A RESEARCH REPORT On “A CAMPARATIVE ANALYSIS OF VAT IN DELHI & HARYANA” Submitted towards the partial fulfillment of Requirement for the degree of Master of Business Administration (Affiliated to UPTU LUCKNOW) (2008-09) Under the kind guidance of: Submitted by: Miss. Pallavi Jain Kriti Sharma Faculty of Vidya MBA – III rd Sem. Roll No -0822970025
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ARESEARCH REPORT
On
“A CAMPARATIVE ANALYSIS OF VAT IN DELHI & HARYANA”
Submitted towards the partial fulfillment of Requirement for the degree of
Master of Business Administration (Affiliated to UPTU LUCKNOW)
(2008-09)
Under the kind guidance of: Submitted by:
Miss. Pallavi Jain Kriti Sharma Faculty of Vidya MBA – IIIrd Sem.
Roll No -0822970025
Submitted to:
VIDYA COLLEGE OF ENGINEERING, MEERUT
CERTIFICATE
This is to certify that Ms KRITI SHARMA student MBA III semester, Vidya School of
Business; Meerut has undergone a summer training project on “A CAMPARATIVE ANALYSIS
OF VAT IN DELHI & HARYANA” and submitted a report based on the same as a mandatory
for the degree of Master of Business Administrator, U.P Technical University, Lucknow.
(Dr Aditya Gautam)
Director, Vidya School of DATE:
Business; Meerut
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who made completion of my
dissertation possible. I would like to thank my college authorities for providing me the
opportunity to research in one of the most prestigious organizations.
I express my sincere gratitude to my Industry Mentor and other executives who
provided me full support and encouragement to complete this work.
I am deeply indebted to my Faculty Guide co-ordinator Miss. Pallavi Jain whose help,
stimulating suggestions and encouragement helped me in at all times in research and for
writing of this thesis and others who have been associated with this work directly or
indirectly...
Especially, I would like to give my special thanks to my parents, their love and blessings
enabled me to complete this work.
CONTENTS
Page No.
Chapter-I
Abstract
Introduction
Company profile
Product profile
Literature review
Chapter-I
Objectives of the study
Chapter-III
Research methodology Chapter-IV
Data Analysis & Interpretation
Chapter-V
Findings
Limitations of the study
Recommendation
Annexure
Chapter-VI
Bibliography
CHAPTER-I
ABSTRACT
Abstract
“The king should collect his taxes without hurting his subjects, even as a bee collects honey
without harming the flowers”—Vidur Niti
Value Added Tax (VAT) is a system of indirect taxation which is currently employed by nearly
136 countries across the world. In India, VAT, being a current tax reform, captures the existing
states sales tax system. Sales tax is a conventional system where in different tax rates prevail in
different states. Value Added Tax is undoubtedly one of the most important fiscal innovations of
the 21st Century. The Empowered Committee of State Finance Ministers on Vat has done a
commendable job in its introduction. The Union Finance Minister also took a number of bold
and positive initiatives to ensure that the same is in place.
This study deals with the likely impacts of differential VAT rates for specific products with
recognized environmental benefits in both states: Haryana & Delhi. In both states: Delhi &
Haryana the main research question was how producers, retailers and consumers would change
their behavior in response to the introduction of VAT rates for ‘greener’ products and to the
‘non-green’ products.
This question has been addressed in various ways: through a literature survey, by reviewing
experiences with previous and existing (environmentally motivated) VAT design and other
subsidy schemes, and by directly contacting stakeholders.
In this study is conducted on the impact of VAT in both states: Haryana and Delhi the Finance
Commission has to look into restructuring their taxes on commodities and services such that
most of these can be converted into one comprehensive state VAT.
The study was significant in view of the fact that despite the revenue implications of
implementing VAT in both the states: Haryana & Delhi and indirect tax design are effect by the
implement of VAT. In Haryana the VAT design has been introduced in the State from IST April,
2003. It is the first state to initiate and implement VAT for own revenue generation but In Delhi
has implemented Value Added Tax (VAT) in Delhi on 01st April, 2005. Initially this system was
protested by the trade unions and dealers.
