, thereby making the tax system
quite comprehensible and simple.

In some countries like India, the system of VAT has been designed to change the existing
system of sales taxation. Value added tax is different from the conventional system of
sales tax, because VAT is charged at every stage of value addition whereas sales tax is
imposed on final value of transaction only.

The value added tax system allows for input tax credit, or ITC, on the amount of tax
levied at the preceding stage of the value addition chain. The allowance for ITC is
normally appropriated from the value added tax liability imposed on the following stage
of the sale of the product.
4.1.5 Silent Features of VAT

a. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
o

4% on declared goods or the goods commonly used.

10-12% on goods called Revenue Neutral Rates (RNR). There would be

no fall in such remaining goods.

Two special rates will be imposed-- 1% on silver or gold and 20% on

liquor. Tax on petrol, diesel or aviation turbine fuel are proposed to be
121

kept out from the VAT system as they would be continued to be taxed, as
presently applicable by the CST Act.
b. Uniform Rates in the VAT system, certain commodities are exempted from tax.
The taxable commodities are listed in the respective schedule with the rates. VAT
proposes to keep these rates uniform in all the states so the goods sold or
purchased across the country would suffer the same tax rate. Discretion has been
given to the states when it comes to finalizing the RNR along with the
restrictions. This rate must not be less than 10%. This will ensure By doing this
that there will be level playing fields to avoid the trade diversion in connection
with the different states, particularly in neighbouring states
c. No concession to new industries Tax Concessions to new industries is done away
with in the new VAT system. This was done as it creates discrepancy in
investment decision. Under the new VAT system, the tax would be fair and
equitable to all.
d. Adjustment of the tax paid on the goods purchased from the tax payable on the
goods of sale All the tax, paid on the goods purchased within the state, would be
adjusted against the tax, payable on the sale, whether within the state or in the
course of interstate. In case of export, the tax, paid on purchase outside India,
would be refunded. In case of the branch transfer or consignment of sale outside
the state, no refund would be provided.
e. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the
tax on the full price of the goods sold and shows separately in the sell invoice
issued by him
122

f. VAT is not cascading or additive though the tax on the goods sold is collected at
each stage, it is not cascading or additive because the net effect would be as
follows: - the tax, previously paid on the sale of goods, would be fully adjusted. It
will be like levying tax on goods, sold in the last state or at retail stage.

4.1.6 ADVANTAGES OF VAT

1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%,
8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there
would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. This
will eliminate any disputes that relate to rates of tax and classification of goods as
this is the most usual cause of litigation. It also helps to determine the relevant
stage of the tax. This is necessary as the CST Act stipulates that the tax levies at
the first stage or the last stage differ. Consequently, the question of which stage of
tax it falls under becomes another reason for litigation. Under the VAT system,
tax would be levied at each stage of the goods of sale or purchase.
2. Adjustment of tax paid on purchased goods Under the present system, the tax paid
on the manufactured goods would be adjusted against the tax payable on the
manufactured goods. Such adjustment is conditional as such goods must either be
manufactured or sold. VAT is free from such conditions.
3. Further such adjustment of the purchased goods would depend on the amount of
tax that is payable. VAT would not have such restrictions. CST would not have
the provisions on refund or carry over upon such goods except in case of export

123

goods or goods, manufactured out of the country or sale to registered dealer.

Similarly, on interstate sale on tax-paid goods, no refund would be admissible.
4. Transparency The tax that is levied at the first stage on the goods or sale or
purchase is not transparent. This is because the amount of tax, which the goods
have suffered, is not known at the subsequent stage. In the VAT system, the
amount of tax would be known at each and every stage of goods of sale or
purchase.
5. Fair and Equitable VAT introduces the uniform tax rates across the state so that
unfair advantages cannot be taken while levying the tax.
6. Procedure of simplification Procedures, relating to filing of returns, payment of
tax, furnishing declaration and assessment are simplified under the VAT system
so as to minimize any interface between the tax payer and the tax collector.
7. Minimize the Discretion the VAT system proposes to minimize the discretion
with the assessing officer so that every person is treated alike. For example, there
would be no discretion involved in the imposition of penalty, late filing of returns,
non-filing of returns, late payment of tax or non payment of tax or in case of tax
evasion. Such system would be free from all these harassment
8. Computerization the VAT proposes computerization which would focus on the
tax evaders by generating Exception Report. In a large number of cases, no
processing or scrutiny of returns would be required as it would free the tax
compliant dealers from all the harassment which is so much a part of assessment.
The management information system, which would form a part of integral
computerization, would make the tax department more efficient and responsive.
124

4.1.7 DISADVANTAGES OF VAT

1)VAT-is-regressive
It is claimed that the tax is regressive, i.e. 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
125

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
126

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.

127

Revenue to Government:
TABLE 4.2: STATEWISE SALES TAX COLLECTION OF INDIA AND CALCULATION OF CGR
AND CV.
(Rs In Crore)
States
1.Andhra
Pradesh

2.Bihar

3.Chhattisgarh

4.Goa

5.Gujarat

6.Haryana

7.Jharkhand

8.Karnataka

9.Kerala
10.Madhya
Pradesh

11.Maharashtr
a

12.Orissa

13.Punjab

14.Rajasthan

15.Tamil Nadu

16.Uttar

01-02

02-03

03-04

04-05

05-06

06-07

07-08

0809(RE)

0910(BE)

7,741

8,322

9,187

11,041

12,542

15,467

19,026

24,532

27,685

(10.58)

(10.13)

(9.86)

(9.90)

(9.74)

(10.07)

(10.97)

(12.11)

(12.30)

1,450

1,627

1,995

1,891

1,734

2,081

2,535

3,704

3,948

(1.98)

(1.98)

(2.14)

(1.70)

(1.35)

(1.36)

(1.46)

(1.83)

(1.75)

940

1,102

1,299

1,674

2,089

2,843

3,024

3,470

3,776

(1.28)

(1.34)

(1.39)

(1.50)

(1.62)

(1.85)

(1.74)

(1.71)

(1.68)

401

439

502

567

743

845

879

1,110

1,258

(0.55)

(0.53)

(0.54)

(0.51)

(0.58)

(0.55)

(0.51)

(0.55)

(0.56)

5,857

6,252

7,170

8,309

10,561

12,817

15,105

17,123

18,215

(8.00)

(7.61)

(7.70)

(7.45)

(8.20)

(8.35)

(8.71)

(8.45)

(8.10)

2,945

3,337

3,838

4,761

5,604

6,853

7,721

9,785

10,740

(4.02)

(4.06)

(4.12)

(4.27)

(4.35)

(4.46)

(4.45)

(4.83)

(4.77)

1,515

1,622

1,550

1,782

2,150

2,458

2,790

3,715

4,400

(2.07)

(1.97)

(1.66)

(1.60)

(1.67)

(1.60)

(1.61)

(1.83)

(1.96)

5,269

5,474

6,649

8,700

9,870

11,762

13,894

15,489

17,727

(7.20)

(6.66)

(7.14)

(7.80)

(7.66)

(7.66)

(8.01)

(7.64)

(7.88)

4,441

5,343

5,991

6,701

7,038

8,563

9,372

11,011

12,734

(6.07)

(6.50)

(6.43)

(6.01)

(5.47)

(5.58)

(5.40)

(5.43)

(5.66)

2,361

2,906

3,293

3,912

4,508

5,261

6,045

6,720

8,012

(3.23)

(3.54)

(3.53)

(3.51)

(3.50)

(3.43)

(3.49)

(3.32)

(3.56)

12,131

13,488

15,326

18,817

19,677

24,131

26,753

28,439

27,006

(16.58)

(16.42)

(16.45)

(16.87)

(15.28)

(15.71)

(15.43)

(14.04)

(12.00)

1,402

1,605

1,864

2,471

3,012

3,765

4,118

4,770

5,116

(1.92)

(1.95)

(2.00)

(2.22)

(2.34)

(2.45)

(2.37)

(2.35)

(2.27)

2,684

3,072

3,308

3,816

4,627

4,829

5,342

6,530

8,320

(3.67)

(3.74)

(3.55)

(3.42)

(3.59)

(3.14)

(3.08)

(3.22%)

(3.70)

3,069

3,438

3,985

4,798

5,594

6,721

7,751

9,100

10,030

(4.19)

(4.18)

(4.28)

(4.30)

(4.34)

(4.38)

(4.47)

(4.49)

(4.46)

8,386

9,590

11,005

12,996

15,555

17,727

18,156

20,906

23,243

(11.46)

(11.67)

(11.81)

(11.65)

(12.08)

(11.54)

(10.47)

(10.32)

(10.33)

6,163

7,124

7,684

8,888

11,285

13,279

15,023

17,178

20,741

Compoun
d Growth
rate

Co-efficient
Variance

18.40

45.41

12.47

36.59

20.57

44.67

15.94

37.93

17.13

39.71

18.46

42.84

14.74

39.61

17.64

40.18

13.36

32.63

16.02

37.19

12.00

28.29

19.03

41.83

14.23

36.19

16.81

39.02

13.75

31.81

16.64

39.58

128

Pradesh

17.West
Bengal

18. Others

All States

(8.42)

(8.67)

(8.25)

(7.97)

(8.76)

(8.65)

(8.66)

(8.48)

(9.22)

3,802

4,192

4,831

5,716

6,109

7,079

8,060

9,794

12,047

(5.20)

(5.10)

(5.19)

(5.12)

(4.74)

(4.61)

(4.65)

(4.83)

(5.35)

2,623

3,220

3,679

4,714

6,072

7,091

7,826

9,235

10,013

(3.58)

(3.92)

(3.95)

(4.23)

(4.72)

(4.62)

(4.51)

(4.56)

(4.45)

73,181

82,155

93,155

1,11,554

1,28,769

1,53,573

1,73,422

2,02,610

2,25,009

(100)

(100)

(100)

(100)

(100)

(100)

(100)

(100)

(100)

15.02

37.54

19.00

41.67

15.73

36.87

SOURCE: Handbook of Statistics on State Government Finances - 2010, Reserve bank of India
Note: figures in parenthesis represents percentage of total.

Table 4.2 reveals that Chandigarh state rank 1st in India during 2001-02 to 2009-10
related to Compound Growth of Sales Tax Collection in India i.e. to the extent of 20.57%
followed by Orissa (19.3%), Haryana (18.46%) and Andhra Pradesh (18.40%). Whereas
the Compound growth rate of Sales Tax collection of Maharashtra and Bihar during the
same period was least in India i.e.12.00% and 12.47% respectively.
Co-efficient of Variance during 2001-02 to 2009-10 is highest in the state of Andhra
Pradesh (45.41%) in India whereas Lowest in the state of Maharashtra during the same
period i.e. 28.29%. If we compare the growth rate and variation of all the states in India
then Compound Growth rate is 15.73% and Variation is 36.87% which is normal for the
same period in India.

129

Fig. 4.1 State wise Sales tax collection in India 2009-10.

12.3

Andhra Pradesh
Maharashtra
12

Tamil Nadu
Uttar Pradesh
Others

56.15

10.33

9.22

130

TABLE 4.3 STATE WISE REVENUE RECEIPTS OF INDIA 2009-10

(Rs. In Crores)

States

1.Andhra
Pradesh

2.Bihar

3.Chhattisgarh

4.Goa

5.Gujarat

6.Haryana

7.Jharkhand

8.Karnataka

9.Kerala
10.Madhya
Pradesh

11.Maharashtra

12.Orissa

13.Punjab

14.Rajasthan

15.Tamil Nadu
16.Uttar
Pradesh

01-02

02-03

03-04

04-05

05-06

06-07

07-08

0809(RE)

0910(BE)

21,845

23,003

26,869

28,750

34,851

44,245

54,143

69,686

78,964

(8.76)

(8.41)

(8.69)

(7.91)

(8.09)

(8.34)

(8.68)

(9.44)

(9.81)

10,219

11,569

13,525

15,714

17,837

23,083

28,210

36,317

41,837

(4.10)

(4.23)

(4.37)

(4.32)

(4.14)

(4.35)

(4.52)

(4.92)

(5.20)

4,376

5,417

5,959

7,249

8,839

11,450

13,879

16,778

18,897

(1.75)

(1.98)

(1.93)

(1.99)

(2.05)

(2.16)

(2.23)

(2.27)

(2.35)

1,873

1,833

1,623

1,820

2,169

2,610

2,944

3,806

4,137

(0.75)

(0.67)

(0.52)

(0.50)

(0.50)

(0.49)

(0.47)

(0.52)

(0.51)

15,986

17,875

18,248

20,265

25,067

31,002

35,690

39,684

41,815

(6.41)

(6.53)

(5.90)

(5.57)

(5.82)

(5.84)

(5.72)

(5.38)

(5.19)

7,601

8,657

9,843

11,149

13,853

17,952

19,751

21,771

22,437

(3.05)

(3.16)

(3.18)

(3.07)

(3.21)

(3.38)

(3.17)

(2.95)

(2.79)

6,100

7,406

7,443

7,307

8,203

10,144

11,612

16,107

17,936

(2.45)

(2.71)

(2.41)

(2.01)

(1.90)

(1.91)

(1.86)

(2.18)

(2.23)

15,321

16,169

20,760

26,570

30,352

37,587

41,151

42,818

48,389

(6.14)

(5.91)

(6.71)

(7.31)

(7.04)

(7.08)

(6.60)

(5.80)

(6.01)

9,056

10,634

11,815

13,500

15,295

18,187

21,107

25,063

28,154

(3.63)

(3.89)

(3.82)

(3.71)

(3.55)

(3.43)

(3.38)

(3.40)

(3.50)

11,201

13,390

14,289

19,743

20,597

25,694

30,689

34,949

39,961

(4.49)

(4.89)

(4.62)

(5.43)

(4.78)

(4.84)

(4.92)

(4.74)

(4.96)

30,093

31,103

34,371

41,013

48,438

62,195

79,583

82,870

89,061

(12.07)

(11.37)

(11.12)

(11.28)

(11.24)

(11.72)

(12.76)

(11.23)

(11.06)

7,048

8,439

9,440

11,850

14,085

18,033

21,967

26,810

26,550

(2.83)

(3.08)

(3.05)

(3.26)

(3.27)

(3.40)

(3.52)

(3.63)

(3.30)

8,929

11,071

12,139

13,807

16,966

16,795

19,238

22,919

24,072

(3.58)

(4.05)

(3.93)

(3.80)

(3.94)

(3.17)

(3.08)

(3.11)

(2.99)

12,153

13,082

15,424

17,764

20,839

25,592

30,781

34,383

38,268

(4.87)

(4.78)

(4.99)

(4.89)

(4.83)

(4.82)

(4.93)

(4.66)

(4.75)

18,818

20,837

23,706

28,452

33,960

40,913

47,521

55,410

58,271

(7.54)

(7.61)

(7.67)

(7.83)

(7.88)

(7.71)

(7.62)

(7.51)

(7.24)

25,598

27,821

31,638

37,617

45,349

60,600

68,672

85,146

94,440

(10.26)

(10.17)

(10.23)

(10.35)

(10.52)

(11.42)

(11.01)

(11.54)

(11.73)

Compou
nd
Growth
rate

Coefficien
t
Varian
ce

18.72

46.46

19.97

48.18

20.91

47.84

12.21

34.19

14.27

34.57

16.12

37.04

14.00

38.65

16.64

36.91

15.35

36.90

17.66

40.79

16.91

40.11

19.89

45.05

12.88

30.40

16.64

39.06

16.59

38.44

19.33

45.32

131

17.West Bengal

18. Others

All States

14,538

14,525

16,609

19,918

23,726

25,828

30,167

40,777

42,312

(5.83)

(5.31)

(5.37)

(5.48)

(5.50)

(4.87)

(4.84)

(5.53)

(5.26)

28,668

30,842

35,487

41,025

50,595

58,645

66,644

82,571

89,442

(11.49)

(11.27)

(11.48)

(11.29)

(11.74)

(11.05)

(10.68)

(11.19)

(11.11)

2,49,423

2,73,673

3,09,188

3,63,513

4,31,021

5,30,555

6,23,749

7,37,865

8,04,943

(100)

(100)

(100)

(100)

(100)

(100)

(100)

(100)

(100)

15.84

39.22

16.42

38.98

17.05

40.23

SOURCE: Handbook of Statistics on State Government Finances - 2010, Reserve bank of India
Note: Figures in parenthesis represents % contribution to Total Revenue.

