Chapter 01

CHAPTER 01
INTRODUCTION
1. INCOEM TAX
An income tax is a tax imposed on individuals or entities (taxpayers) that varies with the
income or profits (taxable income) of the taxpayer. Details vary widely by jurisdiction. Many
jurisdictions refer to income tax on business entities as companies tax or corporate tax.
Partnerships generally are not taxed; rather, the partners are taxed on their share of
partnership items. Tax may be imposed by both a country and subdivisions. Most
jurisdictions exempt locally organized charitable organizations from tax.
Income tax generally is computed as the product of a tax rate times taxable income. The tax
rate may increase as taxable income increases (referred to as graduated rates). Taxation rates
may vary by type or characteristics of the taxpayer. Capital gains may be taxed at different
rates than other income. Credits of various sorts may be allowed that reduce tax. Some
jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of
income.
Taxable income of taxpayers resident in the jurisdiction is generally total income less income
producing expenses and other deductions. Generally, only net gain from sale of property,
including goods held for sale, is included in income. Income of a corporation's shareholders
usually includes distributions of profits from the corporation. Deductions typically include all
income producing or business expenses including an allowance for recovery of costs of
business assets. Many jurisdictions allow notional deductions for individuals, and may allow
deduction of some personal expenses. Most jurisdictions either do not tax income earned
outside the jurisdiction or allow a credit for taxes paid to other jurisdictions on such income.
Nonresidents are taxed only on certain types of income from sources within the jurisdictions,
with few exceptions.
Most jurisdictions require self-assessment of the tax and require payers of some types of
income to withhold tax from those payments. Advance payments of tax by taxpayers may be
required. Taxpayers not timely paying tax owed are generally subject to significant penalties,
which may include jail for individuals or revocation of an entity's legal existence.
1.1 DEFINITION OF INCOME TAX:Most systems define income subject to tax broadly for residents, but tax nonresidents only on
specific types of income. What is included in income for individuals may differ from what is
included for entities. The timing of recognizing income may differ by type of taxpayer or
type of income.
Income generally includes most types of receipts that enrich the taxpayer, including
compensation for services, gain from sale of goods or other property, interest, dividends,
rents, royalties, annuities, pensions, and all manner of other items. Many systems exclude
from income part or all of superannuation or other national retirement plan payments. Most
tax systems exclude from income health care benefits provided by employers or under
national insurance systems.
1.2 COMMON PRINCEPLES:While tax rules vary widely, there are certain basic principles common to most income tax
systems. Tax systems in Canada, China, Germany, Singapore, the United Kingdom, and the
United States, among others, follow most of the principles outlined below. Some tax systems,
such as India, may have significant differences from the principles outlined below. Most
references below are examples; see specific articles by jurisdiction (e.g., Income tax in
Australia).
1.3 Residents and Nonresidents:Residents are generally taxed differently from nonresidents. Few jurisdictions tax
nonresidents other than on specific types of income earned within the jurisdiction. See , e.g.,
the discussion of taxation by the United States of foreign persons. Residents, however, are
generally subject to income tax on all worldwide income.
A very few countries
(notably Singapore and Hong Kong) tax residents only on income earned in or remitted to the
country.
Residence is often defined for individuals as presence in the country for more than 183 days.
Most countries base residence of entities on either place of organization or place of
management and control. The United Kingdom has three levels of residence.
1.4 Deductions allowed :Nearly all income tax systems permit residents to reduce gross income by business and some
other types of deductions. By contrast, nonresidents are generally subject to income tax on
the gross amount of income of most types plus the net business income earned within the
jurisdiction.
Expenses incurred in a trading, business, rental, or other income producing activity are
generally deductible, though there may be limitations on some types of expenses or activities.
Business expenses include all manner of costs for the benefit of the activity. An allowance (as
a capital allowance or depreciation deduction) is nearly always allowed for recovery of costs
of assets used in the activity. Rules on capital allowances vary widely, and often permit
recovery of costs more quickly than ratably over the life of the asset.
Most systems allow individuals some sort of notional deductions or an amount subject to zero
tax. In addition, many systems allow deduction of some types of personal expenses, such as
home mortgage interest or medical expenses.
2. Type of Taxes in India:-
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Types of Direct Taxes

Direct taxes come in many shapes and forms. All of the below mentioned tax headings have
two things in common they are imposed directly and apply to every Indian citizen.
These types of taxes are directly imposed & paid to Government of India. There has been a
steady rise in the net Direct Tax collections in India over the years, which is healthy signal.
Direct taxes, which are imposed by the Government of India, are:
(1) Income Tax:Income tax, this tax is mostly known to everyone. Every individual whose total income
exceeds taxable limit has to pay income tax based on prevailing rates applicable time to time.
(2) Capital Gains Tax:Capital Gain tax as name suggests it is tax on gain in capital. If you sale property, shares,
bonds & precious material etc. and earn profit on it within predefined time frame you are
supposed to pay capital gain tax. The capital gain is the difference between the money
received from selling the asset and the price paid for it.
Capital gain tax is categorized into short-term gains and long-term gains. The Long-term
Capital Gains Tax is charged if the capital assets are kept for more than certain period 1 year
in case of share and 3 years in case of property. Short-term Capital Gains Tax is applicable if
these assets are held for less than the above-mentioned period.
Example:If you purchase share at say 1000 Rs/- (per share) and after two months this price
increased to 1200 Rs/-(per share) you decide to sale this stock and earn profit of 200 Rs/- per
share. If you do so you have to pay Short term CGT (capital gain tax) @ 10% +Education
cess on profit as it is short term capital gain. If you hold same share for 1 year or above it is
considered as long term capital gain and you need not to pay capital gain tax.it is considered
as tax free.
Similarly if you purchase property after two year if you find that property price in which you
invested has increased and you decide to sale it you need to pay short term capital gain tax.
For property it is considered as long term capital gain if you hold property for 3 years or
above.
(3) Securities Transaction Tax:A lot of people do not declare their profit and avoid paying capital gain tax, as
government can only tax those profits, which have been declared by people. To fight with this
situation Government has introduced STT (Securities Transaction Tax ) which is applicable
on every transaction done at stock exchange. That means if you buy or sell equity shares,
derivative instruments, equity oriented Mutual Funds this tax is applicable.
This tax is added to the price of security during the transaction itself, hence you cannot avoid
(save) it. As this tax amount is very low people do not notice it much.
Current STT Rates are:-
(4) Perquisite Tax:Earlier to Perquisite Tax we had

