By TIOL News Service

NEW DELHI, DEC 08, 2013: THE Confederation of Indian Industry (CII) and Ernst & Young have jointly made a strong case for prompt and efficient introduction of goods and service tax (GST) in India by focusing on the degeneration of value-added tax (VAT) into a messy system.

In a While Paper captioned ‘Evolving global tax policy trends: Outlook for India', the duo notes: "The introduction of VAT and the experience in the last eight years should have given us a simple robust and consistent tax regime with a broad base, low rates, ease of compliance resulting in increased revenues - a virtuous circle." It says: "Unfortunately, the unraveling of VAT system experienced over the past few years, has recreated the vicious circle of narrow tax base, high tax rates, low compliance and reduced revenues. Without harmonization across the states, VAT in India has become complex."

As put by the Paper, this further underlines the urgency for GST with a broad base, harmonization and reasonable rates to simplify the tax regime, remove cascading and create a common market leading to increased competitiveness and growth.

When VAT was introduced in 2005, the new regime did attempt a very substantial harmonization across states. It provided for uniform tax rates and base, an input tax credit system to prevent "tax-on-tax," and common/streamlined policies and procedures for compliance.

It has now degenerated into a tax maze of 30 plus VAT regimes due to numerous deviations from this harmonized model since its inception.

According to the Paper, "The return forms, annexures to return forms, tax payment due dates, are all different for different states. Complying with these different systems has become a nightmare for the industry and even automation has failed to provide the requisite relief. Such is the level of complexities that for some large businesses, even world class ERP systems are not fully successful in automating VAT compliance."

Even the definitions in the VAT laws vary across states. A case in point is the definition of capital goods for input tax credit purposes. Capital assets in Maharashtra have the same meaning as under the Income Tax Act, 1961. In contrast, Gujarat defines capital goods to mean plant and machinery meant for use in manufacture and such other goods, as may be notified by the State Government from time to time. It is therefore, possible for a product to be a capital asset in Maharashtra, which may or may not be the case in Gujarat.

Even the basis of levying the tax is different in different states. For example, in the case of a dealer engaged in sale of imported goods in Delhi, the taxable value of VAT is the higher of the sale price agreed with the customer or the import price on which the customs duty has been paid. This is a complete deviation from the transaction value concept, which was meant to be the basis for all transactions.

Internationally, VAT is payable on the value agreed to be paid by the buyer to the seller irrespective of the cost of purchase, manufacture, or the import price.

Furthermore there are inconsistencies in classifying a specific product under various VAT laws; this issue is compounded by the fact that unlike excise and customs, VAT laws do not follow any structured classification nomenclature. Some states have attempted albeit with little success. This has led to litigation in various states besides ending up with varying rates of taxes. Moreover, from a perspective of tax base, various states have their own versions of exclusions/inclusions in the taxable value, e.g., freight, insurance, service tax etc., being either part of VAT base or otherwise.