INTRODUCTION
Introduction
The concept of Value Added Tax (VAT) is nothing but a revised and simplified form of single-
point sales Tax. In 1918, F. Von Seemens of Germany devised this concept in place of Turnover
Tax. ...At present, VAT is implemented in more than 120 countries around the world. It covers
70% of the world population and raises nearly 27% total tax revenue in those countries.
WHAT IS VALUE ADDED TAX?
Value Added Tax is a broad-based commodity tax that is levied at multiple stages of production.
The concept is akin to excise duty paid by the manufacturer who, in turn, claims a credit on input
taxes paid. Excise duty is on manufacture, while VAT is on sale and both work in the same
manner, according to the white paper on VAT released by finance minister Chidambaram. The
document was drawn up after all states, were prepared to implement VAT. It is usually intended
to be a tax on consumption, hence the provision of a mechanism enabling producers to offset the
tax they have paid on their inputs against that charged on their sales of goods and services. Under
VAT revenue is collected throughout the production process without distorting any production
decisions.
Value Added Tax is undoubtedly one of the most important fiscal innovations of the 21st
Century. The Empowered Committee of State Finance Ministers on Vat has done a
commendable job in its introduction. The Union Finance Minister also took a number of bold
and positive initiatives to ensure that the same is in place. FICCI would like to compliment both
the Union Finance Minister and the Empowered Committee for the same.
While the Empowered Committee is seized of the problem and making all efforts to have a
uniform system in place, we would in particular like to submit the following for the
consideration of the Empowered Committee:
• Uniformity in classification of products across States
• Uniformity on the valuation base (e.g. Drugs attracting VAT @ MRP in some States vs.
normal selling price in other States).
• Reducing CST rate to 2% in 2006-07 and nil in 2007-08.
• After VAT, continuation of any local levy by any State including octroi, mandi tax,
professional tax etc. are totally unwarranted and against the basic philosophy of VAT. All local
levies must go and it should also be ensured that no new levy is introduced in any State.
• Input Tax Credit must be available.
• The Mindset of authority needs to be changed for mutual trust to sustain.
WHY VAT IS PREFERRED OVER SALES TAX?
While theoretically the amount of revenue collected through VAT is equivalent to sales tax
collections at a similar rate, in practice VAT is likely to generate more revenue for government
than sales tax since it is administered on various stages on the production – distribution chain.
With sales tax, if final sales are not covered by the tax system e.g. due to difficulty of covering
all the retailers, particular commodities may not yield any tax. However, with VAT some
revenue would have been collected through taxation of earlier transactions, even if final retailers
evade the tax net.
There is also in-built pressure for compliance and auditing under VAT since it will be in the
interest of all who pay taxes to ensure that their eligibility for tax credits can be demonstrated.
VAT is also a fairer tax than sales tax as it minimizes or eliminates the problem of tax cascading,
which often occurs with sales tax. These are facilitated by the fact that VAT operates through a
credit system so that tax is only applied on value added at each stage in the production –
distribution chain. At each intermediate stage credit will be given for taxes paid on purchases to
set against taxes due on sales. Only at consumption stage where there are no further transactions
will there be no tax credits. Lack of input credit facility in sales tax often results in tax on inputs
becoming a cost to businesses which are often passed on to consumers. Sales tax is often applied
again to the sales tax element of the cost, thus there is a problem of tax on tax. This is not the
case with VAT, which makes it a neutral tax as it provides the least disturbance to patterns of
production and the generation and use of income.
In addition, the audit trail that exists under the VAT system makes it a more effective tax in
administration terms than sales tax as it helps with the verification of VAT amounts declared as
due. This is made possible by the fact that one person’s output is another’s input. As with sales
tax imports are treated the same way as local goods while exports are zero- rated to avoid anti-
export bias.
