The structure of an ideal VAT:-

The Value Added Tax is an important innovation of 21st Century. In its purest form, VAT is a tax that is levied on the value added along different stages of production and distribution of a commodity or service. Therefore, it is on the sum total of value added, i.e., equal to the value of a commodity or service. In this sense, it should be equivalent to a retail sales tax that is collected only at the retail stage. But the retail sales tax is difficult to collect because there are too many retailers of various sizes. The VAT, instead, can be collected at earlier stage of production in different fragments and can end at the retail stage. But the total tax collected from the VAT should be exactly the same as if collected only from the retailers of the commodity concerned.

The VAT system is a basically a reform to replace the old Sales tax System which had manifold defects, the major one being ‘cascading’. The change was never brought to increase the revenue of the state and the concept of Revenue Neutral Rate (RNR) was at the core of the systems. Unfortunately, we could not enforce RNR in true sense as different RNR’s were working out for different states. Implementing such RNR’s would have revived “rate war” which was effectively controlled under “Uniform Floor Rate”. In case of our own State the RNR was working out less than 12%.

The VAT system introduced in India cannot be termed as true VAT. It is a distorted VAT. In true VAT, there is no scope for exemption such as Tax Based Industrial Incentive etc. But in India, all of sudden, discontinuance of such an incentive enjoyed by industries over a period of time would have created number of problems and therefore, it was thought of controlling it to the extent possible in acceptable form, without harming the VAT system, seeking to take it’s place in the economy.

Sales Tax Based Incentive

Sales Tax based incentive by way of exemption of Sales Tax was introduced in the then Union Territory of Goa, Daman & Diu as early as in 1971. Initially, it was 5 years to be reckoned from the date of registration with the Department of Industries & Mines. Subsequently, having realized it’s impact, the period of 5 years was counted from the date of first sale after the date of Sales Tax registration, provided the claimant industry is registered with the Department of Industries. The period of exemption provided for got enhanced to 15 years somewhere in the year 1983. The relevant entry of the second schedule also undergone changes with clause for graduation from ‘small’ to ‘medium’ and exclusion of highly polluting industries from the purview of exemption generally, but allowable conditionally.

Consequent upon decision in the conference of Chief Ministers on 16/11/1999, this incentive of exemption has been discontinued to the new units w.e.f. 1/4/2002. The existing units, however, were allowed to reap the benefit till its expiry, termed as “ balance unexpired “ period.

In relation to medium and large scale industries, the exemption incentive was extended somewhere in the year 1985.Initially it was for 10 years for Medium Scale and 5 years for Large Scale Industries. Subsequently the period was enhanced to 12 years and curtailed to 10 years w.e.f. 1/4/2001. Polluting Industries were excluded from exemption generally, but allowed conditionally in exercise of power vested in Government.

As stated earlier, largely on account of sales tax based incentive by way of exemption the growth of small scale industries in the state was eye catching. It is an accepted fact, that within the State, raw materials and capital goods required by Industrial Units functioning in the State are by and large not available within the State. With the result these items are required to be procured from outside the State. Consequently, the procured goods had to be loaded with 4 % CST. Further, there being no local market for the goods produced by the Industrial Units, the dispatches had to made by way of sales to other states.

It is on account of extension of exemption to inter state sales made by eligible Industrial Units of the goods manufactured by them, the Industries could stand in the competitive market in relation to outside the state manufacturers.

The authorities at the helm of the affairs of the Sales Tax Department then realized the position and the difficulties likely to be faced by the Industries once the VAT is introduced and implemented the Goa Sales Tax Deferment-Cum-Net Present Value Compulsory Payment Scheme, 2001. The scheme underwent amendments according to the needs of hour in 2003 and 2005.

Exemption of CST: A noteworthy feature of Goa Sales Tax exemption is that it was extended to inter-state sales u/s 8(5) of the Central Sales Tax Act, 1956. Only after 11/5/2002 the requirement of production of C/D form was introduced by amendment to the C.S.T. Act, 1956.

Effect of Incentive: During the pre-liberation era in Goa, we had only 46 industries. During the period from 1961 to 1971 approximately 423 industries were started in the Territory. In 1987, i.e. at the time when Goa achieved statehood, there were approximately 3,200 Small Scale Industrial units. The credit for such a speedy growth of SSI ‘s has to go in a big way, to Sales Tax incentive and effective implementation of relevant scheme. The march continued and at the end of 2005 it crossed 7000(Industries).

The Goa Value Added Tax Deferment-Cum-Net Present Value Compulsory Payment Scheme, 2005 which is commonly known as ‘NPV’ Scheme has replaced the exemption available in Sales Tax regime. The scheme is compulsory as far as local sales are concerned i.e. for purposes of VAT. It simply means payment of 25% of net tax payable during the balance unexpired period of exemption available in pre-VAT regime.

Although in Goa, NPV Scheme is made compulsory; in neighbouring states exemption continued which placed the Goan industries in disadvantageous position in competitive market as compared to neighbouring state industries.

