Value Added Tax Syatem

“VALUE ADDED TAX SYSTEM”

(A study with reference to Thiruvallur District, Tamil Nadu, India).

A dissertation work submitted to the Pondicherry University in

partial fulfillment of the requirement for the degree of

MASTER OF PHILOSOPHY

(COMMERCE)

By

A. HARIKUMAR

(Register No. 2100705)

Under the guidance of

Thiru.S.ARAVANAN,

ASSISTANT PROFESSOR (SG).

DEPARTMENT OF COMMERCE SCHOOL OF MANAGEMENT

PONDICHERRY UNIVERSITY Kalapet, Puducherry-14

NOVEMBER-2011

S.ARAVANAN,

Assistant Professor (SG), Department of commerce,

School of Management,

Pondicherry University,

Puducherry-14.

CERTIFICATE OF THE SUPERVISOR

This is to certify that the dissertation entitled “VALUE ADDED TAX

SYSTEM”(a study with reference to Thiruvallur District, Tamil Nadu,

India) is a bonafide record of research work done by Mr. A.HARI KUMAR

and submitted for the award of the degree of Master of Philosophy in

Commerce of Pondicherry University. The dissertation is a record of

independent research work undertaken by him under my supervision and

guidance and that it has not previously formed the basis for the award of any

degree, diploma, associateship, fellowship or any other similar title of this or

any other university.

Place: Puducherry Supervisor

Date:

Forwarded

Dean Head of Dept

School of management Department of commerce

Mr. A.HARI KUMAR,

M.Phil Scholar in commerce, Department of commerce,

School of Management,

Pondicherry University, Puducherry-14.

DECLARATION

I hereby declare that the dissertation entitled “VALUE ADDED TAX

SYSTEM” (a study with reference to Thiruvallur District, Tamil Nadu, India),

submitted by me for the award of the Degree of Master of Philosophy in

Commerce is a record of original research work done by me under the

supervision and guidance of Thiru S.ARAVANAN,(Assistant Professor SG)

and that the dissertation has not previously formed the basis for award of any

degree, diploma, associateship, or any other similar title.

Place: Puducherry

Date: (A.HARIKUMAR)

ACKNOWLEDGEMENT

I extend my heart full gratitude to the Almighty for his blessings showered on me to

complete this piece of work.

I express my wholehearted thanks to Dr.M.Ramadoss, Dean, School of Management,

and director of studies, Pondicherry University.

It is from my heart that I express my deep and sincere thanks to my guide and

supervisor Thiru. S. Aravanan, Assistant professor (SG) in Department of Commerce,

Pondicherry University who inspired me a lot while doing my dissertation. Without his

advice, guidance and supervision, I would not have submitted this research work in time; no

words are there to express my gratitude to my guide. I am really very proud to have a guide

like him.

I also express my gratitude to Dr. Malabika Deo, Professor and Head Department of

Commerce, Pondicherry University for her encouragement and support for doing M.Phil

research work.

I am extremely happy to extend my sincere thanks Dr.P.Palanichamy Professor in

Department of Commerce, Pondicherry University for his encouragement and valuable

suggestions.

I thank Dr.P.Natarajan, Professor, Department of Commerce, Pondicherry University

for his inspiration.

I thank Dr. Dr. G. Shanmugasundaram, Associate Professor, Department of

Commerce, Pondicherry University.

I thank Dr. D. Lazar, Associate Professor, Department of Commerce, Pondicherry

University.

My thanks to Mr. Nidheesh, Assistant professor, Department of Commerce,

Pondicherry University for his guidance.

I thank Dr. P.S. Velmurugan, Assistant professor, Department of Commerce,

Pondicherry University.

I thank Dr. S. Shijin, Assistant professor, Department of Commerce, Pondicherry

University.

I thank to Mr A.N.Veerasalingam Assistant Commissioner of Commercial Tax

Department.

My sincere thanks to Mr.Lakshmipathy Aassistant Commissioner of Commercial Tax

Department.

And I thank Mr.Nandhagopal, M/s.Renu and Mr.Maduraipandian the superintendents

of Commercial Tax Department.

I also thank all my friends and co-researchers who helped me a lot academically. I

owe thanks to teaching and non-teaching staff of Pondicherry University. Especially non

teaching staff members of Department of Commerce, Pondicherry University.

Last, but not least, I thank all those friends who helped me either directly or indirectly

in the successful completion my research work. I am greatly indebted to all these persons.

Place: Puducherry

Date : A.HARI KUMAR

i

CONTENTS

CHAPTERS Particulars Page No.

I INTRODUCTION AND DESIGN OF

THE STUDY

1-10

II REVIEW OF LITERATURE 11-24

III THEORETICAL FRAMEWORK

ABOUT VAT

25-46

IV ANALYSIS AND

INTERPRETATIONS

47-87

V SUMMARY, FINDINGS AND

CONCLUSIONS

88-94

BIBLIOGRAPHY 95-97

ANNEXURE 98-108

ii

LIST OF TABLES

Sl. No. Particulars Page No.

VAT Payers Demographic Variables

4.1 Gender 47

4.2 Age Group 48

4.3 Marital Status 49

4.4 Educational Qualifications 50

4.5 Type of Business 51

4.6 Annual Turnover 52

4.7 Respondents’ Business Age 53

VAT Officials Demographic Variables

4.8 Gender Status 54

4.9 Age Group 55

4.10 Marital Status

56

4.11 Education Level 57

4.12 Respondents Designation 58

4.13 Income 59

Factor Analysis Of VAT Officials

4.14(a) KMO and Bartlett's Test 60

4.14(b) Total Variance Explained 60

4.14(c) Rotated Component Matrix 62

4.14(d) List of factors 64

Factor Analysis Of VAT Payers

4.15(a) KMO and Bartlett's Test 66

4.15(b) Total Variance Explained 66

4.15(c) Rotated Component Matrix 68

iii

4.15(d) List of Factors 68

Cross tabulation results Relating To VAT Payers

4.16 Gender * Work Burden 69

4.17 Education * Work Burden 70

4.18 Business * Work Burden 71

4.19 Turnover * Work Burden 71

4.20 Turnover * Incidence 72

4.21 Age of Business * Incidence 72

4.22 Education * Rate Knowledge 73

Cross tabulation results Relating To VAT Officials

4.23 Gender * Work Burden 74

4.24 Designation * Work Burden 74

4.25 Age Group * Work Burden 75

One Way ANOVA Relating VAT Payers

4.26 Age of Business and Work burden 75

4.27 Education and Awareness of Exemptions 76

4.28 Registration and Incidence of Tax 76

4.29 Turnover and Convenience to pay tax 77

4.30 Age and business and Tax evasion 77

4.31 Turnover and Tax avoidance 78

One Way ANOVA Relating VAT Officials

4.32 Education and Work burden 78

4.33 Designation and Registration 79

Results of Correlation

4.34(a) Commercial Tax Department Gross Receipts

79

4.34(b) Correlations 80

iv

Result of Paired t-Test

4.35(a) Total Revenue of the Government 80

4.35(b) Paired samples statistics 80

4.35(c) Paired samples test 81

VAT officials’ opinion

4.36 knowledge of VAT rates 81

4.37 VAT or TNGST continue in Tamil Nadu 82

4.38 Awareness of proposed GST 82

4.39 Assistant from VAT consultant 82

4.40 Registration 83

VAT payers’ opinion

4.41 System to continue in Tamil Nadu 83

Revenue collection under VAT

4.42 Commercial Tax Department Gross Receipts (Amount in Crores) 86

4.43 Commercial Tax Department Gross Receipts (Amount in Crores) 87

v

LIST OF FIGURES

Sl. No. Particulars Page No.

VAT Payers Demographic Variables

4.1 Gender 47

4.2 Age Group 48

4.3 Marital Status 49

4.4 Educational Qualifications 50

4.5 Type of Business 51

4.6 Annual Turnover 52

4.7 Respondents’ Business Age 53

VAT Officials Demographic Variables

4.8 Gender Status 54

4.9 Age Group 55

4.10 Marital Status

56

4.11 Education Level 57

4.12 Income 58

4.13 Respondents Designation 59

Result of Factor analysis

4.14 Scree plot of VAT officials 62

4.15 Scree plot of VAT payers 67

Revenue collection under VAT

4.16 Commercial Tax Department Gross Receipts (Amount in Crores) 86

4.17 Commercial Tax Department Gross Receipts (Amount in Crores) 87

1

CHAPTER I

INTRODUCTION AND DESIGN OF THE STUDY

1.1 Introduction:

A tax is “a back bone of every country to meet their social obligations. Without tax

the government cannot do any social benefit activities. Government is the only person to levy

tax. Hence tax is compulsory payment or contribution by the people to the government for

which there is no direct return to the tax payers. Tax imposes a personal obligation on the

people to pay the tax if they are liable to pay it. The general public should be taxed according

to their ability to pay, and the people in the same financial position should be taxed in the

same way without any discrimination (1)

.

Tax can be defined as “an involuntary fee or more precisely, “unrequited payment”,

paid by the individuals or businesses to a government (central or local)”.Taxes may be paid in

cash or kind (although payments in kind may not always be allowed or classified as taxes in

all systems). The means of taxation, and the uses to which the funds raised through taxation

should be put, are a matter of hot dispute in politics and economics, so discussions of taxation

are frequently tendentious. A good tax system should not affect the ability and willingness of

the people to work, save and invest. If not, it will affect the development of trade and industry

and the economy as a whole. Thus, a sound tax system should contribute to the economic

development of a country. Hence “taxation should not be like killing the goose that lays

golden eggs”.

Indirect taxes are those taxes which have their primary burden or impact on a single

person. But that person succeeds in shifting his burden to others. In other words, an indirect

tax is imposed on one person but is paid partly or wholly by another. Indirect taxes are shifted

and the incidence of these taxes fall on persons other than the original payers. Commodity

taxes or sales tax, excise duties, customs duties etc, may be grouped as indirect taxes.

The Objectives of taxation are:

Main objectives

i. Generation of revenue

ii. Maintenance of welfare state

2

iii. Prevention of concentration of economic power

iv. Re-distribution of wealth for the common good.

Subsidiary objectives

i. Accelerate saving and thereby investment

ii. Repaid economic development

iii. Generation of employment.

1.2 Evolution of VAT

Origin: Sales Tax began in India with “petrol tax” introduced by the government of

Madhya Pradesh. During the British rule, arrack and toddy shops were functioning in Madras

Presidency. Following the Madhya Pradesh “petrol tax”, Madras Presidency introduced

“Sales Tax” in 1939. During the year 1939, the Government of Madras Presidency earned 8

crore rupees as revenue from the arrack and toddy shops. The Govt. was interested in

removing the liquor shops and compensate the loss of revenue by levying sales tax. Sales tax

initiated in Tamil Nadu has been levied throughout India. The Tamil Nadu General Sales Tax

Act was enacted in 1959and it is called TNGST Act 1959. Its purpose is to enable the govt.

levy sales and purchase tax with in Tamil Nadu. TNGST is replaced by VAT from the year

2007.

Value Added Tax (VAT) is a general consumption tax assessed on the value added to

goods and services. It is a general tax that applies, in principle, to all commercial activities

involving the production and distribution of goods and the provision of services. It is a

consumption tax because it is borne ultimately by the final consumer. It is not a charge on

companies. It is charged as a percentage of prices, which means that the actual tax burden is

visible at each stage in the production and distribution chain. It is collected fractionally, via a

system of deductions whereby taxable persons can deduct from their VAT liability the

amount of tax they have paid to other taxable persons on purchases for their business

activities. This mechanism ensures that the tax is neutral regardless of how many transactions

are involved. In other words, it is a multi-stage tax, levied only on value added at each stage

in the chain of production of goods and services with the provision of a set-off for the tax

paid at earlier stages in the chain. The objective is to avoid 'cascading', which can have a

snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax;

tax evasion will be checked, resulting in higher revenues to the government. Over 130

3

countries worldwide have introduced VAT over the past three decades and India is amongst

the last few to introduce it.

In the present work study of Value Added Tax with reference to Thiruvallur District,

Tamil Nadu, India has been undertaken.

1.3 Scope of the study

This present study concentrates on the level of work burden of business concerns,

VAT officials and VAT consultants in Thiruvallur District in Tamil Nadu only. This study

also tries to prove whether the revenue derived from the VAT is more compared to other tax

systems like TNGST. For the purpose data has been proposed to be collected from both the

sources of primary and secondary. For the purpose of primary data suitable questionnaire has

been circulated to the respondents in Thiruvallur District. The data are collected from

Commercial Tax Offices, Tax consultancy offices and various shops i.e. VAT payers in

Thiruvallur District in Tamil Nadu. Secondary data are collected from Tamil Nadu Statistical

Reports 2010-11. The collected data are to be analysed using appropriate statistical tools.

1.4 Significance of the Study

The present study tries to focus on a elaborate explanation about the Value Added Tax

in Tamil Nadu.

This study also attempts to focus on the level of Work burden of VAT officials, VAT

consultants and VAT payers.

The growth of revenue appreciation of the Tamil Nadu State Government also has

been focused in this study.

Though many number of research studies have been undertaken in the area of Value

Added Tax system; only few researchers have done their research in Tamil Nadu

jurisdiction.

1.5 Objectives of the Study

To study about value added tax system in general.

To study the profile of VAT payers and VAT administrators.

To examine the influence of various factors on the work burden of VAT officials.

4

To examine the influence of various factors on VAT compliance by VAT payers.

To examine whether value added tax system helps to revenue appreciation to the

government compared to other tax systems like TNGST and finally

To find whether VAT system is convenient to the VAT administrators as well as the

VAT payers.

1.6 Methodology

1.6.1 Research Design

The research problem having been formulated in clear cut terms, the researcher will

be required to prepare a research design, i.e., he will have to state the conceptual structure

within which research would be conducted. The preparation of such a design facilitates

research to be as efficient as possible yielding maximal information. In other words, the

function of research design is to provide for the collection of relevant evidence with minimal

expenditure of effort, time and money. But how all these can be achieved depends mainly on

the research purpose. Research purposes may be grouped into four categories, viz., (i)

Exploration, (ii) Description, (iii) Diagnosis, and (iv) Experimentation. A flexible research

design which provides opportunity for considering many different aspects of a problem is

considered appropriate if the purpose of the research study is that of exploration. But when

the purpose happens to be an accurate description of a situation or of an association between

variables, the suitable design will be one that minimizes bias and maximizes the reliability of

the data collected and analyzed.

1.6.2 Sampling Method

The method followed for selection of sample respondents is convenient cum

judgement sampling. Sample respondents for VAT payers Groups are selected from the areas

of Ponneri, Kavarai Pettai and Gummudi Poondi of Thiruvallur District. Similarly Sample

respondents for VAT officials and Consultants Groups are selected from the areas of Ponneri,

Thiruvallur and some parts of Chennai which comes under jurisdiction of Thiruvallur

District. Respondents from each area are selected on convenient cum judgement basis. Thus

totally 260 respondents are selected, out of while 130 are in the VAT payers group and the

remaining 130 from the VAT officials and consultants.

5

1.6.3 Study Area

The area of study is Commercial Tax Offices, Tax consultancy offices and various

shops in Thiruvallur district in Tamil Nadu.

1.6.4 Data Collection Procedure

For every qualitative study, data on the background and historical context are

gathered. This may not be a major part of data collection but at least, in proposing a particular

setting, the researcher gathers demographic data and describes geographic and historical

particulars. Primary data will be collected through well designed questionnaire (five point-

likert scale from strongly agree to strongly disagree) from VAT payers and VAT officials in

Thiruvallur Dist at Tamil Nadu. Both primary and secondary data are used in the work.

1.6.5 Primary data

The researcher has used questionnaire as a tool for collecting primary data. The

researcher has formulated a questionnaire consisting of 30 questions for VAT payers and 45

questions for VAT consultants and VAT officials and distributed among the 260 respondents.

The specimen questionnaire are given an appendix I and II.

The questionnaire of VAT payers consists of 30 questions, among them the first 9

questions are on demographic base of the respondents. The remaining 21 questions were

formed with a view that the responses fall under the following classification:

1. Assertion, 2.Awareness, 3.Personalized and 4.Opinions.

The questionnaire of VAT consultants and officials consists of 45 questions, out the

45; first 7 questions are on demographic base of the respondents. The remaining 38 questions

are formed with a view that the responses fall under the following classification:

1.Assertion, 2.Awareness, 3.Personalized and 4.Opinions.