tax called FBT (Fringe Benefit Tax)
which was abolished in 2009, this tax is on benefit given by employer to employee. E.g If
your company provides you non-monetary benefits like car with driver, club membership,
ESOP etc. All this benefit is taxable under perquisite Tax.
In case of ESOP The employee will have to pay tax on the difference between the Fair
Market Value (FMV) of the shares on the date of exercise and the price paid by him/her.
(5) Corporate Tax:Corporate Taxes are annual taxes payable on the income of a corporate operating in
India. For the purpose of taxation companies in India are broadly classified into domestic
companies and foreign companies.
In addition to above other taxes are also applicable on corporate
2.2 Indirect Taxes:(1) Sales Tax :Sales tax charged on the sales of movable goods. Sale tax on Inter State sale is
charged by Union Government, while sales tax on intra-State sale (sale within State) (now
termed as VAT) is charged by State Government.
Sales can be broadly classified in three categories.
(a) Inter-State Sale
(b) Sale during import/export
(c) Intra-State (i.e. within the State) sale.
State Government can impose sales tax only on sale within the State.
CST is payable on inter-State sales is @ 2%, if C form is obtained. Even if CST is charged by
Union Government, the revenue goes to State Government. State from which movement of
goods commences gets revenue. CST Act is administered by State Government.
(2) Service Tax:Most of the paid services you take you have to pay service tax on those services. This
tax is called service tax. Over the past few years, service tax been expanded to cover new
services.
Few of the major service which comes under vicinity of service tax are telephone, tour
operator, architect, interior decorator, advertising, beauty parlor, health center, banking and
financial service, event management, maintenance service, consultancy service
Current rate of interest on service tax is 14.5%. This tax is passed on to us by service
provider.
(3) Value Added Tax:The Sales Tax is the most important source of revenue of the state governments; every
state has their respective Sales Tax Act. The tax rates are also different for respective states.
Tax imposed by Central government on sale of goods is called as Sales tax same is called as
Value added tax by state government.VAT is additional to the price of goods and passed on to
us as buyer (end user). Around 220+ Items are covered with VAT.VAT rates vary based on
nature of item and state.
Government is planning to merge service tax and sales tax in form of Goods service tax
(GST).
Also Read:- Download new 15G/15H Forms
(4) Custom duty &Octroi (On Goods):Custom Duty is a type of indirect tax charged on goods imported into India. One has
to pay this duty , on goods that are imported from a foreign country into India. This duty is
often payable at the port of entry (like the airport). This duty rate varies based on nature of
items.
Octroi is tax applicable on goods entering in to municipality or any other jurisdiction for use,
consumption or sale. In simple terms one can call it as Entry Tax.
(5) Excise Duty:An excise or excise duty is a type of tax charged on goods produced within the
country. This is opposite to custom duty which is charged on bringing goods from outside of
country. Another name of this tax is CENVAT (Central Value Added Tax).
If you are producer / manufacturer of goods or you hire labor to manufacture goods you are
liable to pay excise duty.
(6) Anti Dumping Duty:Dumping is said to occur when the goods are exported by a country to another
country at a price lower than its normal value. This is an unfair trade practice which can have
a distortive effect on international trade. In order to rectify this situation Central Govt.
imposes an anti dumping duty not exceeding the margin of dumping in relation to such
goods.
2.3 Other Taxes:(1) Professional Tax
:-
If you are earning professional you need to pay professional tax. Professional tax is
imposed by respective Municipal Corporations. Most of the States in India charge this tax.
This tax is paid by every employee working in Private organizations. The tax is deducted by
the Employer every month and remitted to the Municipal Corporation and it is mandatory like
income tax.
The rate on which this tax is applicable is not same in all states.
(2) Dividend distribution Tax:Dividend distribution tax is the tax imposed by the Indian Government on companies
according to the dividend paid to a companys investors. Dividend amount to investor is tax
free. At present dividend distribution tax is 15%.
(3) Municipal Tax:Municipal Corporation in every city imposed tax in terms of property tax. Owner of
every property has to pay this tax. This tax rate varies in every city.
(4) Entertainment Tax:Tax is also applicable on Entertainment; this tax is imposed by state government on
every financial transaction that is related to entertainment such as movie tickets, major
commercial shows exhibition, broadcasting service, DTH service and cable service.
(5) Stamp Duty, Registration Fees, Transfer Tax:If you decide to purchase property than in addition to cost paid to seller. You must
consider additional cost to transfer that property on your name.
That cost include registration fees, stamp duty and transfer tax. This is required for preparing
legal document of property.
In simple sense this tax is imposed on the handing over of the title of property ownership by
one person to another. It incorporates a legal transaction fee & stamp duty. This amount
varies from property to property based on cost.
(6) Education Cess , Surcharge:Education cess is deducted and used for Education of poor people in INDIA. All taxes
in India are subject to an education cess, which is 3% of the total tax payable. The education
cess is mainly applicable on Income tax, excise duty and service tax.
Surcharge is an extra tax or fees that added to your existing tax calculation. This tax is
applied on tax amount.
(7) Gift Tax:If you receive gift from someone it is clubbed with your income and you need to pay
tax on it. This tax is called as gift tax.
This tax is applicable if gift amount or value is more than 50000 Rs/- in a year.
(8) Wealth Tax:Wealth tax is a direct tax, which is charged on the net wealth of the assessee. Wealth
tax is chargeable in respect of Net wealth corresponding to Valuation date.Net wealth means
all assets less loans taken to acquire those assets. Wealth tax is 1% on net wealth exceeding
30 Lakhs (Rs 3,000,000). So if you have more money, assets you are liable to pay tax.
Note:- Wealth tax is abolished by government in budget 2015.Now onwards surcharge of
12% is applicable on individual earning 1 crore and above.
(9) Toll Tax:At some of places you need to pay tax in order to use infrastructure (road, bridge etc.)
build from your money given to government as Tax. This tax is called as toll tax. This tax
amount is very small amount but, to be paid for maintenance work and good up keeping.
(10) Swachh Bharat Cess:Swacch Bharat Cess is recently being imposed by the government of India. This tax is
applicable on all taxable services from 15thNovemeber, 2015. The effective rate of Swachh
Bharat Cess is 0.5%. After this tax we need to pay 14.5% service tax.
(11) KrishiKalyanCess:In budget 2016 finance minister has introduced new tax namely KrishiKalyanCess.
This cess is introduced in order to extend welfare to the farmers. The effective rate of
KrishiKalyanCess is 0.5%. This tax will be imposed on all taxable services.
KrishiKalyanCess would come in force with effect from June, 1, 2016. Once this cess is
applied we need to pay service tax @ 15%.
(12) Dividend Tax:In budget 2016 finance minister has introduced a new tax on the dividend amount. It
is proposed that 10% additional tax will be imposed on dividend income above 10 Lac from
1st April 2016 onwards.
(13) Infrastructure Cess:New Infrastructure cess on car and utility vehicle imposed recently in budget 2016.
1% infrastructure cess is applicable on petrol/LPG/CNG-driven motor vehicles of length not
exceeding 4 meters and engine capacity not exceeding 1200cc. 2.5% cess on diesel motor
vehicles of length not exceeding 4 meters and engine capacity not exceeding 1500cc and 4%
cess is applicable on big sedans and SUVs.
(14) Entry Tax:This entry tax is imposed by Gujarat, Madhya Pradesh, Assam, Delhi and Uttarakhand
state government recently. The tax rate is variable 5.5-10% depending upon the state. All
items entering in the state boundaries ordered via E-commerce are under this tax boundary.
So in total you pay 25 different taxes in direct or indirect way. At the end in order to make
you laugh i will tell you one small joke on tax.
3. Benefits of Direct Taxation:

1.
Equitable: The burden of direct taxes cant be shifted, and an equitable sacrifice of
income and wealth can be achieved from all sections of society through progressive
taxation.
2.
Economical: Income tax and most other forms of direct taxation are done at source
with the help of TDS (Tax Deduction at Source), and are hence not a problem for the
government to collect.
3.
Certainty: There is a sense of certainty from the taxpayer and the government, as
each know how much to pay and how much to expect to collect respectively.
4.
Productivity: Direct taxes are very productive in the sense that as the working
population and community grows, so do the returns from direct taxation.
5.
Consciousness of duty: When people consciously pay their taxes, they can claim the
right to know how their money is being spent by the government.
6.
Creates equal distribution of wealth: The government charges more taxes from
those that can afford them, and uses this money to uplift the lower and poorer sections of
society.
4. Value-added tax
4.1 What is VAT?
VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to
allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against
the VAT liability on subsequent sale.
VAT is intended to tax every stage of sale where some value is added to raw materials, but
taxpayers will receive credit for tax already paid on procurement stages. Thus, VAT will be
without the problem of double taxation as prevalent in the earlier Sales tax laws.
Presently VAT is followed in over 160 countries. The proposed Indian model of VAT will be
different from VAT, as it exists in most parts of the world. In India, VAT has replaced the
earier State sales tax system.
One of the many reasons underlying the shift to VAT is to do away with the distortions in our
earier tax structure that carve up the country into a large number of small markets rather than
one big common market. In the earlier sales tax structure tax is not levied on all the stages of
value addition or sales and distribution channel which means the margins of distributors/
dealers/ retailers at large not subject to sales tax earlier.
Thus, the sales tax pricing structure needs to factor only the single-point levy component of
sales tax and the margins of manufacturers and dealers/ retailers etc, are worked out
accordingly.
internal trade and impeded development of a common market.
prices by an amount higher than what accrues to the exchequer by way of revenues from it.
Also, there was the problem of multiplicity of rates. All the states, provided for plethora of
rates. These range from one to 25 per cent. This multiplicity of rates increases the cost of
compliance while not really benefiting revenue.
Heterogeneity prevailed in the structure of tax as well. Apart from general sales tax, most
states used to levy an additional sales tax or a surcharge. In addition, the states levied luxury
tax as also an entry tax on the sale of imported goods.
All these practices of heterogeneity in structure as well as rates cause diversion of trade as
well as shifting of manufacturing activity from one State to another. Further, widespread
taxation of inputs relates to vertical integration of firms, i.e., the earlier system of taxes
militated against ancillary industries and encourages them to produce more and more of the
inputs needed rather than purchase them from ancillary industries.
The earlier system of commodity taxes is non-neutral. It interferes with the producers' choice
of inputs as well as with the consumers' choice of consumption, thereby leading to severe
economic distortions.
4.2 How can VAT address these issues:

Under the VAT regime, due to multi-point levy on the price including value additions at each
and every resale, the margins of either the re-seller or the manufacturer would be reduced
unless the ultimate price is increased.
VAT would not cause cascading, nor would it cause vertical integration of firms. Also, it
provides total transparency of the incidence of tax. This is because, VAT is a multi-stage sales
tax levied as a proportion of the value added. It is collected at each stage of the production
and distribution process, and in principle, its burden falls on the final consumer. Another
feature of VAT regime is discontinuation of the sales tax based incentives to new industrial
units. Until now, all the states were granting such incentives to new industries in the form of
exemption from tax on the purchase of inputs as well as on the sale of finished goods, sales
tax loans and/or tax deferral. However for the new industrial units to whom the incentive by
way of exemption/ or tax deferrals are already sanctioned under the Sales Tax Act are
continued in the form of refund.
4.3 WHO GAINS?