Table 4.3 reveals that Chhattisgarh state rank 1st in India during 2001-02 to 2009-10
related to Revenue Growth i.e. to the extent of 20.91% followed by Bihar (19.9%), Orissa
(19.9%) and Uttar Pradesh (19.3%). Whereas the revenue growth of Goa, Punjab during
the same period was least in India i.e.12.21% and 12.88% respectively.
Co-efficient of Variance during 2001-02 to 2009-10 is highest in the state of Bihar
(48.18%) in India whereas Lowest in the state of Punjab during the same period.
If we compare the growth rate and variation of all the states in India then Compound
Growth rate is 17.05% and Variation is 40.2% which is normal for the same period in
India.

132

Fig. 4.2 State wise revenue receipt of India 2009-10

Uttar Pradesh

11.73

Maharashtra
11.06

Andhra Pradesh
Tamil Nadu

9.81

Others

60.16
7.24

"More than 550 items would be covered under the new Indian VAT regime of which 46
natural and unprocessed local products would be exempt from VAT", a PTI report quoted
West Bengal Finance Minister and VAT panel chairman Asim Dasgupta as saying.

About 270 items including drugs and medicines, all agricultural and industrial inputs,
capital goods and declared goods would attract four per cent VAT in India.
The remaining items would attract 12.5 per cent VAT. Precious metals like gold and
bullion would be taxed at one per cent. Considering the difficulties faced by the tea
industry, it was decided that tea-producing states would be given an option to levy 12.5
per cent or four per cent subject to review in 2006. Petrol and diesel would be kept out of

133

VAT regime in India, which covers only marketable items. Dasgupta was quoted as
saying that the panel was yet to take a view on CNG.
Following opposition from some of the states, it was decided that states would have
option to either levy four per cent or totally exempt food grains but it would be reviewed
after one year. Three items - sugar, textile and tobacco - covered under Additional Excise
Duties, will not be under VAT regime for one year but the existing arrangement would
continue. The Indian VAT panel relaxed the threshold limit for traders coming under
VAT regime from Rs 5-50 lakh of turnover from the previous stance of Rs 5-40 lakh.
Traders within this limit can pay a composite VAT rate of one per cent but would not be
entitled to input tax credit.
4.2 GOODS AND SERVICE TAX.
Goods and Services Tax (GST) is a part of the proposed tax reforms that center
round evolving an efficient and harmonized consumption tax system in the country.
Presently, there are parallel systems of indirect taxation at the central and state levels.
Each of the systems needs to be reformed to eventually harmonize them.

In the Union Budget for the year 2006-2007, Finance Minister proposed that India should
move towards national level Goods and Services Tax that should be shared between the
Centre and the States. He proposed to set April 1, 2011 as the date for introducing GST.
World over, goods and services attract the same rate of tax. That is the foundation of a
GST. The first step towards introducing GST is to progressively converge the service tax
rate and the CENVAT rate. The goods and service tax (GST) is proposed to be a
134

comprehensive indirect tax levy on manufacture, sale and consumption of goods as well
as services at a national level. Integration of goods and services taxation would give India
a world class tax system and improve tax collections. It would end the long standing
distortions of differential treatments of manufacturing and service sector. The
introduction of goods and services tax will lead to the abolition of taxes such as octroi,
Central sales tax, State level sales tax, entry tax, stamp duty, telecom licence fees,
turnover tax, tax on consumption or sale of electricity, taxes on transportation of goods
and services, and eliminate the cascading effects of multiple layers of taxation. GST will
facilitate seamless credit across the entire supply chain and across all states under a
Common tax base.
Roadmap-to-GST:
As we have parallel systems of indirect taxation at the central and state levels, each of the
systems needs to be reformed to eventually harmonise them. The central excise duty
should be converted into a full fledged manufacturing stage VAT on goods and services
and the states sales tax systems should be transformed into a retail stage destination based
VAT, before the two are integrated. At the central level, beginning has been made by
converging widely varying tax rates and extending input tax credit to convert excise
duties into a CENVAT.

The reformed indirect tax system GST-Goods and service tax is proposed to implement
on 1st April 2011 in India. Several countries implemented this tax mechanism followed
by France, the first country introduced GST. Goods and service tax is a new version of
VAT which gives a comprehensive setoff for input tax credit and subsuming many
135

indirect taxes from state and national level. The GST Implementation is not yet declared
by government and the drafting of GST law is still under process and a clear picture will
be available only after announcement of Implementation. As the name denotes the goods
and service tax is integrated in GST for setoff benefit of Input tax credit.

FACTORS FOR IMPLEMENTATION OF GST IN INDIA:

i. Avoid cascading effect of taxation:

One of the main reasons of the introduction of GST is to avoid cascading effect of taxes
in India. For example manufacturing of a product attract CENVAT. The manufacturer
pays CENVAT on goods produced. So the CENVAT element is loaded on the product.
According VAT rules, the sales tax is payable on the aggregate selling price which
include CENVAT. Here there is no set off benefits available. Likewise there are many
situations in the nature of cascading effect for instance, State VAT on CST, Entry tax on
VAT etc. Now Govt. has decided to abolish tax on tax effect by implementing GST.

ii. Shortfall of Existing VAT:

Indirect taxes like luxury tax, entertainment tax, are yet to be included in the VAT. These
taxes are still existing and payable.

iii. Shortfall of Existing CENVAT:

Several taxes like additional customs duty, surcharges not included under CENVAT.
Input tax and service tax set off is out of reach to the manufacturer and dealers.
136

Benefits of GST:

1. GST provide comprehensive and wider coverage of input credit setoff, you can
use service tax credit for the payment of tax on sale of goods etc.
2. CST will be removed and need not pay. At present there is no input tax credit
available for CST.
3. Many indirect taxes in state and central level subsumed by GST, You need to pay
a single GST instead of all.
4. Uniformity of tax rates across the states
5. Ensure better compliance due to aggregate tax rate reduces.
6. By reducing the tax burden the competitiveness of Indian products in international
market is expected to increase and there by development of the nation.
7. Prices of goods are expected to reduce in the long run as the benefits of less tax
burden would be passed on to the consumer.
8. Overall tax compliance cost will reduce for government and can concentrate on
GST

Indirect taxes subsumed under GST:

The following indirect taxes from state and central level is going to integrated with GST

State taxes:

1. VAT/Sales tax
2. Entertainment Tax ( unless it is levied by local bodies)
137

3. Luxury tax
4. Taxes on lottery, betting and gambling.
5. State cesses and surcharges in so far as they relate to supply of goods and
services.
6. Entry tax not on in lieu of octroi.
7. Purchase tax ( This is not sure still under discussion )

Central Taxes:

1. Central Excise Duty.

2. Additional Excise Duty.
3. The Excise Duty levied under the medical and Toiletries Preparation Act
4. Service Tax.
5. Additional Customs Duty, commonly known as countervailing Duty ( CVD)
6. Special Additional duty of custums-4% ( SAD)
7. Surcharges
8. Cessess

The above taxes dissolve under GST; instead only CGST & SGST exists.

The GST model in India:

Many countries are following single GST. But it is proposed that dual GST is suitable for
federal country like India. The end user, i.e. consumer cannot recover taxes but a business
can recover by claiming input tax setoff.
138

Dual GST:

Dual GST means, the proposed model will have two component called

1. CGST Central goods and service tax for levied by central Govt.
2. SGST State goods and service tax levied by state Govt.

There would have multiple statute one CGST statute and SGST statute for every state.

Taxable event:

Supply of goods and supply of services will be considered as taxable event under GST.
Any economic activity which is not supply of goods is treated a supply of service.

Tax payer identification number:

Each tax payer allotted a pan based identification number containing 13 or 15 digit
number.

Payment of tax:
The central GST would be paid to central and state GST paid to state government in the
prescribed account head.

Collection of GST:
It is same as VAT; Tax is collected on the basis of value addition on each stage of sale.
Both CGST and SGST would have to be charged in an every service bill and sale bill and
paid after adjusting input credit available on both.

139

Input tax credit setoff

The input tax credit of SGST can be utilized for the payment of SGST only and input tax
credit on CGST can be utilized for the payment of CGST only. This means that cross
utilization of input tax credit will not be allowed.

Making it clearer; input tax credit of CGST cannot be utilized for the payment of SGST
and vice versa. However there is an exemption for the above in the case of interstate
transaction .For interstate transaction IGST is proposed and would be implemented along
with CGST and SGST.

Constitution amendment for levying service tax by the states

The power of levying service tax is rest with central Government and a constitutional
amendment is necessary for empowering states for levying service tax.

Applicability of CGST and SGST

The applicability of taxes is as usual there would be a prescribed limit of annual turnover,
also some goods and services are exempted under GST. The dealer whose turnover is
below prescribed limit need not pay tax.
Threshold for annual turnover for goods and services would be 10 lakh for SGST and
threshold of CGST for goods may be 1.5 crore and service would have a separate
threshold that too will be appropriately high.

140

GST rates
The rate structure would be as follow; but not final
1. A lower rates for essential commodities
2. Standard rates for general goods
3. Special rates for precious metals
4. For services may be single rates for CGST and SGST.
GST rates is not yet announced by government, however it is assumed that aggregate
total of CGST & SGST would be 14 % to20%.

4.3 CONCLUSION:
VAT has been adopted instead of sales tax in India from 2002 by Central Government of
India, but only seven states has implemented VAT and other shown their inability to
impalement that. Subsequently from 2005 all state in India has adopted VAT and rate of
tax was uniformly accepted which was 1%, 4%, 12.5% & for other products like
petroleum etc discretion was given to state for rate of tax. Initially for few years states
found it very inconvenient and difficult to implement VAT as no proper administrative
machinery was available & large Scale Computerisation was not done even the
manufacturer, trader and retailers were not computer competent. So they were also
finding very difficult to cope up with VAT so there was resistant from business
community, but in due course Government machinery has been improved to cope up with
VAT. At the same time last few years large scale computerisation was done in all sectors
and liberal National Policies to import computers has reduced the computer prices and
141

increase the computer literacy which also help business community and Government to
cope up with VAT. All above factors are giving better result and total indirect tax
revenue has been increased in last few years even after reducing tax rates. Tax evasion in
India has been reduced to the great extent after successful implementation of VAT now
Central Government of India has decided to implement GST from 2011 which is a step
ahead of VAT where excise duty, service tax, octroi will be covered under GST.

142

CHAPTER- 5
SALES TAX IN MAHARASHTRA

5.1 INTRODUCTION:

As per the 2001 census, Maharashtra has a population of 96,752,247 inhabitants making
it the second most populous state in India, and the second most populous country
subdivision in existence, and third ever after the Russian SFSR of the former Soviet
Union. The Marathi-speaking population of Maharashtra numbers 62,481,681 according
to the 2001 census. This is a reflection of the cosmopolitan nature of the state. Only
eleven countries of the world have a population greater than Maharashtra. Its density is
322.5 inhabitants per square kilometer. Males constitute 50.3 million and females, 46.4
million. Maharashtra's urban population stands at 42.4%. Its sex ratio is 922 females to
1000 males. 77.27% of its population is literate, broken into 86.2% males and 67.5%
females. Its growth rate between 19912001 was pegged at 22.57%.

5.1.1 HISTORY OF SALES TAXES:

Sales tax was first introduced in India in the province of Bombay, where a tax was
imposed on sales of tobacco within certain very limited urban and suburban areas by the
Bombay Tobacco (Amendment) Act, 1938, which came into force on the 24th March,
1938.
In the Central provinces & levy, again a selective one, on motor spirit and lubricants
alone was introduced in January, 1939. In the province of Bombay, Government took
143

powers by the Bombay Sales Tax Act, 1939 to levy sales tax on motor spirit and
manufactured cloth, at rates not exceeding six and a quarter per cent. Eventually,
however, only motor spirit was notified for taxation under that Act.
It was not until 1945, that an attempt to introduce a general sales tax was made in
Bombay. The Bombay Sales Tax Act of 1946 enacted on 8th March, 1946, provided for
the levy of a tax at the last stage of sale of any goods. The rate of tax under the Bombay
Sales Tax Act, 1946 was six paisa per rupee of the sale price. The exemption list largely
comprised articles of staple diet and other necessities of the common man and other items
such as electrical energy, tobacco, foreign liquor and motor-spirits on which there was
already same form of duty or tax.
On the 1st April, 1948 a tax of one anna in the rupee was levied, for the first time, on 13
specially selected items which included motor cars, refrigerators wireless equipment,
perfumery, firearms, silk and jewellery.
A radical change in the basis of the sales tax was effected on 1st November, 1952 by the
sales introduction of a system of multi-point taxation, that is to say, a uniform levy at
each stage of the sale of any goods, supplemented by a special tax at one anna in the
rupee on selected goods, in addition to the general levy. The limit of turnover for
registration in the case of persons dealing in general goods it was at Rs. 30,000 per year.
The Bombay State introduced from the 1st of April, 1954 the system on tax which has
come to be commonly known as the two point system. Under this system of tax the
turnover limits attracting liability to tax and registration are Rs. 10,000 per year in the
144

case of manufacturers and importers and Rs. 25,000 in the case of all patterns of the lists
under the earlier enactments, generally speaking. The scheme of the Act is broadly that a
sales tax is levied at the first stage of the sales of any goods and a General Sales Tax is
levied in addition to the sales tax.
The BST Act, 1959 was amended by from 1.7.1981, which completely amended the
scheme of taxation under the BST Act, 1959 from 1.7.1981.Prior to 1.7.1981, the BST
Act, 1959 was a schedule oriented Act in as much as the tax liability of a sale or purchase
of a commodity will depend on the schedule in which the goods fall. Thus, prior to
1.7.1981 there were five schedules in which the specific goods in question lie schedule A
Tax free goods No Tax.

Schedule B Part I Declared goods Tax at first stage only at a rate not more than 4%

Schedule B Part II Declared goods Tax at last stage. The last stage being the
stage at which goods pass from a licensed dealer to unlicensed dealer at a rate not more
than 4%

Schedule C Tax at the first stage of sale. The first stage being the stage at which the
goods enter into the stream of sale in the State of Maharashtra. Such first stage one can
visualise as follows:-

a)

Where the goods are manufactured.

b)

Where the goods are imported from foreign country.

145

c)

Where goods are purchased from a dealer from outside the State of Maharashtra.

d)

Where goods purchased from an unregistered dealer are resold.

Schedule D Tax at the last stage of sale. The last stage being the stage at which the
goods pass from a licensed to an unlicensed dealer.
Schedule E Tax at first stage and tax at last stage. The stages being stages (first and last)
as explained above. In addition to this in respect of Schedule E goods, additional retail S.
T. at 4% is payable by a dealer who is not a licensed dealer both at the time of purchase
and sale.
To review the present system of Sales Tax in the State, in the light of the system
prevailing in Gujarat, Tamil Nadu, West Bengal and Karnataka and to examine the
system of administration of Sales Tax Law and to suggest improvement therein so as to
simplify the procedure for assessment ensuring avoidance of evasion of taxes, a
Committee under the Chairmanship of Shri. M. R. Yardi was appointed by the
Government in 1975.In view of the recommendation of the Committee on various issues,
the BST Act, 1959 is suitably amended from 1.7.1981.

The first stage tax is called sales tax. In view of this new scheme, the schedules have
now been reduced from 5 in number to 3 viz..

(a) Schedule - A Tax free goods on which no tax is payable under section 5 of the Act.

146

(b) Schedule -B Declared goods on which tax is leviable at the first stage at a rate not
more than 4%.
(c) Schedule -C First stage levy at the rates specified against the entry. This Part I
schedule is covered by items of raw materials which are generally Part II used for
manufacture, liable to 4% S. T.

Thus, under the new amended Act since tax is leviable in the first stage i. e. the stage
at which goods enter the manufacturers, the tax liability of transaction of a sale will
depend upon the character of purchase i. e. whether from R. D. or O. M. S. import or U.
R. D.
Thereafter on important change in the State indirect tax reforms took place from April
1st, 2005 by introduction of VALUE ADDED TAX system.