1.6.6 Secondary Data

The Secondary data for this purpose were collected from various journals, books,

professional magazines, annual reports, statistical report and past records. In this study the

secondary data were collected for the purpose of analysing the revenue receipts of the Tamil

Nadu Government from the Tamil Nadu statistical report.

6

1.7 Tools Used for Analyses:

1.7.1 SPSS Package

The abbreviation SPSS stands for Statistical Package for the Social Sciences and is a

comprehensive system for analysing data. SPSS package consists of a set of software tools

for data entry, data management, statistical analysis and presentation. SPSS is a very

powerful and user friendly program for statistical analyses. SPSS can take data from almost

any type of file and use them to generate tabulated reports, charts, and plots of distribution

and trends, descriptive statistics, and complex statistical analysis. Anyone with a basic

knowledge of statistics can easily learn how to run very complicated analysis in SPSS with a

simple click of the mouse. SPSS 16.0 version is used in this research for analysing the

datum(2)

.

1.7.2 Chi square Test

Chi-square is one of the very popular methods for testing hypothesis on discrete data.

The discrete data can be nominal or ordinal. Finding descriptive statistics for such data is

meaningless. The only summary statistics useful for such data are frequencies and

percentages. Contingency tables along with some chi-square statistics are used in such kind

of data. There are three different types of chi-square analysis:

1. Chi-square test for goodness of fit.

2. Chi-square test for homogeneity.

3. Chi-square test of independence.

The chi-square test for goodness of fit determines if the sample under investigation

has been drawn from a population, which follows some specified distribution, while the test

for homogeneity investigates the issue whether several population are homogeneous with

respect to particular characteristic. The Chi-square test of independence is used to test the

hypothesis that two categorical variables are independent of each other. In this research the

researcher used the Chi-square test of independence.

The formula is

22 ( )O E

E

Where

O = the frequencies Observed

E = the frequencies Expected

7

∑ = the sum of

2 = Chi-square value.

1.7.3 Analysis of Variance (ANOVA)

ANOVA or analysis of variance is used to compare the means of more than two

populations. It uncovers the main and interaction effects of classification or independent

variables on one or more dependent variables. ANOVA has found extensive application in

psychological research using experimental data.

The formula for calculating „F‟ test is

2

2

B

w

SF

S

Where

F = Ratio of Variance (F Value)

2

BS = between group variance

2

wS = within group variance

1.7.4 Correlation

Correlation is a technique which measures the strength of association between two

variables. Both the variables X and Y may be random or may be that one variable is

independent (non-random) and the other to be correlated are dependent. When the changes in

one variable appear to be linked with the changes in the other variable, the two variables are

said to be correlated. When the two variables are meaningfully related and both increase or

both decrease simultaneously, then the correlation is termed as positive. If increase in any one

variable is associated with decrease in the other variable, the correlation is termed as negative

or inverse. Suppose marks in Mathematics are denoted by X and marks are Statistics are

denoted by Y. If small values of X appear with small values of Y and large values of X come

with large values of Y, then correlation is said to be positive. On the other hand, a small value

of X appears with large values of Y. It is a case of negative correlation. Where there are two

or more than two independent variables, the analysis concerning relationship is known as

multiple correlations. It has wide application in business and statistics (3)

.

8

1.7.5 Dependent (paired) samples t-Tests

In case of independent samples test for testing the difference between means, it is

assumed that the observations on one sample are not dependent on the other. However, this

assumption limits the scope of analysis as in many cases the study has to be done on the same

set of elements to control some of the sample specific extraneous factors. Such experiments

where the observations are made on the same sample at two different times, is called

dependent or paired sample t-Test.

Where,

d = Difference between Matched Scores

N = Number of pairs of scores

1.7.6 Factor Analysis

Factor analysis is by far the most often used multivariate technique of research

studies, especially pertaining to social and behavioural sciences. Factor analysis, thus, seeks

to resolve a large set of measured variables in terms of relatively few categories, known as

factors. This technique allows the researcher to group variables into factors (based on

correlation between variables) and the factors so derived may be treated as new variables and

their value derived by summing the values of the original variables which have been grouped

into the factor (4)

.

Formula for factor analysis:

Y = Xβ + E

Where

Y= matrix of measured variables

X= matrix of common factors

β = matrix of weights (factor loading)

E = matrix of unique factors, error variation.

9

1.8 Limitations of the Study

The study concentrates in Thiruvallur district of Tamil Nadu only.

The period of the study is only six months.

The study is based on the respondents‟ opinion which is based on their attitude, the

attitude may change.

The improper opinion of the respondents may also affect the nature of the results.

The respondents felt unwilling in answering some of the questions as they feel that the

opinion would turn against them.

1.9 Chapterization:

This study comprises of five chapters.

Chapter I: Deals with introduction, scope of the study, objectives of the study,

methodology of the study and limitation of study.

Chapter II: Presents the review of literature relating to the study.

Chapter III: Gives a theoretical framework about Value Added Tax system and its

explanation.

Chapter IV: Represents the detailed Analysis of the primary and secondary data and

interpretation with statistical calculations.

Chapter V: Presents main findings of the study, suggestions and conclusion of the

study.

10

REFERENCES:

1. V.Balachandran “Indirect Taxation”, Sultan Chand Publications, New Delhi-02, 10th

EDITION, 2005.

2. Ajai S.Gaur and Sanjaya S.Gaur “Statistical Methods For Practice and Research(A

Guide to data analysis using SPSS)”, Response Book, Business Books from SAGE

Publications Ltd, New Delhi-110 044.

3. http://www.emathzone.com/tutorials/basic-statistics/correlation.html

4. C.R.Kothari “Research Methodology (Methods and Techniques)”, Wiley Eastern Ltd,

New Age International Ltd, New Delhi-110 002, Second Edition, 1994.

11

CHAPTER II

REVIEW OF LITERATURE

Review of Literature

Introduction

Tax is a back bone of every country. It plays an important role in countries’

developmental activities. Many researchers in the past had taken up various studies relating to

the value added tax in India and elsewhere in other parts of the world. This chapter reviews

various literatures relating to value added tax.

Need for review of literature

First review of literature demonstrates knowledge about the field. This means more

than reporting what the researcher is reading and understanding, the researcher needs

to read it critically and to write in such a way that shows the researcher has a feel for

the area and also know what the most important issues are and their relevance to his

work.

It justifies the reason about research. This is closely connected with demonstrating

what the researcher knows about the field. It is the knowledge of research field which

allows identifying the gap which the research could fill.

Finally it allows establishing the theoretical framework and methodological focus

even if the researcher is proposing a new theory or a new method. (www.uq.edu.au)

Now review of a few related works is given below:

Roberto Steiner and Carolina Soto, (1994),(1)

“TAX EVASION AND ELUSION

OF VALUE ADDED TAX IN COLOMBIA”-They examine the three aspects to the value

added tax in Columbia. Fist they show that although the VATs’ productivity is at an

acceptable level according to international standards, it has recently been declining. Second,

they estimate tax evasion and elusion for 1994. Their results indicate that the international

VAT evasion rate is 32.6%, whereas the total evasion of the tax is 28.1%. Assuming that

there were neither evasion nor exemptions, the VAT rate that would generate the same

amount actually collected in 1994, would be 4.9%, compared to the actual general rate of

12

14%. Finally, they verify if the tax is really as regressive as theory suggests, employing an

annual time frame analysis, also for 1994. According to the actual expenditure structure and

taking into account exemptions and excises, they conclude that the VAT is slightly

progressive, although its progressivity is not monotonic throughout income deciles.

However, as households are ordered by deciles on a consumption basis instead of an income

basis, the tax becomes clearly progressive.

Arindam Das Gupta and Ira N. Gang, (1996),(2)

“VALUE ADDED TAX

EVASION, AUDITING AND TRANSACTIONS MATCHING” -They examined the impact

of enforcement on the revenue effectiveness and efficiency consequences of the VAT.

Transactions matching are shown to have very different effects from auditing: Even when

auditing alone is unable to induce non-zero taxpayer reports, and regardless of the expected

success rate in auditing of the tax administration, sufficiently intensive cross matching can

induce truthful reporting. On the other hand, matching leads to distorted purchase and sales

transactions. It can also distort input use and output decisions even if auditing alone has no

adverse effects. In the model, conditions under which the VAT leaves input prices

undistorted are found and the content of the often made claim, that a VAT is self-enforcing, is

explored. The ability of the tax administration to enforce compliance with the VAT is shown

to be sensitive to the knowledge that the tax administration has about the production

technology.

Laszlo Goerke, (1999),(3)

“VALUE-ADDED TAX VERSUS SOCIAL SECURITY

CONTRIBUTIONS” -It is a discussion paper in order to alleviate unemployment it is often

recommended to reduce social security contributions (SSC) and to compensate for the

ensuing loss in revenues by a rise in the value-added tax (VAT). Assuming unemployment to

be caused by efficiency wages, it is shown that a balanced-budget shift from a payroll tax to a

VAT will increase employment if the rise in the VAT does not alter consumer prices. If the

effects of a shift from SSC to the VAT on the worker's effort are neutralized, for example, by

imposing a constant wedge, the employment impact will depend on the nature of the

unemployment compensation system.

Michael Keen and Jack Mintz, (2000), (4)

“THE OPTIMAL THRESHOLD FOR A

VALUE-ADDED TAX”- They develop a simple rule characterizing the optimal threshold in

terms of a trade-off between tax revenues and collection costs. It then considers, in principle

and by simulation, the implications for the optimal threshold of the production inefficiencies

13

implied by the differential treatment of those above and below the threshold. The analysis

here has focused on the central trade-offs to be faced in choosing the threshold for a VAT:

between the desires to increase tax revenue, reduce administration and compliance costs, and

minimize the distortions arising from the differential treatment of firms above and below the

threshold. One common advantage perceived in the value-added tax, for instance (and a

common source of resistance to its introduction) is the prospect of its yielding information

useful for enforcement of the income tax. In practice, distributional effects are naturally a

major concern. Much emphasis is often given, in particular, to the regressive nature of the

compliance costs associated with the VAT, generally thought to be more burdensome,

relative to value added, for smaller traders than large. Against this, however, must be borne

the competitive advantage enjoyed (at least in respect of sales to final consumers) by those

who remain below the threshold.

Sameer R. Rege, (2002),(5)

“A GENERAL EQUILIBRIUM ANALYSIS OF VAT

IN INDIA”-He evaluates the welfare implications of a VAT in the static and a sequentially

dynamic context after accounting for the political and administrative constraints facing the

Indian government in implementing a VAT. Replacing the old indirect tax structure with a

VAT is welfare worsening. The increase in final consumer prices on account of reduced tax

base leads to higher price of essentials, causing welfare loss. Zero rating v/s exemption plays

an important role on welfare, with lower welfare loss if essential commodities are exempt

from VAT. Agriculture sector unambiguously plays a crucial role in welfare. Finally he

concludes, replacing the old indirect tax structure with a VAT is welfare worsening. The

increase in final consumer prices on account of reduced tax base leads to higher price of

essentials, which causes welfare loss. When agriculture, food and food products and textiles

are exempted, the welfare loss is reduced by half on account of lower final tax rates on

consumption. Even a change in tax / subsidy policy of one sector (agriculture) produces a

dramatic change in welfare.

Paresh Kumar Narayan, (2003),(6) “

THE MACROECONOMIC IMPACT OF THE

IMF RECOMMENDED VAT POLICY FOR THE FIJI ECONOMY: EVIDENCE FROM

A CGE MODEL”-He uses a computable general equilibrium model to examine the economy

wide effects of this VAT policy and find that while the VAT improves government revenue

and brings about a small 0.6% increase in real GDP, it fails to address investment levels.

VAT actually leads to a decline in investments and a reduction in real consumption and

national welfare. He highlights that large amounts of tax revenue are owed to government.

14

This is three times more than what government will collect from the 25% increase in VAT. In

this light, an alternative to VAT is to upgrade government’s tax collecting mechanism. From

that they deduce that the IMF policy is misdirected.

Rao.M.Govinda,(2005),(7)

“TAX SYSTEM REFORMS IN INDIA:

ACHIEVEMENTS AND CHALLENGES AHEAD”- He examined the Indian tax system

has come a long way from the narrow based, complicated and confiscatory to the one that is

far more efficient. Over the years, the thrust and direction of reforms have been to improve

revenue productivity while minimizing distortions. The reform to convert the state level sales

tax into VAT this year is a major initiative. The recent focus on tax administration promises

rich dividends. Despite reforms since 1991, much remains to be done to make the tax system

broad-based, productive and efficient. In corporate tax, excise, customs and sales taxes,

revenue concentration on diesel and petrol has high efficiency costs. The personal income tax

continues to be narrow based. Reform in the sales tax has only just begun and a lot remain to

be done to evolve destination-based retail VAT. The reforms in tax administration promise

increased revenues and, hopefully, that will provide the elbow room necessary for calibrating

future reforms.

Berhan, Bahro A. and Jenkins, Glenn P, (2005),

(8) “THE HIGH COSTS OF

CONTROLLING GST AND VAT EVASION”- They developed the Canada's goods and

services tax (GST) is sometimes said to be self-enforcing--vendors will always charge the tax

because purchasers will always want to claim input tax credits. Nonetheless, GST evasion is a

reality. Solutions to the problem usually involve increased audits (and therefore increased

compliance costs) for taxpayers and increased administration costs for governments; those

costs represent a diversion of resources from more productive activities and an economic loss

to the country. The GST is a value-added tax (VAT). Other countries that impose a VAT face

similar problems and have proposed various solutions. Northern Cyprus and Bolivia, for

example, refund some of the VAT paid on the purchases for which final consumers have

obtained official receipts from sellers. In this article, the authors measure the compliance

costs to taxpayers and the administration costs to the tax authorities in those two countries.

Although similar schemes are not likely to be directly copied in Canada, the authors provide

data to show how high compliance and administration costs can go when governments single-

mindedly pursue the goal of controlling VAT evasion. The total VAT compliance and

administration costs incurred by Northern Cyprus (in 2003) and Bolivia (in 2002) are

estimated at, respectively, 1.50 and 1.55 times the total budgetary expenditures to administer

15

the entire domestic tax system. In both countries, the compliance and administration costs of

the VAT refund schemes amounted to more than the 5 percent of the total revenues collected

by the VAT systems.

Marna Kearney et al, (2005),(9)

“AN ANALYSIS OF SOUTH AFRICA’S VALUE

ADDED TAX” -In this paper, they describe South Africa’s value added tax (VAT), showing

that (1) the VAT is mildly regressive and (2) it is an effective source of government revenue,

compared to other tax instruments in South Africa. They evaluate the VAT in the context of

other distortions in the economy by computing the marginal cost of funds—the effect of

raising government revenue by increasing the VAT rates on household welfare. Then they

evaluate alternative, revenue-neutral tax systems in which they reduce the VAT and raise

income taxes. For the analysis, they use a computable general equilibrium (CGE) model with

detailed specification of South Africa’s tax system. Households are disaggregated into

income deciles. They demonstrate that alternative tax structures can benefit low-income

households without placing excess burdens on high-income households.

Graham Harrison and Russell Krelove, (2005),(10)

“VATREFUNDS: A REVIEW

OF COUNTRY EXPERIENCE”- In this paper they explained a key feature of the invoice-

credit form of value-added tax (VAT) is that some businesses— notably exporters—will pay

more tax on their purchases than is due on their sales, and so can seek refunds of excess

credits from government. While refunding is straightforward in principle, serious problems

arise in practice, including opportunities for fraud and corruption, and denial of refunds by

governments with cash shortages. This makes the refund process the ―Achilles heel‖ of the

VAT. Finally they examine the refund approaches of tax administrations in 36 developing,

transitional, and developed countries. It evaluates the effectiveness of these approaches and

suggests a model of best practice that takes into consideration compliance issues faced by

countries during different stages of development.