State and Central governments gain in terms of revenue. VAT has in-built incentives for tax
compliance only by collecting taxes and remitting them to the government can a seller
claim the offset that is due to him on his purchases. Everyone has an incentive to buy only
from registered dealers purchases from others will not provide the benefit of credit for the
taxes paid at the time of purchase. This transparency and in-built incentive for compliance
would increase revenues. Industry and trade gain from transparency and reduced need to
interact with the tax personnel. For those who have been complying with taxes, VAT would
be a boon that reduces the cost of the product to the consumer and boosts competitiveness.
VAT would be major blow for tax evaders, both manufacturers who evade excise duty pay
ments and traders who evade sales-tax.
4.4 WHATLL BE THE TAX BURDEN?

The overall tax burden will be rationalized as itll be shared by all dealers, and prices, in
general, will fall. Moreover, VAT will replace the existing system of inspection by a system
of built-in self-assessment by traders and manufacturers. The tax structure will become
simple and more transparent and tax compliance will improve significantly. It will also be
simpler and offer easy computation and easy compliance. VAT will prevent cascading effect
through input rebate and help avoid distortions in trade and economy by ensuring uniform tax
rates.
4.5 WHO PAYS?

All dealers registered under VAT and all dealers with an annual turnover of more than Rs 5
lakh will have to register. Dealers with turnovers less than Rs 5 lakh may register voluntarily.
4.6 HOW TO PAY?

VAT will be paid along with monthly returns. Credit will be given within the same month for
entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated
over any month will be utilized to deduct from the tax collected by the dealer during that
month. If the tax credit exceeds the tax collected during a month on sale within the state, the
excess credit will be carried forward to the next month.
4.7 WHICH GOODS WILL BE TAXABLE UNDER VAT?

All goods except those specifically exempt. In fact, over 550 items will be covered under the
new tax regime, of which 46 natural and unprocessed local products would be exempt from
VAT. About 270 items, including drugs and medicines, all agricultural and industrial inputs,
capital goods and declared goods would attract 4% VAT. But, following opposition from
some states, it was decided that states would have option to either levy 4% or totally exempt
food grains from VAT but it would be reviewed after one year. Three items sugar, textile,
tobacco under additional excise duties will not be under VAT regime for one year but
existing arrangement would continue.
4.8 OTHER CONSIDERATIONS

It is imperative that policy makers in considering adoption of VAT should be interested in the
economy wide impact of this tax. Special emphasis is often placed on its effect on equity,
prices and economic growth. This is particularly important because of the potential effects on
consumption of certain commodities that have a direct or indirect effect on labour
productivity.
5. 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 one time effect that simply shifted the trend line of
the consumer price index (CPI). To guard against any unforeseen price effects the authorities
may consider a tighter monetary policy stance at the introduction of VAT.
6. DISTRIBUTION EFFECTS OF VAT

Value added tax is widely criticized as being regressive with respect to income that is its
burden falls heavily on the poor than on the rich.
This emanates from the fact that
consumption as a share of income falls as income rises. Hence a uniform VAT rate falls
heavily on the poor than the rich. This criticism is valid when VAT payments are expressed
as a proportion of current income.
However if, following the premise that welfare is
demonstrated by the level of consumption rather than income, consumption is used as the
denominator the impact of VAT would be proportional.
A proportional burden would also
be demonstrated if lifetime income rather than current income is used. A lifetime income
concept considers the fact that many income recipients are only temporarily at lower income
brackets as their earnings increase. In order to address the regressivity of VAT the following
measures can be taken:
The VAT itself can be used to differentiate taxation of consumer items that are consumed
primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher
than standard rate.
VAT exemptions may also be granted on goods and services that are consumed mostly by
the poor.
Equity concerns may also be addressed through other ways, outside the VAT system, such
as other tax and spending instruments of government. This could be in the form of lower
basic income tax rates on the poor or some pro-poor expenditures of government. The use of
multiple rates of VAT has however been widely discouraged for various reasons. These
include:
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 concessions extended may tend to benefit the rich much more than the poor.
Increased costs of VAT administration as a differentiated rate structure brings with it
problems of delineating products and interpreting the rules on which rate to use.
significantly increased costs of tax compliance for small firms, which are usually unable to
keep separate records/accounts for sales of differently taxed items.
This results in the use
of presumptive methods of determining the tax liability, which leads to more

difficulties in monitoring the compliance.
The higher compliance cost resultant from
differentiation of VAT rates may also be regressive with respect to income since smaller firms
with lower income tend to bear proportionately more of the burden than do larger firms.
Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional effects of
tax through the effect on incomes. The effects of exemption may be as follows:
falling of revenues exemptions break the VAT chain. If exemptions are granted at prior to
the final sale, it results in a loss of revenue since value added at the final stage escapes tax.
Un-recovered taxation of some intermediate goods may lead to producers substituting away
from such inputs thus distorting the input choices of the said producers.
Exemptions may create incentives to self supply i.e. tax avoidance by vertical integration.
Exemptions tend to feed on each other giving rise to a phenomenon called exemption
creep.This arises from the fact that each exemption gives rise to pressures on further
exemption. For example creating an exemption to reduce the tax burden on a particular
commodity or goods may lead to increased pressure for exemption or zero rating of inputs
used for the production of such a commodity.
Based on the above, it is important that care is taken when introducing exemptions in order to
avoid distortions in the production process as well as to minimize revenue loss resulting from
such distortions.
Given the fact that the primary purpose of VAT is to raise government revenue in an efficient
manner and with as little distortions of economic activity as possible, distribution effects are
perhaps better addressed by other forms of tax and government expenditure policies which
can often be better targeted at these aims.
7. VAT EFFECT ON ECONOMIC GROWTH

Economic growth can be facilitated through investment by both government and the private
sector. Savings by both parties are required in order to finance investment in a noninflationary manner. Compared to other broadly based taxes such as income tax VAT is
neutral with respect to choices on whether to consume now or save for future
consumption. Although VAT reduces the absolute return on saving it does not reduce the net
rate of return on saving. Income tax reduces the net rate of return as both the amount saved as
well as the return on that saving are subject to tax. In this regard VAT may be said to be a
superior tax in promoting economic growth than income tax. Since VAT does not influence
investment decisions on firms, by increasing their costs, its effects on investment can be said
to be neutral.
8. FEATURES OF VAT
1. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
a. 4% on declared goods or the goods commonly used.
b. 10-12% on goods called Revenue Neutral Rates (RNR). There would be no
fall in such remaining goods.
c. Two special rates will be imposed-- 1% on silver or gold and 20% on liquor.
Tax on petrol, diesel or aviation turbine fuel are proposed to be kept out from
the VAT system as they would be continued to be taxed, as presently
applicable by the CST Act.
Uniform Rates in the VAT system, certain commodities are exempted from tax. The
taxable commodities are listed in the respective schedule with the rates. VAT proposes
to keep these rates uniform in all the states so the goods sold or purchased across the
country would suffer the same tax rate. Discretion has been given to the states when it
comes to finalizing the RNR along with the restrictions. This rate must not be less
than 10%. This will ensure By doing this that there will be level playing fields to
avoid the trade diversion in connection with the different states, particularly in
neighboring states
2. No concession to new industries Tax Concessions to new industries is done away with in
the new VAT system. This was done as it creates discrepancy in investment decision. Under
the new VAT system, the tax would be fair and equitable to all.
3. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of
sale All the tax, paid on the goods purchased within the state, would be adjusted against the
tax, payable on the sale, whether within the state or in the course of interstate. In case of
export, the tax, paid on purchase outside India, would be refunded. In case of the branch
transfer or consignment of sale outside the state, no refund would be provided.
4. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the tax on
the full price of the goods sold and shows separately in the sell invoice issued by him
5. VAT is not cascading or additive though the tax on the goods sold is collected at each stage,
it is not cascading or additive because the net effect would be as follows: - the tax, previously
paid on the sale of goods, would be fully adjusted. It will be like levying tax on goods, sold in
the last state or at retail stage.
9. ADVANTAGE OF VAT
The biggest benefit of VAT is that it could unite India into a large common market. This will
translate to better business policy. Companies can start optimizing purely on logistics of their
operations, and not on based on tax-minimization. Lorries need not wait at check-points for
days; they can zoom down the highways to their destinations. Reduced transit times and
lower inventory levels will boost corporate earnings. Following are the some more advantage
of VAT: 1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%, 10%,
12%, 20% and 25%. However, under the present VAT system, there would only be 2 types of
taxes 4% on declared goods and 10-12% on RNR. This will eliminate any disputes that relate
to rates of tax and classification of goods as this is the most usual cause of litigation. It also
helps to determine the relevant stage of the tax. This is necessary as the CST Act stipulates
that the tax levies at the first stage or the last stage differ. Consequently, the question of which
stage of tax it falls under becomes another reason for litigation. Under the VAT system, tax
would be levied at each stage of the goods of sale or purchase.
2. Adjustment of tax paid on purchased goods Under the present system, the tax paid on
the manufactured goods would be adjusted against the tax payable on the manufactured
goods. Such adjustment is conditional as such goods must either be manufactured or sold.
VAT is free from such conditions.
3. Further such adjustment of the purchased goods would depend on the amount of tax that
is payable. VAT would not have such restrictions. CST would not have the provisions on
refund or carry over upon such goods except in case of export goods or goods, manufactured
out of the country or sale to registered dealer. Similarly, on interstate sale on tax-paid goods,
no refund would be admissible.
4. Transparency The tax that is levied at the first stage on the goods or sale or purchase is
not transparent. This is because the amount of tax, which the goods have suffered, is not
known at the subsequent stage. In the VAT system, the amount of tax would be known at each
and every stage of goods of sale or purchase.
5. Fair and Equitable VAT introduces the uniform tax rates across the state so that unfair
advantages cannot be taken while levying the tax.
6. Procedure of simplification Procedures, relating to filing of returns, payment of tax,
furnishing declaration and assessment are simplified under the VAT system so as to minimize
any interface between the tax payer and the tax collector.
7. Minimize the Discretion the VAT system proposes to minimize the discretion with the
assessing officer so that every person is treated alike. For example, there would be no
discretion involved in the imposition of penalty, late filing of returns, non-filing of returns,
late payment of tax or non payment of tax or in case of tax evasion. Such system would be
free from all these harassment
8. Computerization the VAT proposes computerization which would focus on the tax
evaders by generating Exception Report. In a large number of cases, no processing or
scrutiny of returns would be required as it would free the tax compliant dealers from all the
harassment which is so much a part of assessment. The management information system,
which would form a part of integral computerization, would make the tax department more
efficient and responsive.
1[FIRST SCHEDULE
(Goods exempted from tax under sub-section (1) of section 5)
Value Added Tax 813
1
. Agricultural implements manually operated or animal driven.
2.
Aids and implements used by handicapped persons.
3.
All seeds for sowing other than oil seeds.
4.
All varieties of textiles and fabrics (produced or
manufactured in
India) including declared goods but other than those specified

