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VALUE ADDED TAX SYSTEM (A study with reference to Thiruvallur District, Tamil Nadu, India).

A dissertation work submitted to the Pondicherry University in partial fulfillment of the requirement for the degree of

MASTER OF PHILOSOPHY (COMMERCE)


By

A. HARIKUMAR (Register No. 2100705)


Under the guidance of Thiru.S.ARAVANAN, ASSISTANT PROFESSOR (SG).

DEPARTMENT OF COMMERCE
SCHOOL OF MANAGEMENT
PONDICHERRY UNIVERSITY
Kalapet, Puducherry-14 NOVEMBER-2011

S.ARAVANAN, Assistant Professor (SG), Department of commerce, School of Management, Pondicherry University, Puducherry-14.

CERTIFICATE OF THE SUPERVISOR This is to certify that the dissertation entitled VALUE ADDED TAX SYSTEM(a study with reference to Thiruvallur District, Tamil Nadu, India) is a bonafide record of research work done by Mr. A.HARI KUMAR and submitted for the award of the degree of Master of Philosophy in Commerce of Pondicherry University. The dissertation is a record of independent research work undertaken by him under my supervision and guidance and that it has not previously formed the basis for the award of any degree, diploma, associateship, fellowship or any other similar title of this or any other university.

Place: Puducherry Date:

Supervisor

Forwarded Dean School of management Head of Dept Department of commerce

Mr. A.HARI KUMAR, M.Phil Scholar in commerce, Department of commerce, School of Management, Pondicherry University, Puducherry-14.

DECLARATION I hereby declare that the dissertation entitled VALUE ADDED TAX SYSTEM (a study with reference to Thiruvallur District, Tamil Nadu, India), submitted by me for the award of the Degree of Master of Philosophy in Commerce is a record of original research work done by me under the supervision and guidance of Thiru S.ARAVANAN,(Assistant Professor SG) and that the dissertation has not previously formed the basis for award of any degree, diploma, associateship, or any other similar title.

Place: Puducherry Date: (A.HARIKUMAR)

ACKNOWLEDGEMENT
I extend my heart full gratitude to the Almighty for his blessings showered on me to complete this piece of work. I express my wholehearted thanks to Dr.M.Ramadoss, Dean, School of Management, and director of studies, Pondicherry University. It is from my heart that I express my deep and sincere thanks to my guide and supervisor Thiru. S. Aravanan, Assistant professor (SG) in Department of Commerce, Pondicherry University who inspired me a lot while doing my dissertation. Without his advice, guidance and supervision, I would not have submitted this research work in time; no words are there to express my gratitude to my guide. I am really very proud to have a guide like him. I also express my gratitude to Dr. Malabika Deo, Professor and Head Department of Commerce, Pondicherry University for her encouragement and support for doing M.Phil research work. I am extremely happy to extend my sincere thanks Dr.P.Palanichamy Professor in Department of Commerce, Pondicherry University for his encouragement and valuable suggestions. I thank Dr.P.Natarajan, Professor, Department of Commerce, Pondicherry University for his inspiration. I thank Dr. Dr. G. Shanmugasundaram, Associate Professor, Department of Commerce, Pondicherry University. I thank Dr. D. Lazar, Associate Professor, Department of Commerce, Pondicherry University. My thanks to Mr. Nidheesh, Assistant professor, Department of Commerce, Pondicherry University for his guidance. I thank Dr. P.S. Velmurugan, Assistant professor, Department of Commerce, Pondicherry University.

I thank Dr. S. Shijin, Assistant professor, Department of Commerce, Pondicherry University. I thank to Mr A.N.Veerasalingam Assistant Commissioner of Commercial Tax Department. My sincere thanks to Mr.Lakshmipathy Aassistant Commissioner of Commercial Tax Department. And I thank Mr.Nandhagopal, M/s.Renu and Mr.Maduraipandian the superintendents of Commercial Tax Department. I also thank all my friends and co-researchers who helped me a lot academically. I owe thanks to teaching and non-teaching staff of Pondicherry University. Especially non teaching staff members of Department of Commerce, Pondicherry University. Last, but not least, I thank all those friends who helped me either directly or indirectly in the successful completion my research work. I am greatly indebted to all these persons.

Place: Puducherry Date : A.HARI KUMAR

CONTENTS
CHAPTERS I II III IV V BIBLIOGRAPHY ANNEXURE Particulars INTRODUCTION AND DESIGN OF THE STUDY REVIEW OF LITERATURE THEORETICAL FRAMEWORK ABOUT VAT ANALYSIS AND INTERPRETATIONS SUMMARY, FINDINGS AND CONCLUSIONS Page No. 1-10 11-24 25-46 47-87 88-94 95-97 98-108

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LIST OF TABLES
Sl. No. Particulars VAT Payers Demographic Variables 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Gender Age Group Marital Status Educational Qualifications Type of Business Annual Turnover Respondents Business Age VAT Officials Demographic Variables 4.8 4.9 4.10 4.11 4.12 4.13 Gender Status Age Group Marital Status Education Level Respondents Designation Income Factor Analysis Of VAT Officials 4.14(a) 4.14(b) 4.14(c) 4.14(d) KMO and Bartlett's Test Total Variance Explained Rotated Component Matrix List of factors Factor Analysis Of VAT Payers 4.15(a) 4.15(b) 4.15(c) KMO and Bartlett's Test Total Variance Explained Rotated Component Matrix 66 66 68 60 60 62 64 54 55 56 57 58 59 47 48 49 50 51 52 53 Page No.

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4.15(d)

List of Factors Cross tabulation results Relating To VAT Payers

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4.16 4.17 4.18 4.19 4.20 4.21 4.22

Gender * Work Burden Education * Work Burden Business * Work Burden Turnover * Work Burden Turnover * Incidence Age of Business * Incidence Education * Rate Knowledge Cross tabulation results Relating To VAT Officials

69 70 71 71 72 72 73

4.23 4.24 4.25

Gender * Work Burden Designation * Work Burden Age Group * Work Burden One Way ANOVA Relating VAT Payers

74 74 75

4.26 4.27 4.28 4.29 4.30 4.31

Age of Business and Work burden Education and Awareness of Exemptions Registration and Incidence of Tax Turnover and Convenience to pay tax Age and business and Tax evasion Turnover and Tax avoidance One Way ANOVA Relating VAT Officials

75 76 76 77 77 78

4.32 4.33

Education and Work burden Designation and Registration Results of Correlation

78 79

4.34(a) Commercial Tax Department Gross Receipts 4.34(b) Correlations

79 80

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Result of Paired t-Test 4.35(a) 4.35(b) 4.35(c) Total Revenue of the Government Paired samples statistics Paired samples test VAT officials opinion 4.36 4.37 4.38 4.39 4.40 knowledge of VAT rates VAT or TNGST continue in Tamil Nadu Awareness of proposed GST Assistant from VAT consultant Registration VAT payers opinion 4.41 System to continue in Tamil Nadu Revenue collection under VAT 4.42 4.43 Commercial Tax Department Gross Receipts (Amount in Crores) Commercial Tax Department Gross Receipts (Amount in Crores) 86 87 83 81 82 82 82 83 80 80 81

LIST OF FIGURES
Sl. No. Particulars VAT Payers Demographic Variables 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Gender Age Group Marital Status Educational Qualifications Type of Business Annual Turnover Respondents Business Age VAT Officials Demographic Variables 4.8 4.9 4.10 4.11 4.12 4.13 Gender Status Age Group Marital Status Education Level Income Respondents Designation Result of Factor analysis 4.14 4.15 Scree plot of VAT officials Scree plot of VAT payers Revenue collection under VAT 4.16 4.17 Commercial Tax Department Gross Receipts (Amount in Crores) Commercial Tax Department Gross Receipts (Amount in Crores) 86 87 62 67 54 55 56 57 58 59 47 48 49 50 51 52 53 Page No.

CHAPTER I INTRODUCTION AND DESIGN OF THE STUDY


1.1 Introduction:
A tax is a back bone of every country to meet their social obligations. Without tax the government cannot do any social benefit activities. Government is the only person to levy tax. Hence tax is compulsory payment or contribution by the people to the government for which there is no direct return to the tax payers. Tax imposes a personal obligation on the people to pay the tax if they are liable to pay it. The general public should be taxed according to their ability to pay, and the people in the same financial position should be taxed in the same way without any discrimination (1). Tax can be defined as an involuntary fee or more precisely, unrequited payment, paid by the individuals or businesses to a government (central or local).Taxes may be paid in cash or kind (although payments in kind may not always be allowed or classified as taxes in all systems). The means of taxation, and the uses to which the funds raised through taxation should be put, are a matter of hot dispute in politics and economics, so discussions of taxation are frequently tendentious. A good tax system should not affect the ability and willingness of the people to work, save and invest. If not, it will affect the development of trade and industry and the economy as a whole. Thus, a sound tax system should contribute to the economic development of a country. Hence taxation should not be like killing the goose that lays golden eggs. Indirect taxes are those taxes which have their primary burden or impact on a single person. But that person succeeds in shifting his burden to others. In other words, an indirect tax is imposed on one person but is paid partly or wholly by another. Indirect taxes are shifted and the incidence of these taxes fall on persons other than the original payers. Commodity taxes or sales tax, excise duties, customs duties etc, may be grouped as indirect taxes. The Objectives of taxation are: Main objectives i. ii. Generation of revenue Maintenance of welfare state

iii. iv.