Glenn P. Jenkins et al, (2006),(11) “

IS THE VALUE ADDED TAX NATURALLY

PROGRESSIVE?”-This paper employs a rich data set on household incomes and

expenditures for the Dominican Republic. The data set covers 2042 goods and services

purchased by households of different income and consumption levels. It also contains

information on the type of establishment from which the items were purchased. With this

information they estimate the effective rate of tax that has been paid on each item purchased

by households. These estimations include the effect of the different rates of the tax

16

compliance across households with different expenditure levels. The results of the study

show that the burden of the current VAT in the Dominican Republic is progressive over all

the quintiles of household expenditure. Finally they conclude, however, have not taken into

account the fact that in developing countries the commodities, on which poor households

spend most of their income, even if they are included in the legal tax base, and are

administratively impractical to tax.

Arvind Ashta, (2007),(12)

“EUROPEAN VAT – GENERAL PRINCIPLES”-In

1954, France became the first nation to adopt a value-added tax, a notion credited to Maurice

Laure. Today, this tax is growing in popularity, and about 40 nations use it, including all EU

member States. As a notable exception, it is not used by the United States on the

federal level. But most of the other large industrial nations use it. A peculiar reason

for not adopting VAT in most of the federal countries is that traditionally, sales taxes

and indirect taxes were invariably left to the States in the constitution. If a federal VAT

replaces these taxes, then the States would have no revenue base and the federal

countries would soon resemble Unitary States. State governments are loath to give up

their tax bases.

Andrea Gebauer et al, (2007),(13)

“CAN REFORM MODELS OF VALUE ADDED

TAXATION STOP THE VAT EVASION AND REVENUE SHORTFALLS IN THE

EU?”- They examined VAT evasion caused by the growth of carousel fraud has recently led

to significant VAT revenue losses in the EU. Carousel fraud works such that intra-EU firms

repeatedly carry out cross-border supply and purchase of goods and services, leading to the

fraudulent retention of revenue. This study discusses three reform models of the VAT system

in Germany, whose implementation would open up further possibilities for tax evasion and

lead to a considerable increase in administrative costs. The elimination of the problems in the

current VAT system should not lead to new abuses from which the negative effects on VAT

revenue may be just as large or even larger. One of the main problems after a system change

would seem to lay in the future coexistence of two VAT systems, which, due to the unclear

delimitation, would apply for most enterprises, as well as the fraud potential of using

identification numbers. Input-tax reimbursements are now often illegally claimed primarily

by the holder of an invoice, whereas the multiple use of an invoice for fraudulent purposes

plays no major role. Also, it would be a mistake to overestimate the control possibilities. For

all these reasons, before a radical change is made to the VAT system with unforeseeable

results, all available possibilities to make the present system more fraud-secure should be

17

exhausted. Finally, it is not evident why the financial means required for the establishment of

extensive control mechanisms in a new system could not also be used for the improvement of

the present system.

Michael Keen and Ben Lockwood, (2007),(14)

“THE VALUE-ADDED TAX: ITS

CAUSES AND CONSEQUENCES”- They proved that VAT, as its proponents claim, an

especially effective form of taxation? To address this, this paper first shows that a tax

innovation—such as the introduction of a VAT—reduces the marginal cost of public funds if

and only if it also leads an optimizing government to increase the tax ratio. This leads to the

estimation, on a large panel, of a system of equations describing the probability of VAT

adoption and the revenue impact of the VAT. The sign of the revenue impact is generally

ambiguous, but most countries that have adopted a VAT seem to have gained a more

effective tax instrument in doing so.

Lyubomir P. Zabov, (2007),(15)

“VALUE ADDED TAX AND SALES TAX

(COMPARATIVE OVERVIEW)”- He reviewed and compared briefly the Pennsylvania

Sales Tax and the Bulgarian VAT. It focused on the questions of when tax is imposed, what

are the tax bases and the applicable tax rate and on the exclusions from the sales tax and the

credit method used for VAT purposes. Thus it revealed that the structures of the sales tax and

the VAT are different. However, the ultimate result of each of the two taxes is in principle the

same in taxing of the individual consumption. Accordingly, the Pennsylvania sales tax and

the Bulgarian VAT share many common features and the differences between them are often

subtle.

Benjamin A. Neil,(2009),(16)

“VAT: THE ELIXIR FOR AMERICA’S ECONOMIC

ILLS?”- In his research he develops America is one of the few nations without a value-added

tax (VAT), but there is growing pressure to impose the language. In simple terms, a VAT is a

type of national sales tax. However, instead of being collected at the cash register, it is

imposed on the ―value added‖ at each stage of the production process. Some like the VAT

because it offers a new way to finance bigger government. Others like the VAT because – at

least, compared to the income tax – it does not impose as much damage on the economy.

Supporters of limited government oppose the tax because it makes it easier for politicians to

expend the size of government. For these reasons, and others, the VAT is very much a work

in progress, as more and more countries continue to adopt it and grapple with ways of

improving its design and implementation.

18

Helena Blazic and Mira Dimitric, (2009),(17)

“THE REDUCED VAT RATE FOR

SMALL BUSINESS IN CROATIA”- In this paper they developed to assess the potential

effects of introduction of the reduced VAT rate for small business, based on the EU VAT

legislation development. The analysis includes effects on prices, sales, shadow economy and

employment. It starts with the assumption of no substantial effect. Survey for Croatia is done

by small business owners’ interviews and encompasses descriptive and inferential statistics

based on parametric tests. The EU expected existence of a link between VAT reduction, price

reduction, sales increase and positive effects on employment (as well as decline in the

shadow economy) is proved even in this research. However, the pass-through to prices is very

moderate as well as other effects. The reduced VAT rate could have some positive results for

the restaurants and bars only. There exists also some possibility for construction of housing

and construction services related to housing as well as some other labour intensive services.

Alan Schenk, (2009),(18)

“WORLDWIDE VERSUS TERRITORIAL TAX

SYSTEMS: COMPARISON OF VALUE ADDED TAX AND INCOME TAX”- In

designing an income tax or a VAT, a country generally must decide how broadly,

geographically, it wants to assert its tax authority. The country may choose to impose its

income tax or VAT under a worldwide or territorial principle. There are many countries with

worldwide and territorial income taxes. There are many countries that impose territorial VAT

systems, but relatively few impose a worldwide VAT system. To date, the literature fails to

recognize some existing VAT systems as worldwide systems. In this paper, he suggests that

at least the New Zealand and South Africa VATs can be analyzed as worldwide VAT

systems. He compares these systems with the commonly used territorial VATs. This paper

also raises the question of whether differences in the design of a VAT as a territorial or

worldwide VAT represent only differences in form or differences in substance.

Lumumba Omweri Martin and Bernard M.Obongo, (2010),(19)

“THE

EFFECTIVENESS OF ELECTRONIC TAX REGISTERS IN PROCESSING OF VALUE

ADDED TAX RETURNS”- They aimed to assess the effectiveness of Electronic Tax

Registers (ETRs) in the processing of Value Added Tax returns. The study sought to

determine the extent to which the Electronic Tax Registers are being used by the taxpayers,

the problems if any that they were encountering in using them as well as get possible

solutions to the problems. Since many researchers had concentrated much of their work on

tax systems, tax evasion, taxes and interest rates, a lot was desired especially in this area to

19

assess the effectiveness of Electronic Tax Registers had been recently introduced by the

Kenyan tax authority. The study sought to establish if the Electronic Tax Registers had

increased the speed at which taxpayers processed their VAT returns and if there were any

associated costs in the processing of VAT. The population under study comprised of 98 VAT

registered taxpayers in Kisii town according to the regional KRA office’s records which was

stratified into; service providers, wholesalers and large scale retailers and supermarkets. The

main instrument of collecting primary data was the questionnaires while secondary data was

obtained from the KRA regional office. The findings of this research project will assist the

Kenya Revenue Authority look for ways of improving the processing of VAT returns. Data

was collected from 78 registered VAT taxpayers in Kisii town. The respondents were senior,

middle level and low managers. Out of the 78 registered VAT taxpayers to whom the

questionnaires were administered, only 68 responded. This gives a response rate of 87%

percent. Data analysis tools used in the research were Excel and SPSS and data was presented

in form of tables and graphs.

Renata Dombrovski and Sabina Hodzic, (2010),(20)

“IMPACT OF VALUE

ADDED TAX ON TOURISM”- They developed Republic of Croatia is currently carrying

out preparatory measures for accession to the European Union. One of them is the

harmonization of value added tax (VAT) with the requirements of Directive. Strong taxation

affects tourism negatively. Hoteliers in Croatia set aside large funds for facility investments,

which include partly high VAT rate of 23%, in order to achieve the market standards.

Tourists face higher bid prices which puts the country in an unenviable position among

Mediterranean competitors. It is important to find an optimal solution within the VAT system

to encourage tourism development. Budget funds collected from tourism need to be refunded

to the tourism industry.

Christian Hubert Ebeke, (2010),(21)

“REMITTANCES, VALUE ADDED TAX

AND TAX REVENUE IN DEVELOPING COUNTRIES”- Here Christian Hubert Ebeke

examines the impact of international remittances on both the level and the instability of

government tax revenue in receiving countries. It investigates in particular whether the

presence of a value added tax (VAT) system increases the benefit of the inflows of

remittances in terms of high and less volatile tax revenue ratio. This is supported by the fact

that remittances are largely used for consumption purposes and contribute to smoothing

private consumption. Using a large sample of developing countries observed over the period

20

1980-2006, and even after factoring in the endogeneity of remittances and VAT adoption, the

results highlight that remittances significantly increase both the level and the stability of

government tax revenue ratio in receiving countries that have adopted the VAT.

Rawat Deepa et al, (2010),(22)

“MACRO ECONOMIC EFFECTS OF VAT IN

INDIA”- They developed VAT is seen as a prospective substitute of the present tax system.

It will encourage and result in a better administrated system that will close avenues of tax

evasion. If enforced properly it would help in fiscal consolidation for the country. It would

provide a steady source of revenue; this in turn could be used for reducing the debt burden in

due course. The central government must fully take the state governments in confidence

before imposing VAT. VAT is a comprehensive levy covering almost all production in its

fold. Thus there should be adequate education of the public and the trading community on the

features of VAT, its benefits, costs, simplicity, etc. The paper suggests that there should be no

other state levels taxes such as octroi, states additional tax, entry tax etc. There should be

immediate removal of CST, same legislation should be there for all states a grace period may

be provided are some of the other suggestions paper has submitted.

Dr. K. Shankaraiah and D.N. Rao, (2010),(23)

“VALUE ADDED TAX

ACCOUNTING: CONCEPTS AND ISSUES”- The Value Added Tax Accounting (VATA)

is one of those newly emerged concepts, which emphasized much in the context of VISION

2020 by the industry, business, profession, academic, administration, politicians etc. as

VATA is regarded as a source of stable revenue, conducive to investment, immune to

lobbying pressures and ensures the economic growth, which is also evident from the

successful introduction of VATA by developed countries. The concept and issues are

presented in this paper to make the people aware of the VATA and remove the

misconceptions or notions about VATA and to draw the attention and participation of the

different sections of the society for strengthening the VATA system.

Synthesis of review of literature:-

From the above review of literature relating to VAT the following points emerge:

VAT is slightly progressive, although its progressivity is not monotonic throughout

income deciles. However, as households are ordered by deciles on a consumption

basis instead of an income basis, the tax becomes clearly progressive.

Balanced-budget shift from a payroll tax to a VAT will increase employment if the

rise in the VAT does not alter consumer prices.

21

The central trade-offs to be faced in choosing the threshold for a VAT: between the

desires to increase tax revenue, reduce administration and compliance costs, and

minimize the distortions arising from the differential treatment of firms above and

below the threshold.

Replacing the old indirect tax structure with a VAT is welfare worsening. The

increase in final consumer prices on account of reduced tax base leads to higher price

of essentials, causing welfare loss.

Large amounts of tax revenue are owed to government. This is three times more than

what government will collect from the 25% increase in VAT.

The reforms in tax administration promise increased revenues and, hopefully, that will

provide the elbow room necessary for calibrating future reforms.

The EU expected existence of a link between VAT reduction, price reduction, sales

increase and positive effects on employment.

New Zealand and South Africa VATs can be analyzed as worldwide VAT systems.

The Kenya Revenue Authority look for ways of improving the processing of VAT

returns.

The remittances significantly increase both the level and the stability of government

tax revenue ratio in receiving countries that have adopted the VAT.

Steps to be taken to make people aware of the VATA and remove the misconceptions

or notions about VATA and to draw the attention and participation of the different

sections of the society for strengthening the VATA system.

Research Gap (present study)

There are many studies done in the field of value added tax throughout the world. But

only few researchers did their research about value added tax in India. Among that few, very

few are conducted in Tamil Nadu in that field. The present research conducted in Tamil Nadu

especially in Thiruvallur District focuses on the level of work burden and revenue collection

of the State Government officials and also on the concerns of VAT payers.

22

References

1. Roberto Ste iner and Carolina Soto, Tax Evasion and Elusion of Value Added

Tax in Colombia (Social Science Research Network, 1994)

2. Arindam Das Gupta and Ira N. Gang, Value Added Tax Evasion, Auditing

And Transactions Matching (Social Science Research Network, 1996)

3. Laszlo Goerke, Value Added Tax versus Social Security Contribution

(Social Science Research Network ,Aug 1999)

4. Michael Keen and Jack Mintz: The Optimal Threshold for a Value Added Tax

(Journal of Public Economics, 2004)

5. Sameer R. Rege, A General Equilibrium Analysis Of Vat In India (Blackwell

Publishing Ltd, 2000)

6. Paresh Kumar Narayan, The Macroeconomic Impact of the IMF

Recommended VAT Policy for the FIJI Economy: evidence from a CGE

model (Blackwell Publishing Ltd. 2003)

7. Rao, M. Govinda, Tax Reforms in India: Achievements and Challenges ahead

(Journal of Asian Economics; Dec2005, Vol. 16 Issue 6, p993-1011, 19p)

8. Berhan, Bahro.A and Jenkins, Glenn.P, The high costs controlling CST and

VAT evasion (Canadian Tax Journal; 2005, Vol. 53 Issue 3, p720-736, 17p)

9. Marna Kearney, Sherman Robinson and Karen Thierfelder, An Analysis Of

South Africa’s Value Added Tax (World Bank Policy Research Working

Paper 3671, August 2005)

10. Graham Harrison and Russell Krelove, VAT Refunds: A Review of Country

Experience(International Monetary Fund, 2005)

23

11. Glenn P. Jenkins et al, Is the Value Added Tax Naturally Progressive?

(Social Science Research Network 2006)

12. Arvind Ashta, European Vat – General Principles (2007)

13. Andrea gebauer, chang woon nam & Rudiger parsche, Can Reform Models of

Value Added Taxation stop the VAT Evasion and Revenue Shortfalls in the

EU? (Journal of Economic Policy Reform Vol. 10, March 2007)

14. Michael Keen and Ben Lockwood, The Value-Added Tax: Its Causes and

Consequences ( International Monetary Fund ,2007)

15. Lyubomir P. Zabov, Value Added Tax And Sales Tax (Comparative

Overview) (Social Science Research Network, 2007)

16. Benjamin A. Neil, VAT: The Elixir for America’s economic Ills? (Journal of

Finance and Accountancy, 2009)

17. Helena Blazic and Mira Dimitric, The Reduced VAT Rate for Small Business

in Croatia (Original scientific paper, 2009 page No 83-114)

18. Alan Schenk, Worldwide Versus Territorial Tax Systems: Comparison of

Value Added Tax and Income Tax (Wayne State University Law School Legal

Studies Research Paper Series No. 09-27 December 8, 2009)

19. Lumumba Omweri Martin et al, The Effectiveness of Electronic Tax Registers

in Processing of Value Added Tax Returns (African Journal of Business &

Management -AJBUMA Vol. 1 (2010), 11 pages)

20. Renata Dombrovski and Sabina Hodzic, Impact Of Value Added Tax On

Tourism (International business and economic research journal, vol.9, 2010)

21. Christian Hubert Ebeke, Remittances, Value Added Tax And Tax Revenue In

Developing Countries (2010)

24

22. Rawat Deepa Agarwal, Kalpna Agarwal And Gunjan, Macroeconomic Effects

of VAT in India (Finance India; Jun2010, Vol. 24 Issue 2, p493-504)

23. Dr. K. Shankaraiah and D.N. Rao, Value Added Tax Accounting: Concepts

And Issues (Social Science Research Network, 2010)

25

CHAPTER III

THEORETICAL FRAMEWORK ABOUT VAT

This chapter gives a theoretical background of VAT in general and in Tamil Nadu in

particular.