Notwithstanding the advantages mentioned above, it is worth noting that VAT is a considerably
complex tax to administer compared with sales tax. It may be difficult to apply to small
companies due to difficulties of record keeping and its coverage in agriculture and the services
sector may be limited. To cover the high administration costs, VAT rates of 10-20 per cent are
generally recommended. The equity impact of the relatively high rates have been a cause for
concern as it is possible that the poor spend relatively high proportions of their incomes on goods
subject to VAT. Thus the concept of zero VAT rate on some items has been introduce.
DIFFERENCE BETWEEN VAT AND CST
Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore, the
burden of the full tax bond is borne by only one dealer, either the first or the last dealer.
However, under the VAT system, the tax burden would be shared by all the dealers from first to
last. Then, such tax would be passed upon the final consumers. Under the CST Act, the tax is
levied at a single point. Under the VAT system, the retailers are not subject to tax except for the
retail tax.
Under the CST Act, general and specific exemptions are granted on certain goods while VAT
does not permit such exemptions. Under the CST law, concessional rates are provided on certain
taxes. The VAT regime will do away with such concessions as it would provide the full credit on
the tax that has been paid earlier.
Under VAT law, first, the dealer pays tax on the sale or purchase of goods. The subsequent
dealer pays tax on the portion of the value added upon such goods. Thus, the tax burden is shared
equally by the last dealer. To illustrate the whole procedure of VAT, an example is as follows:
At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%.Therefore the net
VAT would be 12.5%. At the second change of sale, the sale value is Rs.120 and the tax thereon
is 15%. The tax that is to be paid at every point is 15%. The input tax is 15%. The dealer will get
a credit for first change in sale of 2.5%-- i.e. 15% -12.5%. Therefore, 2.5% will be the net rate.
At the third change of sale, the sale value is Rs.150 and the tax on this is 18.75%. At the last
stage, the tax paid is 18.75%. The Input Tax is 18.75%. Dealers get a credit for second change in
sale? i.e. 18.75% -15% = 3.75%. Therefore, 3.75% would be the net VAT. This means that VAT
is paid in the last point tax under the sale tax regime.
WHO GAINS?
State and Central governments gain in terms of revenue. VAT has in-built incentives for tax
compliance — only by collecting taxes and remitting them to the government can a seller claim
the offset that is due to him on his purchases. Everyone has an incentive to buy only from
registered dealers — purchases from others will not provide the benefit of credit for the taxes
paid at the time of purchase. This transparency and in-built incentive for compliance would
increase revenues. Industry and trade gain from transparency and reduced need to interact with
the tax personnel. For those who have been complying with taxes, VAT would be a boon that
reduces the cost of the product to the consumer and boosts competitiveness. VAT would be
major blow for tax evaders, both manufacturers who evade excise duty payments and traders
who evade sales-tax.
WHAT’LL BE THE TAX BURDEN?
The overall tax burden will be rationalized as it’ll be shared by all dealers, and prices, in general,
will fall. Moreover, VAT will replace the existing system of inspection by a system of built-in
self-assessment by traders and manufacturers. The tax structure will become simple and more
transparent and tax compliance will improve significantly. It will also be simpler and offer easy
computation and easy compliance. VAT will prevent cascading effect through input rebate and
help avoid distortions in trade and economy by ensuring uniform tax rates.
WHO PAYS?
All dealers registered under VAT and all dealers with an annual turnover of more than Rs 5 lakh
will have to register. Dealers with turnovers less than Rs 5 lakh may register voluntarily.
HOW TO PAY?
VAT will be paid along with monthly returns. Credit will be given within the same month for
entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated over
any month will be utilized to deduct from the tax collected by the dealer during that month. If the
tax credit exceeds the tax collected during a month on sale within the state, the excess credit will
be carried forward to the next month.
WHICH GOODS WILL BE TAXABLE UNDER VAT?