The Bombay Sales of Motor Spirit Taxation Act, 1958

The act remained in operation from 1958 till 31/03/2005. The act provided a levy of tax
on the sales of Motor Spirits within the State. The following commodities were covered
under the Act.

High Speed Diesel Oil

Aviation Gasoline (Duty paid)

Aviation Gasoline (Banded)

147

Aviation Turbine Fuel (Duty paid)

Aviation Turbine Fuel (Banded)

Any other kind of Motor Spirit

1st April, 2005 the tax on Motor Spirit is being levied under Value Added Tax Act, 2002.

Maharashtra Sales Tax on the transfer of property in goods involved in the

executions of Works Contract Act, 1985.

Historical Background :Prior to the enactment of Constitution of India, the provincial Legislatures derived
power to levy taxes on the sale of goods and advertisement by virtue of Entry 48 of List
II in the Seventh Schedule to the Government of India Act, 1935. The power exercised
by the States was not subject to any restrictions or conditions. The then province of
Madras was the first State which attempted to bring within its tax net the transactions of
Works Contract by amending the term 'goods', 'sale' and 'turnover' in the Madras General
Sales Tax Act, 1939. The expression 'sale' was amended so as to bring within its ambit
transfer of property in goods involved in the execution of works contract. The term
'goods' was also amended so as to include materials used in construction, fitting out,
improvements etc. Assessment of taxable turnover arrived at by the authorities in
pursuance of the said Amendment was challenged in the Madras High Court in the Case
of Gannon Dunkerley and Co. (Madras) Ltd. V/s. State of Madras. Similar question
about the liability of contractors who had undertaken to carry on works contract to pay
148

sales tax on transfer property in goods involved in works contract came up for
consideration in different High Courts.

Maharashtra tax on transfer of the right to use any goods for any purpose Act,
1985

Devices by way of leases of films had been resulting in avoidance of sales tax.
The main right in regard to a film related to its exploitation and after that for a certain
period of time ,in most cases, the ceases to have any value. In the year 1982 Parliament
passed the 46th Amendment amending the Constitution in several respect in order to bring
many of the transactions, in which property in goods passed but where not considered as
sales for the purpose of levy of sales tax, within the scope of the powers of the states to
levy sales tax. In pursuance of the amendment to the constitution and in order to cover
such and similar transactions the act was enacted on 1st October 1986 which operated
during the period from 1st October, 1986 till 31st March, 2005. Accordingly, tax was
levied on the leasing transaction at the rate of 4%.
From 1st April, 2005 tax on such lease transaction is being levied under Value Added Tax
Act, 2002.

5.1.2 Revenues of Government from tax:

Table 5.1 Maharashtra State Division wise Sales Tax Revenue Receipts for the
years 2003-04 to 2009-10.

149

Table 5.1 Maharashtra State Division wise Sales Tax Revenue Gross Receipts for the years 2003-04 To 2009-10 (Rs in Crores)

DIVISION

Mumbai

Thane

03-04

04-05

05-06

2006-07

2007-08

2008-09

2009-10

15,315.54

13,745.25

14,998.65

17,727.20

19,806.05

21,632.95

22,383.10

(71.07)

(67.07)

(66.77)

(64.24)

(64.00)

(63.06)

(60.60)

1,230.18

1,099.01

1,270.46

1,425.87

(4.46)

(3.55)

(3.70)

(3.86)

849.52
(3.94)

Raigad

Pune

Nasik

(4.58)

457.48

Nagpur

Aurangabad

(4.37)

461.86

431.72

584.60

545.99

733.73

802.29

(2.25)

(1.92)

(2.12)

(1.76)

(2.14)

(2.17)

2,107.47

2,445.74

2,828.85

3,697.51

4,201.59

4,603.61

5,451.93

(9.78)

(11.93)

(12.59)

(13.40)

(13.58)

(13.42)

(14.76)

1,151.95

1,203.76

1,430.44

(3.72)

(3.51)

(3.87)

800.74

883.65
(4.31)

472.44

473.27
(2.31)

1,023.50

1,035.16

(4.75)

(5.05)

524.55

Others

942.89
(4.20)

(2.19)

(2.43)

TOTAL

981.00

(2.12)

(3.72)
Kolhapur

939.57

525.14
(2.34)
942.43
(4.20)

510.40
(2.49)

655.56
(2.92)

158.24

977.87
(3.54)
658.73

706.20

827.34

974.63

(2.39)

(2.28)

(2.41)

(2.64)

1,151.19

1,378.77

1,459.40

1,587.48

(4.17)

(4.45)

(4.25)

(4.30)

847.05
(3.07)
720.08

908.69

929.79

1,011.93

(2.94)

(2.71)

(2.74)

1,150.99

1,646.44

1,868.91

(0.70)

(2.61)

(3.72)

(4.80)

(5.06)

21,551.24

20,494.90

22,464.48

27,594.41

30,949.24

34,307.48

36,936.58

100%

100%

100%

100%

100%

100%

100%

Total
Revenue
receipts of
Maharashtra

34,371.00

41,013.00

48,438.00

62,195.00

79,583.00

82,870.00

89,061.00

% of Sales
tax to Total
revenue

62.70%

49.97%

46.38%

44.37%

38.89%

41.40%

41.47%

Compo
und
Growth
rate

Coefficient
Variance

8.65

20.15

8.45

19.53

10.70

26.60

17.49

35.72

9.57

21.84

13.66

30.39

8.89

21.50

13.30

28.06

77.98

55.93

8.65

17.63

SOURCE: www.mahavat.gov.in
Note: Figures in parenthesis represents % contribution to Total Revenue.

150

Table 5.1 reveals that Pune Division rank 1st In Maharashtra during 2003-04 to 2009-10
related to revenue growth i.e. to the extent of 17.49% followed by Kolhapur (13.66%)
and Aurangabad (13.30%). Whereas revenue growth of Thane and Mumbai during the
same period was least in Maharashtra i.e. 8.45% and 8.65% respectively.
Co-efficient of Variance duri2003-04 to 2009-10 is highest in the division of Pune
(35.72%) whereas lowest in the division of Mumbai (20.15%).

If we compare the Growth rate and Variation of All Divisions of Maharashtra then
Compound Growth Rate is 8.65% and Variation is 17.63%.

Fig.5 .1 Division wise Sales Tax Revenue Gross Receipts of Maharashtra 2009-10

151

Table 5.2 Actwise Sales Tax Revenue Gross Receipts in Maharashtra for the years 01-02 to 09-10
Rs. Crore
Year
BST/VAT
MST
CST
SCPT
PT
ET
LT
Total
1

10

11

2001-02

7,144.70
(52.18)

3,282.19
(23.97)

2,059.50
(15.04)

82.97
(0.61)

982.07
(7.17)

4.41
(0.03)

136.86
(1.00)

13,692.70
(100)

2002-03

8,232.17
(54.72)

3,867.87
(25.71)

1,742.14
(11.58)

24.84
(0.17)

1,029.06
(6.84)

4.92
(0.03)

144.22
(0.96)

15,045.22
(100)

2003-04

9,736.00
(57.58)

3,478.62
(20.57)

2,530.95
(14.97)

3.98
(0.02)

1,018.97
(6.03)

4.22
(0.02)

136.36
(0.81)

16,909.10
(100)

2004-05

12,066.13
(58.87)

4,950.41
(24.15)

2,234.02
(10.90)

6.58
(0.03)

1,084.02
(5.29)

11.70
(0.06)

142.05
(0.69)

20,494.91
(100)

2005-06

13,170.98
(58.63)

5,705.09
(25.40)

2,261.75
(10.07)

56.50
(0.25)

1,150.92
(5.12)

5.24
(0.02)

113.99
(0.51)

22,464.47
(100)

2006-07

17,076.79
(61.88)

6,496.98
(23.54)

2,572.09
(9.32)

41.67
(0.15)

1,246.72
(4.52)

3.86
(0.01)

156.29
(0.57)

27,594.40
(100)

2007-08

20,270.95
(64.94)

6,780.80
(21.72)

2,402.62
(7.70)

3.46
(0.01)

1,488.57
(4.77)

3.52
(0.01)

264.13
(0.85)

31,214.05
(100)

2008-09

22,238.00
(64.82)

7,570.81
(22.07)

2,623.22
(7.65)

50.95
(0.15)

1,556.62
(4.54)

5.24
(0.02)

262.66
(0.77)

34,307.50
(100)

2009-10

24,774.31
(67.07)

7,379.32
(19.98)

2,822.92
(7.64)

122.41
(0.33)

1,613.65
(4.37)

10.07
(0.03)

213.92
(0.58)

36,936.60
(100)

Compound
Growth rate

17.68

12.12

4.30

9.19

7.12

3.42

8.70

14.20

Co-efficient
Variance

40.28

28.72

13.07

86.58

18.87

46.43

30.92

33.30

SOURCE: www.mahavat.gov.in

Note: Figures in parenthesis represents % contribution to Total Revenue.

152

Fig. 5.2 Act wise Sales Tax Revenue Gross Receipts in Maharashtra 2009-10

5.1.3 SALES TAX FUNCTIONS:

Maharashtra State is one of the leading states in India. Mumbai the capital city of state is
internationally recognized as financial capital of India. State is rich with a long stretch of
coastline, mountains, plains and full of natural resources. States progressive attitude has
attracted national as well as international investors in a big way especially because of
atmosphere conducive to the trade and commerce.
Sales Tax Department is a major revenue earning body for the state Government.
Department's share to the state exchequer is whopping 58%. Government has adopted a
single point tax structure. Tax range is fixed between 1% to 20% depending on the

153

commodity. Apart from Bombay Sales Tax Act 1959, Sales Tax Department is entrusted
to implement some other Acts of Tax recovery.
Sales Tax is the single largest contributor of revenue to the State Government. Monitoring
the collection of taxes as per law is the main function of the department. Registration,
Assessment, Appeals and Enforcement are some of the major activities including
Establishment, Administration, Audit, Legal etc.

5.1.4 HISTORICAL BACKGROUND AND BASIS OF COLLECTION IN

MAHARASHTRA STATE:
Maharashtra, from 1.7.1981, adopted single point first stage taxation system. It broadly
means manufacturers/ importers in Maharashtra will be liable to pay taxes on their first
sale in the state, while resellers are normally exempted from paying taxes.
Sales Tax in Maharashtra was introduced way back in 1946. Bombay Sales Tax Act,
which is, present enactment, came into existence w.e.f. 1-1-1960 as a first stage single
point levy. This Act has under gone major changes in 1981 and 1995 when VAT (Value
Added Tax) was made applicable on resellers of all taxable commodities except declared
goods on the basis of Annual Turnover of Sales. As per recent amendment Turnover Tax
Surcharge is levied i.e. while VAT is discontinued.

5.2 CONCLUSION:
Maharashtra Government has replaced the sales tax and accepted VAT from 2005.
Initially for two years revenue has been reduced due to non proper implementation and
154

some other factor but then onwards revenue has been increased substantially every year
and in the year 2009-10 Maharashtra not only achieved the target but also exceed the
revenue collection with successful implementation of VAT and also succeeded in 100
percent computerisation of return and going towards paperless era which is the basic
requirement for the success of VAT regime. Even business communities has also well
wost with the VAT systems and they are now ready to welcome GST which will reduce
their administrative work and where they will be entitle to get input tax credit (setoff)
even on the tax paid on services and where tax on Goods and Services will be uniform.

155

CHAPTER 6
DATA ANALYSIS
6.1 INTRODUCTION:
Value Added Tax is one of the most radical reforms that have been proposed for
the Indian economy after years of political and economic debate. Revenue growth is the
most important aspect by which to judge the success of VAT in Maharashtra. To measure
the revenue growth, it is essential to study the various factors undertaken by government
of Maharashtra since introduction of VAT. Therefore VAT in Maharashtra is an
important segment of the economy of Maharashtra state in particular and Indian economy
in general. Maharashtra is the third largest state which is contributing in to the exchequer.
It contributed 12 per cent per cent revenue through VAT in India in 2009-10. This study
undertakes the impacts of VAT on the profitability of manufacturing units in
Maharashtra, based on the primary surveys and secondary surveys that covered the
financial information of various companies in the state of Maharashtra, thus it provides
an integrated view of the industrial sector of the state.

6.2 INDUSTRY WISE AND TURNOVER WISE CLASSIFICATION OF

INDUSTRIES:
The primary data was obtained from the sample respondents who are associated with
manufacturing activity. Field survey covered the hundred industries, which are grouped
into five major categories. Which are as follows.
1) Capital Goods Industries 18 Industries
156

2) Consumer Goods Industries 24 Industries

3) Infrastructure Industries 10 Industries
4) Chemical Industries 23 Industries
5) Pharmaceutical Industries- 25 Industries
For our analysis, in Table 6.1 we have classified industries on the basis of turnover into
small, medium and Large Industries. Small Industries includes Industries whose average
sales turnover from 2001-02 to 2008-09 is less than two hundred crores. Medium
Industries are those whose average sales turnover during 2001-02 to 2008-09 is more
than two hundred crores and less than one thousand crores and large industries are
consists of industries whose average turnover during 2001-02 to 2008-09 is more than
one thousand crores.
TABLE 6.1 INDUSTRYWISE AND TURNOVERWISE CLASSIFICATION OF
INDUSTRIES

Turnover
(Rs. In Crores)

A)
Capital
Industries

11
07
00
Total
18
Source: Field Survey.
1-200
201-1000
1000 & Above

B)
Consumer
Industries

C)
Infrastructure
Industries

D)
Chemical
Industries

E)
Pharma
Industries.

Total

10
09
05
24

04
02
04
10

16
03
04
23

13
10
02
25

54
31
15
100

6.2.1 Profile of Capital Goods Industries:

This section covers the information of 18 capital goods industries regarding turnover,
Sales Tax/ Value Added Tax since 2001-02 to 2008-09.

157

Table 6.2 SALES TAX / VAT ON CAPITAL GOODS INDUSTRIES

(Rs in Crores)
% of
% of
Sales Tax
Sales
Sales
VAT
Year
Sales
VAT
/ VAT
tax
tax on
on
Sales
Sales
2001-02
1,501.14
25.09
25.09
1.67
2002-03
1,693.51
29.97
29.97
1.77
2003-04
2,086.83
34.52
34.52
1.65
2004-05
2,428.78
40.10
40.10
1.65
2005-06
2,874.55
42.39
42.39
1.47
2006-07
3,282.58
48.22
48.22
1.47
2007-08
3,662.61
46.78
46.78
1.28
2008-09
3,990.74
42.45
42.45
1.06
CGR
15.67
8.65
16.75
0.26
CV
31.82
19.70
17.12
5.76
Co-efficient
0.008
0.015
0.00
Std. Error
0.002
0.001
0.004
T-Test
4.61
10.89
-0.012
R
0.88
0.99
0.009
2
R
0.78
0.98
0.00
Source: Field Survey (2009-10)
Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.
2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.2 reveals that Compound Growth Rate of capital goods industries since 2001-02
to 2008-09 regarding total sales is 15.7 per cent and Sales Tax/ Value Added Tax is 8.65
per cent. Whereas coefficient of variation about total sales is 31.82per cent and Sales
Tax/ VALUE ADDED TAX is 19.7 per cent during same period. But compound growth
rate of capital goods industries only for Sales tax was16.75 per cent and coefficient of
variation was 17.2per cent during 2001-02 to 2004-05. Moreover compound growth rate
of capital goods industries only for Value Added Tax was 0.26 per cent and coefficient of
158

variation was 5.76 per cent during 2005-06 to 2008-09. Therefore it states that Capital
Goods Industries are More Beneficial under Value Added Tax system as CGR of Value
Added Tax is 0.26 per cent whereas CGR for Sales Tax is 16.75 per cent. So we can say
that The Profit of capital goods industries is increased under VAT system than Sales Tax.
Regarding capital goods industry Regression analysis shows that there is positive
relationship between sales and Sales Tax as well as Sales and Value Added Tax of an
Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover
the co-relation between sales and Sales Tax is closely related with 1 (0.99) whereas corelation between Sales and Value Added Tax is far below 1 (0.009) during the same
period.
Fig. 6.1 The Value of CGR of Capital goods

Fig. 6.2 The Value of regression of Capital

Industries during 2001-02 to 2008-09.