3.1 Introduction of VAT

The concept of VAT was first adopted by France in 1954. By 2000, it was used by

Canada and 40 other industrialized countries. In most cases, the percentage of tax charged

varies based on the necessity of the particular product, so the tax on food would generally be

less than the tax on luxury items like boats. In recent years, VAT has been proposed for use

in the United States as a way to simplify business and personal income tax laws. Proponents

claim that VAT would replace other forms of taxation and reduce the costs of tax compliance.

In fact, some people say that adopting VAT would eliminate tax returns for individuals and

make the internal revenue service obsolete.

On the other hand, opponents argue that VAT would be more complicated to

implement than other tax-reform options, such as a national sales tax. They also worry that it

would increase the cost of food, medicine, and other necessities, which would hurt the poor.

3.2 Concept of VAT

Value Added Tax is a consumption tax which is levied at each stage of production

based on the value added to the product at the stage. It is an indirect tax on the domestic

consumption of goods and services except those that are zero-rated (such as essential foods

and drugs) or are otherwise exempt (such as exports). It is levied at each stage in the chain of

production and distribution from raw materials to the final sale based on the value (price)

added at each stage. It is not a cost to the producer or the distribution chain member, and

whereas it‟s full brunt is borne by the end consumer, it avoids the double taxation (tax on tax)

of a direct sales tax. A Value Added Tax (VAT) is a fee that is assessed against business by a

government at various points in the production of goods and services-usually any time a

product is or value is added to it. For tax purposes, a value is added whenever the value of a

product increases as a result of the application of a company‟s factor of production, such as

labor and equipment.VAT must be paid by every company that handle a product during its

transition from raw materials to finished goods.

26

For example, tax is charged when a manufacturer sells to wholesaler and again a

wholesaler sells to a retailer. With VAT, the taxable amount is based on the value added at

each stage of the process of producing goods and bringing them to market.

As an example, say that a company that makes shocks buys cotton yarns for Rs.1,000;

adds Rs.500 to its value in terms of labor, depreciation of knitting mechanics, and profits;

then sells the complete shocks forRs.1,500. VAT would be calculated as a percentage of the

Rs.500 value added by turning cotton yarn into shocks.

Of course, the shock company would also get credit for the amount of VAT it paid on

the purchase of inputs, like cotton yarn. In general, the total VAT accrued during the

production of goods is reflected in the price of items sold to final consumers, because each

reseller along the way usually passes along its VAT costs. In this way, VAT is somewhat

similar to a national sales tax, and the two forms of taxation are often compared by

governments. An expert claims that VAT entails higher administrative costs but is easier to

enforce than a national sales tax.

VAT is a progressive and transparent system of taxation which eliminates the

cascading impact of multiple taxation and set-off principle. It promotes transparency,

compliance and equity and therefore, is both dealer friendly and consumer friendly.

VAT is being a multi point tax, envisages an increase in the number of dealers and it

is based on the concept of self-assessment and self-compliance. It is therefore, inevitable that

the sales tax department transforms itself into a dealer friendly, focused and dynamic

department to cater to ever increasing expectations of both the government and the trade and

industry.

Sales tax department has taken up the challenge to transform their selves and be

available for assisting the dealers in complying with the provisions of the law. They are in the

process of installing a state-wide networked IT system to computerize entire tax

administration and hope to provide online service to the dealers in due course. They also are

realigning their organizational structure to meet the challenges of the new system and

stakeholders‟ expectations‟.

27

3.3 Necessity of VAT in India

India, particularly the trading community, has believed in accepting and adopting

loopholes in any system administered by the state or the Centre. If a well-administered

system comes in, it will close avenues for traders and businessmen to evade paying taxes.

They will also be compelled to keep proper records of their sales and purchases.

Many sections hold the view that the trading community has been amongst the biggest

offenders when it comes to evading taxes. Under the VAT system, no exemptions will be

given and a tax will be levied at each stage of manufacture of a product. At each stage of

value-addition, the tax levied on the inputs can be claimed back from the tax authorities.

At a macro level, there are two issues, which make the introduction of VAT critical

for India. Industry watchers say that the VAT system, if enforced properly, forms part of the

fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit

problem and the revenues estimated to be collected could actually mean lowering of the fiscal

deficit burden for the government.

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

released on April 9, expressed its concern over India's large fiscal deficit - at 10 per cent of

the GDP. Further any globally accepted tax administrative system will only help India

integrate better in the World Trade Organisation regime.

In the conference of Chief Ministers of all the states held in November 1999, it was

agreed that all the states and union territories may implement the Value added tax (VAT). As

a result, the Government of India constituted an empowered committee of State finance

ministers in order to monitor the implementation of decision. The empowered committee has

agreed the broad structure and key features of the legislation on Value Added Tax.

It has held its meeting on 18th

June 2004 in which it has unanimously decided that

Value Added Tax system would be introduced in all states and union territories with effect

from the 1st April 2005

(1).

3.4 Advantages of VAT

Since ages always a reform is made for the benefit in the process of development. It

was Chanakya who first wrote that a government should tax its people like a shepherd shears

his flock or a bee gets nectar from a flower. But apparently that fiscal wisdom died with him.

Let India not experience the same with VAT. It has a baggage full of benefits. Few

advantages of VAT in India are mentioned below.

28

(i) Coverage

If the tax is carried through the retail level, it offers all the economic advantages of a tax that

includes the entire retail price within its scope, at the same time the direct payment of the tax

is spread out and over a large number of firms instead of being concentrated on particular

groups, such as wholesalers or retailers.

If retailers do evade, tax will be lost only on their margins because customers that are

registered firms gain nothing if their suppliers fail to collect tax, except delay in payment;

they will pay more to the government themselves. Under other forms of sales tax, both seller

and customer gain by evading tax. One particular advantage is that of the widening of the tax

base by bringing all transactions into the tax net. Specifically, VAT gives the new

government the opportunity to bring back into the tax system all those persons and entities

who were given tax exemptions in one form or another by the previous regime.

(ii) Revenue security

VAT represents an important instrument against tax evasion and is superior to a

business tax or a sales tax from the point of view of revenue security for three reasons. In the

first place, under VAT it is only buyers at the final stage who have an interest in undervaluing

their purchases, since the deduction system ensures that buyers at earlier stages will be

refunded the taxes on their purchases. Therefore, tax losses due to undervaluation should be

limited to the value added at the last stage. Under a retail sales tax, on the other hand, retailer

and consumer have a mutual interest in under declaring the actual purchase price.

Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing

will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, the

government will at least have collected the VAT paid at stages previous to that at which the

tax was avoided; while if evasion takes place at the final stage the state will lose only the tax

on the value added at that point.

If evasion takes place under a sales tax, on the other hand, all the taxes due on the

product are lost to the government. A significant advantage of the value added form in any

country is the cross-audit feature. Tax charged by one firm is reported as a deduction by the

firms buying from it. Only on the final sale to the consumer there is no possibility of cross

audit. Cross audit is possible with any form of sales tax, but the tax-credit feature emphasises

and simplifies it and is likely to make firms more careful not to evade because they know of

the possibility of cross check.

29

(iii) Selectivity

VAT may be selectively applied to specific goods or business entities. In addition the

VAT does not burden capital goods because the consumption-type VAT provides a full credit

for the tax included in purchases of capital goods. The credit does not subsidize the purchase

of capital goods; it simply eliminates the tax that has been imposed on them.

(iv) Co-ordination of VAT with direct taxation

Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate

income taxes. The operation of a VAT resembles that of the income tax more than that of

other taxes, and an effective VAT greatly aids income tax administration and revenue

collection. It is interesting to note that when Trinidad and Tobago set out to introduce VAT it

chose one of its top income tax administrators as the VAT Commissioner. It must be

stressed once again that if properly implemented VAT can ultimately lead to a reduction in

overall rates of tax. Revenues will not be sacrificed but would in fact be enhanced as a

consequence of the broadened tax base. This does not seem to be a bad idea at all.

3.5 Disadvantages of VAT

The main disadvantages which have been identified in connection with the Value

Added Tax are:

(i) 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 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. 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.

30

(ii) 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

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 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 treatment is

to reduce the administrative burden on small enterprises, but not the taxes that normally

31

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.

(c) 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.

(d) 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.

3.6 Some reflections on VAT

3.6.1 VAT would not have cascading effect

The decision to introduce VAT was taken by the committee comprising finance

ministers of 28 states and two union territories. The advantage of VAT would become clear

when compared with the multi-point sales tax. It would not have a cascading effect and was

devoid stringent penal provisions. Small dealers with an annual gross turnover not exceeding

Rs. 5lakhs would be exempted from tax, he said.

Recalling the effects made by the centre since 1994 on the VAT, the committee, set

up in November 1999, met 90 times to evolve a consensus on the new tax system. Out of 550

goods brought under the VAT, 270 would incur a mere 4 percent tax and the rest would fall

under the general VAT rate of 12.5 percent. Around 46 commodities that had social

implications, including 10 items flexibly chosen by the states, were exempted. Problems that

came up while implementing the VAT would be looked at by the committee with an open

mind.

32

3.6.2 Higher Economic Growth

Highlighting the importance of the VAT, Dr.Dasgupta said it would help consumers,

traders, industrialists and the government, as it provided for a set set-off for input tax as well

as tax paid on previous purchases, abolition of turn over tax, surcharge and additional

surcharge, rationalisation of the overall tax burden, reduction in prices, self-assessment by

dealers, enhanced transparency and higher revenue growth (2)

.

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 a non-

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 savings 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 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 a

neutral.

3.6.3 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 stands at the introduction of VAT (3)

.

3.6.4 Distribution Effects of VAT

Value added tax is widely criticised as being regressive with respect to income that is

its burden falls heavily on the poor a on rich. This emanates from the facts that consumption

as a share of income falls as income rises. Hence a uniform VAT rate falls heavily on the

33

poor a 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 temporally at lower income brackets as their earnings increase.

In order to address the regressive nature of VAT the following measures can be taken:

The VAT itself can be used to differentiate taxation of consumer items are consumed

primarily by the poor such that they pay less or at zero rate or to 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 expenditure of

government. The use of multiple rates of VAT has however been widely discouraged

for various reasons.

The fact 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 concession extended may tend to benefit the rich much more

then 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.

34

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 a do larger firm.

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.

3.6.5 VAT exemptions

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

on incomes. The effect exemption may also be as follows:

Falling of revenues-exemptions break the VAT chain. If exemptions are granted at

prior to 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 procedures

substituting away such inputs thus distorting the input choices of the said procedures.

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 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 minimise revenue

loss resulting from such distortions.

3.7 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 a sales tax since it is administered on various stages on the production-

35

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 a

sales tax as it minimises 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 production- distribution chain.

At each intermediate stage credit will be given for tax paid on purchases to set against

tax 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 business 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 tax 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

amount 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. Not withstanding the advantages mentioned above, it is worth 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 percent are generally recommended.

The equity impact of the relativity 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 introduced (4)

.

36

3.8 Background of VAT in Tamil Nadu

Tamil Nadu is one of the 21 states which have introduced the Value Added Tax

(VAT) system of taxation from 1st April 2007. With introduction of VAT, the sales tax

department has moved to a globally recognized sales taxation system that has been adopted

by more than 130 countries.

The design of Tamil Nadu State VAT is generally guided by the best international

practices with regard to legal frame work, as well as operating procedures. Another key factor

in preparation of the design of state level VAT is the national consensus on certain issues.

The consensus has been arrived at through the discussion in the empowerment committee of

state finance ministers on implementation of state level VAT.

On 1st April 2007, VAT replaced the single point tax which had a number of

disadvantages, primarily that of double taxation. VAT is a modern and progressive taxation

system which avoids double taxation. In addition to offering the possibility of a set-off tax

paid on purchases, VAT has other advantages for both business and government.

It eliminates cascading impact of double taxation and promotes economic efficiency.

It is primarily a self-policing; self-assessment system with more trust put on dealers.

It provides the potential for a stronger manufacturing base and more competitive

export pricing.

It is invoice based, and as a result it offers a better financial system with less scope of

error.

It has an improved control, mechanism resulting in better compliance.

It widens the tax base and promotes equity.

VAT in Tamil Nadu is levied under a legislation known as the Tamil Nadu Value

Added Tax Act (TNVAT Act), supported by the Tamil Nadu Value Added Tax Rules

(TNVAT Rules). VAT is levied on sale of goods including intangible goods.

37

3.9 Explaining the VAT procedure in Tamil Nadu

3.9.1 How VAT works

When a dealer sell goods, the sale price is made up of two elements; the selling price

of goods and tax on the sale. The tax is payable to the state government.

The tax payable on sales is to be calculated on the selling price. The tax paid on

purchases supported by a valid tax invoice is generally available as set-off (input tax credit)

while discharging the tax liability on sales.

Example

The following shows how the VAT works through the chain from manufacturer to

retailer.

Company A buys iron ore and other consumables and manufactures stainless steels

utensils; another firm B buys the utensils in bulk from company A and polishes them;

shopkeeper C buys some of utensils and purchases packing, material from vendor D,

packages them and sells the packed utensils for the public.

(The sale and purchase figures shown in the example are excluding tax)

Particulars Amount

(in Rs)

VAT

@5%(in Rs)

Company A

Cost of iron ore and consumables 50,000 2,500

Sale of unpolished stainless steel utensils 1,50,000

Value added 1,00,000

Company A liable to pay VAT on Rs.1,50,000/-

@5%

7,500

Loss set off (Input Tax Credit) (2,500)

Net VAT amount to pay with the return (Note: Tax

invoice issued by company A will show sale price as

5,000

38

Rs. 1,50,000/- tax as Rs.7,500/-. Therefore, the total

invoice value will be Rs.1,57,500/-)

Firm B

Purchases unpolished stainless steel utensils 1,50,000

Sells polished stainless steel utensils 1,80,000

Value added 30,000

The firm B is liable to pay VAT on Rs.1,80,000 @5% 9,000

But can claim set off tax paid on purchases (7,500)

Net VAT amount to pay with the return 1,500

Shop keeper C

Purchases polished stainless steel utensils 1,80,000

Packing material 5,000

Total purchases 1,85,000

Sales 2,25,000

Value added 40,000

Shop keeper C is liable to pay VAT on Rs.2,25,000/-

@5%

11,250

Set off of tax paid on purchases (Rs.9,000+Rs250 of

packing Material)

9,250

Net VAT amount to pay with the return 2,000

Vendor D

39

Tax paid costs Nil

Sales 5,000

Value added 5,000

Vendor D is liable to pay VAT on Rs.5,000/- @5% 250

The VAT due on the Value Added through the Chain,

i.e.,5% on Rs.2,25,000/-

11,250

The state government received the tax in stages. The payments of tax were as follows:

Particulars Amount in Rs.

Suppliers of company A 2,500

Company A 5,000

Firm B 1,500

Shopkeeper C 2,000

Vendor D 250

Total 11,250

Thus, through a chain of tax on sale price and set off on purchase price, the cascading

impact of tax is totally eliminated. Since set-off of tax on purchases is given only on

purchases from registered dealers, importers, inter-state purchases and purchases from

registered dealers without separate tax collection are not entitled to set-off.

In practice, the tax is finally borne by the ultimate consumer, who is not a registered

dealer, in this case, people who buy utensils from the shopkeeper C.

40

3.9.2 Rates of Value Added Tax

Old VAT rates: (till 11th

July 2011)

There are two main rates of VAT 4% and 12.5%. The goods are grouped into

four schedules as under:

Schedule Rate of

tax

Illustrative items

A 0% Vegetables, milk, eggs, bread and candles etc. (i.e.

exempted goods form VAT)

B 1% Precious metals and precious stones and worn-out or

beaten jewellery

C 4% Agriculture implements not operated manually or not

driven by animal, Raw materials, notified industrial

inputs, notified information technology products and few

essential items

D 12.5% Other than items specified in schedules A,B and C.

New VAT rates: (from 11th

July 2011)

There are two main rates of VAT 5% and 14.5%. The goods are grouped into four

schedules as under:

Schedule Rate of tax Illustrative items

A 0% Vegetables, milk, eggs, bread and candles etc. (i.e. exempted

goods form VAT)

B 1% Precious metals and precious stones and worn-out or beaten

jewellery

41

C 5% Agriculture implements not operated manually or not driven by

animal, Raw materials, notified industrial inputs, notified

information technology products and few essential items

D 14.5% Other than items specified in schedules A,B and C.