Besides, as stated earlier there being no raw material required by industries available within the state, it had to be imported from other states on payment of CST of 4 % for which no input tax credit was available in VAT

It would have been an industry friendly gesture if the NPV was allowed to be worked out at 25% of output tax and deduction of admissible input tax credit was allowed with due revenue safeguard from so allowed NPV at 25%. However, the Authorities in Sales Tax were too much revenue minded and were working the revenue collection arithmetically forgetting that the revenue for the State will only accrue if industries function effectively and required employment opportunities are created within the State.

It would also have been a step towards safeguarding the local industries to allow one time option for eligible industries who have opted for NPV to be in exemption during limited period within the so called ‘balance unexpired’ period. This could have been till CST is completely phased out. Further, it could have been restricted at a point of sale by eligible industry to plug the anticipated leakages of the revenue.

One more issue the framers of NPV Scheme have not taken into consideration is that, continuance of NPV Scheme benefit in case of graduation from Small Scale Industry to Medium Scale Industry / Large Scale Industry. In the best interest of local industries specially those in small scale sector, such a concession would have provided a required solace.

The above issues perhaps escaped attention of draftman of the scheme due to missing / postponing the VAT implementation date and diluting the VAT to a large extent in National Interest. Proper feedback from the market during the post implementation period of VAT and considering such feedback in right spirit would have eased out the problem of SSI sector.

Other issues affecting industries in VAT regime.

Entry 53 of schedule B to the Goa VAT Act, 2005 reads as under:-

“Industrial inputs and packing materials as may be notified.”

The Government of Goa has notified the items for purposes of said entry. Now, ‘Industrial input’ and ‘packing material’ are two different and distinct classes of goods. The Department of Sales Tax has misinterpreted the entry to mean that packing material, to fall within the ambit of said entry should be packing material to be consumed by the industry. With this misinterpretation, Government prescribed form XXXIII for claiming the lower rate of 4 % under the entry referred to above. The result is that traders are reluctant to purchase packing material from industries as the VAT rate for them is 12.5 % (without VAT XXXIII ).

In fact, under VAT system there should not be any forms such as VAT XXXIII, VAT XXX. If the revenue leakage is required to be plugged and if Government fears loss due to misuse by certain unscrupulous traders, linkage could have been to the provision of Section 8 (3) of the Central Sales Tax Act, 1956.

In any case, the provision of forms VAT XXX and VAT XXXIII is against the principles of Value Added Tax.

Effect of recent amendment to the C.S.T. Act, 1956.

With effect from 1st April 2007, the Central Sales Tax Act, 1956 has been amended. As we are now aware, VAT is a consumption based tax i.e. tax collected by State where goods are consumed. As against this, CST is production based tax i.e. tax collected by State where goods are generally produced. On comparison of both these taxes, one can infer that they i.e. CST and State VAT are not compatible.

With effect from 1/4/2007 following changes, inter-alia, are brought in force:-

i) CST rate reduced to 3%.
ii) CST rate applicable for sale to unregistered dealers will be same as that of VAT rate within the State.
iii) ‘D’ forms which were issued by Government Departments upto 31st March 2007, stands abolished.

Now sale to Government will be treated for CST purposes as if it is sale to unregistered dealer.

SSI’s in Goa supplying goods to Government Departments / registered dealers / Unregistered dealers, in course of inter-state trade, shall have to charge CST.

Now in 4% taxable schedule of Goa VAT Act, there are certain entries which take within their ambit components, fittings and parts of named commodities. It is quite possible that some of the parts are multi-use parts and for that reason disputes as regards rate of tax with Assessing Authority at subordinate level cannot be ruled out. The SSI’s manufacturing parts / components / fittings should, therefore, exercise proper caution.

Although there is 1% reduction in CST this year and it is hoped, further reduction will be as anticipated, the real solution will come if CST is reduced to NIL and inter-state transactions are ‘zero rated’.

Computerisation of the Department:-

It is surprising to know that the Department is not fully computerized even after two years of VAT being implemented. CAN VAT be effectively enforced without Computerisation? Even the Registration Certificate under the Goa Value Added Tax has not been issued to the dealers including the SSI’s inspite of 2 years period having been elapsed. The Department is perhaps happy on overall growth of tax revenue. But the fact remains that the major contribution is from ‘petroleum products’ and ‘NPV’ of industries. It will be foolishness to place reliance on one single commodity. The ways and means for alternative should be found out and the knock at the door of Goods and Service Tax by 2010 should not be ignored or passed on by Authorities to their Successors. No time should be spared to make a comprehensive study of problems likely to crop in once Goods & Service Tax is introduced as categorically spelt out by Honourable FM of India in his Budget Speech. He has placed the date of implementation as 2010. The Government, Trade & Industries, therefore, have ample time to open a debate on the issue and to bring to light the likely disadvantages of the business class, specially, SSI’s which have bright future in posterity.

The newly installed Government in Goa should endeavour to translate the above suggestions in reality to give solace to the SSI’s which in turn will boost up revenue collection.