Taxation - VAT - Value Added Tax

The draft amendment bill proposing a hike in VAT had been met with much opposition by the trader lobby. The Confederation of All India Traders had earlier raised concerns over the proposed increase in the VAT slab, saying it would lead to a hike in the prices of necessities and affect the common man.

But the government moved to pass the amendment Bill in the Delhi assembly in December, and on Wednesday notified the scrapping of the 4% slab and its replacement with the 5% slab.

The Delhi Cabinet on Saturday evening cleared two draft amendment Bills in an emergency meeting held here.

One of the draft amendment Bills proposes changes in the value added tax (VAT) slabs and the creation of a new 5 per cent slab and the scrapping of the 4 per cent slab.

The Centre had asked states to create a 5 per cent slab to improve their tax revenue. All items under the 4 per cent slab in the VAT Act would be put under the 5 per cent slab if the Delhi Assembly cleared the proposal in its winter session.

The Cabinet also cleared a draft amendment Bill for a change in the Entertainment and Betting Tax Act proposing a charge on all Direct to Home (DTH) television connections. Hindustan Times had reported these proposed changes on December 4 in the article `Life is going to get more paynful'.

"Domestic users are proposed to be charged at a rate of Rs 20 per month, while commercial connections in hotels and restaurants would be charged at Rs 50.

Source: Hindustan Times New Slabs For VAT Get Cabinet Nod In Delhi

Value added tax
 The VAT system replaced the sales tax system with the objective of simplifying the tax regime and to avoid the problem of double taxation. VAT is a multi-stage tax levied at each stage of the value chain with the provision that tax credit will be allowed for the tax paid at an earlier stage.

 Under the VAT structure, there are two categories of rates - four percent or 12.5 percent. The idea behind this was to bring about uniformity in the levying of tax by different States and simplify the complex structure under the sales tax system. Different States have enacted the VAT Act for their State along with certain variations. While some States have moved away from the basic rate structure, some have introduced certain exemptions and concessions for the benefit of specific sectors.

In Karnataka, the real estate developers or builders have an option to charge VAT to the customers under two schemes. The first one is the composition scheme where the builder pays four percent of the construction cost as VAT. In this case, he does not claim anything from the individual owners.

Under the second scheme, the builder can collect 12.5 percent of 70 percent of the cost of construction from the individual owners. This works out to 8.75 percent of the total cost of construction. VAT is applicable only to materials and 70 percent of construction cost is representative of the materials cost in construction. VAT is calculated on the cost of the flat, parking space cost and amenities.

While some may think that it is unfair for buyers where the builder opts for the second scheme, it is not so. In the first case, although the builder is paying VAT himself, the additional burden will be passed on to the owners by way of a higher price. Similarly, where the builder is recovering VAT from the owners, the price of the flat would be lower to that extent since VAT is an additional cost to the buyer. Failure to do so may render him uncompetitive in his overall pricing.

• Monthly returns will be recived at the Front Office on the First Floor of the Vyapar Bhawan

• Monthly returns of the dealers registred in the Key Customer Service and the Special Zone will be recived on the 13th floor of the vyapar bhawan

• While filling the monthly returns in form DVAT-16

• Liable to pay penalty besides intrest

• Cancellation of registration

• Survey and sealing of business premisses

The rate of CST on inter-State sale of goods to registered dealers (against Form-C) shall now be the lower of 2 per cent and the rate of VAT or State Sales Tax applicable. This reduction forms a part of the roadmap for phasing out CST completely by 31st March, 2010 in preparation of introducing Goods & Services Tax (GST), the roadmap for which is being worked out by the EC of State Finance Ministers together with the Union Finance Ministry.

The Central Government and the Empowered Committee of State Finance Ministers have further agreed that the compensation for revenue loss to the States in any year arising from the lowering of CST will be limited to the proportionate loss based on the actual collection of CST in the relevant year.

The STAPM has filed SLP with Supreme Court which has been dismissed today by upheding the orders of the Bombay High Court

Therefore the due date for filing VAT Audit Reports for 2005-06 and 2006-07 is upto 30-06-2008.

With Warm Regards,

This is a step towards the introduction of Goods and Services Tax (GST) from 2010-2011 by phasing out CST, value-added tax and other taxes, thereby bringing in a unified tax regime encompassing both the Centre and the states. The process of phasing out CST started in 2007-08 with the rate having been reduced from four per cent to three per cent.