Goods Industries during 2001-02 to 2008-09.

Compound Growth
Rate
18
16
14
12
10
8
6
4
2
0
Sales tax

VAT

159

TABLE 6.3 CGR AND CV OF CAPITAL GOODS INDUSTRIES

Sr
No.

Name of the Industry

Period

Compound
Growth Rate

Co-efficient
Variance

A1

A2

A3

A4

A5

A6

A7

A8

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

13.31
8.52
11.11
-7.04
2.90
-0.48
0.28
-3.36
22.36
1.27
252.36
5.44
7.75
4.24
-31.12
24.24
17.92
-11.04
-17.43
-8.25
19.30
11.53
38.09
-4.74
30.60
26.35
39.58
39.58
16.51
16.44
-21.08
51.76

28.34
22.50
12.74
8.74
7.38
6.60
2.82
8.90
41.91
6.95
68.06
6.95
18.48
35.73
42.11
26.53
37.26
58.29
56.10
22.35
42.07
34.85
44.84
18.82
55.16
47.09
38.83
9.51
47.68
79.13
30.62
68.11
160

A9

10

A10

11

A11

12

A12

13

A13

14

A14

15

A15

16

A16

17

A17

18

A18

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly

12.31
-23.12
-10.19
14.87
-41.32
-36.18
-19.53
-42.57
19.49
3.89
16.86
5.98
-1.83
-12.00
5.48
-2.30
19.30
11.53
38.09
-4.74
19.49
3.89
16.86
5.98
12.31
-23.12
-10.19
14.87
17.92
-11.04
-17.43
-8.25
13.31
8.52
11.11
-7.04
19.49

26.22
68.81
31.18
74.23
108.30
74.46
23.54
71.49
38.79
15.96
17.94
13.34
9.63
34.61
9.05
12.65
42.07
34.85
44.84
18.82
38.79
15.96
17.94
13.34
26.22
68.81
31.18
74.23
37.26
58.29
56.10
22.35
28.34
22.50
12.74
8.74
38.79
161

Sales Tax/ VAT

Sales tax
VAT

8.52
16.86
5.98

22.50
17.94
13.34

Source : Field Work

6.2.2 Profile of Consumer Goods Industries:
This section covers the information of 24 Consumer Goods Industries regarding turnover,
sales tax/ Value Added Tax since 2001-02 to 2008-09.

Year

Table 6.4 SALES TAX / VAT ON CONSUMER GOODS IND.

(Rs In Crores)
% of Sales
Sales Tax /
% of VAT
Sales
Sales tax VAT tax on Sales
VAT
on Sales

2001-02
10,178.20
136.53
2002-03
10,862.87
147.06
2003-04
11,072.90
167.45
2004-05
11,701.01
184.26
2005-06
14,151.54
248.78
2006-07
17,452.41
396.63
2007-08
20,706.69
469.38
2008-09
23,109.12
486.93
CGR
13.34
23.30
CV
31.08
49.51
Co-efficient
0.03
Std. Error
0.002
T-Test
15.86
R
0.98
2
R
0.97
Source: Field Survey (2009-10)

136.53
147.06
167.45
184.26
10.84
11.59
0.03
0.007
4.76
0.95
0.919

248.78
396.63
469.38
486.93
24.40
23.44
0.02
0.006
4.7
0.95
0.917

1.34
1.35
1.51
1.57
-

1.76
2.27
2.27
2.11

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression.

162

Table 6.4 reveals that Compound Growth Rate of Consumer goods industries since 200102 to 2008-09 regarding total sales is 13.34 per cent and Sales Tax/ Value Added Tax is
23.30 per cent. Where as coefficient of variation about total sales is 31.08 per cent and
Sales Tax/ VAT is 49.51 per cent during same period. But Compound Growth Rate of
Consumer goods industries only for Sales tax was 10.84 per cent and coefficient of
variation was 11.59 per cent during 2001-02 to 2004-05. Moreover Compound Growth
Rate of Consumer Goods industries only for VAT was 24.40 per cent and coefficient of
variation was 23.44 per cent during 2005-06 to 2008-09. Therefore it states that
Consumer Goods Industries are More Beneficial under Sales Tax system as CGR of Sales
Tax is 10.84 per cent whereas CGR for VAT is 24.40 per cent. So we can say that The
Profit of Consumer goods industries is reduced under VAT system than Sales Tax.
Regarding Consumer Goods industry Regression analysis shows that there is positive
relationship between sales and Sales Tax, Sales and VAT of an Organization during
2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover the co-relation
between sales and Sales Tax is closely related with 1 (0.95) and co-relation between
Sales and Value Added Tax is also close to 1 (0.95) during the same period.

163

Fig. 6.3 the Value of CGR of Consumer goods

Industries during 2001-02 to 2008-09. Goods

Fig. 6.4 the Value of regression of consumer

Industries during 2001-02 to 2008-09.

TABLE 6.5 CGR AND CV OF CONSUMER GOODS INDUSTRIES

Sr
No.

Name of the Industry

B1

B2

B3

Period

Compound
Growth
Rate

Coefficient
Variance

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

24.82
20.06
10.05
15.53
9.74
21.25
37.20
30.26
29.33
52.06
62.04
29.43

49.99
42.06
11.71
15.92
26.33
44.10
32.41
30.59
59.97
75.64
47.34
27.13
164

B4

B5

B6

B7

B8

B9

10

B10

11

B11

12

B12

13

B13

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly

15.09
-22.75
-28.45
-52.40
7.33
-21.93
-21.56
26.32
19.54
10.23
38.19
-12.40
24.61
-48.62
22.77
90.03
16.13
10.25
-23.30
40.87
39.69
44.50
8.51
136.22
6.48
-24.49
-17.28
7.18
14.30
-9.47
8.30
-20.31
13.23
0.04
-2.04
-21.80
6.05

43.27
65.63
51.77
75.87
19.78
58.72
29.14
85.84
35.70
29.72
36.49
14.82
50.07
94.44
23.27
142.56
35.17
44.58
29.24
38.70
95.13
128.30
22.13
88.78
17.63
66.81
24.49
34.64
29.68
34.85
25.91
31.43
31.72
42.82
26.73
43.01
14.86
165

14

B14

15

B15

16

B16

17

B17

18

B18

19

B19

20

B20

21

B21

22

B22

Sales Tax/ VAT

Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT

-16.55
35.35
14.17
19.11
15.36
14.30
8.90
-8.47
-10.64
-16.02
-26.94
18.89
10.25
-23.30
40.87
-3.88
-22.98
-40.41
-1.81
8.72
-18.94
9.32
-69.30
16.30
18.36
35.57
4.98
27.82
23.26
-23.83
61.20
24.82
20.06
10.05
15.53
9.74
21.25

80.40
49.32
21.12
40.52
33.38
15.13
14.58
23.59
31.38
20.88
38.97
39.27
44.58
29.24
38.70
29.13
83.75
58.94
17.46
24.51
64.42
51.92
74.05
36.24
34.13
30.87
8.09
53.67
69.25
31.07
43.73
49.99
42.06
11.71
15.92
26.33
44.10
166

23

B23

24

B24

Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

37.20
30.26
29.33
52.06
62.04
29.43
7.33
-21.93
-21.56
26.32

32.41
30.59
59.97
75.64
47.34
27.13
19.78
58.72
29.14
85.84

Source: Field Work

6.2.3 Profile of Infrastructure Industries:
This section covers the information of 10 Infrastructure Industries regarding turnover,
sales tax/ Value Added Tax since 2001-02 to 2008-09.

167

Year

Table 6.6 SALES TAX / VAT ON INFRASTRUCTURE IND.

(Rs In Crores)
% of
% of
Sales Tax
Sales
Sales
Sales tax
VAT
VAT
/ VAT
tax on
on Sales
Sales

2001-02
48,250.43
271.47
2002-03
53,250.00
533.80
2003-04
59,880.85
876.49
2004-05
78,823.94
618.22
2005-06
95,561.16
2,754.85
2006-07
126,093.51
1,235.43
2007-08
149,126.95
675.42
2008-09
156,641.73
370.09
CGR
20.72
7.24
CV
42.19
81.71
Co-efficient
0.001
Std. Error
0.008
T-Test
0.168
R
0.06
2
R
0.005
Source: Field Survey (2009-10)

271.47
533.80
876.49
618.22
34.51
37.56
0.009
0.012
0.735
0.46
0.213

2,754.85
1,235.43
675.42
370.09
(48.45)
72.90
-0.038
0.004
9.03
0.98
0.976

0.56
1.00
1.46
0.78
-

2.88
0.98
0.45
0.24

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.6 reveals that Compound Growth Rate of Infrastructure industries since 2001-02
to 2008-09 regarding total sales is 20.72 per cent and Sales Tax/ VALUE ADDED TAX
is 7.24 per cent. whereas coefficient of variation about total sales is 42.19 per cent and
Sales Tax/ VAT is 81.71 per cent during same period. But Compound Growth Rate of
Infrastructure industries only for Sales tax was 34.51 per cent and coefficient of variation
was 37.56 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of

168

Infrastructure industries only for Value Added Tax was (48.45) per cent and coefficient
of variation was 72.90 per cent during 2005-06 to 2008-09. Therefore it states that
Infrastructure Industries are More Beneficial under Value Added Tax system as CGR of
Sales Tax is 34.51 per cent whereas CGR for Value Added Tax is (48.45) per cent. So we
can say that The Profit of Infrastructure industries is increased Value Added Tax system
than Sales Tax. Regarding Infrastructure Industry Regression analysis shows that there is
less positive relationship between sales and Sales Tax then Sales and VALUE ADDED
TAX of an Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09
respectively. Moreover the co-relation between sales and Value Added Tax is closely
related with 1 (0.98) and co-relation between Sales and Sales Tax is far below 1 (0.46)
during the same period.
Fig. 6.5 The Value of CGR of Infrastructure
Infrastructure Ind. during 2001-02 to 2008-09.

40

Compound Growth
Rate

Fig. 6.6 The Value of regression of

Industries during 2001-02 to 2008-09.

Regression

0.9

30

0.8

20

0.7

10

0.6
0.5

0.4
-10

Sales tax

VAT

0.3

-20

0.2

-30

0.1

-40

-50

Sales tax
VAT

169

TABLE 6.7 CGR AND CV OF INFRASTRUCTURE INDUSTRIES

Sr
No.

Name of the Industry

Period

Compound
Growth
Rate

Coefficient
Variance

C1

C2

C3

C4

C5

C6

C7

C8

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

14.16
-2.12
-6.82
1.97
19.77
8.50
12.24
-27.17
37.70
44.96
-7.36
72.24
20.60
3.69
32.10
-56.48
34.30
21.95
57.89
71.53
18.10
20.07
49.26
11.69
16.41
-12.97
-66.17
17.59
25.54
26.76
51.54
8.78

33.48
8.59
8.45
6.31
40.46
49.04
27.48
39.15
68.14
99.71
25.07
56.30
42.08
93.09
43.01
83.64
78.93
86.37
112.97
50.44
35.67
41.07
57.99
12.21
33.71
88.88
85.06
51.80
51.03
51.54
45.24
25.88
170

C9

10

C10

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

18.10
20.07
49.26
11.69
0.00
0.00
-66.17
17.59

35.67
41.07
57.99
12.21
0.00
0.00
85.06
51.80

Source: Field Work

6.2.4 Profile of Chemical Industries: This section covers the information of 23
Chemical Industries regarding turnover, sales tax/ Value Added Tax since 2001-02 to
2008-09.
Table 6.8 SALES TAX / VAT ON CHEMICAL INDUSTRIES

Year

Sales

Sales Tax
/ VAT

2001-02
4055.57
33.18
2002-03
4501.83
45.04
2003-04
5637.18
51.14
2004-05
7757.77
81.78
2005-06
10923.98
80.57
2006-07
14361.72
117.37
2007-08
17999.84
120.31
2008-09
21370.67
125.81
CGR
24.67
22.02
CV
56.31
41.72
Co-efficient
0.005
Std. Error
0.001
T-Test
7.62
R
0.95
2
R
0.906
Source: Field Survey (2009-10)

Sales tax
33.18
45.04
51.14
81.78
32.75
33.99
0.12
0.001
8.29
0.29
0.972

VAT
80.57
117.37
120.31
125.81
14.59
16.07
0.004
0.002
2.47
0.86
0.753

(Rs In Crores)
% of Sales
% of
tax on
VAT
Sales
on Sales
0.82
1.00
0.91
1.05
0.74
0.82
0.67
0.59

171

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression

Table 6.8 reveals that Compound Growth Rate of Chemical industries since 2001-02 to
2008-09 regarding total sales is 24.67 per cent and Sales Tax/ Value Added Tax is 22.02
per cent.where as coefficient of variation about total sales is 56.31 per cent and Sales
Tax/ Value Added Tax is 41.72 per cent during same period. But compound growth rate
of these industries only for Sales tax was 32.75 per cent and coefficient of variation was
33.99 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of these
industries only for Value Added Tax was 14.59 per cent and coefficient of variation was
16.07 per cent during 2005-06 to 2008-09. Therefore it states that Chemical Industries are
More Beneficial under Value Added Tax system as CGR of Sales Tax is 32.75 per cent
whereas CGR for Value Added Tax is 14.59 per cent. So we can say that The Profit of
Chemical industries is increased under Value Added Tax system than Sales Tax.
Regression analysis shows that there is less positive relationship between sales and Sales
Tax then Sales and Value Added Tax of an Organization during 2001-02 to 2004-05 and
2004-05 to 2008-09 respectively. Moreover the co-relation between sales and Value
Added Tax is closely related with 1 (0.86) and co-relation between Sales and Sales Tax
is far below 1 (0.29) during the same period.

172

Fig. 6.7 The Value of CGR of Chemical

Fig. 6.8 The Value of regression of Chemical

Industries during 2001-02 to 2008-09.

Industries during 2001-02 to 2008-09.

Table 6.9 CGR AND CV OF CHEMICAL INDUSTRIES

Sr
No.