3.9.3 Calculating Tax Liability

In, order to calculate how much tax a dealer has to pay, he must, first determine his

turnover of sales and turnover of purchases. The second stage is to ascertain the amount of

tax due for payment.

Calculation of turnover and purchases

The turnover of sales is the total of the amounts received or receivables (excluding

VAT charged separately) in respect, of the sale of goods, less the amount refunded, within

six months of the date of the sale.

Similarly, the turnover of purchase is the total number of the amounts paid or payable

(excluding VAT charged separately) in respect of the purchase of goods less (the amount

repaid in respect of goods they return) within six months of date of purchase.

Credit notes and debit notes

If the sale price, or the purchase price, of any goods is varied and either a credit note

or a debit note is issued, then the credit note or the debit note, as the case may be, should

Show separately, the tax and the price

Be accounted for in the period in which the appropriate entries are made in

their books of accounts.

Special Cases

Auctioneers

If dealer is an auctioneer, then they must include in their turnover, the price of the

goods they auction for their principal.

42

Hotels

There are special rules for hotels and other establishments that provide boarding and

lodging for an inclusive amount. The rules provide a formula to enable them calculate their

turnover of sales for meals (food and beverages) which they provide. The supply of food in a

restaurant also includes an element of service. But the full amount charged is the sale price

for the purposes of calculating turnover and tax.

Work contracts

VAT applies only to the sale of goods. Supply of services is not liable to VAT. Works

contracts are deemed sales where both, goods and services are provided in a transaction and

cannot be separated. A works contract may involve the creation of immovable property, e.g.

house, a factory or a bridge. Some other examples of works contracts are photography,

repairs and maintenance etc.

To calculate the amount a dealer should include in their sales, so that they may deduct

it from the total contract price, the

Costs of labour and service charges.

Amount paid to sub-contractors.

Charges for planning and designing, and any architect‟s fees.

Hiring charges for machinery and tools.

Cost of consumables, such as, water, gas and electricity.

Dealer‟s administrative costs relating to labour and services and any other

similar expenses.

Any profit element that relates to the supply of labour and services.

Alternatively, in lieu of the deductions as above, a dealer may choose to discharge the

liability arising on works contracts by referring to the table prescribed in the rules. If the

dealer finds that it is too complicated to calculate that deductions, then they may option for a

composition scheme for any works contract.

3.9.4 Difference between tax free goods and exempted goods

It is sometimes confusing to have goods that are tax free and sales that are exempt.

Both result in reduction on VAT being charged, so what is the difference. Tax free goods do

not attract tax at any stage of sale or in any type of transaction, whereas, exempted sales are

certain types of transactions, viz., export sales which are exempt from tax.

43

3.9.5 Records and Accounts

Keeping records

Proper records are an essential part of effective management and control of their

business. Dealers are required by law to keep a true and accurate account of the transactions

effected by them. This will also help them to correctly quantify their tax liability or refunds,

as the case may be. Thus dealers should keep all their accounts, registers and documents

relating to their stocks of goods, purchases, sales and deliveries of goods, at their place of

business. If they wish to keep them at a different location they may do so, but only if they

have the permission of the commissioner of sales tax.

Nature of Records

Normally, the department will not expect them to keep any special records for VAT

purposes. However, the records that they do keep should have sufficient details to enable

them to correctly calculate the amount of VAT due for payment and file their return.

If sales tax office happens to find that their records are not properly maintained, then

they will issue a notice, informing dealers about what records they must keep.

A dealer should maintain the following records

To identify the nature and value of goods purchased and sold;

Distinguish between:-

Local sales, interstate sales and exports.

Local purchases, interstate purchase and imports.

Indicate value of:-

Sale and purchase of tax free goods.

Sales exempted from tax.

Purchases from Un Registered Dealer

Rate-wise purchases and sales.

Local purchases from registered dealer with VAT shown separately.

Record payments for the purchases and sale of goods in cash book/ bank book.

Include a summary of VAT paid separately on purchases, VAT charged on sales,

VAT paid to the state treasury and VAT refundable/refunded to the dealers.

Contain adequate proof that goods have been exported or imported.

44

Be supported by invoices for all goods purchased, and copies of invoices, and bills or

cash memoranda, issued for goods sold.

3.9.6 Tax Invoices and Memoranda of Sales or Purchases

As a registered dealer, they should issue a tax invoice when they sell goods to another

registered dealer and charge VAT. For sales made to consumers and unregistered dealers,

they must issue a tax invoice, or a bill or cash memorandum.

However, if a dealer is a composition dealer other than a works contractor, they must

issue a bill or cash memorandum only and not a tax invoice or a bill or cash memorandum.

Tax invoice must contain

The words “tax invoice”, printed in bold letters at the top or at a prominent

place;

Dealers name, address and registration number (TIN).

The name, address and the registration number of the purchaser;

Serial number of the invoice;

Date of issue;

Description of goods, the quantity and price of the goods sold;

Rate and amount of tax charged and indicated separately;

Prescribed declaration regarding validity of the registration and payment of

tax;

And it must also sign either by dealer or by someone who is authorized by the

dealer.

If a dealer issues a bill or cash memorandum, it must contain:-

Words „bill/cash memorandum‟, printed in bold letters at the top or at a

prominent place;

If a dealer is „a composition dealer (other than works contractor) then the word

composition dealer at the top of the bill/ cash memorandum;

Dealer name , address and registration number (TIN);

The name and address of the purchaser;

Serial number of the bill/ cash memorandum;

Date of the issue;

45

Description of good, the quantity and price of the goods sold;

Prescribed declaration regarding validity of the registration and payment of

tax;

It must sign either by dealer or by someone who is authorized by the dealer.

3.10 Conclusion

India already has a system of sales tax collection wherein the tax is collected at one

point (first/last) from the transactions involving the sale of goods.

VAT would, however, be collected in stages (instalments) from one stage to another.

The mechanism of VAT is such that, for goods that are imported and consumed in a

particular state, the first seller pays the first point tax, and the next seller pays tax only on the

value-addition done - leading to a total tax burden exactly equal to the last point tax.

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. In Tamil Nadu

VAT has been introduced in 2007 and has been successfully implemented since then. Tamil

Nadu is one of the 21 states in India which has introduced the Value Added Tax (VAT)

system of taxation from 1st April 2007. With introduction of VAT, the sales tax department

has moved to a globally recognized sales taxation system that has been adopted by more than

130 countries.

46

REFERENCES:

1. http://finance.indiamart.com/taxation/necessity_of_vat_in_india.html

2. http://www.caindia.org/news/4.2008/state_rule_vat_rate_hike_for_nov_.html

3. www.oecd.org/ctp/vatguidelines

4. Purohit.M.C “Adoption of State Value Added Tax in India: Problems and

Prospectus”, Economic and Political Weekly.

47

CHAPTER IV

DATA ANALYSIS AND INTERPRETATION

This chapter analysis the data collected from 130 VAT payers and 130 VAT officials.

The collected data are processed, analyzed and the results are furnished in the following tables:

4.1 ANALYSIS OF DEMOGRAPHIC VARIABLES OF VAT PAYERS

Table #4.1

Table Showing the Gender of the Respondents

Gender Frequency Percent

Male 108 83.1

Female 22 16.9

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

The above data are presented diagrammatically in Fig # 4.1

Interpretation

Among the 130 respondents Table # 4.1 shows 108 respondents are male (83.1%) and 22 are

female respondents (16.9%).

0

50

100

150

MaleFemale

48

Table # 4.2

Table Showing the Age Group of Respondents

Age Group Frequency Percent

Up to 19 years 1 0.8

20 to 29 years 74 56.9

30 to 39 years 28 21.5

40 to 49 years 23 17.7

50 to 59 years 1 0.8

Above 60 years 3 2.3

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.2

Interpretation

Table # 4.2 it can be seen that 1 respondent is in the age group of below 19 years, 74 in

the age group of 20 to 29 years (56.9%), 28 in the age group of 30 to 39 years (21.5%), 23 in the

age group of 40 to 49 years (17.7%), and 4 in the age group of above 50 years. Thus 74% of

respondents are in the age group of 20 to 29 years. i.e. Young Entrepreneurs.

0

10

20

30

40

50

60

70

80

Up to 19 years 20 to 29 years 30 to 39 years 40 to 49 years 50 to 59 years Above 60

years

49

Table # 4.3

Table Showing Marital Status of Respondents

Marital Status Frequency Percent

Single 55 42.3

Married 75 57.7

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.3

Interpretation

Table # 4.3 shows that 43.3% of respondents are unmarried and 57.7% are married. This

tallies with the age group profile that 56.9% of respondents are in the age group of 20 to 29

years.

Single, 55

Married, 75

0 0.5 1 1.5 2 2.5

0

10

20

30

40

50

60

70

80

Marital status

50

Table # 4.4

Table Showing Educational Qualifications of Respondents

Education Frequency Percent

Up to 12th std 49 37.7

Graduate 57 43.9

Post Graduate 12 9.2

Professional Degree 5 3.8

Others 7 5.4

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.4

Interpretation

Among the 130 respondents 43.9% are graduates, 37.7% are below 12th

standard, 9.2%

are post graduates, 3.8% are professional degree holders and 5.4% come under the category of

others. Thus the majority respondents are graduates and post graduates (52.2%).

0 10 20 30 40 50 60

Up to 12th std

Graduate

Post Graduate

Professional Degree

Others

Education

51

Table # 4.5

Table Showing the Type of Business of Respondents

Type of Business Frequency Percent

Pharmacy Shop 13 10.0

Provisional Store 20 15.4

Electrical and Electronics Shop 6 4.6

Fancy Store 8 6.2

General Merchant 12 9.2

Textile 7 5.4

Foot wear 10 7.7

Jeweler Shop 8 6.2

Automobile Shop 11 8.5

Hard ware 17 13.1

Others 18 13.8

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.5

Pharmacy Shop, 13

Provisional Store, 20

Electrical and Electronics

Shop, 6

Fancy Store, 8

General Merchant, 12

Textile, 7Foot wear, 10

Jeweler Shop, 8

Automobile Shop, 11

Hard ware, 17

Others, 18

52

Interpretation

Table # 4.5 revels 20 respondents are provisional store owners, 17 respondents are hard

ware owners, 10,11,12,13 respondents are foot wear, automobile shop, general merchant, and

pharmacy shop owners respectively. Thus the VAT payers do a variety of business and not

concentrated on as single business.

Table # 4.6

Table Showing Annual Turnover of Respondents

Annual Turnover Frequency Percent

1-10 Lakhs 60 46.2

10-20 Lakhs 30 23.0

20-30 Lakhs 11 8.5

30-40 Lakhs 6 4.6

40-50 Lakhs 16 12.3

50-60 Lakhs 7 5.4

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.6

Interpretation

As per table # 4.6, 60 out of 130 respondents annual turnover is Rs.1-10 lakhs, 30

respondents turnover is from Rs.10 to 20 lakhs, 16 respondents turnover is Rs.40-50 lakhs, and 7

0 10 20 30 40 50 60

1-10 Lakhs

10-20 Lakhs

20-30 Lakhs

30-40 Lakhs

40-50 Lakhs

50-60 Lakhs

53

respondents turnover is Rs.50-60 lakhs. 46.2% of respondents are small traders with an annual

turnover falling in the range of Rs.1-10 lakhs.

Table # 4.7

Table Showing Respondents’ Business Age

Age Frequency Percent

0-5 Years 53 40.8

5-10 Years 39 30.0

10-15 Years 16 12.3

15-20 years 19 14.6

More than 20 Years 3 2.3

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.7

Interpretation

Table # 4.7 shows 53 respondents are doing business for 0-5 years, 39 respondents for

5-10 years, 19 respondents for 15-20 years, 16 respondents for 10-15 years and only 3

respondents out of 130 are doing business for more than 20 years. Thus out of 130 respondents

nearly 41% of respondents are relatively new to business world.

0-5 Years

5-10 Years

10-15 Years

15-20 years

More than 20 Years

54

4.2 ANALYSIS OF DEMOGRAPHIC VARIABLES OF VAT OFFICIALS

Table # 4.8

Table Showing Gender Status of Respondents

Gender Frequency Percent

Male 70 53.8

Female 60 46.2

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.8

Interpretation

Out of the 130 respondents 53.8% of respondents are male i.e.70 respondents and 60 of

130 respondents are female i.e.46.2%. Thus major portion of respondents are male members.

Male, 70

Female, 60

Male

Female

55 60 65 70 75

Gender

55

Table # 4.9

Table Showing Age Group of Respondents

Age Group Frequency Percent

20-29 Years 19 14.6

30-39 Years 37 28.5

40-49 Years 36 27.7

50-59 Years 38 29.2

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.9

Interpretation

Table # 4.9 shows that nearly 15% of respondents are young officials falling in the age

group of 20-29 years, 56% of them are middle aged officials falling in the age group of 30-49

years and 29% of the respondents are senior officials in the age group of 50-59 years.

20-29 Years

30-39 Years

40-49 Years

50-59 Years

0 5 10 15 20 25 30 35 40

56

Table # 4.10

Table Showing Marital Status of Respondents

Marital Status Frequency Percent

Single 19 14.6

Married 111 85.4

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.10

Interpretation

The majority respondents are married i.e. 111 out of 130 (85.4%).

0

20

40

60

80

100

120

Single

Married

19

111

Marital status

57

Table # 4.11

Table Showing Education Level of Respondents

Education Frequency Percent

Up to 12th STD 29 22.3

Graduate 62 47.7

Post Graduate 29 22.3

Professionals 6 4.6

Others 4 3.1

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data presented diagrammatically in Fig # 4.11

Interpretation

Table # 4.11 reveals that 62 respondents out of 130 (i.e.47.7%) are graduates. Only 22%

of respondents have an educational qualification up to 12th

standard. These respondents belong to

clerical cadre and also include assistants to tax consultants.

Up to 12th STD

Graduate

Post Graduate

Professionals

Others

58

Table # 4.12

Table Showing Respondents Designation

Designation Frequency Percent

Professional Cadre 9 6.9

Assistant Commissioner 21 16.2

Commercial Tax Officer 17 13.1

Assistant Commercial Tax Officer 42 32.3

Tax Analyst 41 31.5

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.12

Interpretation

42 respondents out of 130 are Assistant Commercial Tax Officers, 41 respondents are tax

consultants, 21are Assistant Commissioners and 17 respondents are Commercial Tax Officers.

Hence the majority respondents among VAT administrators are Assistant Commercial Tax

Officers.

Professional Carde, 9

Assistant Commissioner, 21

Commercial Tax Officer, 17

Assistant Commercial Tax

Officer, 42Tax Analyst, 41

Professional Carde

Assistant Commissioner

Commercial Tax Officer

Assistant Commercial Tax

Officer

Tax Analyst

0

5

10

15

20

25

30

35

40

45

Designation

59

Table # 4.13

Table Representing the Income of Respondents

Income Frequency Percent

1-4 Lakhs 121 93.1

4-8 Lakhs 9 6.9

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.13

Interpretation

Table # 4.13 shows 93% of respondents earn Rs.1-4 lakhs per annum, and only 7%

respondents earn Rs.4-8 lakhs per annum.

0

20

40

60

80

100

120

140

1-4 Lakhs 4-8 Lakhs

60

4.3 RESULT OF FACTOR ANALYSIS OF VAT OFFICIALS

Factor analysis is used to reduce the number variables as one factor.

Table # 4.14(a)

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .627

Bartlett's Test of Sphericity Approx. Chi-Square 2.434

Df 435

Sig. .000

The table # 4.14 (a) The Kaiser-Meyer-Olkin (KMO) and Bartlett's test. The KMO

measures the sampling adequacy which should be greater than 0.5 for a satisfactory factor

analysis to proceed. From the same table, it can be seen that the Bartlett's test of sphericity is

significant. That is, its associated probability is less than 0.05. In fact, it is actually .000. This

means that the correlation matrix is not an identity matrix. In addition, the overall MSA for the

set of variables included in the analysis was 0.627, which exceeds the minimum requirement of

0.50.Kaiser recommends the accepting value

greater than 0.5 is acceptable. Values between 0.5 to 0.7 are mediocre, values between

0.7 to 0.8 are good; values between 0.8 to 0.9 are great and values above 0.9 are superb. Since

the KMO value is 0.627 it shows the mediocre adequacy.