Prevention of concentration of economic power Re-distribution of wealth for the common good.

Subsidiary objectives i. ii. iii. Accelerate saving and thereby investment Repaid economic development Generation of employment.

1.2 Evolution of VAT


Origin: Sales Tax began in India with petrol tax introduced by the government of Madhya Pradesh. During the British rule, arrack and toddy shops were functioning in Madras Presidency. Following the Madhya Pradesh petrol tax, Madras Presidency introduced Sales Tax in 1939. During the year 1939, the Government of Madras Presidency earned 8 crore rupees as revenue from the arrack and toddy shops. The Govt. was interested in removing the liquor shops and compensate the loss of revenue by levying sales tax. Sales tax initiated in Tamil Nadu has been levied throughout India. The Tamil Nadu General Sales Tax Act was enacted in 1959and it is called TNGST Act 1959. Its purpose is to enable the govt. levy sales and purchase tax with in Tamil Nadu. TNGST is replaced by VAT from the year 2007. Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services. It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer. It is not a charge on companies. It is charged as a percentage of prices, which means that the actual tax burden is visible at each stage in the production and distribution chain. It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved. In other words, it is a multi-stage tax, levied only on value added at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax; tax evasion will be checked, resulting in higher revenues to the government. Over 130

countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it. In the present work study of Value Added Tax with reference to Thiruvallur District, Tamil Nadu, India has been undertaken.

1.3 Scope of the study


This present study concentrates on the level of work burden of business concerns, VAT officials and VAT consultants in Thiruvallur District in Tamil Nadu only. This study also tries to prove whether the revenue derived from the VAT is more compared to other tax systems like TNGST. For the purpose data has been proposed to be collected from both the sources of primary and secondary. For the purpose of primary data suitable questionnaire has been circulated to the respondents in Thiruvallur District. The data are collected from Commercial Tax Offices, Tax consultancy offices and various shops i.e. VAT payers in Thiruvallur District in Tamil Nadu. Secondary data are collected from Tamil Nadu Statistical Reports 2010-11. The collected data are to be analysed using appropriate statistical tools.

1.4 Significance of the Study


The present study tries to focus on a elaborate explanation about the Value Added Tax in Tamil Nadu. This study also attempts to focus on the level of Work burden of VAT officials, VAT consultants and VAT payers. The growth of revenue appreciation of the Tamil Nadu State Government also has been focused in this study. Though many number of research studies have been undertaken in the area of Value Added Tax system; only few researchers have done their research in Tamil Nadu jurisdiction.

1.5 Objectives of the Study


To study about value added tax system in general. To study the profile of VAT payers and VAT administrators. To examine the influence of various factors on the work burden of VAT officials.

To examine the influence of various factors on VAT compliance by VAT payers. To examine whether value added tax system helps to revenue appreciation to the government compared to other tax systems like TNGST and finally To find whether VAT system is convenient to the VAT administrators as well as the VAT payers.

1.6 Methodology 1.6.1 Research Design


The research problem having been formulated in clear cut terms, the researcher will be required to prepare a research design, i.e., he will have to state the conceptual structure within which research would be conducted. The preparation of such a design facilitates research to be as efficient as possible yielding maximal information. In other words, the function of research design is to provide for the collection of relevant evidence with minimal expenditure of effort, time and money. But how all these can be achieved depends mainly on the research purpose. Research purposes may be grouped into four categories, viz., (i) Exploration, (ii) Description, (iii) Diagnosis, and (iv) Experimentation. A flexible research design which provides opportunity for considering many different aspects of a problem is considered appropriate if the purpose of the research study is that of exploration. But when the purpose happens to be an accurate description of a situation or of an association between variables, the suitable design will be one that minimizes bias and maximizes the reliability of the data collected and analyzed.

1.6.2 Sampling Method


The method followed for selection of sample respondents is convenient cum judgement sampling. Sample respondents for VAT payers Groups are selected from the areas of Ponneri, Kavarai Pettai and Gummudi Poondi of Thiruvallur District. Similarly Sample respondents for VAT officials and Consultants Groups are selected from the areas of Ponneri, Thiruvallur and some parts of Chennai which comes under jurisdiction of Thiruvallur District. Respondents from each area are selected on convenient cum judgement basis. Thus totally 260 respondents are selected, out of while 130 are in the VAT payers group and the remaining 130 from the VAT officials and consultants.

1.6.3 Study Area


The area of study is Commercial Tax Offices, Tax consultancy offices and various shops in Thiruvallur district in Tamil Nadu.

1.6.4 Data Collection Procedure


For every qualitative study, data on the background and historical context are gathered. This may not be a major part of data collection but at least, in proposing a particular setting, the researcher gathers demographic data and describes geographic and historical particulars. Primary data will be collected through well designed questionnaire (five pointlikert scale from strongly agree to strongly disagree) from VAT payers and VAT officials in Thiruvallur Dist at Tamil Nadu. Both primary and secondary data are used in the work.

1.6.5 Primary data


The researcher has used questionnaire as a tool for collecting primary data. The researcher has formulated a questionnaire consisting of 30 questions for VAT payers and 45 questions for VAT consultants and VAT officials and distributed among the 260 respondents. The specimen questionnaire are given an appendix I and II. The questionnaire of VAT payers consists of 30 questions, among them the first 9 questions are on demographic base of the respondents. The remaining 21 questions were formed with a view that the responses fall under the following classification: 1. Assertion, 2.Awareness, 3.Personalized and 4.Opinions. The questionnaire of VAT consultants and officials consists of 45 questions, out the 45; first 7 questions are on demographic base of the respondents. The remaining 38 questions are formed with a view that the responses fall under the following classification: 1.Assertion, 2.Awareness, 3.Personalized and 4.Opinions.

1.6.6 Secondary Data


The Secondary data for this purpose were collected from various journals, books, professional magazines, annual reports, statistical report and past records. In this study the secondary data were collected for the purpose of analysing the revenue receipts of the Tamil Nadu Government from the Tamil Nadu statistical report.

1.7 Tools Used for Analyses: 1.7.1 SPSS Package


The abbreviation SPSS stands for Statistical Package for the Social Sciences and is a comprehensive system for analysing data. SPSS package consists of a set of software tools for data entry, data management, statistical analysis and presentation. SPSS is a very powerful and user friendly program for statistical analyses. SPSS can take data from almost any type of file and use them to generate tabulated reports, charts, and plots of distribution and trends, descriptive statistics, and complex statistical analysis. Anyone with a basic knowledge of statistics can easily learn how to run very complicated analysis in SPSS with a simple click of the mouse. SPSS 16.0 version is used in this research for analysing the datum(2).

1.7.2 Chi square Test


Chi-square is one of the very popular methods for testing hypothesis on discrete data. The discrete data can be nominal or ordinal. Finding descriptive statistics for such data is meaningless. The only summary statistics useful for such data are frequencies and percentages. Contingency tables along with some chi-square statistics are used in such kind of data. There are three different types of chi-square analysis: 1. Chi-square test for goodness of fit. 2. Chi-square test for homogeneity. 3. Chi-square test of independence. The chi-square test for goodness of fit determines if the sample under investigation has been drawn from a population, which follows some specified distribution, while the test for homogeneity investigates the issue whether several population are homogeneous with respect to particular characteristic. The Chi-square test of independence is used to test the hypothesis that two categorical variables are independent of each other. In this research the researcher used the Chi-square test of independence. The formula is

(O E )2 E
2

Where O = the frequencies Observed E = the frequencies Expected

= the sum of

2 = Chi-square value.
1.7.3 Analysis of Variance (ANOVA)
ANOVA or analysis of variance is used to compare the means of more than two populations. It uncovers the main and interaction effects of classification or independent variables on one or more dependent variables. ANOVA has found extensive application in psychological research using experimental data. The formula for calculating F test is

SB2 F Sw2
Where F = Ratio of Variance (F Value)

S B 2 = between group variance S w 2 = within group variance

1.7.4 Correlation
Correlation is a technique which measures the strength of association between two variables. Both the variables X and Y may be random or may be that one variable is independent (non-random) and the other to be correlated are dependent. When the changes in one variable appear to be linked with the changes in the other variable, the two variables are said to be correlated. When the two variables are meaningfully related and both increase or both decrease simultaneously, then the correlation is termed as positive. If increase in any one variable is associated with decrease in the other variable, the correlation is termed as negative or inverse. Suppose marks in Mathematics are denoted by X and marks are Statistics are denoted by Y. If small values of X appear with small values of Y and large values of X come with large values of Y, then correlation is said to be positive. On the other hand, a small value of X appears with large values of Y. It is a case of negative correlation. Where there are two or more than two independent variables, the analysis concerning relationship is known as multiple correlations. It has wide application in business and statistics (3).

1.7.5 Dependent (paired) samples t-Tests


In case of independent samples test for testing the difference between means, it is assumed that the observations on one sample are not dependent on the other. However, this assumption limits the scope of analysis as in many cases the study has to be done on the same set of elements to control some of the sample specific extraneous factors. Such experiments where the observations are made on the same sample at two different times, is called dependent or paired sample t-Test.