Name of the Industry

Period

Compound
Growth
Rate

Coefficient
Variance

D1

D2

D3

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT

15.59
-19.89
-19.89
15.59
-1.95
3.12
21.34
-23.32
19.19
11.93

34.30
67.20
38.52
40.55
22.90
29.98
21.12
30.26
38.40
34.39
173

D4

D5

D6

D7

D8

D9

10

D10

11

D11

12

D12

Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax

26.95
25.00
20.08
10.63
19.74
4.02
6.33
79.13
92.05
14.84
6.99
9.01
14.90
5.38
1.57
2.85
5.37
-38.40
33.64
-9.43
43.18
-26.61
51.85
46.12
53.78
31.33
24.13
28.34
41.65
9.70
15.59
-19.89
-19.89
15.59
-1.95
3.12
21.34

35.91
28.05
39.20
24.09
20.25
11.68
15.95
86.67
63.74
19.73
16.47
20.21
17.49
8.61
44.74
77.05
35.36
68.85
65.89
52.12
43.50
54.43
71.41
71.46
66.97
28.22
45.55
49.33
40.91
13.72
34.30
67.20
38.52
40.55
22.90
29.98
21.12
174

13

D13

14

D14

15

D15

16

D16

17

D17

18

D18

19

D19

20

D20

21

D21

VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

-23.32
19.19
11.93
26.95
25.00
6.33
79.13
92.05
14.84
6.33
79.13
92.05
14.84
6.99
9.01
14.90
5.38
1.57
2.85
5.37
-38.40
33.64
-9.43
43.18
-26.61
51.85
46.12
31.33
31.33
51.85
46.12
53.78
31.33
24.13
28.34
41.65
9.70

30.26
38.40
34.39
35.91
28.05
15.95
86.67
63.74
19.73
15.95
86.67
63.74
19.73
16.47
20.21
17.49
8.61
44.74
77.05
35.36
68.85
65.89
52.12
43.50
54.43
71.41
71.46
66.97
28.22
71.41
71.46
66.97
28.22
45.55
49.33
40.91
13.72
175

22

D22

23

D23

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

51.85
46.12
53.78
31.33
33.64
-9.43
43.18
-26.61

71.41
71.46
66.97
28.22
65.89
52.12
43.50
54.43

Source: Field Work

6.2.5 Profile of Pharmaceutical Industries:
This section covers the information of 25 Pharmaceutical Industries regarding turnover,
sales tax/ Value Added Tax since 2001-02 to 2008-09.
TABLE 6.10 SALES TAX / VAT ON PHARMACEUTICALS IND.
(Rs In Crores)
% of Sales
% of
Sales Tax
tax on
VAT
Year
Sales
Sales tax
VAT
/ VAT
Sales
on Sales
2001-02
7,088.87
243.24
2002-03
8,380.98
336.22
2003-04
9,082.50
328.15
2004-05
10,888.76
368.69
2005-06
11,839.56
326.71
2006-07
13,748.98
332.26
2007-08
17,134.96
356.75
2008-09
15,681.99
344.78
CGR
13.26
3.21
CV
28.50
10.74
Co-efficient
0.006
Std. Error
0.003
T-Test
1.8
R
0.59
2
R
0.352
Source: Field Survey (2009-10)

243.24
336.22
328.15
368.69
13.01
14.52
0.03
0.01
2.9
0.89
0.809

326.71
332.26
356.75
344.78
2.35
3.42
0.006
0.001
6.9
0.98
0.960

3.43
4.01
3.61
3.39
-

2.76
2.42
2.08
2.20

176

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.10 reveals that Compound Growth Rate of Pharmaceutical Industries since 200102 to 2008-09 regarding total sales is 13.26 per cent and Sales Tax/ VAT is 3.21 per cent.
where as coefficient of variation about total sales is 28.50 per cent and Sales Tax/ Value
Added Tax is 10.74 per cent during same period. But compound growth rate of these
industries only for Sales tax was 13.01 per cent and coefficient of variation was 14.52 per
cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of Pharmaceutical
Industries only for Value Added Tax was 2.35 per cent and coefficient of variation was
3.42 per cent during 2005-06 to 2008-09. Therefore it states that Pharmaceutical
Industries are More Beneficial under Value Added Tax system as CGR of Sales Tax is
13.01 per cent whereas CGR for Value Added Tax is 2.35 per cent. So we can say that
The Profit of Pharmaceutical Industries is increased under Value Added Tax system than
Sales Tax. Regression analysis shows that there is positive relationship between sales and
Sales Tax as well as Sales and Value Added Tax of an Organization during 2001-02 to
2004-05 and 2004-05 to 2008-09 respectively. Moreover the co-relation between sales
and Value Added Tax is closely related with 1 (0.98) and co-relation between Sales and
Sales Tax also closely related to 1 (0.89) during the same period.

177

Fig. 6.9 the Value of CGR of Pharmaceutical

Industries during 2001-02 to 2008-09.

Fig.6.10 Value of regression of pharmaceutical

Industries during 2001-02 to 2008-09.

Regression
0.98
0.96
0.94
0.92
0.9
0.88
0.86
0.84
Sales tax
VAT

TABLE 6.11 CGR AND CV OF PHARMACEUTICAL

INDUSTRIES

Sr No.

Name of the Industry

E1

E2

E3

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT

Compound
Growth
Rate

Coefficient
Variance

8.82
4.29
7.92
11.02
-0.08
20.80
5.73
-5.17
16.57
7.27

20.74
11.88
8.59
11.80
17.88
60.11
23.81
35.25
33.66
24.57
178

E4

E5

E6

E7

E8

E9

10

E10

11

E11

12

E12

Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax

11.33
-10.32
-7.46
-21.41
-11.91
-22.82
24.13
6.03
15.74
8.00
5.22
2.21
15.97
-3.79
16.33
9.34
15.93
3.97
4.19
-2.43
15.15
-7.76
5.24
1.94
-11.72
5.43
7.61
-0.82
19.03
-9.81
13.03
-0.96
-5.98
5.74
35.60
7.70
-39.41

17.37
15.67
29.56
51.75
19.92
30.57
53.74
15.34
16.57
9.88
14.59
41.18
48.49
32.25
34.18
19.81
16.63
4.65
12.02
17.25
15.74
13.86
13.03
21.47
24.72
16.49
17.90
19.01
22.12
11.51
31.68
13.20
11.78
14.24
70.53
66.73
49.76
179

13

E13
3

14

E14

15

E15

16

E16

17

E17

18

E18

19

E19

20

E20

21

E21

VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

11.70
7.03
4.67
-67.77
47.70
6.62
-7.04
-31.98
6.44
15.01
-0.33
13.40
-14.03
8.82
4.29
7.92
11.02
-0.08
20.80
5.73
-5.17
16.57
7.27
11.33
-10.32
-7.46
-21.41
-11.91
-22.82
24.13
6.03
15.74
8.00
5.22
2.21
15.97
-3.79

57.85
15.86
62.18
80.33
41.50
23.58
40.85
47.08
8.41
34.69
19.59
19.58
19.59
20.74
11.88
8.59
11.80
17.88
60.11
23.81
35.25
33.66
24.57
17.37
15.67
29.56
51.75
19.92
30.57
53.74
15.34
16.57
9.88
14.59
41.18
48.49
32.25
180

22

E22

23

E23

24

E24

25

E25

Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT
Total Yearly
Sales Tax/ VAT
Sales tax
VAT

4.19
-2.43
15.15
-7.76
7.03
4.67
-67.77
47.70
13.03
-0.96
-5.98
5.74
7.61
-0.82
19.03
-9.81

12.02
17.25
15.74
13.86
15.86
62.18
80.33
41.50
31.68
13.20
11.78
14.24
17.90
19.01
22.12
11.51

Source: Field Work

6.2.6 Profile of All Industries Combined:
This section covers the information of all 100 Industries regarding turnover, sales tax/
Value Added Tax since 2001-02 to 2008-09.

181

TABLE 6.12 SALES TAX / VAT ON ALL COMBINED INDUSTRIES

(Rs In Crores)
% of Sales
% of
Sales Tax
tax on
Year
Sales
Sales tax
VAT
VAT
/ VAT
Sales
on Sales
2001-02
71,074.21
709.51
2002-03
78,689.18
1,092.08
2003-04
87,760.25
1,457.75
2004-05
111,600.26
1,293.04
2005-06
135,350.78
3,453.29
2006-07
174,939.21
2,129.90
2007-08
208,631.06
1,668.64
2008-09
220,794.25
1,370.05
CGR
19.65
11.10
CV
40.58
47.50
Co-efficient
0.004
Std. Error
0.006
T-Test
0.788
R
0.306
2
R
0.094
Source: Field Survey (2009-10)

709.51
1,092.08
1,457.75
1,293.04
23.23
24.53
0.012
0.010
1.249
0.662
0.438

3,453.29
2,129.90
1,668.64
1,370.05
-26.04
36.96
-0.24
0.003
-7.229
0.981
0.963

1.00
1.39
1.66
1.16
-

2.55
1.22
0.80
0.62

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.12 reveals that Compound Growth Rate of all Industries since 2001-02 to 200809 regarding total sales is 19.65 per cent and Sales Tax/ Value Added Tax is 11.10 per
cent. Whereas coefficient of variation about total sales is 40.58 per cent and Sales Tax/
Value Added Tax is 47.50 per cent during same period. But compound growth rate of
these industries only for Sales tax was 23.23 per cent and coefficient of variation was
24.53 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of all these
Industries only for Value Added Tax was (26.04) per cent and coefficient of variation
182

was 36.96 per cent during 2005-06 to 2008-09. Therefore it states that All Industries
taken together are More Beneficial under Value Added Tax system as CGR of Sales Tax
is 23.23 per cent whereas CGR for Value Added Tax is (26.04) per cent. So we can say
that the profit of all industries is increased under Value Added Tax system than Sales
Tax. Regression analysis shows that there less is positive relationship between sales and
Sales Tax then Sales and Value Added Tax of an organization during 2001-02 to 2004-05
and 2004-05 to 2008-09 respectively. Moreover the co-relation between sales and Value
Added Tax is closely related with 1 (0.98) and co-relation between sales and sales tax far
away from 1 (0.66) during the same period.
Fig. 6.11 the Value of CGR of All

Fig.6.12 Value of regression of all

Industries during 2001-02 to 2008-09.

Industries during 2001-02 to 2008-09.

Compound Growth
25
Rate
20
15
10
5
0
-5
-10
-15
-20
-25
-30

Sales tax

VAT

183

6.2.7 Profile of Small Industries:

This section covers the information of 54 Small Industries regarding turnover, sales tax/
Value Added Tax since 2001-02 to 2008-09.

Year

TABLE 6.13 SALES TAX /VAT ON SMALL INDUSTRIES

(Rs in Crore)
% of Sales
% of
Sales
Sales
Sales
VAT
tax on
VAT on
tax
Tax/VAT
sales
Sales

2001-02
2,250.43
67.70
2002-03
2,438.23
76.43
2003-04
2,828.91
83.61
2004-05
3,453.68
98.13
2005-06
4,014.58
100.86
2006-07
4,588.87
128.62
2007-08
5,274.65
136.77
2008-09
5,579.70
147.33
CGR
15.10
12.20
CV
31.29
26.29
Co-efficient
0.23
Std. Error
0.001
T-Test
16.513
R
0.98
2
R
0.97
Source: Field Survey (2009-10)

67.70
76.43
83.61
98.13

12.79
13.68
0.24
0.002
10.338
0.99
0.98

3.01
3.13
2.96
2.84
100.86
128.62
136.77
147.33
12.73
13.41
0.27
0.005
5.024
0.96
0.92

2.51
2.80
2.59
2.64

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.13 reveals that Compound Growth Rate of small industries since 2001-02 to 2008-09
regarding total sales is 15.10 per cent and Sales Tax/ Value Added Tax is 12.20 per cent.
Whereas coefficient of variation about total sales is 31.29 per cent and Sales Tax/ Value Added
Tax is 26.29 per cent during same period. But compound growth rate of these industries only
for Sales tax was 12.79 per cent and coefficient of variation was 13.68 per cent during 2001-02
184

to 2004-05. Moreover Compound Growth Rate of all small industries only for Value Added
Tax was 12.73 per cent and coefficient of variation was 13.41 per cent during 2005-06 to
2008-09. Therefore it states that all small industries taken together are Beneficial under Value
Added Tax system as CGR of Sales Tax is 12.79 per cent whereas CGR for Value Added Tax
is 12.73 per cent. So we can say that The Profit of All small industries is slightly increased
under Value Added Tax system than Sales Tax. Regression analysis shows that there is
positive relationship between sales and Sales Tax as well as Sales and Value Added Tax of an
organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover the
co-relation between sales and Sales Tax is closely related with 1 (0.99) and co-relation
between Sales and Value Added Tax is 0.96 during the same period.

Fig. 6.13 the Value of CGR of small

Fig.6.14 Value of regression of small

Industries during 2001-02 to 2008-09.

Industries during 2001-02 to 2008-09.

185

6.2.8 Profile of Medium Industries:

This section covers the information of 31 Medium Industries regarding turnover, sales tax/
Value Added Tax since 2001-02 to 2008-09.
TABLE 6.14 SALES TAX /VAT ON MEDIUM INDUSTRIES
(Rs in Crore)
% of
% of
Sales
Sales
Year
Sales
VAT
Sales tax
VAT on
tax
Tax/VAT
on sales
Sales
2001-02
8,600.44
277.74
2002-03
10,640.41
370.61
2003-04
11,263.95
387.50
2004-05
13,413.60
480.52
2005-06
16,342.45
521.44
2006-07
19,711.25
661.70
2007-08
23,269.74
750.79
2008-09
24,573.47
764.45
CGR
16.93
15.77
CV
35.19
32.38
Co-efficient
0.3
Std. Error
0.001
T-Test
21.62
R
0.99
2
R
0.98
Source: Field Survey (2009-10)

277.74
370.61
387.50
480.52

18.40
18.98
0.42
0.001
29.27
0.99
0.99

3.23
3.48
3.44
3.58
521.44
661.70
750.79
764.45
13.59
14.35
0.3
0.004
7.76
0.98
0.96

3.19
3.36
3.23
3.11

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.14 reveals that Compound Growth Rate of Medium Industries since 2001-02 to 200809 regarding total sales is 16.93 per cent and Sales Tax/ Value Added Tax is 15.77 per cent.
Whereas coefficient of variation about total sales is 35.19 per cent and Sales Tax/ Value Added
Tax is 32.38 per cent during same period. But compound growth rate of these industries only

186

for Sales tax was 18.40 per cent and coefficient of variation was 18.98 per cent during 2001-02
to 2004-05. Moreover Compound Growth Rate of All medium Industries only for Value
Added Tax was 13.59 per cent and coefficient of variation was 14.35 per cent during 2005-06
to 2008-09. Therefore it states that All Medium Industries taken together are More Beneficial
under Value Added Tax system as CGR of Sales Tax is 18.40 per cent whereas CGR for Value
Added Tax is 13.59 per cent. So we can say that The Profit of All Medium Industries is
increased under Value Added Tax system than Sales Tax. Regression analysis shows that there
is positive relationship between sales and Sales Tax as well as Sales and Value Added Tax of
an Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover
the co-relation between sales and Value Added Tax is closely related with 1 (0.98) and corelation between Sales and Value Added Tax is 0.99 during the same period.
Fig. 6.15 the Value of CGR of medium

Fig.6.16 Value of regression of medium

Industries during 2001-02 to 2008-09.

Industries during 2001-02 to 2008-09.

187

6.2.9 Profile of Large Industries:

This section covers the information of 15 Large Industries regarding turnover, sales tax/ vat
since 2001-02 to 2008-09.

Year

2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
CGR
CV

TABLE 6.15 SALES TAX /VAT ON LARGE INDUSTRIES

(Rs in Crore)
% of
% of
Sales
Sales
Sales
VAT
Sales tax
VAT on
tax
Tax/VAT
on sales
Sales

60,223.33
364.07
65,610.55
645.04
73,667.40
986.64
94,732.99
714.39
114,993.76
2,830.99
150,639.09
1,339.58
180,086.67
781.08
190,641.07
458.27
20.20
5.96
41.64
73.23
0.001
Co-efficient
Std. Error
0.006
T-Test
0.131
R
0.54
2
R
0.003
Source: Field Survey (2009-10)

364.07
645.04
986.64
714.39

27.73
32.69
0.008
0.011
0.716
0.45
0.204

0.60
0.98
1.34
0.75
2,830.99
1,339.58
781.08
458.27
-45.13
67.28
-0.31
0.004
-7.995
0.98
0.97

2.46
0.89
0.43
0.24

Note: 1) Sales tax (BST) is applicable from 2001-02 to 2004-05.

2) Value Added Tax (VAT) is applicable from 2005-06 to 2008-09.
3) CGR: Compound Growth rate, CV: Co-efficient Variance, R: Regression
Table 6.10 reveals that Compound Growth Rate of large Industries since 2001-02 to
2008-09 regarding total sales is 20.20 per cent and Sales Tax/ Value Added Tax is 5.96
per cent. Whereas coefficient of variation about total sales is 41.64 per cent and Sales
Tax/ Value Added Tax is 73.23 per cent during same period. But compound growth rate
of these industries only for Sales tax was 27.73 per cent and coefficient of variation was
32.69 per cent during 2001-02 to 2004-05. Moreover Compound Growth Rate of All
188

Large Industries only for Value Added Tax was (45.13) per cent and coefficient of
variation was 67.28 per cent during 2005-06 to 2008-09. Therefore it states that All Large
Industries taken together are More Beneficial under Value Added Tax system as CGR of
Sales Tax is 27.73 per cent whereas CGR for Value Added Tax is (45.13) per cent. So
we can say that The Profit of All Large Industries is increased under Value Added Tax
system than Sales Tax. Regression analysis of all large shows that there is positive
relationship between sales and Sales Tax as well as Sales and Value Added Tax of an
Organization during 2001-02 to 2004-05 and 2004-05 to 2008-09 respectively. Moreover
the co-relation between sales and Value Added Tax is closely related with 1 (0.98) and
co-relation between Sales and Sales taxis 0.45 during the same period.
Fig. 6.17 the Value of CGR of large

Fig.6.18 Value of regression of large

Industries during 2001-02 to 2008-09.

Industries during 2001-02 to 2008-09.