Elsewhere in Third Schedule 1[or notified by the Government.]1
1. Inserted by Act 4 of 2006 w.e.f. 1.4.2006.
5.
1[(i) Animal feed and feed supplements, namely, processed

commodity sold as poultry feed, cattle feed, pig feed, fish feed,
fish meal, prawn feed, shrimp feed and feed supplements and
mineral mixture concentrates, intended for use as feed
supplements;
(ii) Chunni of pulses, de-oiled cake and wheat bran.]1
1. Substituted by Act 4 of 2006 w.e.f. 1.4.2006.

6.
Animal 1[shoe and nails.]1

7.
Aviation turbine fuel.
8.
Awalakki (Beaten rice) and Mandakki (Parched rice or puffed

rice).
9.
Bangles of all materials excluding precious metals.
10.
Betel leaves.
11.
Books, Periodicals and journals including maps, charts and globe.
12.
Bread and bun.
13.
Cart driven by animals 1[and their parts, but excluding rubber

tyres, tubes and flaps]1

14.
Charakha, Ambar Charaka, handloom fabrics and Gandhi Topi.
15.
Charcoal and firewood except Casurina and Eucalyptus timber..
814 Value Added Tax [2004: KAR. ACT 32

16.
Coarse grains and their flour excluding paddy, rice and wheat and
their flour.
17.
Condoms and contraceptives.
18.
Cotton and silk yarn in hank.
19.
Curd and butter milk.
20.
Diesel.
21.
Earthen Pots.
22.
Electrical energy.
23.
Fish seeds, Prawn seeds, Shrimp seeds, fishing nets and twine
and fishing requisites including purse-seiners and gill netters, but
excluding boats, trawlers and other mechanized boats.
24.
Fresh milk and pasteurised milk.
25.
Fresh plants, saplings, fresh flowers, plantain leaves, patravali

(dinner leaves) and their products.
26.
Fresh Vegetables & fresh fruits.
27.
Garlic, ginger, green chillies, onions, potatoes, sweet potatoes,

tapioca and their seeds.
28.
Hay (green or dry).
29.
Human blood 1[including all its components]1

30.
Jaggery.
31.
Khadi garments including made-up articles; other goods sold by

Khadi and Village Industries as may be notified.
32.
Kumkum, bindi and sindhur.
33.
Leaf plates and cups whether pressed or stiched.
34.
Liquor including Beer, Fenny, Liqueur and Wine.
35.
Lottery tickets.
36.
Meat including flesh of poultry, fish, prawns, shrimps and lobsters,

1[not cured or frozen]1 eggs, livestock including poultry, but
excluding horses; raw wool.
2004: KAR. ACT 32] Value Added Tax 815

37.
National flag.
38.
Non-judicial stamp paper sold by the Government Treasuries and

authorized vendors; postal items like envelopes, post card
including greeting cards and stamps sold by the Government;
rupee note when sold to the Reserve Bank of India; cheques,

loose or in book form.
39.
Organic manure, Compost manure, fish manure and poultry

manure.
40.
Pappad.
41.
Petrol including special boiling spirit.
42.
1[XXX]1
43.
Salt.
1. Omitted by Act 6 of 2007 w.e.f. 1.4.2007.

44.
Semen including frozen semen.
45.
Silkworm eggs, silkworm pupae, silkworm cocoons and raw silk

including raw silk yarn, but excluding raw silk imported from
outside the country.
46.
Slates, slate pencils and chalk crayons.
47.
Sugar (produced or manufactured in India) as described from time

to time in Column 2 of the First Schedule to the Additional Duties
of Excise (Goods of Special Importance) Act 1957 (Central Act
58 of 1957).
48.
Sugar cane.
49.
Tender coconuts.
50.
1[XXX]1

51.
Toddy, Neera and Arrack.
52.
Unbranded broom sticks.
53.
Vibhuthi.
54.
Water other than.-
816
Value Added Tax [2004: KAR. ACT 32

(i) aerated, mineral, distilled , medicinal , ionic , battery and
de-mineralised water; and
(ii) water sold in sealed container.]1
SECOND SCHEDULE
GOODS TAXABLE AT ONE PER CENT
[Section 4(1)(a)(i)]
Serial Number
Description of goods
1.
Bullion and specie
2.
1[xxx]1
3.
1[ XXX ]1
1. Omitted by Act 12 of 2011 w.e.f 1.4.2011

1[THIRD SCHEDULE
1[XXX]1
[section 4(1)(a)(ii)]
Serial Number
(1)
(2)
1.
Agricultural implements not operated manually or not driven by

animal
2.
All kinds of bricks including fly ash bricks; refractory bricks and the
like; ashphaltic roofing sheets; earthen tiles.
3.
All processed fruit and vegetables including fruit jams, jelly, pickle,
fruit squash, paste, fruit drink and fruit juice (whether in sealed
container or otherwise)
4.
All types of yarn other than cotton and silk yarn in hank; sewing
thread
5.
1[All utensils 2 [xxx] 2 including pressure cookers and pans and

cutlery, but excluding stoves, trays, baskets and other
containers, furniture, instruments, implements and tools used in
kitchen or household and utensils made of precious metals.]1
2 Omitted by Act 12 of 2011 w.e.f 1.4.2011

6.
Animal hair
7.
Arecanut and powder
8.
Bamboo and cane including bamboo splints and sticks
9.
Bearings, 1[(excluding parts of motor vehicles)]1 namely.-

(1)
Ball bearings
(2)
Tapered roller bearings including cone and tapered roller

assemblies
(3)
Speherical roller bearings
(4)
Needle roller bearings
(5)
Other cylindrical roller bearings
(6)
Other, including combined ball or roller bearings

(7)
Plummer blocks, bearing housing, locate rings and covers,

adopter withdrawal sleeves, locknut, lock-washer clamps and
rolling elements
10.
Beedi leaves
11.
Beehive
12.
Beltings, namely, Transmission, conveyor or elevator belts or belting

of vulcanized rubber whether combined with any textile material or
otherwise.
13.
Bicycles, tandem cycles, cycle combinations, cycle-rickshaws,

childrens tricycles and similar articles and parts and accessories
thereof including their tyres, tubes and flaps.
14.
Biomass briquettes
15.
Bitumen 1[and cold tar.]1

16.
Bone meal
17.
Buckets made of iron and steel, aluminium, plastic or other materials

except precious metals
18.
Bulk Drugs
19.
Candles
20.
Capital goods as may be notified
21.
Centrifugal and monoblock and submersible pumpsets and parts
22.
Chalk stick
23.
1[Chemical fertilizers, chemical fertilizer mixtures; bio-fertilizers,

micro nutrients, gypsum, plant growth promoters and regulators;
rodenticides, fungicides, weedicides and herbicides; insecticides or
pesticides but excluding phenyl, liquid toilet cleaners, floor cleaners,
mosquito coils, mosquito repellants and the like used for non agricultural
or non-horticultural purposes.]1

24.
Coffee beans and seeds (whether raw or roasted); cocoa pods and
beans; green tea leaf and chicory.
25.
Coir and coir products excluding rubberised coir products

26.
Combs
27.
Cotton waste and cotton yarn waste.
28.
Crucibles
29.
Cups and plates of paper and plastics
30.
1[ xxx]1
Omitted by Act 12 of 2011 w.ef 1.4.2011