Briefing the newspersons on the decisions taken by the meeting of the empowered committee held here on Monday, the West Bengal Finance Minister, Mr Ashim Dasgupta, said that the abolition of CST would result in loss to some of the states like Maharashtra and the committee had worked out a formula for making good the losses to such states, which would be forwarded to the Union Finance Minister.
VAT revenue

The differences may be resolved at a meeting of the Empowered Committee of State Finance Ministers scheduled for May 5-6.

According to the original schedule announced in 2007, the CST rate was to be cut to 2 per cent from April 1, 2008. The date was subsequently changed to May 1.

There is no agreement between state and central governments on compensating states for the revenue loss of around Rs 7,000 crore in 2008-09 due to the reduction in the CST rate to 2 per cent. In 2007-08, the loss on account of the rate cut to 3 per cent from 4 per cent was pegged at Rs 6,000 crore.

The Centre wants states to increase the value-added tax (VAT) rate to 5 per cent from 4 per cent and impose VAT on textiles to make up for the loss. States have instead sought direct compensation from the central government.

With the central government yet to notify the cut, the CST rate continues to be 3 per cent on all inter-state sales.

The concessions include a VAT refund of 12.5 percent through the Air Ambience Fund, 15 percent subsidy on the base price of the vehicle also to be refunded to the dealer through the Air Ambience Fund for all indigenously manufactured battery-operated vehicles being noiseless and pollution-free.

Apart from this two percent concession in Road Tax and registration expenses would also be granted by way of reimbursement through the Air Ambience Fund.

After the Cabinet meeting, Chief Minister Sheila Dikshit said that the Congress Government would allow Delhi citizens to have access to a clean-fuelled vehicle to ensure an improvement in the air quality. Dikshit added that her Government was committed to ensuring that zero pollution vehicles were encouraged and given extra support. For making battery-operated vehicles attractive to consumers, certain concessions were necessary to be provided to customers to motivate them to opt for the cleaner vehicle option.

Dikshit further stated that the total collection from the Air Ambience Fund would be sufficient to cover such concessions.

The Cabinet also gave its approval for the signing of a memo of understanding with Indian National Trust for Art and Cultural Heritage (INTACH) for declaration of Delhi as a World Heritage city.

`We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they don't think so.'

Reduction of Central sales tax (CST) ceiling rate from 3 per cent to 2 per cent may soon become a reality, with the Centre and the State Governments set to meet on Tuesday 15-4-2008 to sort out the thorny issues on compensation for the revenue losses that may arise to the States from such a move.

Official sources said that the Finance Minister, Mr P. Chidambaram, and the Chairman of the Empowered Committee of State Finance Ministers on Value Added Tax (VAT), Dr Asim Dasgupta, are to hold consultations on the compensation issue here on Tuesday. Prior to this, the State Finance Ministers are to meet under the aegis of the Empowered Committee. Indications are that the VAT panel would internally discuss this matter before meeting the Finance Minister.

Although Mr Chidambaram had announced in the Budget 2008-09 that the CST ceiling rate was proposed to be brought down to 2 per cent from April 1, the actual notification is yet to be issued by the Finance Ministry.
Compensation package

Official sources pointed out that the Budget had made it clear that the new CST rate of 2 per cent would be notified only after an agreement was reached between the Centre and the States on the compensation issue. Trade and industry is awaiting the notification of the CST ceiling rate cut.

While the Centre contends that there was no need to tinker with the compensation package agreed to by the States last year, the States have taken a stand that the compensation package needs to be negotiated afresh.

The strong economic growth and the resultant surge in CST collections had prompted the States to demand a revised compensation package.

"We feel that what (compensation package) they (States) agreed for last year is applicable even this year and the subsequent years. But they don't think so. That is the main issue," sources said.

Currently, the States collect and retain the entire CST, which is an origin-based tax. CST has been a massive revenue generator for the States, but is being viewed as incompatible in a VAT regime and hence the move towards its phase-out.

The CST rate was brought down from 4 per cent to 3 per cent on April 1, 2007.

Meanwhile, tax revenues of VAT-implementing States registered a 13.4 per cent increase during April-December 2007 to about Rs 1,19,000 crore.

The extracts from Finance Bill, 2008 state as follows:-

CST and a Roadmap towards GST

183. Following an agreement between the Central Government and the State Governments, the rate of Central Sales Tax was reduced from 4 per cent to 3 per cent in this financial year. It is now proposed to reduce the rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with effect from April 1, 2010.