189

6.3 CONCLUSION:
Maharashtra is a leading state in most of the aspect for which this chapter has analyzed
what extent Value Added Tax is profitable to different Industries. The above analysis
reveals that
Capital goods industries were paying more sales tax (16.75) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (0.26) to the government. Therefore it indicates
that introduction of value added tax has been become profitable to capital goods
industries.
Consumer goods industries were paying less sales tax (10.84) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing more revenue (24.40) to the government. Therefore it
indicates that introduction of value added tax has been reduced the Profit of Consumer
goods industries.
Infrastructure industries were paying more sales tax (34.51) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (-48.45) to the government. Therefore it
indicates that because of introduction of value added tax Infrastructure Industries has
become more Profitable.
Chemical Industries were paying more sales tax (32.75) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
190

industries were contributing less revenue (14.59) to the government. Therefore it

indicates that introduction of value added tax has been become profitable to chemical
industries.
Pharmaceutical industries were paying more sales tax (13.01) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (2.35) to the government. Therefore it indicates
that introduction of value added tax has been become profitable to Pharmaceutical
industries.
A study reveals that all industries were paying more sales tax (23.23) to the
government during 2001-02 to 2004-05. However after introduction of the value added
tax the same industries were contributing less revenue (-26.04) to the government.
Therefore it indicates that introduction of value added tax has been become profitable to
these organisation.
Small industries were paying more sales tax (12.79) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (12.73) to the government. Therefore it
indicates that introduction of value added tax has been become slightly profitable to small
industries.
Medium industries were paying more sales tax (18.40) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (13.59) to the government. Therefore it
191

indicates that introduction of value added tax has been become profitable to Medium
industries.
Large industries were paying more sales tax (27.73) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (-45.13) to the government. Therefore it
indicates that introduction of value added tax has been become profitable to Large
industries.

192

Chapter 7
FINDINGS and SUGGESTIONS
7.1 Introduction
Indirect tax reforms have been as integral part of the liberalization process since new
economic reforms. Value Added Tax / Sales Tax is the type of indirect taxes. Since past
two decades the major reforms which are introduced in the indirect tax structure of India.
A progressive and welfare oriented nation like India tries to keep a balance between
direct and indirect tax structure. This chapter contains the major findings and suggestions
of the research work related to present taxation policies, Problems associated with the
implementation of sales tax and value added tax in India.

7.2 Existing Tax Policies:

7.2.1 Model versus Reality:
The world over tax reform has been an ongoing process, influenced by economic theory,
evolving economic structure, exigencies of practical tax administration and the lessons of
experience. The quarter century between 1965 and 1990 witnessed an unusually strong
wave of tax reforms as most countries of the world reduced their reliance on foreign trade
taxes, introduced some form of value added taxation (VAT) in domestic taxes on goods
and services and streamlined income and company taxes, partly in response to the
imperatives of increasing global economic integration. By the late 1980s there was a
substantial consensus on the principal desiderata of a national tax system. Its features
included.

193

(i) A broad-based, consumption VAT, with a primary rate in the range of 10 to 20

per cent, with crediting provisions and zero rating of exports. This was to be the main
revenue earner among indirect taxes.
(ii) For equity, a consumption VAT buttressed by luxury taxes at two or three
rates on a small number of income-elastic luxury goods, applicable to both imports and
domestic products.
(iii) Low import tariffs that were as uniform as possible, with well-functioning
export rebate or duty drawback schemes to compensate exporters for duties suffered on
inputs. There were to be no export duties.
(iv) Personal income taxes that fell on a broad base, uneroded by numerous
exemptions and tax preferences. A rate structure that was moderately progressive with
three or four slabs and the top marginal rate in the range of 30 to 40 per cent to promote
compliance. Withholding (tax deduction at source) was to be widely prevalent on
incomes from wages, interest and dividends.
(v) Company taxation at a single rate comparable to the maximum personal
income tax rate. Exemptions and tax preferences were to be strictly limited.
(vi) Tax law and administration that were simple and effective, with strong
reliance on modern systems and technology for information gathering, collation and
analysis and transparent procedures for penalties and appeals. Judged by this six-point,
received wisdom on tax policy, displayed similar, massive variance, ranging from zero to
over 200 per cent. Their economic impact was made even more opaque by the prevailing
regime of detailed and tight quantitative restrictions on imports through a complex
system of import licensing. The tax structure for personal income and wealth was, if

194

anything, even more bizarre. Income tax rates were progressive with a vengeance. In
1973-74 there were 11 different tax slabs with rates ranging from an entry level of 10 per
cent and climbing inexorably to the top marginal rate of 85 per cent. With a prevailing
surcharge of 15 per cent, the effective top marginal rate was actually 97.75 per cent!
Since there were significant taxes on net wealth, the combined marginal incidence of
income and wealth taxes at the higher income brackets was frequently in excess of 100
per cent. The predictable result was widespread evasion and avoidance of such taxes.
Company tax rates were also high at around 60 per cent, with rate differentials across
widely-held and closely-held companies. There were complicated tax preferences for
new industrial ventures in particular sectors. This complex tax structure spawned equally
complex systems of tax administration. In sum, Indias tax system in the mid-1970s had
none of the desirable features of a good national tax system noted above. Tax rates were
extremely high and varied with no justification. Inputs were taxed indiscriminately. The
implications for economic efficiency were unequivocally negative. The system had low
built-in revenue elasticity since it encouraged widespread evasion and avoidance. Equity
was ill-served by the heavy dependence on indirect taxes with opaque incidence. Tax
administration procedures and practices were complex and frequently arbitrary. The
system was badly in need of serious reform.

7.2.2 Direct Tax Reforms: The First Wave

The direct tax structure of 1973-74 was the product of two decades of tax policy changes
to bring about a a socialistic pattern of society and raise tax revenues to finance a public
investment led strategy of planned economic development. The Taxation Enquiry
Commission report of 1954 [GoI 1954] emphasised the need to raise more revenues
195

through higher taxes, including through greater progressivity of direct taxes. Its
recommendations were largely implemented. This approach gained further impetus from
Kaldors (1956) prescriptions, which ushered in a set of integrated direct taxes,
including an expenditure tax, a wealth tax and a gift tax in addition to the already extant
taxes on income, capital gains and estates. As Thimmaiah (2002) observes, The system
of direct taxes introduced on the advice of Kaldor encouraged the emergence of the black
money phenomenon in India In ensuing years the scope of these taxes was expanded and
the rates were inexorably raised. One gets a flavour of the prevailing tax ideology of the
times from perusing the budget speeches of those years. Thus, Indira Gandhi, presenting
the budget for 1970-71, said Taxation is also a major instrument in all modern societies
to achieve greater equality of incomes and wealth. It is, therefore, proposed to make our
direct tax system serve this purpose by increasing income taxation at higher levels as well
as by substantially enhancing the present rates of taxation on wealth and gifts. The
marginal rates of income taxation will be increased progressively on all personal incomes
above Rs 40,000 per year. With the addition of the surcharge at 10 per cent, the
maximum rate of 93.5 per cent will now be reached in the slab over Rs 2 lakhs as against
82.5 per cent in the slab over Rs 2 lakhs at present. Not to be outdone, the next
finance minister, Y B Chavan, raised the surcharge on income taxes to 15 per cent in
1971-72 , thereby taking the effective top marginal income tax rate 97.75 per cent. He
also upped the rates of capital gains tax. The zeal in raising tax rates was not matched by
income tax revenue collections, which remained stuck at about 1 per cent of GDP
Fortunately, these absurd levels of income taxation had reached their zenith. The
Wanchoo Direct Taxes Enquiry Committee Report [Go I 1971] took a forthright position

196

on the matter. It pointed out when the marginal rate of taxation is as high as 97.75 per
cent, the net profit on concealment can be as much as 4,300 per cent of the after tax
income. We will not be surprised that placed in such a situation, it would be difficult for a
person to resist the temptation to evade taxes. The committee blamed the extraordinarily
high income tax rates as the principal cause of tax evasion and recommended a reduction
of the effective top marginal rate to 70 per cent. In the budget for 1974-75 finance
minister Chavan reversed his earlier stance and implemented this recommendation by
reducing the top rate to 70 per cent and the surcharge 9 to 10 per cent.Somewhat
unfortunately, Chavan combined this sensible reduction in income tax rates with another
hike in wealth tax rates. The income tax rate-cutting precedent was continued in three of
the budgets in the ensuing decade, although the budgets of the Janata period (1977-80)
witnessed setbacks. Buoyed by the strong increase in income tax revenues in 1974-75 and
1975-76, Chavans successor C Subramanium, attributed much of it to improved
compliance and cut the effective top rate further to 66 per cent (60 per cent plus the 10
per cent surcharge) in his budget for 1976-77. In contrast to Chavan, he also reduced the
rates of wealth taxation. During the Janata government both H M Patel and Charan Singh
increased the income tax surcharge and the wealth tax rates. By 1979-80 the effective top
marginal rate of income tax was back up to 72 per cent and the top wealth tax rate was
increased to a peak (by Charan Singh) of 5 per cent for net wealth over Rs 15 lakhs. With
the return of the Congress to power, R Venkataraman reverted the top effective tax rate to
66 per cent by cutting the surcharge back to 10 per cent and gave some relief on wealth
tax slabs. His successor, Pranab Mukherjee, displayed some ambivalence in his first two
budgets; indeed, in the second he

197

raised the surcharge form 10 to 12.5 per cent. However, in his third and final budget, for
1984-85, Mukherjee lowered the top effective rate to 62 per cent by cutting the top
marginal rate to 55 per cent, while leaving the surcharge unchanged at 12.5 per cent. This
first wave of direct tax reforms brought a semblance of sanity to top personal income tax
rates. But the large number of slabs and relatively narrow bands continued. Even in 198485 there were still eight income tax slabs. Furthermore, there were no major initiatives in
regard to company taxation. As for indirect taxation, the far-reaching recommendations
of the 1978 the committee continued to languish on the finance ministrys shelves

7.2.3 V P Singhs Reforms (1985-87)

Modern tax reform was really launched in India during V P Singhs two year stewardship
of the finance ministry in the Rajiv Gandhi Congress government. As Acharya (1988)
points out, there were several reasons to support this overall assessment.
First, the reforms addressed both direct and indirect taxes in a reasonably integrated
manner. Second, for the first time, a mediumterm tax reform strategy was explicitly
articulated and presented to Parliament in the form of the Long Term Fiscal Policy
(LTFP) policy paper of December 1985 [GoI 1985]. Third, in formulating tax policy,
serious weight was accorded to issues of resource allocation efficiency. Fourth, tax policy
also recognised the importance of stability and predictability. Fifth, there was a conscious
and explicit effort to shift the weight of economic management in favour of nondiscretionary, fiscal and financial policies and away from discretionary physical controls.
Finally, there was a concerted and serious effort to improve tax administration. In V P
Singhs first budget, for 1985-86, the focus was on direct taxes. Despite the rate

198

reductions of the previous decade, the combined burden of income and wealth taxes was
still very high for honest tax payers. As the Economic Administration Reforms
Commissions Report No 22 [GoI 1983] pointed out, if the pre-tax return on wealth was
assumed at 10 per cent, then a person with net wealth of 12 lakhs (and no other income)
suffered a combined marginal tax of 97.5 per cent on his income, even though the top
income tax rate was 62 per cent. And if his net wealth was 18 lakhs or higher, the
combined marginal tax rate rose effectively to 117.5 per cent! Little wonder that for
1980-81 Acharya and Associates (1986) estimated the scale of tax-evaded income to be
over double the amount actually declared for tax. Against this background, V P Singh cut
the top marginal income tax rate from 62 to 50 per cent and that for wealth taxfrom 5 to 2
per cent. He also reduced the number of income tax slabs from eight to four. Estate duty
was abolished. At the same time he brought down the basic rate of company tax (for
widely held companies) to 50 per cent and unified the several rates applicable for
different categories of closely held companies at 55 per cent. Taken together, these
measures constituted the most comprehensive reform of direct taxes in India to date. A
few months later, in December 1985, V P Singh placed the LTFP in Parliament. For its
time it was a remarkable document in many ways. First, it was a completely novel
initiative to bring out a medium-term fiscal policy strategy as a public document (indeed,
nothing similar would happen for almost another 20 years). Second, it embedded tax
policy intentions within an explicit macro fiscal framework. Third, the tax policies
proposed were both comprehensive and specific. In particular, the LTFP committed the
government to sweeping reforms of both central excise and customs duties. For the
former, it recommended the phased induction of VAT principles (especially crediting of

199

taxes paid on inputs) in excise taxation and conferred the name MODVAT (short for
modified VAT) for the new system. In effect it was a commitment to implement the
MANVAT (manufactures VAT) recommended by the Jha Committee eight years
earlier. For customs duties, the LTFP appreciated the economic and administrative ideal
of a modest uniform tariff across all commodities but, bowing to the realities of the day,
it plumped for a three-tier customs duty structure.10 In his second budget, for 1986-87, V
P Singh delivered on many of the policy promises of the LTFP. Most importantly,
MODVAT was implemented in 37 chapters of the Central Excise Tariff, with a clear
commitment to extend the system to the remainder of the manufacturing sector. This was
a huge forward step in the reform of Indias indirect taxes. In the words of the LTFP, The
proposed reform of customs duties did not, unfortunately, find a place in the 1986-87
budget. Indeed, customs duties continued to be raised in the next few years, largely for
revenue reasons. Given the tight regime of import controls prevailing, this was not an
altogether bad thing, since it effectively transformed the scarcity premia associated with
import controls into public revenues. As a result, the share of customs duties in central
government revenues continued to increase in the latter half of the 1980s
7.2.4 Tax Reform in the 1990s
If the mid-1980s saw the launch of modern tax reform in India, the 1990s witnessed its
fruition. Shortly after coming to power in mid-1991, the Narasimha Rao/Manmohan
Singh Congress government made comprehensive tax reform one of its main reform
planks. The Tax Reforms Committee (TRC), chaired by the countrys leading public
finance authority, Raja Chelliah, was swiftly established and it quickly gave an Interim
Report (December 1991), followed by a two-part Final Report (August 1992 and January

200

1993). Taken together, these three volumes of the Chelliah Committee Report [GoI 199193] constitute the finest treatment of tax policy and reform issues in India in the past 30
years. The report provided an excellent combination of lucid, theoretical analysis,
empirical supporting evidence and practical policy recommendations. Among its major
tax policy recommendations were:
(i) A simple three-tier personal income tax structure, with an entry rate of 20 per cent and
a top rate of 40 per cent.
(ii) A phased reduction of the corporate tax rate to 40 per cent, with the abolition of the
distinction between widely-held and closely-held companies.
(iii) The abolition of wealth tax on all assets except certain clearly specified
unproductive assets.
(iv) A phased reduction of the extraordinarily high import duties (many above 200 per
cent in 1991) to a range of 15 to 30 per cent for manufactures and 50 per cent for certain
agricultural items by 1997-98.
(v) A wholesale restructuring of central excise to cover all manufactures, reduction of
multiple tax rates to three in the range of 10 to 20 per cent and extension of MODVAT
credit to all inputs including machinery.
(vi) Selective excises at higher rates on non-essential (luxury) consumption items.
(vii) Systematic elimination of the numerous prevailing exemptions and tax preferences
in both direct and indirect taxes to broaden the base of the major taxes.
(viii) Far-reaching reforms of the systems of tax administration, including the deployment
of modern information technology and online linkage of new tax identification numbers
to a national network. The resemblance of these policy prescriptions with the six point

201

model outlined in Section I is quite striking. Perhaps far more heartening, in hindsight,
is the extent to which these TRC recommendations were actually implemented in the
decade of the 1990s.

7.2.5 Post-2000 Initiatives

Tax policy changes have continued in the new millennium. But to some extent they seem
to have lost the unifying vision and coherence of the TRC. In part this may be due to the
advent of new views advocated in some fresh government reviews and reports on tax
policy. The first of these, the Shome report of the Advisory Group on Tax Policy and Tax
Administration for the Tenth Plan [GoI 2001a], was broadly in the TRC tradition and
provided the very useful service of highlighting the agenda for the future. Shortly
thereafter came the Kelkar reports of Task Forces on Direct and Indirect Taxes [GoI
2002a, 2002b]. While they contained much good advice, especially on revamping of tax
administration,

they

also

struck

some

discordant

notes.