Where, d = Difference between Matched Scores N = Number of pairs of scores

1.7.6 Factor Analysis


Factor analysis is by far the most often used multivariate technique of research studies, especially pertaining to social and behavioural sciences. Factor analysis, thus, seeks to resolve a large set of measured variables in terms of relatively few categories, known as factors. This technique allows the researcher to group variables into factors (based on correlation between variables) and the factors so derived may be treated as new variables and their value derived by summing the values of the original variables which have been grouped into the factor (4). Formula for factor analysis: Y = X + E Where Y= matrix of measured variables X= matrix of common factors = matrix of weights (factor loading) E = matrix of unique factors, error variation.

1.8 Limitations of the Study


The study concentrates in Thiruvallur district of Tamil Nadu only. The period of the study is only six months. The study is based on the respondents opinion which is based on their attitude, the attitude may change. The improper opinion of the respondents may also affect the nature of the results. The respondents felt unwilling in answering some of the questions as they feel that the opinion would turn against them.

1.9 Chapterization:
This study comprises of five chapters. Chapter I: Deals with introduction, scope of the study, objectives of the study, methodology of the study and limitation of study. Chapter II: Presents the review of literature relating to the study. Chapter III: Gives a theoretical framework about Value Added Tax system and its explanation. Chapter IV: Represents the detailed Analysis of the primary and secondary data and interpretation with statistical calculations. Chapter V: Presents main findings of the study, suggestions and conclusion of the study.

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REFERENCES: 1. V.Balachandran Indirect Taxation, Sultan Chand Publications, New Delhi-02, 10th EDITION, 2005. 2. Ajai S.Gaur and Sanjaya S.Gaur Statistical Methods For Practice and Research(A Guide to data analysis using SPSS), Response Book, Business Books from SAGE Publications Ltd, New Delhi-110 044. 3. http://www.emathzone.com/tutorials/basic-statistics/correlation.html 4. C.R.Kothari Research Methodology (Methods and Techniques), Wiley Eastern Ltd, New Age International Ltd, New Delhi-110 002, Second Edition, 1994.

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CHAPTER II REVIEW OF LITERATURE

Review of Literature
Introduction Tax is a back bone of every country. It plays an important role in countries developmental activities. Many researchers in the past had taken up various studies relating to the value added tax in India and elsewhere in other parts of the world. This chapter reviews various literatures relating to value added tax. Need for review of literature First review of literature demonstrates knowledge about the field. This means more than reporting what the researcher is reading and understanding, the researcher needs to read it critically and to write in such a way that shows the researcher has a feel for the area and also know what the most important issues are and their relevance to his work.

It justifies the reason about research. This is closely connected with demonstrating what the researcher knows about the field. It is the knowledge of research field which allows identifying the gap which the research could fill.

Finally it allows establishing the theoretical framework and methodological focus even if the researcher is proposing a new theory or a new method. (www.uq.edu.au)

Now review of a few related works is given below: Roberto Steiner and Carolina Soto, (1994),(1) TAX EVASION AND ELUSION OF VALUE ADDED TAX IN COLOMBIA-They examine the three aspects to the value added tax in Columbia. Fist they show that although the VATs productivity is at an acceptable level according to international standards, it has recently been declining. Second, they estimate tax evasion and elusion for 1994. Their results indicate that the international VAT evasion rate is 32.6%, whereas the total evasion of the tax is 28.1%. Assuming that there were neither evasion nor exemptions, the VAT rate that would generate the same amount actually collected in 1994, would be 4.9%, compared to the actual general rate of

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14%. Finally, they verify if the tax is really as regressive as theory suggests, employing an annual time frame analysis, also for 1994. According to the actual expenditure structure and taking into account exemptions and excises, they conclude that the VAT is slightly progressive, although its progressivity is not monotonic throughout income deciles. However, as households are ordered by deciles on a consumption basis instead of an income basis, the tax becomes clearly progressive. Arindam Das Gupta and Ira N. Gang, (1996),(2) VALUE ADDED TAX EVASION, AUDITING AND TRANSACTIONS MATCHING -They examined the impact of enforcement on the revenue effectiveness and efficiency consequences of the VAT. Transactions matching are shown to have very different effects from auditing: Even when auditing alone is unable to induce non-zero taxpayer reports, and regardless of the expected success rate in auditing of the tax administration, sufficiently intensive cross matching can induce truthful reporting. On the other hand, matching leads to distorted purchase and sales transactions. It can also distort input use and output decisions even if auditing alone has no adverse effects. In the model, conditions under which the VAT leaves input prices undistorted are found and the content of the often made claim, that a VAT is self-enforcing, is explored. The ability of the tax administration to enforce compliance with the VAT is shown to be sensitive to the knowledge that the tax administration has about the production technology. Laszlo Goerke, (1999),(3) VALUE-ADDED TAX VERSUS SOCIAL SECURITY CONTRIBUTIONS -It is a discussion paper in order to alleviate unemployment it is often recommended to reduce social security contributions (SSC) and to compensate for the ensuing loss in revenues by a rise in the value-added tax (VAT). Assuming unemployment to be caused by efficiency wages, it is shown that a balanced-budget shift from a payroll tax to a VAT will increase employment if the rise in the VAT does not alter consumer prices. If the effects of a shift from SSC to the VAT on the worker's effort are neutralized, for example, by imposing a constant wedge, the employment impact will depend on the nature of the unemployment compensation system. Michael Keen and Jack Mintz, (2000), (4) THE OPTIMAL THRESHOLD FOR A VALUE-ADDED TAX- They develop a simple rule characterizing the optimal threshold in terms of a trade-off between tax revenues and collection costs. It then considers, in principle and by simulation, the implications for the optimal threshold of the production inefficiencies

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implied by the differential treatment of those above and below the threshold. The analysis here has focused on the central trade-offs to be faced in choosing the threshold for a VAT: between the desires to increase tax revenue, reduce administration and compliance costs, and minimize the distortions arising from the differential treatment of firms above and below the threshold. One common advantage perceived in the value-added tax, for instance (and a common source of resistance to its introduction) is the prospect of its yielding information useful for enforcement of the income tax. In practice, distributional effects are naturally a major concern. Much emphasis is often given, in particular, to the regressive nature of the compliance costs associated with the VAT, generally thought to be more burdensome, relative to value added, for smaller traders than large. Against this, however, must be borne the competitive advantage enjoyed (at least in respect of sales to final consumers) by those who remain below the threshold. Sameer R. Rege, (2002),(5) A GENERAL EQUILIBRIUM ANALYSIS OF VAT IN INDIA-He evaluates the welfare implications of a VAT in the static and a sequentially dynamic context after accounting for the political and administrative constraints facing the Indian government in implementing a VAT. Replacing the old indirect tax structure with a VAT is welfare worsening. The increase in final consumer prices on account of reduced tax base leads to higher price of essentials, causing welfare loss. Zero rating v/s exemption plays an important role on welfare, with lower welfare loss if essential commodities are exempt from VAT. Agriculture sector unambiguously plays a crucial role in welfare. Finally he concludes, replacing the old indirect tax structure with a VAT is welfare worsening. The increase in final consumer prices on account of reduced tax base leads to higher price of essentials, which causes welfare loss. When agriculture, food and food products and textiles are exempted, the welfare loss is reduced by half on account of lower final tax rates on consumption. Even a change in tax / subsidy policy of one sector (agriculture) produces a dramatic change in welfare. Paresh Kumar Narayan, (2003),(6) THE MACROECONOMIC IMPACT OF THE IMF RECOMMENDED VAT POLICY FOR THE FIJI ECONOMY: EVIDENCE FROM A CGE MODEL-He uses a computable general equilibrium model to examine the economy wide effects of this VAT policy and find that while the VAT improves government revenue and brings about a small 0.6% increase in real GDP, it fails to address investment levels. VAT actually leads to a decline in investments and a reduction in real consumption and national welfare. He highlights that large amounts of tax revenue are owed to government.

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This is three times more than what government will collect from the 25% increase in VAT. In this light, an alternative to VAT is to upgrade governments tax collecting mechanism. From that they deduce that the IMF policy is misdirected. Rao.M.Govinda,(2005),(7) TAX SYSTEM REFORMS IN INDIA:

ACHIEVEMENTS AND CHALLENGES AHEAD- He examined the Indian tax system has come a long way from the narrow based, complicated and confiscatory to the one that is far more efficient. Over the years, the thrust and direction of reforms have been to improve revenue productivity while minimizing distortions. The reform to convert the state level sales tax into VAT this year is a major initiative. The recent focus on tax administration promises rich dividends. Despite reforms since 1991, much remains to be done to make the tax system broad-based, productive and efficient. In corporate tax, excise, customs and sales taxes, revenue concentration on diesel and petrol has high efficiency costs. The personal income tax continues to be narrow based. Reform in the sales tax has only just begun and a lot remain to be done to evolve destination-based retail VAT. The reforms in tax administration promise increased revenues and, hopefully, that will provide the elbow room necessary for calibrating future reforms. Berhan, Bahro A. and Jenkins, Glenn P, (2005),(8) THE HIGH COSTS OF CONTROLLING GST AND VAT EVASION- They developed the Canada's goods and services tax (GST) is sometimes said to be self-enforcing--vendors will always charge the tax because purchasers will always want to claim input tax credits. Nonetheless, GST evasion is a reality. Solutions to the problem usually involve increased audits (and therefore increased compliance costs) for taxpayers and increased administration costs for governments; those costs represent a diversion of resources from more productive activities and an economic loss to the country. The GST is a value-added tax (VAT). Other countries that impose a VAT face similar problems and have proposed various solutions. Northern Cyprus and Bolivia, for example, refund some of the VAT paid on the purchases for which final consumers have obtained official receipts from sellers. In this article, the authors measure the compliance costs to taxpayers and the administration costs to the tax authorities in those two countries. Although similar schemes are not likely to be directly copied in Canada, the authors provide data to show how high compliance and administration costs can go when governments singlemindedly pursue the goal of controlling VAT evasion. The total VAT compliance and administration costs incurred by Northern Cyprus (in 2003) and Bolivia (in 2002) are estimated at, respectively, 1.50 and 1.55 times the total budgetary expenditures to administer