31.
Edible oils (Non-refined and refined), but excluding coconut oil sold
in sachets, bottles or tins of 200 grams or 200 mililitre each or less,
including when such consumer containers are sold in bulk in a
common container; oil cake.
32. Embroidery or zari articles, that is to say,-imi,zari,kasab,saima

dabka,chumki,gota sitara, naqsi,kora,glass bead,badia, gizal
33.
Exercise books, student note books, graph books and laboratory

note books.
34.
Exim scrips, REP licenses, special import licenses (SIL), value

based advance licenses (VABAL), Export quotas, DEPB licenses,
copyrights, patents and the like 1[including software licences by
whatever name called.]1

35.
Feeding bottle and nipple
36.
Fibres of all kinds and Fibre Waste
37.
Fireclay, clay, coal ash, coal boiler ash, fly ash, coal cinder ash, coal
powder and clinker.
38.
Flour (Atta), Maida and Soji of wheat; flour and soji of rice; 1[soji and poha of
maize;]1 flour of pulses

39.
Fried gram
40.
Hand pumps , parts and fittings
41.
Handicrafts excluding furniture
42.
Honey
43.
Hose pipes and fittings thereof 1[excluding parts of motor vehicles]1
820
Value Added Tax [2004: KAR. ACT 32

44.
Hosiery goods
45.
Husk and bran of cereals and pulses.
46.
Ice
47.
Idol made of clay and clay lamps
48.
Imitation Jewellery, Synthetic gems and hairpins
49.
Incence sticks commonly known as agarbathi, dhupkathi or

dhupbathi including sambrani and lobana
50.
Indian musical instruments namely, Veena, violin, tambura,

mridanga, ghatam, khanjira, harmonium, flute, star, sarod, santoor,
dilruba, nadaswara, dolu, tabla, shehnai, pakwaz, vichitra veena,
gotu vadyam, morsing, chande, triangle, rudraveena and sarangi
and parts and accessories thereof.
51.
Industrial inputs and packing materials as may be notified
52.
1[Industrial cables other than copper and alluminium single core PVC cable upto six
square milimetre for use upto1100 Volts.]1

53.
IT Products including telecommunication equipments as may be

notified.
54.
Kerosene lamps and lanterns, petromax, glass chimney
55.
Kerosene oil sold through Public Distribution System ( PDS)
56.
Khova
57.
Kites
58.
Lignite
59.
Lime, limestone, products of lime, dolomite and other white washing

materials.
60.
Medical and pharmaceutical preparations; Medicated ointments

manufactured or imported under license granted under the Drugs
and Cosmetics Act 1940; Light liquid paraffin of IP grade; Wadding
gauze, bandages and similar articles for medical, surgical, dental or veterinary
purposes; 1[Surgical gloves and Syringes including

needles]1 Diagnostic or laboratory reagents including prepared
diagnostic or laboratory reagents
61.
Medical equipments, devices and implants
62.
Medicinal plants, roots, herbs and barks used in the preparation of

Ayurvedic medicines.
63.
Mixed PVC stabilizer 1[;plastic boxes, cases and crates for

conveyance or packing of goods]1
1. Shall be deemed to have been inserted by Act 5 of 2008 w.e.f.7.6.2005.

64.
1[Moulded plastic footwear fully made of plastic and of single mould, hawai
chappals (rubber) and their straps.]1

65.
Napa Slabs (Rough flooring stones) and Shahabad stones
66.
Non-ferrous castings
67.
Non-ferrous metals and alloys; Ingots, slabs, blocks, billets, sheets, circles, hoops,
strips, bars, rods, rounds, squares, flats and other extrusions of Aluminium, brass,
bronze, copper, cadmium, lead and zinc, metal powders, metal pastes of all types and
grades, metal scraps and waste.
68.
Oil Seeds other than those specified in serial number 30
69.
1[(i) Paper of all kinds including ammonia paper, blotting paper,

carbon paper, cellophane, PVC coated paper, stencil paper, tissue paper, water proof
paper, art boards, card boards, corrugated boards, duplex boards, pulp boards, straw boards,
triplex boards and the like, but excluding photographic paper.
(ii) Waste paper, paper waste and newsprint.]1

70.
Pipes, tubes and fittings of all kinds excluding electrical conduit pipes and its fittings.
71.
Printed materials other than books meant for reading; stationaryarticles namely,
Account books, paper envelopes, diaries,calendars,

race cards, catalogues, greeting cards, invitation cards, humour post
cards, picture post cards, cards for special occasions, photo and
stamp albums, computer stationery.
72.
Printing ink excluding toner and cartridges.
73.
1[Meat including flesh of poultry, fish, prawns, shrimps and lobsters when cured or
frozen or processed.]1

74.
Pulp of bamboo, wood and paper.
75.
Pulses other than those specified in serial number 30.
76.
Rail coaches, engines, wagons and parts thereof.
77.
Rakhi
78.
Readymade garments, clothing accessories and other made up

textile articles:(1) Clothing accessories including socks, stockings, gloves,
shawls, scarves, mufflers, mantillas, veils, ties, bow-ties,
knitted or crocheted
(2) Clothing accessories, not knitted or crocheted, including
handkerchiefs, shawls, scarves, mufflers, mantillas, veils,
ties, bow-ties, cravats, gloves headbands
(3) Blankets and travelling rugs
(4) Bed linen, table linen, toilet linen and kitchen linen and other
made ups
(5) Curtains (including drapes) and interior blinds; curtain and
bed valances
(6) Other furnishing articles

1[(7) Woven labels, badges and the like.]1
79.
Religious pictures not for use as calendar
80.
Renewable energy devices and parts thereof
81.
Sacred thread (janivara)
82.
Safety matches

83.
Sand and grits
84.
Sewing machines and parts and accessories thereof
85.
Ship and other water vessels including non-mechanised country

boats
86.
Skimmed milk powder ,UHT milk and cottage cheese
87.
Solvent oil other than organic solvent oil
88.
Spectacles, lenses and frames including attachments, parts and

accessories thereof 1[but excluding sunglasses and goggles and
their lenses, frames, other attachments, parts and accessories]1;
contact lens and lens cleaner

89.
Spices in all forms including jeera (cumin seeds), methi, poppy

seeds (kaskas), Corriander (dhaniya), shajeera, somph, katha,
azwan, kabab chini, bhojur phool, tejpatha, japatri, nutmeg
(marathamoggu), kalhoovu, aniseed, turmeric, cardamom, pepper,
cinnamon, dal chinny,cloves, tamarind and dry chillies; 1[including
cut chillies, spent chillies and chilly seeds, but excluding spices in
the form of masala powder, instant mixes or other mixtures
containing more than one spice or a spice with any other material]1
wet dates; Hing (Asafoetida)
90.
Sports goods (indoor and out door) including body building

equipments, but excluding wearing apparels and footwear.
91.
Starch including sago; tamarind seed and tamarind powder
92.
Tea
93.
Tools, namely.(1) Hand saws; blades for saw of all kinds
(2) Pliers including cutting pliers

(3) Hand operated spanners and wrenches (including torque
meter wrenches but not including tap wrenches);
interchangeable spanner sockets, with or without handle
(4) Drilling, threading or tapping tools
(5) Planes, chisels, gouges and similar cutting tools for working
wood
(6)
Screwdrivers
(7)
Interchangeable tools for hand tools, whether or not poweroperated,

or for machine-tools including dies for drawing or
extruding metal, and rock drilling or earth boring tools.
(8)
Tools for working in the hand, pneumatic, hydraulic or with

self-contained electric or non-electric motor.
94.
Toys excluding electronic toys
95.
Tractors and Power tillers, their parts and accessories including

trailers, but excluding batteries, tyres, tubes and flaps.
96.
Transmission towers (electrical) and wires, and conductors such as Aluminium

conductor steel reinforced.
97.
Umbrella except garden umbrella
98.
Vegetable oil including gingili oil, bran oil and castor oil excluding
vegetable oil use as toilet article and edible oil.
99.
Welding Electrodes of all kinds, graphite electrodes including

anodes, welding rods, soldering rods and soldering wires
100.
Writing instruments and writing ink, namely.(1) Ball point pens

(2) Felt tipped and other porous-tipped pens and markers
(3) Indian ink drawing pens
(4) Fountain pens
(5) Propelling or sliding pencils
(6) Refills for ball point pens, comprising the ball point and the
ink reservoir
(7) Pen nibs and nib points
(8) Pencils and crayons with leads encased in a rigid sheath
(9) Pencil leads, black or coloured

(10) Pastels and drawing charcoals other than chalks
(11) Geometry boxes, colour boxes, pencil sharpeners
(12) Writing ink ]1
FOURTH SCHEDULE
GOODS TAXABLE AT TWENTY PER CENT
[Section 4(1)(a)(iii)]
Serial Number
1
1.
2.
3.
4.
5.
6.
2
Narcotics
Molasses
[3. Denatured anhydrous alcohol
Denatured Spirit
Ethyl alcohol
Rectified Spirit]1

FIFTH SCHEDULE
INPUT TAX RESTRICTED GOODS.
(Section 11(3))
Serial Number
1
Description of Goods
2
1. Motor vehicles of all kinds, aeroplanes, helicopters or any other
type of flying machine, parts and accessories thereof including
tyres, tubes and flaps.
2. Articles of food and drinks, including cakes, biscuits and
confectionery; ready to serve foods; processed or semiprocessed or
semi-cooked food-stuffs; fruits, fruit and vegetable products sold in
any kind of sealed containers; dressed chicken,meat, fish, prawns,
shrimps and lobsters sold in any kind of
sealed containers; aerated water, including soft drinks; sweets and
sweet meats; instant mixes; soft drink concentrates; spice powders,
pastes and the like; tobacco and tobacco products.
3.
All electrical or electronic goods and appliances including air

conditioners, air coolers, telephones, fax machines, duplicating
machines, photocopiers and scanners, parts and accessories thereof,
other than those for use in the manufacture, processing,packing or
storing of goods for sale and those for use in computing, issuing
tax invoice or sale bills, security and storing information.
4. Textiles, crockery, cutlery, carpets, paintings and artifacts.