Principal component analysis requires that the probability associated with Bartlett's Test

of Sphericity be less than the level of significance. The probability associated with the Bartlett

test is <0.001, which satisfies this requirement.

Table # 4.14(b)

Total Variance Explained

Component

Initial Eigen values

Extraction Sums of Squared

Loadings

Rotation Sums of Squared

Loadings

Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

%

1 6.302 21.008 21.008 6.302 21.008 21.008 4.867 16.224 16.224

2 3.802 12.674 33.683 3.802 12.674 33.683 2.553 8.508 24.733

3 2.810 9.365 43.048 2.810 9.365 43.048 2.466 8.219 32.952

61

4 2.358 7.861 50.909 2.358 7.861 50.909 2.277 7.589 40.540

5 1.847 6.158 57.067 1.847 6.158 57.067 2.185 7.284 47.825

6 1.646 5.487 62.554 1.646 5.487 62.554 2.174 7.245 55.070

7 1.342 4.473 67.027 1.342 4.473 67.027 2.119 7.065 62.135

8 1.255 4.184 71.212 1.255 4.184 71.212 2.114 7.048 69.183

9 1.039 3.464 74.676 1.039 3.464 74.676 1.648 5.493 74.676

10 .921 3.072 77.747

11 .826 2.753 80.501

12 .768 2.559 83.060

13 .692 2.307 85.367

Extraction Method: Principal Component Analysis.

Table # 4.14 (b) reveals the factors extractable from the analysis along with their Eigen

values, the percent of variance attributable to each factor, and the cumulative variance of the

factor and the previous factors.

Notice that the first factor accounts for 21.008% of the variance, the second 12.674%, the

third 9.365%, the forth 7.861%, the fifth 6.158%, the sixth 5.487%, the seventh 4.473%, the

eighth 4.184% and ninth 3.464%. All the remaining factors are not significant. Using the output

from iteration 9, there were 9 Eigen values greater than 1.0. The latent root criterion for number

of factors to derive would indicate that there were 9 components (factors) to be extracted for

these variables.

Since the SPSS default is to extract the number of components indicated by the latent

root criterion, our initial factor solution was based on the extraction of 9 components. In

addition, the cumulative proportion of variance criteria can be met with 9 components to satisfy

the criterion of explaining 60% or more of the total variance.

The scree plot figure # 4.14 is a graph of the Eigen values against all the factors. The

graph is useful for determining how many factors to retain. The point of interest is where the

10curve starts to flatten. It can be seen that the curve begins to flatten between factors 9 and 10.

It may also be noted that factor 10 has an Eigen value of less than 1, so only nine factors have

been retained

62

Scree Plot figure # 4.14

Table # 4.14(c)

Rotated Component Matrix

Component

1 2 3 4 5 6 7 8 9

Economic Reform .847

Convenient .761

Mechanism .761

Transparency .739

Fiscal

Responsibility .689

Evolution .663

63

Registration .596

Revenue Security .557

Tax Loss .825

Good Economy .797

Coverage .743

Facilitate To VC .746

Growth .746

Procedures .636

Conditions .812

Work Burden .702

Penalty System .754

Lack Of Clarity .637

Reduce A and E

Educational Visit .818

Bookkeeping .643

Voluntary

Compliance .637

TIN .759

Filing Return .615

RVAT .845

Appropriate

System .586

Uniform Tax .422

Fraudulent .515

Misconception .748

Collection .513

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.

From the table # 4.14 (b) Rotated Component Matrix, the information in 30 of the

variables can be represented by 9 components.

Component 1 includes the variables;

Economic Reform, Convenient, Mechanism, Transparency, Fiscal Responsibility,

Evolution, Registration, Revenue Security, Tax Loss, Good Economy, Collection and Coverage.

64

Component 2 includes the variables;

Facilitate To VC, Growth and Procedures.

Component 4 includes the variables;

Conditions, Work Burden and Fraudulent.

Component 5 includes the variables;

Lack of Clarity and Penalty System.

Component 6 includes the variables;

Educational Visit, Book Keeping and Voluntary Compliance.

Component 7 includes the variables;

TIN and Filing Return.

Component 8 includes the variables;

RVAT, Appropriate System and Uniform Tax

Component 9 includes the variables;

Misconception.

Table # 4.14(d)

List of Factors

Factor 1 Factor 3

Economic Reform .847 Facilitate To VC .746

convenient .761 Growth .746

Mechanism .761 Procedures .636

Transparency .739

Fiscal

Responsibility .689

Factor 4

Evolution .663 Conditions .812

Registration .596 Work Burden .702

Fraudulent .515

Factor 2

Tax Loss .825 Factor 5

Good Economy .797 Penalty System .754

coverage .743 Lack Of Clarity .637

Factor 6 Factor 7

65

From the table # 4.14(d) the researcher identifies nine factors. When the researcher done

factor analysis for 30 variables, it results in nine factors as shown in rotated component matrix

table # 4.14 (c). It denotes these variables are inter-correlated variables. The seven variables that

load highly on factor 1 seem to all relate to convenience. So the researcher may label this factor

convenience. The variables that load highly on factor 2 seem to all relate to profit nature.

Therefore the researcher may label this factor profitability. The variables that load highly on

factor 3 seem to all relate to growth and procedures. Hence the researcher may label this factor

procedure. The variables that load highly on factor 4 seem to all relate to conditions and work

burden. Therefore the researcher may label this factor registration. The variables that load highly

on factor 5 seem to all relate to lack of clarity and penalty system. The researcher may label this

factor penalty system. The variables that load highly on factor 6 seem to all relate to book

keeping. So the researcher may label this factor basic rule. The variables that load highly on

factor 7 seem to all relate to Tax payer Identification Number. Therefore the researcher may

label this factor compulsory requirement. The variables that load highly on factor 8 seem to all

relate to appropriate system. Hence the researcher may label this factor uniformity to the state.

Finally only one variable shows one factor, so the researcher labels this factor misconception.

Educational Visit .818 TIN .759

Book Keeping .643 Filing Return .615

Voluntary

Compliance .637

Factor 8

Factor 9 RVAT .845

Misconception .748 Appropriate System .586

Uniform Tax .422

66

4.4 RESULT OF FACTOR ANALYSIS OF VAT PAYERS

Table # 4.15(a)

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .515

Bartlett's Test of Sphericity Approx. Chi-Square 275.513

df 45

Sig. .000

The table # 4.15(a) The Kaiser-Meyer-Olkin (KMO) and Bartlett's test. The KMO

measures the sampling adequacy which should be greater than 0.5 for a satisfactory factor

analysis to proceed. From the same table, it can be seen that the Bartlett's test of sphericity is

significant. That is, its associated probability is less than 0.05. In fact, it is actually .000. This

means that the correlation matrix is not an identity matrix. In addition, the overall MSA for the

set of variables included in the analysis was 0.515.

Table # 4.15(b)

Total Variance Explained

Component

Initial Eigen values

Extraction Sums of Squared

Loadings

Rotation Sums of Squared

Loadings

Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

% Total

% of

Variance

Cumulative

%

1 2.647 26.471 26.471 2.647 26.471 26.471 1.789 17.893 17.893

2 1.545 15.452 41.923 1.545 15.452 41.923 1.666 16.664 34.557

3 1.350 13.495 55.419 1.350 13.495 55.419 1.588 15.880 50.437

4 1.020 10.201 65.620 1.020 10.201 65.620 1.518 15.183 65.620

5 .889 8.893 74.512

6 .835 8.351 82.863

7 .626 6.257 89.121

8 .499 4.993 94.114

9 .343 3.434 97.547

10 .245 2.453 100.000

67

Extraction Method: Principal Component Analysis.

The total variance explained table # 4.15 (b), shows all the factors extractable from the

analysis along with their Eigen values, the percent of variance attributable to each factor, and the

cumulative variance of the factor and the previous factors. It may be noticed that the first factor

accounts for 26.647% of the variance, the second 15.452%, third 13.495% and the fourth

10.202%. All the remaining factors are not significant.

Scree Plot figure # 4.15

The scree plot is a graph of the Eigen values against all the factors. The graph is useful

for determining how many factors to retain. The point of interest is where the curve starts to

flatten. It can be seen that the curve begins to flatten between factors 4 and 5. Note also that

factor 5 has an Eigen value of less than 1, so only four factors have been retained.

68

Table # 4.15(c)

Rotated Component Matrix

Component

1 2 3 4

Mechanism .833

Tax payable .714

Growth .670

Incidence .844

Evasion .669

Work Burden .642

Procedures .745

Avoidance .716

Simplicity .820

Convenient .688

Extraction Method: Principal Component Analysis.

Rotation Method: Varimax with Kaiser Normalization.

The table # 4.15 (c), reduce the number factors on which the variables under investigation

have high loadings. Rotation does not actually change anything but makes the interpretation of

the analysis easier. Looking at the table below, it can be seen that simplicity and convenient are

substantially loaded on Factor (Component) 4 while procedures and avoidance are substantially

loaded on Factor 3. The factors Incidence, evasion and Work burden are loaded in factor 2. All

the remaining variables are substantially loaded on Factor 1.

Table # 4.15(d)

List of Factors

Assistance Procedures

Mechanism .833 Incidence .844

Tax payable .714 Evasion .669

Growth .670 Work Burden .642

Regulations Convenience

Procedures .745 Simplicity .820

Avoidance .716 Convenient .688

69

From the table # 4.15(d) the researcher identifies 4 factors. When the researcher done

factor analysis for 10 variables, it results in 4 factors as shown in rotated component matrix table

# 4.15(c). It denotes these variables are inter-correlated variables. The first three variables that

load highly on factor 1 seem to all relate to help VAT payers. So the researcher may label this

factor Assistance. The variables that load highly on factor 2 seem to all relate to work burden and

incidence. Therefore the researcher may label this factor procedure. The variables that load

highly on factor 3 seem to all relate to procedures. Hence the researcher may label this factor

regulation. The variables that load highly on factor 4 seem to all relate to simplicity. Therefore

the researcher may label this factor convenience.

4.5 RESULTS OF CHI SQUARE TEST RELATING TO VAT PAYERS

This section gives the results of chi-square test as applied on VAT payer responses:

Table # 4.16: To test whether the male and female respondents differ or do not differ about the

work burden in case of VAT filling.

H0: The attributes, sex and work burden are independent

i.e. the work burden of the respondents does not depend on the sex of such

respondents.

H1: The attributes sex and work burden are dependent.

Table # 4.16

Gender * Work Burden Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 11.954 3 .008*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is lesser than table value.

Since the probability value is 0.008 (p<0.05), there is an evidence to reject the null

hypothesis and conclude that the two attributes, sex and work burden in case of filling VAT

70

returns is dependent. Therefore it is further concluded that work burden of the respondents

depend on the sex of such respondents.

Table # 4.17: To test whether the education and work burden differ or do not differ about the

filling of VAT returns.

H0: There is no significant relation between education and work burden of respondents.

H1: There is a significant relation between education and work burden of respondents.

Table # 4.17

Education * Work Burden Cross Tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 11.147 12 .516*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is greater than table value.

As per the above chi square test results the probability value is 0.516 (p>0.05). Hence

there is no evidence to reject the null hypothesis and it is concluded that there is no significant

relation between education and work burden of respondents.

Table # 4.18: To test whether the type of business and work burden differ or do not differ.

H0: There is no significant relation between type of business organization and work

burden of respondents.

H1: There is a significant relation between the type of business organization and work

burden of respondents.

71

Table # 4.18

Business * Work Burden Cross tabulation

Chi- square tests

Value Df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 54.187 30 .004*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is lesser than table value.

The chi square results show the calculated value as .004. The probability value is lesser

than the table value (p<0.05). This shows that eleven business groups differ in their view about

the work burden. i.e. there is a significant relation between the type of business organization and

work burden.

Table # 4.19: To test whether the turnover of respondents influences or do not influence the

work burden of respondents.

H0: There is no significant influence of turnover on work burden of respondents

H1: There is a significant influence of turnover on work burden of respondents

Table # 4.19

Turnover * Work Burden Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 28.854 15 .017*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is lesser than table value.

Since the probability value is 0.017 (p<0.05), there is an evidence to reject the null

hypothesis and conclude that there is a significant influence of turnover over work burden of

respondents. Therefore, it is concluded that work burden of the respondents depend on the

turnover of such respondents.

72

Table # 4.20: To test whether the turnover of respondents influence or do not influence the

incidence of tax of respondents.

H0: There is no significant difference between the turnover and incidence of tax

H1: There is a significant difference between the turnover and incidence of tax.

Table # 4.20

Turnover * Incidence Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 58.226 15 .000*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is lesser than table value.

The probability value of above chi square table is 0.000 (p<0.05), There is an evidence to

reject the null hypothesis and conclude that there is significant difference between turnover and

incidence of tax. Therefore, it is concluded that the incidence of tax is depending on the turnover

of such respondents.

Table # 4.21: To test whether the age of business and incidence of tax differ or do not differ.

H0: There is no significant relation between age of business and incidence of tax.

H1: There is a significant relation between the age of business and incidence of tax.

Table # 4.21

Age of Business * Incidence Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 8.360 12 .756*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is greater than table value.

73

As per the above chi square test results the probability value is 0.756 (p>0.05). It leads to

the acceptance of null hypothesis. I.e. there is no significant relation between the age of business

and incidence of tax.

Table # 4.22: To test whether the education level and knowledge of VAT rates are related or not

related.

H0: There is no significant relation between education level and knowledge of VAT rates

of respondents.

H1: There is a significant relation between education level and knowledge of VAT rates

of respondents.

Table # 4.22

Education * Rate Knowledge Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 17.416 8 .026*

N of Valid Cases 130

(Source: Primary Data collected from VAT payers)

*Significance at 5% level - calculated value is lesser than table value.

The chi square table probability value is 0.026 (p<0.05). There is an evidence to reject the

null hypothesis and to conclude that there is a significant relation between the respondents

education and knowledge of VAT rates.

4.6 RESULTS OF CHI SQUARE TEST RELATING TO VAT OFFICIALS

This section gives the results of chi-square test as applied for VAT officials’ responses

Table # 4.23: To test whether the male and female respondents differ or do not differ about the

work burden in case of VAT administration.

H0: The attributes, sex and work burden are independent

I.e. the work burden of the respondents does not depend on the sex of such

respondents.

H1: The attributes sex and work burden are dependent.

74

Table # 4.23

Gender * Work Burden Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 3.563 4 .468*

N of Valid Cases 130

(Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level - calculated value is greater than table value.

As per the above chi square test results the probability value is 0.468 (p>0.05). It leads to

the acceptance of null hypothesis i.e. there is no significant difference between the gender and

work burden of respondents.

Table # 4.24: To test whether the designation and work burden of respondents are related or not.

H0: There is no significant relation between designation and work burden of respondents.

H1: There is a significant relation between designation and work burden of respondents.

Table # 4.24

Designation * Work Burden Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 16.794 16 .399*

N of Valid Cases 130

(Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level - calculated value is greater than table value.

The above chi square test results show the probability value is 0.399 (p>0.05). It leads to

the acceptance of null hypothesis i.e. there is no significant relation between the designation and

work burden of respondents.

Table # 4.25: To test whether there is any relation between age group of respondents and work

burden in case in case of VAT administration.

H0: The attributes, age groups and work burden are independent

H1: The attributes age groups

75

Table # 4.25

Age Group * Work Burden Cross tabulation

Chi-Square Tests

Value df

Asymp. Sig.

(2-sided)

Pearson Chi-Square 74.728 12 .000*

N of Valid Cases 130

(Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level - calculated value is lesser than table value.

The probability value of above chi square table is 0.000 (p<0.05), there is an evidence to

reject the null hypothesis and conclude that there is a significant relation between the age groups

and their work burden.

4.7 RESULTS OF ONE WAY ANOVA RELATING VAT PAYERS

H0: The age of business do not influence the work burden of respondents. ‘F’ test was

conducted and the table # 4.26 depicts the same.

Table # 4.26

Age of Business and Work burden

Sum of Squares df Mean Square F Sig.

Between Groups 8.736 3 2.912 2.258 .085*

Within Groups 162.495 126 1.290

Total 171.231 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 2.258. Since the probability value is 0.085

(p>0.05) the null hypothesis is accepted and it is concluded that the age of business does not

influence the work burden of respondents.