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the entire domestic tax system. In both countries, the compliance and administration costs of the VAT refund schemes amounted to more than the 5 percent of the total revenues collected by the VAT systems. Marna Kearney et al, (2005),(9) AN ANALYSIS OF SOUTH AFRICAS VALUE ADDED TAX -In this paper, they describe South Africas value added tax (VAT), showing that (1) the VAT is mildly regressive and (2) it is an effective source of government revenue, compared to other tax instruments in South Africa. They evaluate the VAT in the context of other distortions in the economy by computing the marginal cost of fundsthe effect of raising government revenue by increasing the VAT rates on household welfare. Then they evaluate alternative, revenue-neutral tax systems in which they reduce the VAT and raise income taxes. For the analysis, they use a computable general equilibrium (CGE) model with detailed specification of South Africas tax system. Households are disaggregated into income deciles. They demonstrate that alternative tax structures can benefit low-income households without placing excess burdens on high-income households. Graham Harrison and Russell Krelove, (2005),(10) VATREFUNDS: A REVIEW OF COUNTRY EXPERIENCE- In this paper they explained a key feature of the invoicecredit form of value-added tax (VAT) is that some businesses notably exporterswill pay more tax on their purchases than is due on their sales, and so can seek refunds of excess credits from government. While refunding is straightforward in principle, serious problems arise in practice, including opportunities for fraud and corruption, and denial of refunds by governments with cash shortages. This makes the refund process the Achilles heel of the VAT. Finally they examine the refund approaches of tax administrations in 36 developing, transitional, and developed countries. It evaluates the effectiveness of these approaches and suggests a model of best practice that takes into consideration compliance issues faced by countries during different stages of development. Glenn P. Jenkins et al, (2006),(11) IS THE VALUE ADDED TAX NATURALLY PROGRESSIVE?-This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information they estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax

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compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Finally they conclude, however, have not taken into account the fact that in developing countries the commodities, on which poor households spend most of their income, even if they are included in the legal tax base, and are administratively impractical to tax. Arvind Ashta, (2007),(12) EUROPEAN VAT GENERAL PRINCIPLES-In 1954, France became the first nation to adopt a value-added tax, a notion credited to Maurice Laure. Today, this tax is growing in popularity, and about 40 nations use it, including all EU member States. As a notable exception, it is not used by the United States on the federal level. But most of the other large industrial nations use it. A peculiar reason for not adopting VAT in most of the federal countries is that traditionally, sales taxes and indirect taxes were invariably left to the States in the constitution. If a federal VAT replaces these taxes, then the States would have no revenue base and the federal countries would soon resemble Unitary States. State governments are loath to give up their tax bases. Andrea Gebauer et al, (2007),(13) CAN REFORM MODELS OF VALUE ADDED TAXATION STOP THE VAT EVASION AND REVENUE SHORTFALLS IN THE EU?- They examined VAT evasion caused by the growth of carousel fraud has recently led to significant VAT revenue losses in the EU. Carousel fraud works such that intra-EU firms repeatedly carry out cross-border supply and purchase of goods and services, leading to the fraudulent retention of revenue. This study discusses three reform models of the VAT system in Germany, whose implementation would open up further possibilities for tax evasion and lead to a considerable increase in administrative costs. The elimination of the problems in the current VAT system should not lead to new abuses from which the negative effects on VAT revenue may be just as large or even larger. One of the main problems after a system change would seem to lay in the future coexistence of two VAT systems, which, due to the unclear delimitation, would apply for most enterprises, as well as the fraud potential of using identification numbers. Input-tax reimbursements are now often illegally claimed primarily by the holder of an invoice, whereas the multiple use of an invoice for fraudulent purposes plays no major role. Also, it would be a mistake to overestimate the control possibilities. For all these reasons, before a radical change is made to the VAT system with unforeseeable results, all available possibilities to make the present system more fraud-secure should be

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exhausted. Finally, it is not evident why the financial means required for the establishment of extensive control mechanisms in a new system could not also be used for the improvement of the present system. Michael Keen and Ben Lockwood, (2007),(14) THE VALUE-ADDED TAX: ITS CAUSES AND CONSEQUENCES- They proved that VAT, as its proponents claim, an especially effective form of taxation? To address this, this paper first shows that a tax innovationsuch as the introduction of a VATreduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This leads to the estimation, on a large panel, of a system of equations describing the probability of VAT adoption and the revenue impact of the VAT. The sign of the revenue impact is generally ambiguous, but most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so. Lyubomir P. Zabov, (2007),(15) VALUE ADDED TAX AND SALES TAX (COMPARATIVE OVERVIEW)- He reviewed and compared briefly the Pennsylvania Sales Tax and the Bulgarian VAT. It focused on the questions of when tax is imposed, what are the tax bases and the applicable tax rate and on the exclusions from the sales tax and the credit method used for VAT purposes. Thus it revealed that the structures of the sales tax and the VAT are different. However, the ultimate result of each of the two taxes is in principle the same in taxing of the individual consumption. Accordingly, the Pennsylvania sales tax and the Bulgarian VAT share many common features and the differences between them are often subtle. Benjamin A. Neil,(2009),(16) VAT: THE ELIXIR FOR AMERICAS ECONOMIC ILLS?- In his research he develops America is one of the few nations without a value-added tax (VAT), but there is growing pressure to impose the language. In simple terms, a VAT is a type of national sales tax. However, instead of being collected at the cash register, it is imposed on the value added at each stage of the production process. Some like the VAT because it offers a new way to finance bigger government. Others like the VAT because at least, compared to the income tax it does not impose as much damage on the economy. Supporters of limited government oppose the tax because it makes it easier for politicians to expend the size of government. For these reasons, and others, the VAT is very much a work in progress, as more and more countries continue to adopt it and grapple with ways of improving its design and implementation.

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Helena Blazic and Mira Dimitric, (2009),(17) THE REDUCED VAT RATE FOR SMALL BUSINESS IN CROATIA- In this paper they developed to assess the potential effects of introduction of the reduced VAT rate for small business, based on the EU VAT legislation development. The analysis includes effects on prices, sales, shadow economy and employment. It starts with the assumption of no substantial effect. Survey for Croatia is done by small business owners interviews and encompasses descriptive and inferential statistics based on parametric tests. The EU expected existence of a link between VAT reduction, price reduction, sales increase and positive effects on employment (as well as decline in the shadow economy) is proved even in this research. However, the pass-through to prices is very moderate as well as other effects. The reduced VAT rate could have some positive results for the restaurants and bars only. There exists also some possibility for construction of housing and construction services related to housing as well as some other labour intensive services. Alan Schenk, (2009),(18) WORLDWIDE VERSUS TERRITORIAL TAX SYSTEMS: COMPARISON OF VALUE ADDED TAX AND INCOME TAX- In

designing an income tax or a VAT, a country generally must decide how broadly, geographically, it wants to assert its tax authority. The country may choose to impose its income tax or VAT under a worldwide or territorial principle. There are many countries with worldwide and territorial income taxes. There are many countries that impose territorial VAT systems, but relatively few impose a worldwide VAT system. To date, the literature fails to recognize some existing VAT systems as worldwide systems. In this paper, he suggests that at least the New Zealand and South Africa VATs can be analyzed as worldwide VAT systems. He compares these systems with the commonly used territorial VATs. This paper also raises the question of whether differences in the design of a VAT as a territorial or worldwide VAT represent only differences in form or differences in substance. Lumumba Omweri Martin and Bernard M.Obongo, (2010),(19) THE EFFECTIVENESS OF ELECTRONIC TAX REGISTERS IN PROCESSING OF VALUE ADDED TAX RETURNS- They aimed to assess the effectiveness of Electronic Tax Registers (ETRs) in the processing of Value Added Tax returns. The study sought to determine the extent to which the Electronic Tax Registers are being used by the taxpayers, the problems if any that they were encountering in using them as well as get possible solutions to the problems. Since many researchers had concentrated much of their work on tax systems, tax evasion, taxes and interest rates, a lot was desired especially in this area to