In

particular,

the

recommendations to double the exemption limit for personal income taxation and to
abolish taxes on equity capital gains and dividends received by individuals were severely
criticized by public finance specialists such as Bagchi (2002), Chelliah (2002) and
Acharya (2003). So were the recommendations to move to a dual rate structure in excise
and customs [Mukhopadhya 2002 and Acharya 2003]. In any case, the consensus
among authorities had been breached, making it easier for ad hoc-ery to flourish in tax
policy. The main new initiatives, not all retrograde, are briefly reviewed here.

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7.3 Problems / Difficulties of Implementing Sales tax/ VAT in India:

1)

Multiplicity of Levies and Complexity of Structure: The system is

characterized by multiplicity of levies on the same base. Not only do these levies
fall on the very same products but also there is no single authority that looks into
their cumulative effect. While individually each tax does pay regard to
progression as well as to economic factors, the overall objectives of the country's
tax policy are not adequately sub served due to their cumulative effect.
Consequently, taxes not only fall on the final products but also on imports. In
addition, the existing structure of all the three important taxes is complex. The
rate categories are enormous and show large variations in structures among
individual industries which could cause distortion of tax incentives.

2)

Cascading Effects: Various taxes fall on the taxes levied earlier causing
escalation of costs and profits at each stage. As inputs are subjected to excise
and/or sales tax, the manufacturer needs a larger amount of working capital to
maintain the necessary stock of the inputs. Consequently, the cost of his final
product gets raised. Besides, when the manufacturer works out his own profit
margin as a percentage of his costs and arrives at a price, he adds a mark-up
which is a higher quantum of profit. This phenomenon of snowballing or
cascading effect raises consumer prices by more than what accrues to the
exchequer by way of additional revenue.

3)

Lack of Transparency: The existing system results in uncontrolled incidence of

various taxes. The overall cumulative incidence lacks transparency for an
economic analysis. As the cumulative incipience on commodities becomes
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fortuitous, it is difficult to grade different commodities according to progressivity.

The lack of transparency hinders exact calculations of tax-incidence.
4)

Vertical Integration: The phenomenon of widespread taxation of inputs

promotes vertical integration. That is, it militates against ancillary industries and
encourages industries to produce more and more of the inputs needed rather than
purchase them from ancillary industries. To discourage this trend, the Modified
VAT (MODVAT) scheme was introduced in the year 1986 in respect of goods
covered by 37 specified chapters of the Central Excise Tarrif. This scheme was
extended to cover practically all chapters except those relating to petroleum
products, textile products, tobacco products, cinematographies films and matches.
However, as explained in Annexure 1, the coverage of MODVAT is not
complete. Also, at the state level, the sales tax system does not provide any such
mechanism.

5)

Manufacturers' and Importers' Sales Tax: An important problem in the sales

tax structure relates to the point of levy. There has been a tendency for the states
over the years to switch over the point of levy to the origin, i e, the import or the
manufacturing stage. Most of the states raise between 70 and 90 per cent of
revenue from the first-point tax which has all the weaknesses of the excise
system. In addition, it lacks the advantage of capturing additional value added and
deviates from its destination principle.

6)

Out-of-state Sales: Taxation of out-of-state sale (hereinafter referred to as interstate sale) creates many formidable problems. Presently, these sales are taxable at

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the rate of 4 per cent under the Central Sales Tax (CST) Law. Although the tax
was levied to avoid unnecessary movement of roods among states. If does cause
the phenomenon of cascading. Also; a high rate of 4 per cent in increases the
incidence of tax and forces the states to surrender their autonomy in deciding their
sales tax rates. The CST at present is levied on inter-state sales only;
consignments are exempt. It is now proposed that the CST be levied on all these
exempted transactions too which comprise three-fourths of the base Hence,
taxation of all the transactions would be inflationary, inequitous and distortionary.

7)

Narrow Base: The existing tax base is confined to commodities only; services are
exempt from taxation due to constitutional limitations. Both the Union List and
the State List do not cover taxation of services. Hence, the union excise duties and
sales tax do not, in general, cover services, although hotel services are specifically
taxed. Also, a few selected services are separately taxed under specific provisions
of the Constitution. Since services constitute a fast growing sector in the Indian
economy, exclusion of services deprives the government of a lucrative source of
revenue. In fact, in most countries either under VAT or under sales tax, the tax
base does include services.

8)

Psychological Problem: These problems are related to politicians, administrators

and dealers. Political problems relate to the inertia of the past. Owing to such
inertia, which ensures that the bulk of revenue is drawn from the existing taxes,
most tax laws of future importance take a long time to get implemented. The
politicians avoid big changes in taxation because of the likely adverse comments
that the new legislation could attract from parties with vested interests. Like
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politicians, tax administrators are also risk-averse. They too have apprehensions
of losing revenue and think exclusively of administrative expediency without
regard to any other economic criterion. TV idlers on their part are bothered about
compliance costs in terms of money and time needed for compliance. These
problems being psychological, a rational tax structure like VAT is unlikely to
suffer a major setback in its introduction. However, with a view to avoiding the
above problems the following measures are essential to be implemented.
Psychological problems are primarily related to information gap. This could be
overcome by spending adequate time and money on a publicity campaign aimed
at both tax-payers and consumers. The experience of India who has recently
introduced VAT suggests that it is indeed important that tax-payers fully
comprehend the new legislation. This will help to overcome resistance and
compliance problems. It is useful to learn, for example, that the Korean
government campaigned with the help of the Chamber of Commerce and
Industry, daily newspapers, television, radio and other mass media. Similarly,
Taiwan also made sincere efforts to educate the masses in general and the dealers
in particular. Thus an important requirement for a successful introduction of VAT
is an adequate information campaign aimed both at tax-payers and consumers.
10)

Lead-in Time: Equally important is the requirement of lead-in time. Although it

varies according to the circumstances peculiar to each country concerned, in
general, sufficient time is needed to prepare legislation and rules. The length of
lead-in time could vary from a few months in a country like Chile which had prior
experience of a turnover tax.

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11)

Structure of Tax : The assessment of the existing structure of commodity taxes

suggests that the reforms in the overall structure would necessitate harmonisation
of all these taxes in the context of the following constraints in the federal
structure. Federal Constraints to be Recognised: Four important constraints
appear to affect any quick solution to rationalise the tax system. First, the
division of tax powers between the centre and the states provides both the tiers of
governmental powers to levy taxes falling on the same base. However, 45 per
cent of the revenue from excises collected by the central government is shared
among the states. This has been the practice since the recommendations of the
Eighth Finance Commission.

12)

Intermediate Production Inputs : That taxation of intermediate production

inputs leads to inefficient production is known from basic economics. With
competitive markets the optimal commodity tax, like the VAT, would not tax
intermediate inputs, permitting efficient production. Despite production
inefficiency, intermediate input taxation, as prevails under most sales or turnover
taxes, is part of the optimal commodity tax if markets are not competitive, VAT
can be inferior in terms of overall economic efficiency to certain other sales tax
systems. VAT it has also been shown that because its narrower base makes higher
tax rates necessary if markets are not Competitive, revenue, value added and
economic welfare may simultaneously be higher with a turnover tax. Replacing
import tariffs with a VAT in economies with a large informal sector may reduce
economic welfare and government revenue. Unlike most sales taxes there is no
cascading (or tax on tax) under the VAT since tax on inputs is rebated. Cascading

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does create an incentive for vertical integration. Indias state VAT does not
eliminate cascading. Theoretical deficiencies of taxes, including the VAT, may be
of limited relevance for practical policy. Comparison with a multi-point sales tax,
by introducing input rebates, the VAT violates now standard practical advice to
have broad-based taxes which facilitate low tax rates.
13)

Incomplete Coverage: VAT in practice inevitably differs from a textbook VAT

because of incomplete coverage of goods and services and of coverage only of
registered dealers or manufacturers and sellers with turnover exceeding a
threshold (Rs 5 lakh in India). Revenue from real world VAT as a percentage of
GDP is 1.1 per cent more than the sales taxes it has replaced.

14)

Cascading Effect: India has not implemented a transparent destination based

consumption tax and not evens a VAT. Instead, Indias state VAT cascades; has
roughly an income rather than a consumption base; will not implement the
destination principle even if the central sales tax (CST) on interstate sales is
removed; and is far from transparent. There are at least five reasons for continued
cascading. Most importantly, services are still outside the VAT. Second to protect
revenue no rebate is allowed on certain universal intermediates like petroleum
products. Nor are rebates allowed for another 80 odd exempt goods. Third, other
taxes which inputs may be subject to, including central excise and customs duties,
motor vehicles taxes, electricity duty and stamp duty are not integrated into the
VAT. Fourth, small registered dealers with turnover below Rs 50 lakh can choose
to pay a turnover tax without entitlement to rebates. Tax paid on inputs purchased
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by electing dealers will cascade. Fifth, some state legislations provide for refund
of input taxes only if they do not exceed tax paid, a common drawback
internationally Implied delays and ceilings make input tax credits partial, causing
cascading, particularly for zero rated exports.

15)

Input on capital Goods: As with intermediate inputs, full tax credit must
immediately be allowed for VAT paid by capital goods suppliers under a
consumption type VAT. Yet some state VAT legislations provide for rebates for
capital goods in installments over three years without interest on deferred rebates.
Inclusion of capital services or investment in the VAT base, albeit only roughly,
makes the tax base closer to income than consumption. If at any intermediate
stage of production of export goods, supplies are exempt or made by small or
unregistered dealers, zero-rating does not achieve complete tax removal. The
destination principle is violated to this extent even if check-post and refund delays
are minimized. As a result, contrary to popular claims, the state VAT is not
transparent.

16)

Implementation of Vat: Implementation of the state VAT, despite weaknesses,

deserves support for four reasons. First, in 120 countries VAT works. Whether
better or worse than the sales tax on revenue and efficiency grounds, differences
are likely to be limited. Of far greater importance is the strengthening of tax
administration and lowering taxpayer compliance costs. The few states which
have improved administration and taxpayer services during VAT implementation

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have made a permanent gain, which could have been jeopardized if

implementation had been stalled. As the key novelty in adopting a VAT is often
less the nature of the tax itself than in the methods of its administration and its
modernizing influence more generally . Second, by bringing sales after the first
point of sale or import in a state into the tax net, there is tax base broadening,
countering and narrowing due to input rebates. Third, despite problems listed
above, some realignment of production costs with comparative advantage across
states will result, especially when the CST is removed. This should increase the
efficiency with which Indias resources are utilized. Most important, in the
process of VAT introduction, the strengthening of institutions of cooperative
federalism has taken place. Specifically, the empowered committee of state
finance ministers, which played a major role in achieving a multi-state consensus
VAT design, is likely to continue with a more permanent structure.

17)

GST Model: The model GST that is being put forward is that of a dual VAT
that will be levied at two levels of government, the centre and the states. The
states fiscal autonomy will not be impaired. However the dealers who will be
liable to collect and pay the two GSTs, one central and the other of the states will
not have to deal with more than one tax authority. A single return will do,
presumably as in the Canadian model in Quebec, where the provincial
government collects the federal GST along with its own tax, the Quebec sales tax.
The states will collect the tax on behalf of the centre and remit the amounts so
collected to the coffers of the union.

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18)

Low rates under GST: It is possible to have a low rate if all goods and services
are taxed without discrimination. A GST at 6 per cent or so by the centre and
around 8 per cent in the states might suffice to secure the same revenue as at
present, if the base is comprehensive and petroleum products, tobacco and alcohol
are taxed separately under an excise regime.

19)

Moving towards a GST provides a great opportunity to simplify the system of

trade taxation in the country provided the base is truly comprehensive and the tax
is levied at a low rate on both goods and services under a common legislation. It
would be a pity if this opportunity is lost.

20)

The two outstanding developments in the tax field in the 20th century have been
the emergence of income tax in the first half and the value added tax (VAT) in the
second half as the preferred instrument of taxation across the world. The ascent of
VAT in just 50 years beginning with France replacing its turnover tax with a tax
on value added in the mid-1950s has been truly remarkable. With the European
Commission (now European Union, the EU) in the lead, the tax spread rapidly
and is now operating in over 130 countries of the world.

21)

Current VAT in the Dominican Republic is very progressive. The analysis is

detailed and thorough, in the sense we examine carefully whether the tax is levied
and indeed collected by vendors in the economy. In prior studies of the incidence

211

of the VAT the assumption has been made that when the tax law is enacted
specifying a rate of tax on a particular good and service then that rate of tax is
collected an all sales of the item. No differentiations are made between sales to
poor or well off households. This, however, is not the case in reality, especially in
a developing country such as the Dominican Republic.

22)

The distribution of the burden of the VAT holds up almost as strong in a large
modern city such as Santa Domingo as it does in the countryside. This evidence
indicates that the variation in the degree of tax compliance across households of
different income levels is a very fundamental determinant of the distributive
burden a VAT

23)

National GST, which is to be achieved by combining central GST and state GST,
has no special advantage. There is no reason to think that a combined GST is
better than two parallel GSTs. Those who are arguing for a combined GST must
prove how a combined GST is better than two parallel GSTs. The total collection
of revenue will remain the same. The Constitution does not permit the centre to
charge sales tax. If the Constitution is amended to allow the centre to charge sales
tax, it will completely ruin fiscal federalism, which is the cornerstone of the
Indian polity.

212

24)

VAT is more complicated than a simple cascading first point tax. The tax payer
has to keep accounts not only of sales but also of purchases and taxes paid on
those purchases. Since the tax liability will be based not merely on value of the
total turnover but also the tax paid on the inputs, there is more administrative
work involved.

7.4 Chapter wise findings of the study:

Chapter one reveals that Indirect tax reforms have been as integral part of the
liberalization process since new economic reforms. A welfare oriented nation like India
tries to keep a balance between direct and indirect taxes. In this chapter we have made an
attempt to understand the concepts and methodological approach required to analyze the
impact of Sales tax, VAT and GST on the Profitability of the organization as well as the
revenue growth of the Govt. at State and National level.
Chapter two states about the different types of literature which have been referred
by the researcher related to tax in general and Sales tax and Vat in Particular.
Chapter Three reveals that Nowadays VAT/ GST is globally accepted tax system.
France the first European country who implemented VAT on an extensive scale in 1954.
Since then VAT has been adopted by a large number of countries in the world. Value
Added Tax is perceived by many as means to promote neutrality and uniformity of tax
burden and to provide incentives for increased productivity and industrialization. Despite
the widespread proclamation of VAT, there have been difficulties in implementing VAT
in its true spirit like in the case of Argentina, Brazil, Canada and India. There have also
been attempts to introduce Value Added Tax in USA, which however has preferred to
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retain the retail sales tax system. If VAT is centrally administered, the tax base is quite
wide, comprising imports, production and different stages of sales. If the base is divided
between the Centre and states, the chain is broken, making tax evasion easier and
affecting the states' tax base. Those countries where VAT is administered by a federal
government, revenue collection on imports accounts for a larger portion of total VAT
revenues. A study conducted by IMF of 22 developing countries, discovered that about
two-third of them, more than half the VAT revenue was collected from imports. In
Pakistan and Bangladesh, VAT collection from imports was 64 per cent of the total
proceeds from the tax. As tax evasion on bulk imports is difficult, it also helps in
checking tax evasion at subsequent stages of the tax chain.
Thus it prove that is a indirect tax which has help the world to increase revenue by
reducing tax rate and broadening tax base with minimum tax evasion. GST is a next step
of VAT, where more taxes are merged and procedure is simplified by reducing
administrative procedures
Chapter four reveals that VAT has been adopted instead of sales tax in India from
2002 by Central Government of India, but only seven states has implemented VAT and
other shown their inability to impalement that. Subsequently from 2005 all state in India
has adopted VAT and rate of tax was uniformly accepted which was 1%, 4%, 12.5% and
for other products like petroleum etc discretion was given to state for rate of tax. Initially
for few years states found it very inconvenient and difficult to implement VAT as no
proper administrative machinery was available and large Scale Computerisation was not
done even the manufacturer, trader and retailers were not computer competent. So they
were also finding very difficult to cope up with VAT so there was resistant from business
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community, but in due course Government machinery has been improved to cope up with
VAT. At the same time last few years large scale computerisation was done in all sectors
and liberal National Policies to import computers has reduced the computer prices and
increase the computer literacy which also help business community and Government
cope up with VAT. All above factors are giving better result and total indirect tax
revenue has been increased last few years even after reducing tax rates. Tax evasion in
India has been reduced to the great extent after successful implementation of VAT now
Central Government of India has decided to implement GST from 2011 which is a step
ahead of VAT where excise duty, service tax, octroi will be covered under GST
Chapter five reveals that Maharashtra Government has been replaced the sales tax
and accepted VAT from 2005. Initially for two years revenue has been reduced due to
non proper implementation and some other factor but then onwards revenue has been
increased substantially every year and in the year 2009-10 Maharashtra not only achieved
the target but also exceed the revenue collection with successful implementation of VAT
and also succeeded in 100 percent computerisation of return and going towards paperless
era which is the basic requirement for the success of VAT regime. Even business
communities has also well wost with the VAT systems and they are now ready to
welcome GST which will reduce their administrative work and where they will be entitle
to get input tax credit (setoff) even on the tax paid on services and where tax on goods
and services will be uniform
Chapter six concludes that Maharashtra is a leading state in most of the aspect for
which this chapter has analyzed what extent Value Added Tax is profitable to different
Industries. The above analysis reveals as follows :215