5
Furniture including slotted angles and ready to assemble parts of

furniture, stationery articles including paper, sanitary fittings,
cement and other construction materials including bricks,
timber,wood, glass, mirrors, roofing materials, stones, tiles and
paints,toilet articles.
1[SIXTH SCHEDULE
[Section 4(1)(c)]
Serial
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Description of work contract
Rate of tax
Bottling, canning, and packing of goods.

Dyeing and printing of textiles.
Electroplating, electorgalvanising, anodizing and the
like
Fabrication and erection of structural works, including
fabrication, supply and erection of iron trusses,
purlines , etc.,
Fabrication or supply and installation of capital
goods specified in serial number 20 in Third
schedule
Lamination, rubberisation, coating and similar
process,(including power coating).
[XXX]
Printing, block making
Processing and supplying of photographs,
photoprints and photo negatives.
5%
5%
5%
and
supplying
5%
5%
5%
5%
5%
5%
10.
Processing
,
printing
cinematographic films.
of 5%
11.
12.
Programming and providing of computer software.

5%
Providing and laying of steel pipes for purpose At the maximum rate specified
other than for pluming , drainage and the link.
for declared for declared
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
goods in section 15 of the

Central
sales
Act
,
1956(Central Act74of1956)
Rewinding of electrical motors.
5%
Service and maintenance of IT product including 5%
Telecommunications equipments specified in serial
number 53 of Third Scheduled.
Sizing and dyeing of yarn.
5%
Supply of election of electrical transmission towers. 5%
Supplying and fixing of Shahabad slabs and stones.
5%
Supply and installation of centrifugal, mono block, 5%
and submersible pump sets.
Supply and training out of stone ballasts
5%
Supply, erection, installation and commissioning of 5%
renewable energy device.
Tyre retreading .
5%
Composite contract involving two or more of the
above categories.
All other works contracts not specified in any of the 14%
above categories including composite with one or
more of the above categories.
CHAPTER - 02
REVIEW OF LITERATURE
Tax reforms have drawn the attention of researchers both in India and abroad. The
implementation of VAT of comprehensive nature, or at central and state levels both, may also
involve some elements of tax design. Most of the countries have introduced VAT in the last
about 25 years. In India also indirect tax reforms have drawn attention only after introduction
of economic reforms in the country. Therefore, the literature on VAT is of recent origin. The
Value Added Tax does not have a long history admittedly, there is not as much literature
available on this topic as other forms of tax system. So, in other words, only a limited number
of studies have been undertaken on VAT and those too with different perspectives. An attempt
thereby, has been made to review the literature on VAT.
Purohit (1993),
examined the system of commodity taxation in India and discussed the problems which could
arise in introducing VAT in view of the federal structure of the country. He pointed out that
the prevailing system of commodity taxation in India was uninterested and gave rise to many
problems like multiplicity of levies, complexity of structure, high tax rates, cascading effect,
lack of transparency, vertical integration and narrow base, etc. He emphasized the need for
immediate tax reforms like reducing the number of rates, reducing tax incidence, sales tax
reforms, adoption of VAT and broadening the tax base by bringing services under tax net. He
brought out the documentary and accounting obligations under MODVAT. While examining
the existing sales tax administration, he brought out the problem areas for introducing VAT,
which included need for more staff, training of tax personnel, suitable computational
technology, Tax Identification Number (TIN) and auditing.
Purohit (1995),
in his another study, examined the structure and administration of sales taxation in India. He
expressed the opinion that failure to administer the sales tax properly could defeat its purpose
and threaten the canon of equity. It could create parallel economy due to increased tax
evasion. He brought out the features of sales tax administration, examined its operational
requirements, which included management information system (MIS) and suggested certain
improvements in the operation and administration of sales tax. He opined that tax
administration has important role in achieving the objectives of tax policy. He emphasized the
need for strengthening sales tax administration to pave way for adoption of VAT in place of
sales tax.
Burgess, Howes and Stern (1995),