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assess the effectiveness of Electronic Tax Registers had been recently introduced by the Kenyan tax authority. The study sought to establish if the Electronic Tax Registers had increased the speed at which taxpayers processed their VAT returns and if there were any associated costs in the processing of VAT. The population under study comprised of 98 VAT registered taxpayers in Kisii town according to the regional KRA offices records which was stratified into; service providers, wholesalers and large scale retailers and supermarkets. The main instrument of collecting primary data was the questionnaires while secondary data was obtained from the KRA regional office. The findings of this research project will assist the Kenya Revenue Authority look for ways of improving the processing of VAT returns. Data was collected from 78 registered VAT taxpayers in Kisii town. The respondents were senior, middle level and low managers. Out of the 78 registered VAT taxpayers to whom the questionnaires were administered, only 68 responded. This gives a response rate of 87% percent. Data analysis tools used in the research were Excel and SPSS and data was presented in form of tables and graphs. Renata Dombrovski and Sabina Hodzic, (2010),(20) IMPACT OF VALUE ADDED TAX ON TOURISM- They developed Republic of Croatia is currently carrying out preparatory measures for accession to the European Union. One of them is the harmonization of value added tax (VAT) with the requirements of Directive. Strong taxation affects tourism negatively. Hoteliers in Croatia set aside large funds for facility investments, which include partly high VAT rate of 23%, in order to achieve the market standards. Tourists face higher bid prices which puts the country in an unenviable position among Mediterranean competitors. It is important to find an optimal solution within the VAT system to encourage tourism development. Budget funds collected from tourism need to be refunded to the tourism industry. Christian Hubert Ebeke, (2010),(21) REMITTANCES, VALUE ADDED TAX AND TAX REVENUE IN DEVELOPING COUNTRIES- Here Christian Hubert Ebeke examines the impact of international remittances on both the level and the instability of government tax revenue in receiving countries. It investigates in particular whether the presence of a value added tax (VAT) system increases the benefit of the inflows of remittances in terms of high and less volatile tax revenue ratio. This is supported by the fact that remittances are largely used for consumption purposes and contribute to smoothing private consumption. Using a large sample of developing countries observed over the period

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1980-2006, and even after factoring in the endogeneity of remittances and VAT adoption, the results highlight that remittances significantly increase both the level and the stability of government tax revenue ratio in receiving countries that have adopted the VAT. Rawat Deepa et al, (2010),(22) MACRO ECONOMIC EFFECTS OF VAT IN INDIA- They developed VAT is seen as a prospective substitute of the present tax system. It will encourage and result in a better administrated system that will close avenues of tax evasion. If enforced properly it would help in fiscal consolidation for the country. It would provide a steady source of revenue; this in turn could be used for reducing the debt burden in due course. The central government must fully take the state governments in confidence before imposing VAT. VAT is a comprehensive levy covering almost all production in its fold. Thus there should be adequate education of the public and the trading community on the features of VAT, its benefits, costs, simplicity, etc. The paper suggests that there should be no other state levels taxes such as octroi, states additional tax, entry tax etc. There should be immediate removal of CST, same legislation should be there for all states a grace period may be provided are some of the other suggestions paper has submitted. Dr. K. Shankaraiah and D.N. Rao, (2010),(23) VALUE ADDED TAX ACCOUNTING: CONCEPTS AND ISSUES- The Value Added Tax Accounting (VATA) is one of those newly emerged concepts, which emphasized much in the context of VISION 2020 by the industry, business, profession, academic, administration, politicians etc. as VATA is regarded as a source of stable revenue, conducive to investment, immune to lobbying pressures and ensures the economic growth, which is also evident from the successful introduction of VATA by developed countries. The concept and issues are presented in this paper to make the people aware of the VATA and remove the misconceptions or notions about VATA and to draw the attention and participation of the different sections of the society for strengthening the VATA system.

Synthesis of review of literature:From the above review of literature relating to VAT the following points emerge: VAT is slightly progressive, although its progressivity is not monotonic throughout income deciles. However, as households are ordered by deciles on a consumption basis instead of an income basis, the tax becomes clearly progressive. Balanced-budget shift from a payroll tax to a VAT will increase employment if the rise in the VAT does not alter consumer prices.

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The central trade-offs to be faced in choosing the threshold for a VAT: between the desires to increase tax revenue, reduce administration and compliance costs, and minimize the distortions arising from the differential treatment of firms above and below the threshold. Replacing the old indirect tax structure with a VAT is welfare worsening. The increase in final consumer prices on account of reduced tax base leads to higher price of essentials, causing welfare loss. Large amounts of tax revenue are owed to government. This is three times more than what government will collect from the 25% increase in VAT. The reforms in tax administration promise increased revenues and, hopefully, that will provide the elbow room necessary for calibrating future reforms. The EU expected existence of a link between VAT reduction, price reduction, sales increase and positive effects on employment. New Zealand and South Africa VATs can be analyzed as worldwide VAT systems. The Kenya Revenue Authority look for ways of improving the processing of VAT returns. The remittances significantly increase both the level and the stability of government tax revenue ratio in receiving countries that have adopted the VAT. Steps to be taken to make people aware of the VATA and remove the misconceptions or notions about VATA and to draw the attention and participation of the different sections of the society for strengthening the VATA system.

Research Gap (present study)


There are many studies done in the field of value added tax throughout the world. But only few researchers did their research about value added tax in India. Among that few, very few are conducted in Tamil Nadu in that field. The present research conducted in Tamil Nadu especially in Thiruvallur District focuses on the level of work burden and revenue collection of the State Government officials and also on the concerns of VAT payers.

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References
1. Roberto Ste iner and Carolina Soto, Tax Evasion and Elusion of Value Added Tax in Colombia (Social Science Research Network, 1994) 2. Arindam Das Gupta and Ira N. Gang, Value Added Tax Evasion, Auditing And Transactions Matching (Social Science Research Network, 1996) 3. Laszlo Goerke, Value Added Tax versus Social Security Contribution (Social Science Research Network ,Aug 1999) 4. Michael Keen and Jack Mintz: The Optimal Threshold for a Value Added Tax (Journal of Public Economics, 2004) 5. Sameer R. Rege, A General Equilibrium Analysis Of Vat In India (Blackwell Publishing Ltd, 2000) 6. Paresh Kumar Narayan, The Macroeconomic Impact of the IMF Recommended VAT Policy for the FIJI Economy: evidence from a CGE model (Blackwell Publishing Ltd. 2003) 7. Rao, M. Govinda, Tax Reforms in India: Achievements and Challenges ahead (Journal of Asian Economics; Dec2005, Vol. 16 Issue 6, p993-1011, 19p) 8. Berhan, Bahro.A and Jenkins, Glenn.P, The high costs controlling CST and VAT evasion (Canadian Tax Journal; 2005, Vol. 53 Issue 3, p720-736, 17p) 9. Marna Kearney, Sherman Robinson and Karen Thierfelder, An Analysis Of South Africas Value Added Tax (World Bank Policy Research Working Paper 3671, August 2005) 10. Graham Harrison and Russell Krelove, VAT Refunds: A Review of Country Experience(International Monetary Fund, 2005)

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11. Glenn P. Jenkins et al, Is the Value Added Tax Naturally Progressive? (Social Science Research Network 2006) 12. Arvind Ashta, European Vat General Principles (2007) 13. Andrea gebauer, chang woon nam & Rudiger parsche, Can Reform Models of Value Added Taxation stop the VAT Evasion and Revenue Shortfalls in the EU? (Journal of Economic Policy Reform Vol. 10, March 2007) 14. Michael Keen and Ben Lockwood, The Value-Added Tax: Its Causes and Consequences ( International Monetary Fund ,2007) 15. Lyubomir P. Zabov, Value Added Tax And Sales Tax (Comparative Overview) (Social Science Research Network, 2007) 16. Benjamin A. Neil, VAT: The Elixir for Americas economic Ills? (Journal of Finance and Accountancy, 2009) 17. Helena Blazic and Mira Dimitric, The Reduced VAT Rate for Small Business in Croatia (Original scientific paper, 2009 page No 83-114) 18. Alan Schenk, Worldwide Versus Territorial Tax Systems: Comparison of Value Added Tax and Income Tax (Wayne State University Law School Legal Studies Research Paper Series No. 09-27 December 8, 2009) 19. Lumumba Omweri Martin et al, The Effectiveness of Electronic Tax Registers in Processing of Value Added Tax Returns (African Journal of Business & Management -AJBUMA Vol. 1 (2010), 11 pages) 20. Renata Dombrovski and Sabina Hodzic, Impact Of Value Added Tax On Tourism (International business and economic research journal, vol.9, 2010) 21. Christian Hubert Ebeke, Remittances, Value Added Tax And Tax Revenue In Developing Countries (2010)

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22. Rawat Deepa Agarwal, Kalpna Agarwal And Gunjan, Macroeconomic Effects of VAT in India (Finance India; Jun2010, Vol. 24 Issue 2, p493-504) 23. Dr. K. Shankaraiah and D.N. Rao, Value Added Tax Accounting: Concepts And Issues (Social Science Research Network, 2010)

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CHAPTER III THEORETICAL FRAMEWORK ABOUT VAT


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

3.1 Introduction of VAT


The concept of VAT was first adopted by France in 1954. By 2000, it was used by Canada and 40 other industrialized countries. In most cases, the percentage of tax charged varies based on the necessity of the particular product, so the tax on food would generally be less than the tax on luxury items like boats. In recent years, VAT has been proposed for use in the United States as a way to simplify business and personal income tax laws. Proponents claim that VAT would replace other forms of taxation and reduce the costs of tax compliance. In fact, some people say that adopting VAT would eliminate tax returns for individuals and make the internal revenue service obsolete. On the other hand, opponents argue that VAT would be more complicated to implement than other tax-reform options, such as a national sales tax. They also worry that it would increase the cost of food, medicine, and other necessities, which would hurt the poor.