Capital goods industries were paying more sales tax (16.75) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (0.26) to the government. Therefore it indicates
that introduction of value added tax has been become profitable to capital goods
industries.
Consumer goods industries were paying less sales tax (10.84) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing more revenue (24.40) to the government. Therefore it
indicates that introduction of value added tax has been reduced the Profit of Consumer
goods industries.
Infrastructure industries were paying more sales tax (34.51) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (-48.45) to the government. Therefore it
indicates that because of introduction of value added tax Infrastructure Industries has
become more Profitable.
Other Industries were paying more sales tax (32.75) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (14.59) to the government. Therefore it
indicates that introduction of value added tax has been become profitable to chemical
industries.
Pharmaceutical industries were paying more sales tax (13.01) to the government
during 2001-02 to 2004-05. However after introduction of the value added tax the same
216

industries were contributing less revenue (2.35) to the government. Therefore it indicates
that introduction of value added tax has been become profitable to Pharmaceutical
industries.
A study reveals that all industries were paying more sales tax (23.23) to the
government during 2001-02 to 2004-05. However after introduction of the value added
tax the same industries were contributing less revenue (-26.04) to the government.
Therefore it indicates that introduction of value added tax has been become profitable to
these organisation.
Small industries were paying more sales tax (12.79) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (12.73) to the government. Therefore it
indicates that introduction of value added tax has been become slightly profitable to small
industries.
Medium industries were paying more sales tax (18.40) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (13.59) to the government. Therefore it
indicates that introduction of value added tax has been become profitable to Medium
industries.
Large industries were paying more sales tax (27.73) to the government during
2001-02 to 2004-05. However after introduction of the value added tax the same
industries were contributing less revenue (-45.13) to the government. Therefore it

217

indicates that introduction of value added tax has been become profitable to Large
industries.
7.5 Major Findings and Suggestions of the Study:
1)

VAT and State Autonomy rightly points out that tax coordination and
harmonisation across states can be achieved by floor rates of VAT for different
goods.

2)

It would be in the interest of both state governments and taxpayers to have

uniform laws and procedures for tax administration. In the medium term, a
consensus Tax Administration Act will greatly reduce the cost and it will lead to
increase the profitability of a organization.

3)

Tax buoyancy estimates, which measure the percentage response of tax revenue
to a one per cent change in the tax base, usually proxied by the gross domestic
product, are a routine requirement for fiscal projection purposes. The elasticity of
tax revenue is more stringently defined as the underlying revenue response,
holding constant all parameters of tax policy.

4)

Universally VAT and GST has been adopted for correcting the fiscal imbalances
as it works well within all political and legal constraints. The Existing VAT
system would also increase the tax revenue as well as the profitability of the
organization.

218

5)

Vat has an inbuilt device for reducing the cascading effect by restricting the levy
to actual value addition. It encourages growth by confining tax burden to the net
economic contribution of the taxpayers results in no double taxation.

6)

Introduction of VAT has bought more transparency in the tax structure. At every
stage of transaction, VAT indicates the quantum of tax payable after adjusting tax
credits. Therefore the taxpayer, ultimate consumer and administrators created
more awareness about the details of payment.

7)

The important objective of Tax policy in India was to improve the tax to GDP
ratio. Therefore VAT has earned the reputation of being a dependable revenue
raising instrument. It can easily access the incremental income generated by the
expanding economic activities without altering the rates or base in every budget.

8)

There have been serious apprehensions about the inflationary impact of VAT. The
price effect of VAT depends mainly on the elasticity of demand and supply of the
taxable products and conditions in the factor markets. Therefore it suggests that, if
VAT substituted an existing tax with no additional revenue objective in the short
run, it would not have any inflationary impact. Moreover sometimes, a reverse
effect takes place due to input tax relief, which was not available during sales tax
policy.

219

9)

The distributional impact of tax burden across various income groups of the
organization and commodity wise the tax is imposed. Therefore, it is suggested
that to reduce the regressive impact of commodity taxes, VAT rate has to be less
than that of the substituted taxes. In comparison to conventional indirect taxes,
Vat can be more equitable by exempting articles of essential consumption.
Moreover it is also suggested that the tax policy should adjusted to the
requirements of the country having regard to the existing patterns of distribution
of income.

10)

It is understood that conventional commodity taxes are highly prone to tax

evasion. Therefore it is suggested that Vat with tax credit method of collection
does not give much scope for tax evasion to the tax payer

11)

VAT is regressive with respect to income therefore full fledged if it is VAT levied
at a single rate with no exemptions would be equivalent to a proportional tax on
consumption. However it is suggested that to reduce the regressivity and to make
VAT proportional extent by having excises at higher rates on a few goods largely
consumed by the richer sections of the society.

12)

The existing trend in the sales tax system was to push the tax base as close to
imports/manufacture if possible. This was considerably reduced the incomeelasticity of the tax system. In sales tax it implemented that (a) the requzisite setoff is given for the taxes paid on raw materials; and (b) the states adopt a structure

220

of 'two-points-with-set off recommended in an earlier study. However in the VAT

system the input tax credit was given to manufacturers. The said policy of input
tax credit was continued to increase the profit of organization.

13)

One of the important components of VAT reform was that instead of multiple
rates of taxes there will be three or four rates of taxes all over the economy.
Therefore, from the consumers point of view the existing 3 rates of VAT as per
categories of the goods is to be continued.

14)

The analytical framework of taxes on international borrowing could be used to

examine the effects of a removal of impediments on capital movements in the
country.

15)

Sales taxes in India has taken place in varying circumstances in the different
states, the existing structure is thus heterogeneous and multifarious. Various
forms include single-point tax, double-point tax and multi-point tax. However,
there is a pronounced movement towards a single-point tax and a predominant
reliance on the first-point tax. Also there exist additional sales tax and surcharge
on the sales tax. The effective rate has thus gone up considerably and varies from
one state to another.

16)

From the point of growth, equity, administrative expediency and co-ordination, it

is necessary that the states have as few rates as-possible. There should be

221

uniformity of rates especially in the neighboring states. Raw materials should be

exempted to avoid the -problem of cascading. However, if the tax is levied, the
rate should not bo higher than that of the Central sales tax (CST).

17)

As the sales taxes are having a significant role in the fiscal structure of the states,
it is of paramount importance that the sales taxes are reformed on the above lines
so that the structure is economically rational and administratively expedient too.
It is important to note that the proposed tax structure would not only be fulfilling
the economic criteria set out in Section II of the paper, but would also' go a long
way to check the evasion of the tax.

18)

It is obvious from the above analysis that the rationality does not lie in taxing
stock transfers. Besides, other anomalies arise because of the fact that the tax rate
on inter-state transactions under the CST Is too high; the rate of tax in the interstate transactions has not been kept in tune with its basic philosophy.

19)

It is extremely important that a proper organization is developed as a

precondition to have a sound system of taxation. Countries that have earlier
experience with administering a turnover tax do not encounter serious problems
in switching over to VAT. For others, it is important to have suitable machinery.
With a view to understanding the administrative problems for the introduction of
VAT in the Indian context, it is essential to comprehend the existing
administrative procedures for MODVAT as well as for sales taxes in the country.

222

20)

The rate rationalisation into four floor rates should be done taking account of all
supplementary levies like surcharge on sales tax and turnover tax. If these
supplementary levies arc continued and if their rates too are differentiated
depending on the turnover range of the dealers, there will be much more rate
differentiation than what is intended and the purpose of minimizing rate
differentiation will be defeated.

21)

It is important to work out the revenue neutral rates as the tax base is expanded in
order to demonstrate the advantages of the VAT to the tax payers. The emphasis
should be on long term revenue productivity coming from better tax compliance.

22)

In a federal country like India, it may be ideal to have state and central VATs
substituting the current state and central taxes on goods and services respectively.

23)

An important step in the introduction of VAT, however, is the need for all
taxpayers to understand that VAT will be levied on their value added only and
not on the gross turnover. Such an understanding will not cause any resistance
and compliance problems from taxpayers. This requires that the government
should vigorously campaign for the case of VAT.

24)

The management of VAT in India calls for a separation of duties of different

functionaries of VAT department. For example, the work related to revenue

223

receipts and follow up action of the defaulters is an important component of VAT

management. It requires special attention on delinquents.

25)

It is of paramount importance in India that we concentrate on this area of activity

to reduce interaction of the dealers with the department. Availability of authentic
information should be a matter of right for the dealers. Requisite publicity of their
rights and duties with dos and donts and use of telephone and electronic means
would help developing proper provisions for introducing VAT in India.

26)

The Integrated GST (IGST) model for taxation of inter-State transaction of goods
and services has been adopted. According to this model, Centre would levy IGST
which would be CGST plus SGST on all inter-State transactions of taxable goods
and services with appropriate provision for consignment or stock transfer of
goods and services.

27)

The Central GST and the State GST would be applicable to all transactions of
goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed
threshold limits.

28)

IT is suggested that under the proposed dual GST model, States would be allowed
to charge and collect SGST on all the supplies under their jurisdiction. The role of

224

the Centre would be to charge and collect CGST, administer IGST and work as
the clearing house for IGST.

29)

It is suggested to prepare the infrastructural setup requisite for adequate

automation in tax administration and engineer the business processes before the
GST implementation.

30)

It is suggested that the Special Economic Zones (SEZs) would also be given same
benefits as those given to the exporters, though such benefits would be allowed
only to the processing zones of SEZs. Further, sales made by SEZ units to
Domestic Tariff Area will come within the purview of GST.

225

BIBLIOGRAPHY
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WEBLIOGRAPHY
1) www.google.com
2) www.rbi.org.in
3) www.mahavat.gov.in
4) www.cmie.com
5) www.imf.org
6) www.taxguru.in
7) www.worldbank.org
8) www.wikipedia.com
9) www.finmin.nic.in
10) www.proquest .com
11) www.sciencedirect .com

240

QUESTIONNAIRE
1

Name of the Company : ____________________________________________________

Address of the Company : ____________________________________________________

________________________________________________________________________

Name of the Concerned Person : _____________________________________________

Contact no. of the Concerned Person : _________________________________________

State the Nature of Activity & Main Product :____________________________________

Mention your Major Market area : ____________________________________________

Who are your Target Customers? _____________________________________________

How much Administrative Cost did you incur during Sales Tax regime?
_________________________________________________________________________
____________________________________________________________________________________
How much Administrative Cost did you incur during VAT regime?
_________________________________________________________________________
_____________________________________________________________________________________

10

Mention your convenience to Work in Sales Tax regime:___________________________

__________________________________________________________________________
____________________________________________________________________________________

11

Mention your convenience to Work in VAT regime:_______________________________

___________________________________________________________________________
_____________________________________________________________________________________

12

Details about Sales, Sales Tax & VAT from 2001-02 to 2008-09.
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Sales (Rs Lakh)

Sales Tax / VAT (Rs Lakh)

241

13

14

What are the Problems or Difficulties encountered regarding tax policy by your
organization in the past? _____________________________________________________
__________________________________________________________________________
__________________________________________________________________________
What are your suggestions for the better implementation of Sales Tax / VAT
Policy in India?_______________________________________________________________________
___________________________________________________________________________
__________________________________________________________________________

242

CHAPTER 1
INTRODUCTION,
INTRODUCTION, OBJECTIVE AND RESEARCH
METHODOLOGY OF THE STUDY

1.1

INTRODUCTION

1.2

CONCEPTS & MEANING

1.3

STATEMENT OF PROBLEM

1.4

OBJECTIVES OF STUDY

1.5

HYPOTHESIS

1.6

RESEARCH METHODOLOGY
OF THE STUDY

1.7

IMPORTANCE OF THE STUDY

1.8

LIMITATIONS OF THE STUDY

1.9

CONCLUSION

CHAPTER 2
REVIEW OF LITERATURE

CHAPTER 3
GLOBAL SCENARIO OF VAT AND GST
3.1

INTRODUCTION

3.2

EVOLUTION OF VAT

3.3

VAT SCENARIO OF MAJOR

COUNTRIES IN THE WORLD.

3.4

GLOBAL SCENARIO OF GST

3.5

GST SCENARIO OF MAJOR

COUNTRIES IN THE WORLD.

3.6

CONCLUSION

CHAPTER 4
INDIAS TAX STRUCTURE
4.1

INTRODUCTION
4.1.1 VAT IN INDIA
4.1.2 IMPORTANCE OF VAT IN INDIA
4.1.3 IMPACT OF VAT IN INDIA
4.1.4 VALUE ADDED TAX
4.1.5 SALIENT FEATURES OF VAT
4.1.6 ADVANTAGES OF VAT
4.1.7 DISADVANTAGES OF VAT

4.2

GOODS AND SERVICE TAX

4.3

CONCLUSION

CHAPTER 5
SALES TAX IN MAHARASHTRA
5.1

INTRODUCTION
5.1.1 HISTORY OF SALES TAX
5.1.2 REVENUE TO GOVERNMENT
5.1.3 SALES TAX FUNCTION
5.1.4 HISTORICAL BACKGROUND
& BASIS OF COLLECTION IN
MAHARASHTRA

5.2

CONCLUSION

CHAPTER 6
DATA ANALYSIS
6.1

INTRODUCTION

6.2

INDUSTRY WISE & TURNOVER WISE

CLASSIFICATION OF INDUSTRIES
6.2.1 PROFILE OF CAPITAL GOODS INDUSTRIES
6.2.2 PROFILE OF CONSUMER GOODS
INDUSTRIES
6.2.3 PROFILE OF INFRASTRUCTURE GOODS
INDUSTRIES
6.2.4 PROFILE OF CHEMICAL INDUSTRIES
6.2.5 PROFILE OF PHARMACEUTICAL
INDUSTRIES
6.2.6 PROFILE OF ALL INDUSTRIES.
6.2.7 PROFILE OF SMALL INDUSTRIES
6.2.8 PROFILE OF MEDIUM INDUSTRIES
6.2.9 PROFILE OF LARGE INDUSTRIES

6.3

CONCLUSION

CHAPTER 7
FINDINGS AND SUGGESTIONS
7.1

INTRODUCTION

7.2

EXISTING TAX POLICIES

7.3

PROBLEMS/DIFFICULTIES IN
IMPLEMENTATION OF SALES TAX /
VAT IN INDIA

7.4

CHAPTER WISE FINDINGS OF THE

STUDY

7.5

MAJOR FINDINGS AND SUGGESTIONS

OF THE STUDY

BIBLIOGRAPHY

EXECUTIVE SUMMARY

INTRODUCTION

STATEMENT OF PROBLEM

OBJECTIVES OF STUDY

HYPOTHESIS

RESEARCH METHODOLOGY
OF THE STUDY

IMPORTANCE OF THE STUDY

LIMITATIONS OF THE STUDY

REASERCH FINDINGS &

RECOMMENDATIONS

WEBLIOGRAPHY

QUESTIONAIRE