VAT: NO DOUBLE TAXATION, YET DOUBLE REVENUE FOR STATES
This small write out is a mere reminiscence of the existing VAT system.
All of us know that VAT is a state subject. Just to recollect, the basis for calculation of VAT is as below,
Total Assessable Value in all the Indian states : Rs.1000/-
Add: Basic Duty @10% : Rs. 100/-
Cess on ED @3% : Rs. 3/-
BASIS FOR VAT : Rs.1103/-
VAT @4% : Rs. 44.12/-
Understandably there is a credit given for the VAT on Inputs, to justify the term ‘Value added tax’.
But already at the threshold some of us do have a nagging question, why at all one should add Excise Duty to calculate VAT. We can desperately attribute a reason that Excise Duty is a liability on manufacture and hence an inevitable cost of production. But, after all we can pay tax only on our own Value addition and not Value addition to Government!
Going by principle, already the VAT collection is higher by 10.3 %( (44-40)/40)
The grave implication here is a portion of VAT accruing as a liability immediately on Manufacture although not meant on paper!
We can go back to our early days, where we have taken lessons on our Constitution and the taxation system. There exist four dynamic balancing devices, viz., revenue sharing, revenue distribution, revenue assignment and grants -in -aid. In respect of revenue sharing, the States share the proceeds of the taxes on income (other than the corporation tax) and of the Union excise duties.
Of late in Feb 2010, the share of Indian states in Central taxes has been increased from 30.5% to 32% as recommended by Kelkar Committee.
Thus the Revenue in the hands of the respective state where the above transaction takes place is as below,
ED shared from Central Government : Rs. 32.00/-
ED+ Cess indirectly collected through VAT : Rs. 1.32/- (103*32%*4%)
TOTAL AMOUNT OF ED ACTUALLY RECEIVED : Rs. 33.32/-
The significant thing is, this amount is including even a portion of the ED Cess which the Central Government cannot share with the States.
It is up to the Centre to renegotiate by means of a proper agreement with the States who whine and Lobby for extra funds.
Hopefully this calculation methodology is not extant under the proposed dual GST System as well.