3.2 Concept of VAT


Value Added Tax is a consumption tax which is levied at each stage of production based on the value added to the product at the stage. It is an indirect tax on the domestic consumption of goods and services except those that are zero-rated (such as essential foods and drugs) or are otherwise exempt (such as exports). It is levied at each stage in the chain of production and distribution from raw materials to the final sale based on the value (price) added at each stage. It is not a cost to the producer or the distribution chain member, and whereas its full brunt is borne by the end consumer, it avoids the double taxation (tax on tax) of a direct sales tax. A Value Added Tax (VAT) is a fee that is assessed against business by a government at various points in the production of goods and services-usually any time a product is or value is added to it. For tax purposes, a value is added whenever the value of a product increases as a result of the application of a companys factor of production, such as labor and equipment.VAT must be paid by every company that handle a product during its transition from raw materials to finished goods.

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For example, tax is charged when a manufacturer sells to wholesaler and again a wholesaler sells to a retailer. With VAT, the taxable amount is based on the value added at each stage of the process of producing goods and bringing them to market. As an example, say that a company that makes shocks buys cotton yarns for Rs.1,000; adds Rs.500 to its value in terms of labor, depreciation of knitting mechanics, and profits; then sells the complete shocks forRs.1,500. VAT would be calculated as a percentage of the Rs.500 value added by turning cotton yarn into shocks. Of course, the shock company would also get credit for the amount of VAT it paid on the purchase of inputs, like cotton yarn. In general, the total VAT accrued during the production of goods is reflected in the price of items sold to final consumers, because each reseller along the way usually passes along its VAT costs. In this way, VAT is somewhat similar to a national sales tax, and the two forms of taxation are often compared by governments. An expert claims that VAT entails higher administrative costs but is easier to enforce than a national sales tax. VAT is a progressive and transparent system of taxation which eliminates the cascading impact of multiple taxation and set-off principle. It promotes transparency, compliance and equity and therefore, is both dealer friendly and consumer friendly. VAT is being a multi point tax, envisages an increase in the number of dealers and it is based on the concept of self-assessment and self-compliance. It is therefore, inevitable that the sales tax department transforms itself into a dealer friendly, focused and dynamic department to cater to ever increasing expectations of both the government and the trade and industry. Sales tax department has taken up the challenge to transform their selves and be available for assisting the dealers in complying with the provisions of the law. They are in the process of installing a state-wide networked IT system to computerize entire tax administration and hope to provide online service to the dealers in due course. They also are realigning their organizational structure to meet the challenges of the new system and stakeholders expectations.

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3.3 Necessity of VAT in India


India, particularly the trading community, has believed in accepting and adopting loopholes in any system administered by the state or the Centre. If a well-administered system comes in, it will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases. Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax levied on the inputs can be claimed back from the tax authorities. At a macro level, there are two issues, which make the introduction of VAT critical for India. Industry watchers say that the VAT system, if enforced properly, forms part of the fiscal consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem and the revenues estimated to be collected could actually mean lowering of the fiscal deficit burden for the government. The International Monetary Fund (IMF), in its semi-annual World Economic Outlook released on April 9, expressed its concern over India's large fiscal deficit - at 10 per cent of the GDP. Further any globally accepted tax administrative system will only help India integrate better in the World Trade Organisation regime. In the conference of Chief Ministers of all the states held in November 1999, it was agreed that all the states and union territories may implement the Value added tax (VAT). As a result, the Government of India constituted an empowered committee of State finance ministers in order to monitor the implementation of decision. The empowered committee has agreed the broad structure and key features of the legislation on Value Added Tax. It has held its meeting on 18th June 2004 in which it has unanimously decided that Value Added Tax system would be introduced in all states and union territories with effect from the 1st April 2005(1).

3.4 Advantages of VAT


Since ages always a reform is made for the benefit in the process of development. It was Chanakya who first wrote that a government should tax its people like a shepherd shears his flock or a bee gets nectar from a flower. But apparently that fiscal wisdom died with him. Let India not experience the same with VAT. It has a baggage full of benefits. Few advantages of VAT in India are mentioned below.

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(i) Coverage If the tax is carried through the retail level, it offers all the economic advantages of a tax that includes the entire retail price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms instead of being concentrated on particular groups, such as wholesalers or retailers. If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime.

(ii) Revenue security VAT represents an important instrument against tax evasion and is superior to a business tax or a sales tax from the point of view of revenue security for three reasons. In the first place, under VAT it is only buyers at the final stage who have an interest in undervaluing their purchases, since the deduction system ensures that buyers at earlier stages will be refunded the taxes on their purchases. Therefore, tax losses due to undervaluation should be limited to the value added at the last stage. Under a retail sales tax, on the other hand, retailer and consumer have a mutual interest in under declaring the actual purchase price. Secondly, under VAT, if payment of tax is successfully avoided at one stage nothing will be lost if it is picked up at a later stage; and even if it is not picked up subsequently, the government will at least have collected the VAT paid at stages previous to that at which the tax was avoided; while if evasion takes place at the final stage the state will lose only the tax on the value added at that point. If evasion takes place under a sales tax, on the other hand, all the taxes due on the product are lost to the government. A significant advantage of the value added form in any country is the cross-audit feature. Tax charged by one firm is reported as a deduction by the firms buying from it. Only on the final sale to the consumer there is no possibility of cross

audit. Cross audit is possible with any form of sales tax, but the tax-credit feature emphasises and simplifies it and is likely to make firms more careful not to evade because they know of the possibility of cross check.

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(iii) Selectivity VAT may be selectively applied to specific goods or business entities. In addition the VAT does not burden capital goods because the consumption-type VAT provides a full credit for the tax included in purchases of capital goods. The credit does not subsidize the purchase of capital goods; it simply eliminates the tax that has been imposed on (iv) Co-ordination of VAT with direct taxation Most taxpayers cheat on their sales not to evade VAT but to evade personal and corporate income taxes. The operation of a VAT resembles that of the income tax more than that of other taxes, and an effective VAT greatly aids income tax administration and revenue collection. It is interesting to note that when Trinidad and Tobago set out to introduce VAT it chose one of its top income tax administrators as the VAT Commissioner. It must be them.

stressed once again that if properly implemented VAT can ultimately lead to a reduction in overall rates of tax. Revenues will not be sacrificed but would in fact be enhanced as a consequence of the broadened tax base. This does not seem to be a bad idea at all.

3.5 Disadvantages of VAT


The main disadvantages which have been identified in connection with the Value Added Tax are: (i) VAT is regressive It is claimed that the tax is regressive, i.e. its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort. Further, there is now a tendency in most countries to reduce this progressivity of taxes. In any case VAT recognises and makes room for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties.

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(ii) VAT is too difficult to operate from the position of both the administration and business. (a) The administration It is often argued that VAT places a special burden on tax administration. However, it is worth noting that wherever VAT was introduced one of its effects was the rationalisation and simplification of the previous indirect tax system and its administration. Each of the previous indirect taxes such as customs duties, purchase tax and excise duties replaced by VAT had its own rate structure as well as a different tax base and separate administrative procedure. The consolidation and incorporation of numerous indirect taxes into the VAT would simplify the rate structure, tax base, and administration of the indirect tax system, thereby eliminating the overlapping auditing practices that had plagued those systems. In addition, the abolition of a number of alternative indirect taxes releases experienced personnel to focus on a single tax. It also means reduction in the number of forms used, legislation to be applied and returns and accounts with which the business person has to contend. (b)Business It is true that the VAT is collected from a larger number of firms than under any form of income tax or single state sales tax; to the typical smaller firms the complexities of the tax and the need for more extensive records (for example, to justify deductions) are likely to prove serious. However, it is often overlooked that businesses already function with considerable administrative responsibility for a number of laws including the National Insurance Act and the Income Tax Act. Under the Income Tax (Accounts and Records) Regulations of 1980 every person, without exception is required to maintain detailed and extensive records of all its transactions. Compliance with this will certainly ensure compliance with VAT regulations, and since there is an actual benefit to be derived from accounting for VAT paid on input there is an incentive for proper record-keeping. As noted before, VAT also allows for the exemption of small businesses from the system. Under any form of sales taxation, small businesses have to be granted special treatment because of their inability to cope with the requirements of keeping adequate records which larger enterprises can handle at a reasonable cost. The intent of the special treatment is to reduce the administrative burden on small enterprises, but not the taxes that normally

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would be charged on the goods and services they supply. The revenue loss at the final link in the commercial cycle is limited only to the value added at that stage, whereas in the case of income tax or sales tax the entire tax is lost. To recover the loss from exemptions, a flat tax on turnover may be applied. In the larger businesses with proper staff and computers, the task is really one of double entry bookkeeping and any additional work is hardly ever noticed. (c) VAT is inflationary Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead to a reduction in income tax, any price increases may be offset by increases in take-home pay. In any case, any price consequence is one time only and prices should stabilise thereafter. (d) VAT favours the capital intensive firm It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capital- intensive competitor, since the ratio of value added to selling price is greater for the former. This is a real problem for labour-intensive economies and industries.