H0: There is no relation between the education and awareness of exemptions. ‘F’ test was

conducted and the table # 4.27 depicts the same.

76

Table # 4.27

Education and Awareness of Exemptions

Sum of Squares df Mean Square F Sig.

Between Groups 3.904 1 3.904 3.574 .061*

Within Groups 139.819 128 1.092

Total 143.723 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 3.574. Since the probability value is 0.085

(p>0.05) the null hypothesis is accepted and it is concluded that there is no significant relation

between education and exemptions awareness of respondents.

H0: There is no relation between the registration and incidence of tax. ‘F’ test was conducted and

the table # 4.28 depicts the same.

Table # 4.28

Registration and Incidence of Tax

Sum of Squares Df Mean Square F Sig.

Between Groups 2.248 3 .749 4.534 .005*

Within Groups 20.829 126 .165

Total 23.077 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 4.534. Since the probability value is 0.005

(p<0.05) the null hypothesis is rejected and it is concluded that there is significant relation

between registration and incidence of tax.

77

H0: There is no relation between the turnover and convenience to pay tax. ‘F’ test was

conducted and the table # 4.29 depicts the same.

Table # 4.29

Turnover and Convenience to pay tax

Sum of Squares df Mean Square F Sig.

Between Groups 81.754 4 20.439 9.920 .000*

Within Groups 257.546 125 2.060

Total 339.300 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 9.920. Since the probability value is 0.000

(p<0.05) the null hypothesis is rejected. There is a significant relation between turnover and

convenience to pay tax.

H0: There is no relation between the age of business and tax evasion. ‘F’ test was

conducted and the table # 4.30 depicts the same.

Table # 4.30

Age and business and Tax evasion

Sum of Squares Df Mean Square F Sig.

Between Groups 11.717 4 2.929 2.296 .063*

Within Groups 159.514 125 1.276

Total 171.231 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 2.296. Since the probability value is 0.063

(p>0.05) the null hypothesis is accepted. There is no significant relation between age of business

and tax evasion.

78

H0: There is no relation between the turnover and tax avoidance. ‘F’ test was conducted

and the table # 4.31 depicts the same.

Table # 4.31

Turnover and Tax avoidance

Sum of Squares Df Mean Square F Sig.

Between Groups 41.015 4 10.254 4.297 .003*

Within Groups 298.285 125 2.386

Total 339.300 129

(Source: Primary Data collected from VAT payers)

*Significance at 5% level

The result shows that calculated F value is 4.297. Since the probability value is 0.003

(p<0.05) the null hypothesis is rejected. There is a significant relation between turnover and tax

avoidance.

4.8 RESULTS OF ONE WAY ANOVA RELATING TO VAT OFFICIALS

H0: There is no influence of education on work burden. ‘F’ test was conducted and the

table # 4.32 depicts the same.

Table # 4.32

Education and Work burden

Sum of Squares Df Mean Square F Sig.

Between Groups 7.827 4 1.957 2.313 .061*

Within Groups 105.743 125 .846

Total 113.569 129

(Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level

The result shows that calculated F value is 2.313. Since the probability value is

0.061 (p>0.05) the null hypothesis is accepted. That shows there is no significant influence of

education on work burden.

79

H0: There is no relation between the designation and registration. ‘F’ test was conducted

and the table # 4.33 depicts the same.

Table # 4.33

Designation and Registration

Sum of Squares Df Mean Square F Sig.

Between Groups 20.597 4 5.149 2.038 .093*

Within Groups 315.872 125 2.527

Total 336.469 129

(Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level

The result shows that calculated F value is 2.038. Since the probability value is 0.093

(p>0.05) the null hypothesis is accepted. i.e. there is no significant relation between designation

and registration.

4.9 RESULT OF CORRELATION

Table # 4.34(a)

Commercial Tax Department Gross Receipts

(Source: Secondary Data collected from Tamil Nadu statistical report)

Year VAT(Rs in crores) TNGST 1959 (Rs in crores)

2006-07 2290 13347

2007-08 16473 329

2008-09 19305 292

2009-10 21336 272

80

Table # 4.34(b)

Correlations

VAT TNGST

VAT Pearson Correlation 1 -.974*

Sig. (2-tailed) .026

N 4 4

TNGST Pearson Correlation -.974* 1

Sig. (2-tailed) .026

N 4 4

` * Correlation is significant at the 0.05 level (2-tailed).

The correlation between VAT and TNGST is -0.974 which is highly negative

indicating that higher revenue derived from the VAT is not associated with TNGST and vice

versa.

4.10 RESULT OF PAIRED t-TEST

Table # 4.35(a)

Total Revenue of the Government

Amount in Crores

Total income before VAT 8499(02-03) 9767(03-04) 11421(04-05) 13597(05-06)

Total income after VAT 15637(06-07) 16802(07-08) 19597(08-09) 21606(09-10)

(Source: Secondary Data collected from Tamil Nadu statistical report)

Ho: There is no difference in mean revenue before and after the implementation VAT

H1: There is difference in mean revenue before and after implementation of VAT

Table # 4.35(b)

Paired samples statistics

Mean N Std. Deviation Std. Error Mean

Before VAT 1.0821E4 4 2203.69205 1101.84603

After VAT 1.84E4 4 2701.763 1350.882

81

Table # 4.35(c)

Paired samples test

Mean Std. Deviation Std. Error Mean t df Sig. (2-tailed)

-7.58950E3 586.31192 293.15596 -25.889 3 .000*

*Significance at 5% level

Since the probability value is 0.000 (p<0.01), the null hypothesis is rejected and it is

concluded that the mean revenue derived after implementation of VAT is significantly higher

than the mean revenue derived before implementation of VAT. Thus the implementation of VAT

is effective in significantly increasing the total revenue of the Tamil Nadu Government.

4.11 COMPILATION OF OPINION OF VAT PAYERS AND OFFICIALS:

VAT payers’ opinion:

Table #4.36

Table showing the knowledge of VAT rates

Knowledge of Rates Frequency Percent

High 44 33.8

Moderate 50 38.5

Low 36 27.7

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

Table # 4.36 shows the respondents knowledge of VAT rates. Out of 130 respondents 44

respondents have high level knowledge about VAT rates. 50 respondents have moderate

knowledge and 36 respondents have minimum knowledge.

82

Table #4.37

VAT or TNGST

Continue in Tamil Nadu Frequency Percent

VAT System 105 80.8

TNGST 25 19.2

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

Table # 4.37 reveals more than 80% of responds vote for VAT system. It means they

recommend VAT system to continue in Tamil Nadu. Only 25 respondents vote for TNGST

system.

Table #4.38

Table showing the awareness of proposed GST

Proposed GST Frequency Percent

Yes 87 66.9

No 43 33.1

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

Table # 4.38 shows VAT payers’ awareness about proposed GST. 67% of respondents

have awareness about proposed GST. 33% of respondents are not aware of GST.

Table #4.39

Assistant from VAT consultant

Help of others Frequency Percent

Yes 66 50.8

No 64 49.2

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

Table # 4.39 reveals that 66(50.8%) respondents need the help of consultants at the time

of filling returns. 64 (49.2%) respondents may ask help from others like follow VAT payers etc.

83

Table # 4.40

Table Showing about the Registration

Registration Frequency Percent

Yes 100 76.9

No 30 23.1

Total 130 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

Table # 4.40 shows 100 respondents out of 130 (77%) are registered VAT dealers and

only 23% of respondents are unregistered dealers. Unregistered dealers (URDs) are those whose

annual turnover is less than Rs.10, 00,000. They need not file separate return for VAT. However

they pay VAT as part of their purchase price.

VAT officials’ opinion:

Table #4.41

Table showing which system to continue in Tamil Nadu

Continue in Tamil Nadu Frequency Percent

VAT System 86 66.2

TNGST 10 7.7

Proposed GST 31 23.8

Other System 3 2.3

Total 130 100.0

(Source: Primary Data collected from VAT officials and consultants)

Table # 4.41 shows the opinion of VAT officials of which system to continue in Tamil Nadu.

66.2% of respondents recommend VAT system, 23.8% of respondents recommend proposed

GST, only 7.7% of respondents recommend continuation of TNGST and 2.3% respondents

recommend other systems.

84

4.12 This section complies the opinion given by VAT officials for the open ended questions

included in the questionnaire.

1. If the main aim of introducing VAT is to implement uniform tax system throughout the

country then why each state has its own VAT Act?

i. VAT phase is a transitional phase between General Sales Tax and Goods and

Service Tax Act. Sales tax comes under the State subject as per Indian

constitution. Hence, it is difficult rather impossible to expect every State to

follow a single rate structure. The forthcoming GST is expected to do this job

as it would be rolled out only after constitutional amendment.

ii. It Depends upon State Government Policy.

iii. Own state Government Policy.

iv. These are all tactics for getting income from a dealer and confusing them.

v. Manufacturing rates; trading rates differ from State to State.

2. How do you consider VAT as a better system as compared to TNGST?

i. Set-off tax already paid i.e. Input Tax Credit. It easer the burden of traders and

manufactures. All units of supply chain are brought under tax net and tax

evasion is checked to a certain extent.

ii. VAT Act is systematically examined and implemented, so it is a better system as

compared to TNGST.

iii. In TNGST lot of operational difficulties. i.e. turn over tax and surcharge, but

VAT has only one tax. i.e. there is no additional tax.

iv. VAT is more clear and has well framed rules and regulations of the products as

compared to TNGST.

v. In TNGST work burden of officers is more when compared to VAT.

3. What difficulties you encounter in the VAT system?

i. Commodity codes cannot be found exactly. Incomplete implementation. New

entries to be made both in system and ledger.

85

ii. The main difficulties of VAT system in practices and lack of implementation of

technical progress.

iii. More exemptions.

iv. e – Mode is not working 100%.

v. Inadequate man power.

4. How do you compare the present VAT with the proposed GST?

i. After the GST implementation the rate of levy of tax would increase.

ii. No idea about this topic.

iii. GST system is the best one.

iv. In VAT state Government has a lot of income but in CST central income.

v. Undecided

5. Give general suggestions in the context of VAT?

i. Needs to be simplified more; inter-state purchase set-off should be made available.

ii. Needs to be fully computerized.

iii. Commodity code is needed.

iv. Presently VAT follows different set of rules and regulation in the Indian Union.

Suggest a single uniform tax system in all the states.

v. If exemptions are withdrawn VAT system would give more revenue to

Government.

vi. The Government of India raises the tax rates by slabs. But better to remove the tax

slabs. Then only India will grow.

vii. Equal treatment and equality for all.

86

4.13 REVENUE COLLECTION UNDER VAT

Table # 4.42

Commercial Tax Department Gross Receipts (Amount in Crores)

Year 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10

VAT - - - - - 2290 16473 19305 21335

TNGST 7541 8499 9767 11421 13597 13347 329 292 271

(Source: Secondary Data collected from Tamil Nadu statistical report)

The above data are presented diagrammatically in Fig # 4.16

The Table and Bar Diagram show the clear picture about the revenue growth of the state

after implementation of VAT. The VAT has come in to force in Tamil Nadu in the year of 2006-

07. If one compares the revenue growth of TNGST and VAT, VAT is most preferable to the

State compared to TNGST. Because from 2001-02 financial year to 2005-06 financial years

TNGST’s highest collection was Rs.13597 crores in the year of 2005-06. On the other hand VAT

was introduced in 2006-07 financial year. In the next financial year itself (2007-08) it collected

Rs.16473 crores. From that one may conclude that after introducing the VAT the revenue of the

state would grow every financial year.

0

5000

10000

15000

20000

25000

Rev

enu

e in

Cro

rs

Year

Commercial Tax Department Gross Receipts

VAT

TNGST

87

Table # 4.43

Commercial Tax Department Total Receipts (Amount in Crores)

Year VAT TNGST Total Variance Growth Rate (Y-O-Y)

2001-02 - 7541 7541 - -

2002-03 - 8499 8499 958 12.70

2003-04 - 9767 9767 1268 14.92

2004-05 - 11421 11421 1654 16.93

2005-06 - 13597 13597 2176 19.05

2006-07 2290 13347 15637 2040 15.00

2007-08 16473 329 16802 1165 7.45

2008-09 19305 292 19597 2795 16.63

2009-10 21335 271 21606 2009 10.25

(Source: Secondary Data collected from Tamil Nadu statistical report)

The above data are presented diagrammatically in Fig # 4.17

Table # 4.43 and Figure # 4.17 represent the revenue growth of Tamil Nadu Government.

The total revenue of the Government has consistently increased. Hence the implementation of

VAT does not affect the total revenue of the State Government.

y = 1797.x + 4843

R² = 0.988

0

5000

10000

15000

20000

25000

TOTAL

TOTAL

Linear (TOTAL)

88

CHAPTER V

SUMMARY, FINIDINGS AND CONCLUSIONS

Summary of the Study

A tax is “a back bone of every country to meet their social obligations. Without tax the

Government cannot do any social benefit activities. Government is the only person to levy tax.

Hence tax is compulsory payment or contribution by the people to the government for which

there is no direct return to the tax payers.

Sales Tax began in India with “petrol tax” introduced by the government of Madhya

Pradesh. During the British rule, arrack and toddy shops were functioning in Madras Presidency.

Following the Madhya Pradesh “petrol tax”, Madras Presidency introduced “Sales Tax” in 1939.

The concept of VAT was first adopted by France in 1954. By 2000, it was used by

Canada and 40 other industrialized countries. Tamil Nadu is one of the 21 states in india which

have introduced the Value Added Tax (VAT) system of taxation from 1st April 2007. With

introduction of VAT, the sales tax department has moved to a globally recognized sales taxation

system that has been adopted by more than 130 countries.

The design of Tamil Nadu state VAT is generally guided by the best international

practices with regard to legal frame work, as well as operating procedures. Another key factor in

preparation of the design of state level VAT is the national consensus on certain issues. The

consensus has been arrived at through the discussion in the empowerment committee of state

finance ministers on implementation of state level VAT.

On 1st April 2007, VAT replaced the single point tax which had a number of

disadvantages, primarily that of double taxation. VAT is a modern and progressive taxation

system which avoids double taxation. In the addition to offering the possibility of a set-off tax

paid on purchases, VAT has other advantages for both business and government.

It eliminates cascading impact of double taxation and promotes economic efficiency.

It is primarily a self-policing; self-assessment system with more trust put on dealers.

89

It provides the potential for a stronger manufacturing base and more competitive export

pricing.

It is invoice based, and as a result it offers a better financial system with less scope of

error.

It has an improved control, mechanism resulting in better compliance.

It widens the, tax base and promotes equity.

VAT in Tamil Nadu is levied under a legislation known as the Tamil Nadu Value Added

Tax Act (TNVAT Act), supported by the Tamil Nadu Value Added Tax Rules (TNVAT Rules).

VAT is levied on sale of goods including intangible goods.

Objectives of the Study

To study about value added tax system in general.

To study the profile of VAT payers and VAT administrators.

To examine the influence of various factors on the work burden VAT officials.

To examine the influence of various factors on VAT compliance by VAT payers.

To examine whether value added tax system helps to revenue appreciation to the

government compare to other tax system like TNGST and finally

To find whether VAT system is convenient to the government as well as the VAT payers

Methodology

In the present study both primary and secondary data were used with the help of

questionnaire from the respondents. The total population of the study consists 260 respondents,

which include 130 VAT officials and VAT consultants/and 130 VAT payers. Convenience cum

Judgment sampling techniques were adopted in this research. The study has been conducted in a

period of six months from December 2010 to May 2011. The statistical tools used for the

purpose of analysis of data were Chi-square test, One Way ANOVA, correlation, Paired t-Test

and Factor Analysis.

90

The major findings of the study are as follows

VAT payers: (sample size is 130)

Among the 130 respondents more than 80% (i.e. 83.1%) of respondents are male and

22 respondents are female.

More than 50% (i.e. 56.9%) respondents are 20-29 years, 21.5% (i.e. 28 respondents)

are 30-39, and 23 respondents are 40-49 years old.

57.7% respondents are married and 42.3% are unmarried.

Majority respondents are graduate i.e.57 respondents, 37.7% respondents have

completed 12th

standard, and 12 respondents are post graduates.