The said notification is yet to be notified.

So, what is the rate of CST from wef 1.4.2008?

Some of the traders started with CST rate of 2% wef 1.4.2008, but some are charging 3%.

It is learnt that sales tax offices are demanding CST rate of 3%. Thier reason may be that the Finance Bill, 2008 is silent about CST amendment. Changes are proposed only in Budget Speech.

Some traders also informed that goods at check post are also held up demanding 3% CST.

This is for your information only.

The Central Sales Tax phaseout plan will miss a crucial deadline on Tuesday with both Centre and state governments failing to converge on the compensation package. As per the plan, CST which was reduced from 4% to 3% on April 1, 2007, is to be slashed by 1% further to 2% from Tuesday. State finance ministers are scheduled to hold discussions with Union finance minister P Chidambaram on April 8.

With the reduction in CST rate from 3% to 2%, the states would lose about 12,000-13,000 crore in revenues. The states want the Centre to compensate this loss in full. While the Centre is agreeable in-principle to this, differences have cropped between the two on the mechanism. The differences have also sprung up on account of the state governments demanding some tweaking-in in the already agreed formula at the time of deal on the CST phase out in early 2007.

State finance ministers will now meet Union finance minister P Chidambaram to strike a common ground on the compensation formula. Sources said missing the April 1 date was not of much consequence and the reduction to 2% could be carried out later, with retrospective effect. The levy is to be brought down to 2% from April 2008 and 1% in 2009, before being eventually abolished on March 31, 2010 to pave the way for roll-out of unified goods and service tax from April 1, 2010.

The compensation package for phasing out CST which began from April 1, 2007 includes transfer of power to levy service tax on some services, removal of additional excise duty on tobacco products and textiles, VAT on imports, abolition of Form D, budgetary support and hike in floor rate of VAT. The Centre has removed additional excise duty from tobacco, provided for budgetary support and has already begun transfer of revenues from 33 existing services to states. However, it is yet to bring the 44 new services under tax net.

HK Dwivedi, commercial tax commissioner, said the process involved in refunding VAT to the exporters is cumbersome at present, as the department has to cross check whether the VAT, for which the exporter has sought refund, has gone to the treasury or not.

"In fact refunding is also a trouble at the government of India level, and it is not only West Bengal, which has backlogs in refunding," Dwivedi said.

Although Dwivedi did not say the amount lying as backlog, he said by the end of 2007-08, the commercial tax department will be refunding Rs 50 crore against Rs 30 crore in 2006-07.

However, this is expected to increase in 2008-09 once the VAT rules are amended, Dwivedi said on the sidelines of an interactive session, organised by the Bengal National Chambers of Commerce & Industry.

The state finance minister proposed in his Budget that the government will be refunding to the exporters 50% of the VAT paid on the basis of book value within one month of the claim filed. The rest 50% will be refunded after proper verification.

KK Navada, president of BNCCI, said the proposed changes in the VAT rules is a welcome step, but industry will like to get more simple VAT returns forms, preferably sector-specific.

Briefing media persons after holding the cabinet meeting at Dharmashala, chief secretary Ravi Dhingra said that the cabinet noted that against a VAT rate of 20 percent applied by Himachal, the states of Haryana, Punjab and Chandigarh were only imposing a rate of 4 percent, which was resulting in smuggling and a heavy revenue loss to the state.

The cabinet decided to follow a middle path and it was decided to reduce VAT from 20 % to 12.5 %. It was also decided to reduce the license fee on Indian Made Foreign Liquor (IMFL) from Rs 160 to Rs 125 and on country liquor from Rs 130 to Rs 95 per proof liter. These measures would reduce the price per bottle of IMFL and Country liquor by Rs 23 and Rs 15, he said.

The cabinet also decided to continue with the individual vend / unit based applications system for allotment of retail vends in the state. It was also agreed that existing retail licensee holders who commit themselves to the new conditions of license fee and other levies would be given an option to apply for renewal. This system had been preferred as the number of people employed in the trade has gone up to 625 where as earlier it was monolplized by 25 persons only, said Dhingra.

The cabinet also decided to reserve 20 % of quota of country liquor for General Industry Corporation, a state public sector undertaking.

The excise department projected an increase of 10 - 12 % in excise revenue, which was expected to touch Rs 402 crore in 2008-09 against a Rs 360 crore projection for the current year.