3.6 Some reflections on VAT 3.6.1 VAT would not have cascading effect
The decision to introduce VAT was taken by the committee comprising finance ministers of 28 states and two union territories. The advantage of VAT would become clear when compared with the multi-point sales tax. It would not have a cascading effect and was devoid stringent penal provisions. Small dealers with an annual gross turnover not exceeding Rs. 5lakhs would be exempted from tax, he said. Recalling the effects made by the centre since 1994 on the VAT, the committee, set up in November 1999, met 90 times to evolve a consensus on the new tax system. Out of 550 goods brought under the VAT, 270 would incur a mere 4 percent tax and the rest would fall under the general VAT rate of 12.5 percent. Around 46 commodities that had social implications, including 10 items flexibly chosen by the states, were exempted. Problems that came up while implementing the VAT would be looked at by the committee with an open mind.

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3.6.2 Higher Economic Growth


Highlighting the importance of the VAT, Dr.Dasgupta said it would help consumers, traders, industrialists and the government, as it provided for a set set-off for input tax as well as tax paid on previous purchases, abolition of turn over tax, surcharge and additional surcharge, rationalisation of the overall tax burden, reduction in prices, self-assessment by dealers, enhanced transparency and higher revenue growth (2). Economic growth can be facilitated through investment by both government and the private sector. Savings by both parties are required in order to finance investment in a 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 savings it does not reduce the net rate of return on saving. Income tax reduces the net rate of return as both the amount saved as well as the return on that saving are subject to tax. In this regard VAT may be said to be superior tax in promoting economic growth than income tax. Since VAT does not influence investment decisions on firms, by increasing their costs, its effects on investment can be said to be a neutral.

3.6.3 VAT Effect on Inflation


In considering the introduction of VAT, countries are often concerned that it would cause an inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD countries that introduced VAT indicated that VAT had little or no effect on prices. In cases where there was an effect it was a onetime effect that simply shifted the trend line of the consumer price index (CPI). To guard against any unforeseen price effects the authorities may consider a tighter monetary policy stands at the introduction of VAT (3).

3.6.4 Distribution Effects of VAT


Value added tax is widely criticised as being regressive with respect to income that is its burden falls heavily on the poor a on rich. This emanates from the facts that consumption as a share of income falls as income rises. Hence a uniform VAT rate falls heavily on the

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poor a rich. This criticism is valid when VAT payments are expressed as a proportion of current income. However if, following the premise that welfare is demonstrated by the level of consumption rather than income, consumption is used as the denominator the impact of VAT would be proportional. A proportional burden would also be demonstrated if lifetime income rather than current income is used. A lifetime income concept considers the fact that many income recipients are only temporally at lower income brackets as their earnings increase. In order to address the regressive nature of VAT the following measures can be taken: The VAT itself can be used to differentiate taxation of consumer items are consumed primarily by the poor such that they pay less or at zero rate or to luxury goods at a higher than standard rate. VAT exemptions may also be granted on goods and services that are consumed mostly by the poor. Equity concerns may also be addressed through other ways, outside the VAT system, such as other tax and spending instruments of government. This could be in the form of lower basic income tax rates on the poor or some pro-poor expenditure of government. The use of multiple rates of VAT has however been widely discouraged for various reasons. The fact that sometimes it is almost impossible to differentiate between higher quality expensive products-e.g. food, consumed by the rich and ordinary products consumed by the poor. Thus any concession extended may tend to benefit the rich much more then the poor. Increased costs of VAT administration as a differentiated rate structure brings with it problems of delineating products and interpreting the rules on which rate to use. Significantly increased costs of tax compliance for small firms, which are usually unable to keep separate records/accounts for sales of differently taxed items. This results in the use of presumptive methods of determining the tax liability, which leads to more difficulties in monitoring the compliance.

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The higher compliance cost resultant from differentiation of VAT rates may also be regressive with respect to income since smaller firms with lower income tend to bear proportionately more of the burden a do larger firm. Given the fact that the primary purpose of VAT is to raise government revenue in an efficient manner and with as little distortions of economic activity as possible, distribution effects are perhaps better addressed by other forms of tax and government expenditure policies which can often be better targeted at these aims.

3.6.5 VAT exemptions


Exemptions refer to situations where output is not taxed but taxes paid on inputs are not recoverable. The rationale behind exemptions is to reduce negative distributional effects on incomes. The effect exemption may also be as follows: Falling of revenues-exemptions break the VAT chain. If exemptions are granted at prior to final sale, it results in a loss of revenue since value added at the final stage escapes tax. Un-recovered taxation of some intermediate goods may lead to procedures substituting away such inputs thus distorting the input choices of the said procedures. Exemptions may create incentives to self supply i.e. tax avoidance by vertical integration. Exemptions tend to feed on each other giving rise to a phenomenon called exemption creep. This arises from the fact that each gives rise to pressures on further exemption. For example creating an exemption to reduce the tax burden on a particular commodity or goods may lead to increased pressure for exemption or zero rating of inputs used for the production of such a commodity. Based on the above, it is important that care is taken when introducing exemptions in order to avoid distortions in the production process as well as to minimise revenue loss resulting from such distortions.

3.7 Why VAT is preferred over Sales Tax


While theoretically the amount of revenue collected through VAT is equivalent to sales tax collections at a similar rate, in practice VAT is likely to generate more revenue for government a sales tax since it is administered on various stages on the production-

35

distribution chain. With sales tax, if final sales are not covered by the tax system e.g. due to difficulty of covering all the retailers, particular commodities may not yield any tax. However, with VAT some revenue would have been collected through taxation of earlier transactions, even if final retailers evade the tax net. There is also in-built pressure for compliance and auditing under VAT since it will be in the interest of all who pay taxes to ensure that their eligibility for tax credits can be demonstrated. VAT is also a fairer tax a sales tax as it minimises or eliminates the problem of tax cascading, which often occurs with sales tax. These are facilitated by the fact that VAT operates through a credit system so that tax is only applied on value added at each stage in production- distribution chain. At each intermediate stage credit will be given for tax paid on purchases to set against tax due on sales. Only at consumption stage where there are no further transactions will there be no tax credits. Lack of input credit facility in sales tax often results in tax on inputs becoming a cost to business which are often passed on to consumers. Sales tax is often applied again to the sales tax element of the cost, thus there is a problem of tax on tax. This is not the case with VAT, which makes it a neutral tax as it provides the least disturbance to patterns of production and the generation and use of income. In addition, the tax audit trail that exists under the VAT system makes it a more effective tax in administration terms than sales tax as it helps with the verification of VAT amount declared as due. This is made possible by the fact that one persons output is anothers input. As with sales tax imports are treated the same way as local goods while exports are zero-rated to avoid anti-export bias. Not withstanding the advantages mentioned above, it is worth that VAT is a considerably complex tax to administer compared with sales tax. It may be difficult to apply to small companies due to difficulties of record keeping and its coverage in agriculture and the services sector may be limited. To cover the high administration costs, VAT rates of 10-20 percent are generally recommended. The equity impact of the relativity high rates have been a cause for concern as it is possible that the poor spend relatively high proportions of their incomes on goods subject to VAT. Thus the concept of zero VAT rate on some items has been introduced (4).

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3.8 Background of VAT in Tamil Nadu


Tamil Nadu is one of the 21 states which have introduced the Value Added Tax (VAT) system of taxation from 1st April 2007. With introduction of VAT, the sales tax department has moved to a globally recognized sales taxation system that has been adopted by more than 130 countries. The design of Tamil Nadu State VAT is generally guided by the best international practices with regard to legal frame work, as well as operating procedures. Another key factor in preparation of the design of state level VAT is the national consensus on certain issues. The consensus has been arrived at through the discussion in the empowerment committee of state finance ministers on implementation of state level VAT. On 1st April 2007, VAT replaced the single point tax which had a number of disadvantages, primarily that of double taxation. VAT is a modern and progressive taxation system which avoids double taxation. In addition to offering the possibility of a set-off tax paid on purchases, VAT has other advantages for both business and government. It eliminates cascading impact of double taxation and promotes economic efficiency. It is primarily a self-policing; self-assessment system with more trust put on dealers. It provides the potential for a stronger manufacturing base and more competitive export pricing. It is invoice based, and as a result it offers a better financial system with less scope of error. It has an improved control, mechanism resulting in better compliance. It widens the tax base and promotes equity. VAT in Tamil Nadu is levied under a legislation known as the Tamil Nadu Value Added Tax Act (TNVAT Act), supported by the Tamil Nadu Value Added Tax Rules (TNVAT Rules). VAT is levied on sale of goods including intangible goods.