The respondents are engaged in different business like Provisional store, Hardware,

Pharmacy shop, etc,

60 out of 130 respondents’ turnover is Rs.1-10 lakhs, 30 respondents turnover is from

Rs.10 to 20 lakhs, and 16 respondents’ turnover Rs.40-50 lakhs.

53 respondents are doing business 0-5 years, 39 respondents 5-10 years, 19

respondents 15-20 years, 16 respondents 10-15 years, only 3 respondents out of 130

are doing business for more than 20 years.

100 respondents out of 130 are registered VAT dealers.

VAT Officials: (Sample Size is 130)

Out of the 130 respondents 53.8% of respondents are male i.e.70 respondents and 60

respondents are female.

Age group about VAT officials tells 29% of respondents are between 50-59 years old,

37 respondents are 30-39 years, 36 respondents are 40-49 years and only 19 are tn the

age group of 20-29 years.

The majority respondents are married i.e. 111 out of 130.

Qualification wise majority respondents are graduates i.e.62, 29 are post graduates

and 6 are professional degree holders.

42 respondents out of 130 are Assistant Commercial Tax Officers, 41 respondents are

tax consultants, 21 are Assistant Commissioners, and 17 respondents are Commercial

Tax Officers.

91

Income wise 93% of respondents earn 1-4 lakhs per annum and only 9 respondents

out of 130 earns 4-8 lakhs per annum.

Findings of factor Analysis

The factor analysis for VAT officials resulted in clubbing of 30 variables into 9

components i.e. 9 factors.

The factor analysis for VAT payers resulted in of 4 factors out of 10 variables.

Findings of Chi-square Test

The work burden of the VAT payers is dependent the gender.

There is no relation between education and work burden VAT payers. It shows both

attributes are independent.

Work burden VAT payers are related to type of business.

There is a significant relation between turnover and work burden of VAT payers.

There is significant relation between turnover and incidence of tax.

There is no significant relation between the age of business and incidence of tax.

There is a significant relation between the respondents’ education and knowledge of

VAT rates.

The gender and work burden of VAT officials are independent.

There is no significant difference between the designation and work burden of VAT

officials. It denotes the designation and work burden of respondents are independent.

There is a relation between age and work burden of VAT officials.

Findings of ANOVA

The age of business does not influence the work burden of VAT payers.

There is no significant relation between Education and Exemptions awareness of

VAT payers.

There is a significant Registration and Incidence of tax of VAT payers.

There is a relationship between Turnover and Convenient to pay tax

There is no difference between the Age of business and Tax evasion of VAT payers.

There is a relationship between turnover and tax avoidance.

92

There are no variations of vat officials education and their work burden of VAT

officials.

Findings of Correlation

There was a highly negative correlation indicating that higher the revenue derived from

the VAT is not associated with TNGST.

Findings of Paired t-Test

On based a paired t-Test finds the implement of VAT is derived revenue is significantly

very more.

Compilation of opinion/suggestions of respondents

I. VAT payers

44 respondents have high level knowledge about VAT rates. 50 respondents have

moderate knowledge and 36 respondents have minimum knowledge.

80% of responds vote for VAT system and 25 respondents vote for TNGST

system.

67% of respondents have awareness about proposed GST. 33% of respondents are

not aware of GST.

66 respondents need the help of consultants at the time of filling returns. 64

(49.2%) respondents may ask help from others.

II. VAT officials

66.2% of respondents recommend VAT system, 23.8% of respondents

recommend proposed GST, only 7.7% of respondents recommend continuation of

TNGST and 2.3% respondents recommend other systems.

Each state has its own VAT Act. Because of

Own state Government Policy.

These are all tactics for getting income from a dealer and confusing them.

Manufacturing rates; trading rates differ from State to State.

93

VAT is a better system compared to TNGST because of:

In TNGST lot of operational difficulties. i.e. turn over tax and surcharge,

but VAT has only one tax. i.e. there is no additional tax.

VAT is clear and has well framed rules and regulations of the products as

compared to TNGST.

In TNGST work burden of officers is more when compared to VAT.

Difficulties of VAT system.

Commodity codes cannot be found exactly. Difficulty in implementation.

New entries to be made both in system and ledger.

More exemptions.

e – Mode is not working 100%.

Inadequate man power.

General suggestion for VAT.

Needs to be fully computerized.

Commodity code is needed.

Presently VAT follows different set of rules and regulation in the Indian

Union. Suggest a single uniform tax system in all the states.

If exemptions are withdrawn VAT system would give more revenue to

Government.

The Government of India raises the tax rates by slabs. But better to

remove the tax slabs. Then only India will grow.

94

Conclusion and Suggestions

The suggestions and conclusion are based upon the results of the study. Suggestions are

made based on the respondent’s opinion.

VAT payers feel heavy work burden in case of filing of VAT return, for that they need

the assistance of VAT consultants. It happens because of lack of sufficient knowledge. It reavels

one of the drawbacks of VAT. For that, the State Government should issue suitable manual of

VAT to the assesses, which should contain the practical application of VAT procedures. It must

be in local language.

VAT officials also feel heavy work burden to administer the VAT, because of inadequate

staff members. So the authorities of the Commercial Tax Department should fill the vacancies in

Commercial Tax Offices immediately. This will overcome the limitation in future. So the

authorities should concentrate on recruitment of staff members.

Finally it is concluded VAT helps to have more revenue collection to the Government of

Tamil Nadu. From 11th July 2011onwords the government of Tamil Nadu has increased the VAT

rates from 1%,4%,12.5% to 1%,5%,14.5%, Definitely it would help to further increase the

revenue. So the government should take utmost care in the matter of issuing manual and

recruitment of staff members.

95

BIBLIOGRAPHY

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(CODSSIA)

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Kothari .C.R “Research Methodology (Methods and Techniques)”, Wiley Eastern Ltd, New

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Alan Schenk, Worldwide Versus Territorial Tax Systems: Comparison of Value Added Tax

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96

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Countries (2010).

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(Social Science Research Network, 2010).

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Web Sites Used:

www.tn.gov.in

www.tax4india.com

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www.google.com

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www.emathzone.com

98

QUESTIONNAIRE

ANNEXURE-I

“A QUESTIONNAIRE FOR VAT PAYERS”

Dear Sir/ Madam

I am A.HARIKUMAR an M.Phil scholar in commerce, Pondicherry University,

puducherry. I am doing research in the area of “value added tax with special

reference to Thiruvallur Region”. I request you to solicit the required

information for research purpose. The opinion given would be treated as highly

confidential and will be used only for academic purpose. Kindly put a tick for the

right options and give your opinion.

1. Name: ………………………………………………………………………………

2. Gender

a) Male b) Female

3. Age Group

5. Educational qualification

a) Upto12th standard b) Graduate

c) Post Graduate d) Professional degree

e) Others please specify……………………………………………..

a) 19 Years or Younger b) 20 - 29 Years

c) 30 - 39 Years d) 40 - 49 Years

e) 50 - 59 Years f)above60 Years

4. Marital status

a) single

b) Married

99

6. Which type of business are you doing?

a) Pharmacy shop b) Provisional store

c) Electrical or Electronics shop d)Fancy store

e) General merchant f) Textile

g) Foot wear shop h) jewellery shop

i) Automobile shop j) Hardware

k) Others Please mention………………………………………

7. Annual turn over

a) 1 to 10Lakhs b) 10 to 20Lakhs c) 20 to 30Lakhs

d) 30 to 40Lakhs e) 40 to 50Lakhs f) 50 to 60Lakhs

g) 60 to 70Lakhs h) 70 to 80Lakhs i) 80 to 90Lakhs

j) 90 to 1 crore k) Above 1 crore

Please specify how much? ……………………………………….

8. How old your business is?

a) 0-5 years b) 5-10 years

c) 10-15 years d) 15-20 years

d) More than 20 years please specify…………………………….

9. Whether you are a registered VAT dealer?

a) Yes b) No

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

10. Value added tax system has less work burden, in case of filing of VAT

return?

a) 1 b) 2 c) 3 d) 4 e) 5

11. In Tamil Nadu state Value added tax system helps to most dealers’

growth?

a) 1 b) 2 c) 3 d) 4 e) 5

12. Incidence of tax is more under value added tax system as compared to

other systems like TNGST system.

a) 1 b) 2 c) 3 d) 4 e) 5

13. The Value added tax system actually leads to a simpler tax system.

a) 1 b) 2 c) 3 d) 4 e) 5

14. “It is easy and convenient to pay tax under VAT”

a) 1 b) 2 c) 3 d) 4 e) 5

15. The assessment procedures under VAT are very simple and clear.

a) 1 b) 2 c) 3 d) 4 e) 5

16. In Value Added Tax system there is some chance of tax evasion?

a) 1 b) 2 c) 3 d) 4 e) 5

17. In Value Added Tax system there is some chance of tax avoidance?

a) 1 b) 2 c) 3 d) 4 e) 5

18. Value added tax system is an alternative mechanism of collection of

tax?

a) 1 b) 2 c) 3 d) 4 e) 5

19. The computation of amount of tax payable is simple under VAT as

compared to other systems.

a) 1 b) 2 c) 3 d) 4 e) 5

20. Are you aware of exemptions available under Value Added Tax system?

a) Yes b) No

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21. In your business, mention the goods you are dealing which are

exempted?

a) ……………………………………………………

b) …………………………………………………….

c) ……………………………………………………

d) …………………………………………………….

22. What about your knowledge about Value added tax system in the

matter of tax rates.

a) High b) Moderate c) Low

23. Under which type you are paying VAT?

a) MANVAT b) Whole sale VAT c) Retail VAT

24. Which tax system would you recommend to continue in Tamil Nadu?

a) Value added tax system b) TNGST

25. Are you aware of the proposed GST system?

a) Yes b) No

If yes would you like recommend for the adoption of GST system

a) Yes b) No

26. Are you aware of incentives available to dealer under VAT?

a) Yes b) No

If yes what type of incentives are availed of? Please mention

a) ……………………………………………………

b) …………………………………………………

c) ……………………………………………………

d) …………………………………………………….

27. Are you taking the help if tax consultants for filing tax VAT returns?

a) Yes b) No

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If yes how much fees are you paying the.............................................

ANNEXURE-II

“A QUESTIONNAIRE FOR VAT CONSULTANTS AND

OFFICIALS”

Dear Sir/ Madam,

I am A.HARIKUMAR an M.Phil scholar in commerce,

Pondicherry University, puducherry. I am doing research in the

area of “value added tax with special reference to

Thiruvallur Region”. I request you to solicit the required

information for research purpose. The opinion given would be

treated as highly confidential and will be used only for academic

purpose. Kindly put a tick for the right options and give your

opinion.

1. Name: ………………………………………………………………………………

2. Gender

a) Male b) Female

3. Age Group

a) 19 Years or Younger b) 20 - 29 Years

c) 30 - 39 Years d) 40 - 49 Years

e) 50 - 59 Years f)above60 Years

4. Marital status

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5. Educational qualification

a) upto12th standard b)Graduate

c) Post Graduate d) Professionals

e) Others please specify…………………………………………….

6. Employment designation / Position currently held

a) Professional cadre b) Joint commissioner

c)Deputy commissioner d)Assistant commissioner

e) Commercial tax officer

f) Assistant commercial tax officer

g) Tax analyst/consultant

7. Annual income

a) 1 to 4Lakhs b) 4 to 8Lakhs

c) 8 to 10Lakhs d) 10Lakhs above

a) single

b) Married

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

8. Registration of all taxable persons is must for successful implementation

of tax.

a) 1 b) 2 c) 3 d) 4 e) 5

9. Value added tax system has less work burden?

a) 1 b) 2 c) 3 d) 4 e) 5

10. In Tamil Nadu state Value added tax system helps to most dealers’

growth?

a) 1 b) 2 c) 3 d) 4 e) 5

11. Value Added Tax system has lot of conditions imposed in registration.

a) 1 b) 2 c) 3 d) 4 e) 5

12. The Value added tax system actually leads to a transparent tax

system.

a) 1 b) 2 c) 3 d) 4 e) 5

13. VAT payer feels “it is easy and too convenient to pay”

a) 1 b) 2 c) 3 d) 4 e) 5

14. The Value added tax reforms are good for the economy of Tamil Nadu.

a) 1 b) 2 c) 3 d) 4 e) 5

15. Implementation of VAT reduces tax avoidance and Evasion.

a) 1 b) 2 c) 3 d) 4 e) 5

16. Value added tax system is expected to prevent tax loss to the state.

a) 1 b) 2 c) 3 d) 4 e) 5

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

17. The Value added tax procedures are very simple and clear.

a) 1 b) 2 c) 3 d) 4 e) 5

18. There is a general belief that revenue collection under VAT is more

than that under TNGST.

a) 1 b) 2 c) 3 d) 4 e) 5

19. VAT covers all type of goods and services and experts say it is one of

the important advantages. (I.e. coverage)

a) 1 b) 2 c) 3 d) 4 e) 5

20. Value added tax system ensures that a tax payer does not involve in

fraudulent activities.

a) 1 b) 2 c) 3 d) 4 e) 5

21. Value Added Tax system provides revenue security to the government.

a) 1 b) 2 c) 3 d) 4 e) 5

22. The Value Added Tax system shows a complete and true appreciation

of fiscal responsibility.

a) 1 b) 2 c) 3 d) 4 e) 5

23. Tax reforms in India have been initiated as a part of the economic

reforms in 1991.

a) 1 b) 2 c) 3 d) 4 e) 5

24. The recent evolution of VAT can be considered as the most important

fiscal innovation.

a) 1 b) 2 c) 3 d) 4 e) 5

25. Value added tax system is an alternative mechanism of collection of

tax?

a) 1 b) 2 c) 3 d) 4 e) 5

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

26. Value Added Tax system suffers from lack of clarity on the treatment of

interstate sales.

a) 1 b) 2 c) 3 d) 4 e) 5

27. The main aim of the government in introducing Value Added Tax

system is to implement the uniform tax system throughout the country.

a) 1 b) 2 c) 3 d) 4 e) 5

28. Is VAT promotes voluntary tax compliance.

a) 1 b) 2 c) 3 d) 4 e) 5

29. Value added tax system has appropriate tax structure and simple

procedures and forms to facilitate, encourage and induce the dealer for

voluntary compliance.

a) 1 b) 2 c) 3 d) 4 e) 5

30. An appropriate system for registration and tax payer identification is

required for administrating of VAT.

a) 1 b) 2 c) 3 d) 4 e) 5

31. Value added system has a sound and effectively enforceable penalty

system that stimulate dealers to go for voluntary compliance.

a) 1 b) 2 c) 3 d) 4 e) 5

32. Tax payer Identification Number (TIN) is must to identify the dealers.

a) 1 b) 2 c) 3 d) 4 e) 5

33. Large number of small scale businesses are under misconception that

input tax has to be adjusted against output tax?

a) 1 b) 2 c) 3 d) 4 e) 5

34. Retail VAT(R-VAT) is difficult to administer compared to MANVAT and

W-VAT?

a) 1 b) 2 c) 3 d) 4 e) 5

35. In TNVAT the filing of chartered accountant report and opting for self

assessment is not mandatory.

a) 1 b) 2 c) 3 d) 4 e) 5

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36. Dealers are highly satisfied at the time of your educational visit?

a) 1 b) 2 c) 3 d) 4 e) 5

37. Suitable system of invoicing and bookkeeping is required?

a) 1 b) 2 c) 3 d) 4 e) 5

38. Certain goods like lottery, petroleum products, etc, may not be taxed

under VAT? Because,

a) It is difficult to administer

b) It is based upon their price fluctuations

c) It is not considered goods under VAT act

d) None of the above

If you choose none of the above option please indicate the correct reason for that

……………………………………………………………………………………… ………………………………………..

39. Which tax system would you recommend to continue in Tamil Nadu?

a) Value added tax system

b) TNGST

c) Proposed GST

d) Other system (please mention

…………………………………………………………………………………………………………)

40. Whether incidence of tax avoidance and evasion has reduced

considerable under VAT in comparison with TNGST?

a) Yes b) No

41. If the main aim of introducing VAT is to implement uniform tax system

throughout the country then why each state has its own VAT Act?

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42. How do you consider VAT as a better system as compared to TNGST?

43. What difficulties you encounter in the VAT system?

44. How do you compare the present VAT with the proposed GST?

45. Give the general suggestion in the context of VAT?