All goods except those specifically exempt. In fact, over 550 items will be covered under the
new tax regime, of which 46 natural and unprocessed local products would be exempt from
VAT. About 270 items, including drugs and medicines, all agricultural and industrial inputs,
capital goods and declared goods would attract 4% VAT. But, following opposition from some
states, it was decided that states would have option to either levy 4% or totally exempt food
grains from VAT but it would be reviewed after one year. Three items — sugar, textile, tobacco
— under additional excise duties will not be under VAT regime for one year but existing
arrangement would continue.
Building Blocks of a Unified VAT
OTHER CONSIDERATIONS
It is imperative that policy makers in considering adoption of VAT should be interested in the
economy wide impact of this tax. Special emphasis is often placed on its effect on equity, prices
and economic growth. This is particularly important because of the potential effects on
consumption of certain commodities that have a direct or indirect effect on labour productivity.
VAT EFFECT ON INFLATION
In considering the introduction of VAT, countries are often concerned that it would cause an
inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD
countries that introduced VAT indicated that VAT had little or no effect on prices. In cases
where there was an effect it was a onetime effect that simply shifted the trend line of the
consumer price index (CPI). To guard against any unforeseen price effects the authorities may
consider a tighter monetary policy stance at the introduction of VAT.
DISTRIBUTION EFFECTS OF VAT
Value added tax is widely criticized as being regressive with respect to income that is its burden
falls heavily on the poor than on the rich. This emanates from the fact that consumption as a
share of income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than
the rich. This criticism is valid when VAT payments are expressed as a proportion of current
income. However if, following the premise that welfare is demonstrated by the level of
consumption rather than income, consumption is used as the denominator the impact of VAT
would be proportional. A proportional burden would also be demonstrated if lifetime income
rather than current income is used. A lifetime income concept considers the fact that many
income recipients are only temporarily at lower income brackets as their earnings increase. In
order to address the regressively of VAT the following measures can be taken:
♦ The VAT itself can be used to differentiate taxation of consumer items that are consumed
primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher
than standard rate.
♦ VAT exemptions may also be granted on goods and services that are consumed mostly by the
poor.
♦ Equity concerns may also be addressed through other ways, outside the VAT system, such as
other tax and spending instruments of government. This could be in the form of lower basic
income tax rates on the poor or some pro-poor expenditures of government. The use of multiple
rates of VAT has however been widely discouraged for various reasons. These include:
♦ Fact is that sometimes it is almost impossible to differentiate between higher quality expensive
products – e.g. Food consumed by the rich and ordinary products consumed by the poor. Thus
any concessions extended may tend to benefit the rich much more than the poor.
♦ Increased costs of VAT administration as a differentiated rate structure brings with it problems
of delineating products and interpreting the rules on which rate to use.
♦ significantly increased costs of tax compliance for small firms, which are usually unable to
keep separate records/accounts for sales of differently taxed items. This results in the use of
presumptive methods of determining the tax liability, which leads to more difficulties in
monitoring the compliance. The higher compliance cost resultant from differentiation of VAT
rates may also be regressive with respect to income since smaller firms with lower income tend
to bear proportionately more of the burden than do larger firms.
Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional effects of tax
through the effect on incomes. The effects of exemption may be as follows:
♦ falling of revenues – exemptions break the VAT chain. If exemptions are granted at prior to the
final sale, it results in a loss of revenue since value added at the final stage escapes tax.
♦ Un-recovered taxation of some intermediate goods may lead to producers substituting away
from such inputs thus distorting the input choices of the said producers.
♦ Exemptions may create incentives to “self supply” i.e. tax avoidance by vertical integration.
♦ Exemptions tend to feed on each other giving rise to a phenomenon called “exemption creep”.
This arises from the fact that each exemption gives rise to pressures on further exemption. For
example creating an exemption to reduce the tax burden on a particular commodity or goods may
lead to increased pressure for exemption or zero rating of inputs used for the production of such
a commodity. Based on the above, it is important that care is taken when introducing exemptions
in order to avoid distortions in the production process as well as to minimize revenue loss
resulting from such distortions.