in their study on value added tax options for India analyzed that the pressure of aggregate
revenue, the requirement of a reduced role for customs duties for the liberalization of the
economy, and the complexity and strains of the current system together point clearly towards
the desirability of tax reform in India. Since domestic indirect taxes provide the major source
of revenue, they deserve special attention. They argued that India would benefit from moving
toward a system of value added taxation (VAT) and focused on the way in which a VAT (or
VATs) can be best introduced into India given the countrys federal structure. Three different
options are distinguished : a central VAT, dual VAT, and states' VAT. They argued that the first
is politically infeasible, that the second represents the best way forward in the short-term, and
that the third deserves consideration as a long run option. Special attention is paid to the
problems that would arise under either a state's or a dual VAT with regard to taxing inter-state
trade.
Murti (1995)
stated that a comprehensive VAT covers value added at all the three levels of business
activities, i.e., manufacturing, wholesaling and retailing. He distinguished between three
types of VAT, i.e., consumption VAT, net income VAT and gross income VAT; and opined that
a comprehensive VAT with consumption base, the tax credit method, following destination
principle to determine VAT on international and inter-state trade flows could be an ideal
commodity tax structure for India. There could be ideally two types of tax regimes in India
with central and state VATs. There could be parallel central and state VATs on the same base
from manufacturing to retailing or central VAT up to manufacturing stage and the state VAT
at wholesaling and retailing stages. He further pointed out that VAT system with one or two
rates might have to be supplemented by special excise and subsidies to take care of the
problems of equity, environment and social bads like tobacco and alcohol.
Bagchi (1995),
termed the operating sales tax system as unworkable. Different problems in the system
including multiple cascading levies, numerous rates, drawing hair-splitting distinction among
commodities, large number of exemptions which narrowed the tax base, tax wars among the
states which led to bizarre results, cumbersome laws and procedures resulting in thousands of
cases pending before courts, etc. Did not reflect comfortable picture about commodity
taxation in India. He opined that simplifying sales tax and removing the drawbacks, was not
the solution and stated that superiority of sales tax lay in taxing consumption of goods and
services in the economy without needless interference with market forces and freeing of
exports from domestic trade taxes in a way which was not otherwise possible. VAT also
offered a buoyant but nondistortionary source of revenue for governments by virtue of wide
base and structure. He cautioned that VAT should apply to all goods and services with
minimum exclusions and should also strictly adhere to the principle of destination, following
preferably tax credit method.
Purohit (1997),
reported that most of the federations did not adopt VAT. Brazil was the only country with
independent VAT both at federal and state levels, and as such the researcher tried to examine
the salient features of VAT implementation in Brazil. The share of VAT in total domestic taxes
on goods and services increased in Brazil, indicating increased fiscal role of the tax. The
federal VAT in Brazil was levied on delivery of industrial products at producers level. The
tax rates were based on degree of processing of commodities and nature of commodities. As
such more revenue came from cars, tobacco products, beverages, chemical products and
machinery industries. The state VAT was imposed by states on sale of goods, while services
were covered under a separate tax. There were five rate categories in state VAT, depending
upon the nature of the products. In the inter-state sales, origin principle was followed and tax
was imposed by exporting state. However, to neutralize the impact of level of development,
the tax rate on inter-regional transactions varied according to destination, the rate being lower
for exporting to less developed and higher for exporting to more developed region. Municipal
governments were also authorized to impose tax on services which was not included in state
VAT. It was reported that Brazil was further contemplating to reform the VAT system. The
researcher suggested that India could also follow Brazilian model of VAT.
Michael (2000)
in his paper titled, VIVAT, CVAT and All That : New Forms of Value Added Tax for Federal
Systems in 2000 stated that conventional wisdom has it that the value added tax is not a
suitable instrument for lower-level jurisdictions (provinces) in a federal system. The
problems that arise when it is so used have become a serious constraint on the development
of the VAT and closer economic integration in Brazil, the EU, India and elsewhere. In
his study, he describes and compares two recent proposals for forms of VAT intended to
alleviate these difficulties: the VIVAT and CVAT. Both enable the VAT chain to be preserved
on inter-provincial trade without compromising the destination principle (allowing provinces
to tax consumption at different rates) or introducing new scope for game-playing by the
provinces. The key difference between them is that the CVAT requires sellers to discriminate
between buyers located in different provinces of the federation, whereas VIVAT requires
them to discriminate between registered and nonregistered buyers.
D.OSei (2000),
in his article on political liberalization and the implementation of Value Added Tax in Ghana,
examined an aspect of Ghanas political economy in the 1990s, covering its transition to
democracy from military dictatorship and how this change process impacted in its attempt to
implement a VAT. It assesses the claim that political transition from autocracy to democracy
improves policy-making and policy outcomes. Ghanas experience of implementing VAT
typifies an inherent problem in African governance, that of lack of adequate capacity for
improved policy-making and for the institutionalization of inclusive politics and public
accountability. The VAT case served in the end to impose a previously absent level of public
accountability on the Ghanaian growth.
Purohit (2001a)
examined roadmap for national and sub national VAT in India and stated that in the unique
indirect tax system in India, central government had the power to impose broad spectrum of
excise duties on manufacturing; and states had power to impose sales tax and other taxes like
entry tax, octroi, motor vehicle tax, and passenger and road tax. Although
tax reform committees recommended adoption of comprehensive VAT, covering all
commodities and services but the dichotomy of tax power created obstacles in adopting
European style VAT in India. He brought out the problems and prospects of introducing VAT
in India in view of the experience of states which experimented in adopting VAT in one form
or the other. Andhra Pradesh introduced VAT on selected items with effect from April 1, 1995
for resellers only. Kerala also introduced VAT on resellers in the case of select items but did
not grant set-off on taxes paid on inputs. Maharashtra moved towards real VAT with
effect from October 1, 1995. Existing tax structure prior to introduction of VAT was
simplified and additional tax and turnover tax were abolished. It also provided set-off on
input tax paid by manufacturers. Efforts were made to make VAT system neutral and
transparent. Thus, the experience of the states showed that except Maharashtra, no other state
attempted to introduce VAT in its proper form, as the first and foremost prerequisite of VAT
was to give input tax credit. Further, he pointed out that there was no requisite preparedness
of tax department for introduction of VAT.
Purohit (2001b)
examined the evolution of sales tax in India and the efforts at introducing VAT. He discussed
different categories of sales tax according to coverage, legal basis and total turnover.
Discussing the fiscal role of sales tax, he reported that in most of the states, sales tax
constituted more than 50 per cent of the states own tax revenue. The buoyancy coefficients
of sales tax revenue were estimated to be greater than one in most of the states. The analysis
of structure of sales tax indicated large variations in rates and multiplicity of rates.
Exemptions were granted to large number of commodities and services. The treatment of
inputs varied from state to state. Levy of surcharges, additional sales tax and tax on resellers
aggravated the complexities in the structure of sales tax. He suggested short-term and
medium-term measures to reform the sales tax, and the major medium-term measure was to
introduce state- VAT. Further, when the states adopted VAT, he suggested important changes
in CST and existing system of taxation. He pointed out that certain reforms were to be carried
out in sales tax for introduction of VAT, which included registration of dealers, raising
exemption limit, smooth processing of returns, simplified payment procedures, and prompt
and proper assessment. He also suggested some reforms in the governance of stateVAT ,
which included mechanism to oversee its operation, separation of duties of different
functionaries of VAT department, integrated management information system, procedure for
risk management and reducing interaction of dealers with the department.
Mukhopadhyay (2002)
examined the issue of implementation of VAT going wrong in India. Providing details of
revenue from CST to the states in India during the period 1990 to 2002, he reported that
Maharashtra, Tamil Nadu, Andhra Pradesh, Haryana, Uttar Pradesh and West Bengal were to
lose a lot of revenue if CST was abolished. As there was no consensus and no attempt to
reach compromise in the interests of the states, VAT was introduced in an imperfect manner
in the states. No enough thought had gone into drafting of the Acts in this context. He
concluded that if it was pointed where exactly the efforts went wrong, it would not be
difficult to improve matters.
Yasmin (2004)
examined sales taxation in Jammu & Kashmir with respect to its structure, fiscal significance,
feasibility of replacement by VAT; and suggested some policy prescriptions. She found sales
tax to be highly elastic and buoyant in the State. The tax base had been widened considerably,
but there was still scope to widen the base and coverage of sales tax as there was a long list of
exempted goods, which could attract at least 4 per cent tax. There was prominence of firstpoint single stage sales tax. Though firstpoint sales tax had administrative advantage but the
tax base became narrower. She opined that VAT appeared to be better alternative for
extending tax base but suggested gradual introduction, starting with select items. She stated
that VAT could cover some of the deficiencies of first-point sales tax. It would reduce tax
evasion considerably. She also cautioned about the problems which would arise when VAT
was introduced.
Rao (2004)
tried to examine the extent of gain or loss to the states from the introduction of value added
tax, having features of uniform design, tax credit for inputs, extension of tax base to
transactions beyond the first-point sale and zero-rating of interstate trade and international
exports. She stated that exclusion of services from the base would not eliminate the problem
of cascading from the tax system. As manufacturing sector output was the major basis of
sales tax, the estimation of impact of VAT was limited to registered manufacturing sector
only. If the entire cost of tax was passed on as higher prices of output, then the result would
be reduction in value of output. The effects of introduction of VAT were classified into four
parts, i.e., loss from providing input tax credit, loss from reduced value of output, loss from
removal of CST, and gains from taxing second and subsequent sales within the state. With
certain assumptions, she estimated the losses, gains and net impact on different states for the
year 1997-98. With 15 per cent rate of VAT, the impact (loss) varied from Rs. 932 core for
U.P. to Rs. 1054 core for Maharashtra. However, she reported that this exercise did not take
certain features of the economy into account which included zero-rating of exports, turnover
taxes on second and subsequent sales by some states, impact of introduction of VAT and
withdrawal of CST on structure and locational choice of business/industry. The author further
argued that homogeneity in VAT rates and structure was required to reduce the scope of tax
competition among the states and neutrality of tax system to economic activity. However,
homogeneity in rates might not ensure that all states retain their existing level of revenue. As
tax-GSDP ratio varied, this indicated that different states had different interests, therefore, at
later stage, the states might change the VAT rates and structure. The author concluded that on
the basis of assumptions, some states seemed to gain consistently from introduction of VAT,
while the others were expected to lose. The losses could be avoided by changing the VAT
rates and structure but this could be a hindrance in the formation of a common internal
market. She cautioned that Central Governments assurance for compensation in case of
losses in revenue from introduction of VAT could invite negative response from states in
terms of slackness of efforts in collection of VAT.
Empowered Committee (2005)

laid down the roadmap of state-level VAT in India in the White Paper, which consisted of
three parts. In Part-I, justification of VAT and background were discussed. Problems of
double taxation and multiplicity of taxes were cited as the major drawbacks of sales tax
structure. The merits of VAT were reported to be input tax credit, abolition of other than VAT
taxes, rationalization of overall tax burden, self45 assessment by dealers, transparency and
higher growth in revenue. To harmonize the VAT design in the states, common points of
convergence with certain flexibility were reported to be the basis, which were elaborated in
Part-II. These points included: input tax credit, its coverage and carrying over; treatment of
opening stock; compulsory issue of tax invoice, cash memo or bill; registration; small dealers
and composition scheme; tax payers identification number; return; procedure of selfassessment of VAT liability; audit; declaration form; incentives; other taxes; penal provisions;
coverage of goods under VAT; VAT rates and classification of commodities. In Part- III of the
paper, related issues were discussed, which included provision of compensation to states in
case of losses, resulting from implementation of VAT to the extent of 100 per cent of loss in
the first year, 75 per cent in the second year and 50 per cent of the loss in the third year of
introduction of VAT. Other related issues discussed were: phasing out of Central Sales Tax
(CST),need for including imports under VAT chain, decision on collection and appropriation
of service tax, need for close interaction with trade and industry, and comprehensive
campaign at state level to communicate the benefits of VAT to common people, traders and
industrialists in simple and
transparent manner. Co-operation of all sections of people in the country was sought for
introduction of state level VAT.
Nour and Pramanik (2005)

stated that VAT is a multi-point turnover tax imposed at each stage of production and
distribution on sales minus cost incurred. They discussed different variants of VAT, i.e., gross
product type, income type, consumption type and the wages type. They also discussed the
three methods of computing VAT, i.e., addition method, subtraction method and credit
(invoice) method. From the methods of computing, they brought out that VAT helped in
reducing tax evasion, whereas sales tax had considerable scope for evasion. They suggested
that for better administration of VAT, each taxpayer be allotted a master file and Tax
Identification Number (TIN). They concluded that VAT would help in improving allocative
efficiency, growth and balance of payments; avoiding cascading effect; providing less scope
for vertical integration; and facilitating accuracy of tax refunds on exports.
Bezborah and Singh (2005)

