The Hindu : Tamil Nadu News : Legislation soon on VAT regime

Online edition of India's National Newspaper
Sunday, Feb 27, 2005

Tamil Nadu

Tamil Nadu

Legislation soon on VAT regime

By Our Special Correspondent

CHENNAI, FEB. 26. The trader-friendly value added tax (VAT) regime, to replace State sales tax and additional sales tax, is being introduced in Tamil Nadu and legislation and rules will be unveiled shortly, according to official sources.

Based on the design finalised by the Empowered Committee of State Finance Ministers on the "West Bengal model," the VAT regime will address apprehensions and doubts, especially in the absence of a final (as against a two-year-old draft) bill and draft rules.

The VAT system will do away with routine inspections and verifications by officials. An audit system will come into force a year after its introduction and spot verification will be undertaken only whenever doubts arose about compliance. The time limit for reopening assessment will be reduced to three years and assessees will have to maintain records only for five years.

Official sources said credit against tax paid on stocks, held on the date of implementation (likely to be April 1, 2005), would be available for goods purchased within the previous year. Details of the credit would be made available within one month of stock verification and credit granted within three months thereafter, while setoff of this credit would be allowed up to six months thereafter.

Manufacturers enjoying sales tax deferral (as an investment incentive) would continue to do so till the expiry of eligibility, while for those availing themselves of ST waiver, an option would be given to convert to deferral or continue with waiver with no eligibility to input tax credit.

Traders (second and subsequent sellers, but not manufacturer-traders) with a turnover less than Rs. 50 lakhs who opt for the facility of compounding VAT through a turnover tax need to charge and pay VAT only from the day they cross the ceiling. However, it will be better for traders who foresee a possible crossing of the limit during the year not to opt for compounding to avoid conversion procedures, say the sources. Those who opt for compounding will face the risk of buyers avoiding them in view of the buyers' need for input tax credit.

No discrimination against imports

An important fallout of the VAT regime is the abolition of the discriminatory tax on imports in the State. At present, in the case of many items subject to 12 or 16 per cent State sales tax and which are manufactured within the country, the competing import item is subject to an ST rate of 20 per cent. "The differential ST on imports is being discontinued because it is a violation of World Trade Organisation norms. If such taxes are levied, Indian exports face the risk of retaliation by our trade partners," the sources said. In many countries, VAT was levied on imports but in the case of India, this fell within the powers of the Centre.

As for exporters subject to a "zero rate" of VAT, the tax would be payable initially but would be refunded on a quarterly basis.

"For purposes of VAT, the only documentation required will be invoices carrying the rate of tax charged," the sources said. A negative list of capital goods would be published and they would not be eligible for input tax credit. Both manufacturers and traders would be eligible for credit against purchase of capital goods. Regarding sales in transit (viz., transfer of title to goods in the course of transportation from one State to another) in terms of the Central Sales Tax Act, the Union Government had agreed, in principle, to abolish the concept, officials said.

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