Given the fact that the primary purpose of VAT is to raise government revenue in an efficient
manner and with as little distortions of economic activity as possible, distribution effects are
perhaps better addressed by other forms of tax and government expenditure policies which can
often be better targeted at these aims.
VAT EFFECT ON ECONOMIC GROWTH
Economic growth can be facilitated through investment by both government and the private
sector. Savings by both parties are required in order to finance investment in anon-inflationary
manner. Compared to other broadly based taxes such as income tax VAT is neutral with respect
to choices on whether to consume now or save for future consumption. Although VAT reduces
the absolute return on saving it does not reduce the net rate of return on saving. Income tax
reduces the net rate of return as both the amount saved as well as the return on that saving are
subject to tax. In this regard VAT may be said to be a superior tax in promoting economic
growth than income tax. Since VAT does not influence investment decisions on firms, by
increasing their costs, its effects on investment can be said to be neutral.
Process of VAT
FEATURES OF VAT
1. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
a. The 4% on declared goods or the goods commonly used.
b. The 10-12% on goods called Revenue Neutral Rates (RNR). There would be no fall in
such remaining goods
c. Two special rates will be imposed-- 1% on silver or gold and 20% on liquor. Taxes on
petrol, diesel or aviation turbine fuel are proposed to be kept out from the VAT system as
they would be continued to be taxed a presently applicable by the CST Act.
2. 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 neighboring states
3. 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.
4. 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.
5. 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
6. 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.
WHAT’S THE BIGGEST ADVANTAGE?
The biggest benefit of VAT is that it could unite India into a large common market. This will
translate to better business policy. Companies can start optimizing purely on logistics of their
operations, and not on based on tax-minimization. Lorries need not wait at check-points for days;
they can zoom down the highways to their destinations.
Reduced transit times and lower inventory levels will boost corporate earnings. Following are the
some more advantage 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 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, and late
payment of tax or nonpayment 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.
COMPANY
PROFILE
About Escorts Construction Equipment Limited (ECEL):
ESCORTS CONSRUCTION EQUIPMENT LIMITED is a fully owned subsidiary of Escorts
Ltd, and belongs to one of the India's largest multiproduct engineering groups, with group sales
turnover exceeding US $ 900 Million. ECEL is the largest Pick 'n' Carry manufacturer in the
world. ECEL has a strong presence in sub continental countries, Middle East and Africa ECEL
was the first to introduce the concept of DEALERSHIPS in the Indian Construction Equipment
Industry.
Escorts Construction Equipment Limited, they have defined the evolution of India's
Construction Equipment Industry over the past 36 years. In 1971, Ecel introduced Pick n Carry
Hydraulic Cranes Mobile Cranes.
A leading material handling and construction equipment manufacturer, they manufacture and
market a diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. Escorts
today are the world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer. Leading
Manufacturer of Construction and material handling equipment in India with largest after sales
service network with products like Soil Vibratory roller, Asphalt compactor, Mobile crushing
plants, Concrete slip form pavers, batching plants. Material handling equipments like Pick n
carry cranes, forklifts, slew cranes etc
Escort construction equipment has been a major player in the railway equipment business in
India for nearly five decades. There product offering includes brakes, couplers, shock absorbers,
rail fastening systems, composite brake blocks and vulcanized rubber parts.
In today's Global Market Place, Escorts is fast on the path of an internal transformation, which
will help it to be a key driver of manufacturing excellence in the global arena. For this we are
going beyond just adhering to prevailing norms, we are setting our own standards and
relentlessly pursuing them to achieve our desired benchmarks of excellence.
ECEL is clearly your best escort to the world of Construction and material Handling. Besides
Pick and Carry, ECEL is a leading manufacturer of Vibratory soil compactors, forklifts,