pointed out the weaknesses of sales tax structure which included lack of uniformity in tax
rates, multiplicity of rates, cascading nature, pyramiding effect and revenue loss due to
incentives. While reporting essentials of good sales tax structure, they opined that VAT was a
good alternative for sales tax. However, VAT also has some black spots. Further, they brought
out implementation problems of VAT in India. They also discussed the issues of uniformity of
rates, removal of CST, making service tax VATable, unification of taxes, threshold limit and
refund mechanism; and concluded that implementation of VAT in India should not be delayed
further.
Misra (2005)
opined that Value Added Tax was a measure to broad-base the tax net and countries all over
the world have adopted this miracle tax. He pointed out that the superiority of VAT lay in the
fact that it prevented cascading effect of taxation and reduced tax evasion. Cross verification
of accounts of all the enterprises has been made possible with the help of computers under
VAT and as such accounts could not be manipulated. VAT could lead to capital formation in
the country when depreciation is made deductible from tax base and tax on capital goods is
offset against VAT liability. VAT could also improve balance of payments of the country as
exports are zero-rated. However, VAT might not be suitable for a large country with a strong
federal system. The author stated that for introduction of VAT, existing tax rates be
rationalized, tax credit system be introduced in place of incentives and steps be taken to
abolish CST.
Sthanumoorthy (2005)
reported that states in India carried out a path-breaking tax reform by replacing defective
sales tax with Value Added Tax (VAT). The author pointed out that sales tax system suffered
from many structural weaknesses, including multiplicity of sales tax rates and commodity
categories in each state; wide differences in rates within and between states; cascading effect
due to its imposition on a large number of inputs; tax competition among states; tax
exportation; large number of exemptions; application of surcharge and additional levies;
additional sales tax and turnover tax; entry tax and octroi; complicated and wide variety of
tax rules and widespread tax evasion. Even when policy-makers were advocating replacement
of sales tax with VAT, the attempts were initiated in early 1990s. The process was delayed
due to several implementation problems and finally Central Government persuaded majority
of the states to switch over to VAT with effect from 1.4.2005. The author discussed important
issues and challenges in implementation of VAT and in this context experience of some of the
Indian states and countries operating VAT system was reported.
Sharma (2005)
opined that VAT emerged as one of the most fundamental component of ambitious process of
implementation of VAT in India since 1991 but the process of implementation faced
constraints in a federal country like India as the experience of Brazil suggested. The major
constraint in implementation of dual VAT in India was that mutual cooperation between
centre and states was quite low. The fear of revenue loss as a result of introduction of VAT
and phasing out of Central Sales Tax (CST) was the major difficulty in implementing dual
VAT. The author opined that no tax credit in case of inter-state trade, as laid down in White
Paper of theb Empowered Committee (2005) undermined the basic benefit ofenforcing VAT
system, i.e., removing the distortion in movement of goods across the states. The integration
of national VAT and state VAT into GST was also stated to be a distant dream. The author
highlighted the need to develop a federal friendly model of VAT that could be implemented
in India without compromising federal principles.
Mukhopadhyay (2005)
brought out the global experiences of VAT and practical difficulties in introducing it in India.
He presented VAT design along with central excise and sale tax structure. While bringing out
the evolution of VAT, the author brought out the variations in definitions, procedures and
statutes in Indian states despite Empowered Committees efforts to provide common
platform. He also brought out the major constraints in adopting VAT in India. In the origin
and destination principles, inter-state trade posed a major problem. He advocated removal of
CST with introduction of VAT. The author also explained administrative and procedural
requirements for introducing VAT.
Bird (2007),
in the preliminary document, argued that in Canada, state value added tax was more likely to
be the right way to tax state level sales. He gave three major reasons for introduction of VAT
in place of retail sales tax (RST) which included taxing sales, taxing business and replacing
other taxes. Discussing the economics of choice between VAT versus RST, he established the
superiority of VAT because RST has cascading effect and subject to abuse. He advocated
inclusion of services under VAT net. Further, he discussed the issues relating to revenue,
eroding of revenue by exemptions, self-enforcing nature of VAT and reducing of tax evasion
to establish the superiority of VAT. He pointed out that even when VAT has to deal with much
larger number of tax payers, its administration is still easier because the onus is on the
taxpayer to keep the record to claim input tax credit to be presented to the authorities, if they
doubt the legitimacy of the credit. Discussing the broader issues of states and exports, he
stated that inter-state sales would not create more problems under VAT than under RST. He
concluded that VAT is the best form of consumption tax both economically as well as
administratively. He suggested that government should check unwarranted price increases,
protecting the interests of low-income consumers and taxing services at discounted rate. He
suggested that remaining states of Canada should also more seriously explore the possibility
of adopting state VAT.
Bansal (2008)
opined that as some states did not join the VAT system, the fractured implementation of VAT
could cause some problems. She stated that CST and VAT were not compatible as CST was
not VAT able and credit could not be claimed for CST. The producing states got considerable
revenue from CST while consuming states did not get much revenue and some states
hesitated in joining VAT system. Examining the Delhi experience of VAT, she reported that
VAT needed honest and efficient government machinery for cross checking and linking
production activities with tax liabilities of the firms but such machinery was lacking. VAT put
additional burden on tax authorities, producers and shopkeepers to keep the records. There
was no uniformity in rates in the states. The Empowered Committee covered only 550
commodities under VAT rates and left others to states to decide. As a result there were
variations in rates even in neighbouring states. Further, she stated that co-operation of
taxpayers was needed in self-assessment and keeping correct accounts butthisco-operation
was not forthcoming. As the government machinery was not able to do cross checking, there
was lot of tax evasion. She termed the VAT procedure as complicated. From the review of
available literature, it clearly emerges that the topics undertaken in these limited research
studies mainly focus on the drawbacks of sales tax and make justification for the introduction
of VAT. Similarly, problems which could arise in introducing VAT have also been explored in
some studies. There are only few studies which explore the effects of VAT after its
introduction. Significance of this study lies in the fact that it empirically examines the
introduction of after the replacement of sales tax in the states. The study undertakes an indepth analysis of Punjab and Haryana states and recommends measures needed to improve
revenue collection from VAT. It takes into consideration the secondary data as well as
primary data collected from the traders and consumers. Thus, the present study is much more
comprehensive as compared to the earlier studies.

Chapter 01

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CHAPTER 01

A very few countries

2. Type of Taxes in India:-

Types of Direct Taxes

(4) Perquisite Tax:Earlier to Perquisite Tax we had

In addition to above other taxes are also applicable on corporate

2.3 Other Taxes:(1) Professional Tax

3. Benefits of Direct Taxation:

4.2 How can VAT address these issues:

4.3 WHO GAINS?

4.4 WHATLL BE THE TAX BURDEN?

4.5 WHO PAYS?

4.6 HOW TO PAY?

4.7 WHICH GOODS WILL BE TAXABLE UNDER VAT?

4.8 OTHER CONSIDERATIONS

5. VAT EFFECT ON INFLATION

6. DISTRIBUTION EFFECTS OF VAT

This emanates from the fact that

However if, following the premise that welfare is

A proportional burden would also

This results in the use

of presumptive methods of determining the tax liability, which leads to more

The higher compliance cost resultant from

7. VAT EFFECT ON ECONOMIC GROWTH

. Agricultural implements manually operated or animal driven.

Aids and implements used by handicapped persons.

All seeds for sowing other than oil seeds.

All varieties of textiles and fabrics (produced or

India) including declared goods but other than those specified

1[(i) Animal feed and feed supplements, namely, processed

1. Substituted by Act 4 of 2006 w.e.f. 1.4.2006.

Animal 1[shoe and nails.]1

1. Substituted by Act 4 of 2006 w.e.f. 1.4.2006.

Aviation turbine fuel.

Awalakki (Beaten rice) and Mandakki (Parched rice or puffed

Bangles of all materials excluding precious metals.

Books, Periodicals and journals including maps, charts and globe.

Bread and bun.

Cart driven by animals 1[and their parts, but excluding rubber

1. Inserted by Act 4 of 2006 w.e.f. 1.4.2006.

Charakha, Ambar Charaka, handloom fabrics and Gandhi Topi.

Charcoal and firewood except Casurina and Eucalyptus timber..

814 Value Added Tax [2004: KAR. ACT 32

Condoms and contraceptives.

Cotton and silk yarn in hank.

Curd and butter milk.

Fresh milk and pasteurised milk.

Fresh plants, saplings, fresh flowers, plantain leaves, patravali

Fresh Vegetables & fresh fruits.

Garlic, ginger, green chillies, onions, potatoes, sweet potatoes,

Hay (green or dry).

Human blood 1[including all its components]1

1. Substituted by Act 4 of 2006 w.e.f. 1.4.2006.

Khadi garments including made-up articles; other goods sold by

Kumkum, bindi and sindhur.

Leaf plates and cups whether pressed or stiched.

Liquor including Beer, Fenny, Liqueur and Wine.

Meat including flesh of poultry, fish, prawns, shrimps and lobsters,

2004: KAR. ACT 32] Value Added Tax 815

Non-judicial stamp paper sold by the Government Treasuries and

rupee note when sold to the Reserve Bank of India; cheques,

Organic manure, Compost manure, fish manure and poultry

Petrol including special boiling spirit.

1. Omitted by Act 6 of 2007 w.e.f. 1.4.2007.