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3.9 Explaining the VAT procedure in Tamil Nadu


3.9.1 How VAT works When a dealer sell goods, the sale price is made up of two elements; the selling price of goods and tax on the sale. The tax is payable to the state government. The tax payable on sales is to be calculated on the selling price. The tax paid on purchases supported by a valid tax invoice is generally available as set-off (input tax credit) while discharging the tax liability on sales. Example The following shows how the VAT works through the chain from manufacturer to retailer. Company A buys iron ore and other consumables and manufactures stainless steels utensils; another firm B buys the utensils in bulk from company A and polishes them; shopkeeper C buys some of utensils and purchases packing, material from vendor D, packages them and sells the packed utensils for the public. (The sale and purchase figures shown in the example are excluding tax) Particulars Amount (in Rs) Company A Cost of iron ore and consumables Sale of unpolished stainless steel utensils Value added Company A liable to pay VAT on Rs.1,50,000/@5% Loss set off (Input Tax Credit) (2,500) 5,000 Net VAT amount to pay with the return (Note: Tax invoice issued by company A will show sale price as 50,000 1,50,000 1,00,000 7,500 2,500 VAT @5%(in Rs)

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Rs. 1,50,000/- tax as Rs.7,500/-. Therefore, the total invoice value will be Rs.1,57,500/-) Firm B Purchases unpolished stainless steel utensils Sells polished stainless steel utensils Value added The firm B is liable to pay VAT on Rs.1,80,000 @5% But can claim set off tax paid on purchases Net VAT amount to pay with the return Shop keeper C Purchases polished stainless steel utensils Packing material Total purchases Sales Value added Shop keeper C is liable to pay VAT on Rs.2,25,000/@5% Set off of tax paid on purchases (Rs.9,000+Rs250 of packing Material) Net VAT amount to pay with the return 2,000 9,250 1,80,000 5,000 1,85,000 2,25,000 40,000 11,250 1,50,000 1,80,000 30,000 9,000 (7,500) 1,500

Vendor D

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Tax paid costs Sales Value added Vendor D is liable to pay VAT on Rs.5,000/- @5%

Nil 5,000 5,000 250

The VAT due on the Value Added through the Chain, i.e.,5% on Rs.2,25,000/-

11,250

The state government received the tax in stages. The payments of tax were as follows: Particulars Suppliers of company A Company A Firm B Shopkeeper C Vendor D Total Amount in Rs. 2,500 5,000 1,500 2,000 250 11,250

Thus, through a chain of tax on sale price and set off on purchase price, the cascading impact of tax is totally eliminated. Since set-off of tax on purchases is given only on purchases from registered dealers, importers, inter-state purchases and purchases from registered dealers without separate tax collection are not entitled to set-off. In practice, the tax is finally borne by the ultimate consumer, who is not a registered dealer, in this case, people who buy utensils from the shopkeeper C.

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3.9.2 Rates of Value Added Tax Old VAT rates: (till 11th July 2011) There are two main rates of VAT 4% and 12.5%. The goods are grouped into four schedules as under: Schedule Rate of tax A 0% Vegetables, milk, eggs, bread and candles etc. (i.e. exempted goods form VAT) B 1% Precious metals and precious stones and worn-out or beaten jewellery C 4% Agriculture implements not operated manually or not driven by animal, Raw materials, notified industrial Illustrative items

inputs, notified information technology products and few essential items D 12.5% Other than items specified in schedules A,B and C.

New VAT rates: (from 11th July 2011) There are two main rates of VAT 5% and 14.5%. The goods are grouped into four schedules as under: Schedule Rate of tax Illustrative items A 0% Vegetables, milk, eggs, bread and candles etc. (i.e. exempted goods form VAT) B 1% Precious metals and precious stones and worn-out or beaten jewellery

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5%

Agriculture implements not operated manually or not driven by animal, Raw materials, notified industrial inputs, notified

information technology products and few essential items D 14.5% Other than items specified in schedules A,B and C.

3.9.3 Calculating Tax Liability In, order to calculate how much tax a dealer has to pay, he must, first determine his turnover of sales and turnover of purchases. The second stage is to ascertain the amount of tax due for payment. Calculation of turnover and purchases The turnover of sales is the total of the amounts received or receivables (excluding VAT charged separately) in respect, of the sale of goods, less the amount refunded, within six months of the date of the sale. Similarly, the turnover of purchase is the total number of the amounts paid or payable (excluding VAT charged separately) in respect of the purchase of goods less (the amount repaid in respect of goods they return) within six months of date of purchase. Credit notes and debit notes If the sale price, or the purchase price, of any goods is varied and either a credit note or a debit note is issued, then the credit note or the debit note, as the case may be, should Show separately, the tax and the price Be accounted for in the period in which the appropriate entries are made in their books of accounts.

Special Cases
Auctioneers If dealer is an auctioneer, then they must include in their turnover, the price of the goods they auction for their principal.

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Hotels There are special rules for hotels and other establishments that provide boarding and lodging for an inclusive amount. The rules provide a formula to enable them calculate their turnover of sales for meals (food and beverages) which they provide. The supply of food in a restaurant also includes an element of service. But the full amount charged is the sale price for the purposes of calculating turnover and tax. Work contracts VAT applies only to the sale of goods. Supply of services is not liable to VAT. Works contracts are deemed sales where both, goods and services are provided in a transaction and cannot be separated. A works contract may involve the creation of immovable property, e.g. house, a factory or a bridge. Some other examples of works contracts are photography, repairs and maintenance etc. To calculate the amount a dealer should include in their sales, so that they may deduct it from the total contract price, the Costs of labour and service charges. Amount paid to sub-contractors. Charges for planning and designing, and any architects fees. Hiring charges for machinery and tools. Cost of consumables, such as, water, gas and electricity. Dealers administrative costs relating to labour and services and any other similar expenses. Any profit element that relates to the supply of labour and services. Alternatively, in lieu of the deductions as above, a dealer may choose to discharge the liability arising on works contracts by referring to the table prescribed in the rules. If the dealer finds that it is too complicated to calculate that deductions, then they may option for a composition scheme for any works contract. 3.9.4 Difference between tax free goods and exempted goods It is sometimes confusing to have goods that are tax free and sales that are exempt. Both result in reduction on VAT being charged, so what is the difference. Tax free goods do not attract tax at any stage of sale or in any type of transaction, whereas, exempted sales are certain types of transactions, viz., export sales which are exempt from tax.

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3.9.5 Records and Accounts Keeping records Proper records are an essential part of effective management and control of their business. Dealers are required by law to keep a true and accurate account of the transactions effected by them. This will also help them to correctly quantify their tax liability or refunds, as the case may be. Thus dealers should keep all their accounts, registers and documents relating to their stocks of goods, purchases, sales and deliveries of goods, at their place of business. If they wish to keep them at a different location they may do so, but only if they have the permission of the commissioner of sales tax. Nature of Records Normally, the department will not expect them to keep any special records for VAT purposes. However, the records that they do keep should have sufficient details to enable them to correctly calculate the amount of VAT due for payment and file their return. If sales tax office happens to find that their records are not properly maintained, then they will issue a notice, informing dealers about what records they must keep. A dealer should maintain the following records To identify the nature and value of goods purchased and sold; Distinguish between:Local sales, interstate sales and exports. Local purchases, interstate purchase and imports. Indicate value of:Sale and purchase of tax free goods. Sales exempted from tax. Purchases from Un Registered Dealer Rate-wise purchases and sales. Local purchases from registered dealer with VAT shown separately. Record payments for the purchases and sale of goods in cash book/ bank book. Include a summary of VAT paid separately on purchases, VAT charged on sales, VAT paid to the state treasury and VAT refundable/refunded to the dealers. Contain adequate proof that goods have been exported or imported.

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Be supported by invoices for all goods purchased, and copies of invoices, and bills or cash memoranda, issued for goods sold. 3.9.6 Tax Invoices and Memoranda of Sales or Purchases As a registered dealer, they should issue a tax invoice when they sell goods to another registered dealer and charge VAT. For sales made to consumers and unregistered dealers, they must issue a tax invoice, or a bill or cash memorandum. However, if a dealer is a composition dealer other than a works contractor, they must issue a bill or cash memorandum only and not a tax invoice or a bill or cash memorandum. Tax invoice must contain The words tax invoice, printed in bold letters at the top or at a prominent place; Dealers name, address and registration number (TIN). The name, address and the registration number of the purchaser; Serial number of the invoice; Date of issue; Description of goods, the quantity and price of the goods sold; Rate and amount of tax charged and indicated separately; Prescribed declaration regarding validity of the registration and payment of tax; And it must also sign either by dealer or by someone who is authorized by the dealer. If a dealer issues a bill or cash memorandum, it must contain:Words bill/cash memorandum, printed in bold letters at the top or at a prominent place; If a dealer is a composition dealer (other than works contractor) then the word composition dealer at the top of the bill/ cash memorandum; Dealer name , address and registration number (TIN); The name and address of the purchaser; Serial number of the bill/ cash memorandum; Date of the issue;

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Description of good, the quantity and price of the goods sold; Prescribed declaration regarding validity of the registration and payment of tax; It must sign either by dealer or by someone who is authorized by the dealer. 3.10 Conclusion India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods. VAT would, however, be collected in stages (instalments) from one stage to another. The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value-addition done - leading to a total tax burden exactly equal to the last point tax. Not surprisingly, due to the ease of payment and ready comprehensibility, the value added tax system has been adopted by different nations across the world. VAT is intended to be levied-or charged-whenever there is some value addition to raw material. In Tamil Nadu VAT has been introduced in 2007 and has been successfully implemented since then. Tamil Nadu is one of the 21 states in India which has introduced the Value Added Tax (VAT) system of taxation from 1st April 2007. With introduction of VAT, the sales tax department has moved to a globally recognized sales taxation system that has been adopted by more than 130 countries.

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REFERENCES: 1. http://finance.indiamart.com/taxation/necessity_of_vat_in_india.html 2. http://www.caindia.org/news/4.2008/state_rule_vat_rate_hike_for_nov_.html 3. www.oecd.org/ctp/vatguidelines 4. Purohit.M.C Adoption of State Value Added Tax in India: Problems and Prospectus, Economic and Political Weekly.

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CHAPTER IV DATA ANALYSIS AND INTERPRETATION


This chapter analysis the data collected from 130 VAT payers and 130 VAT officials. The collected data are processed, analyzed and the results are furnished in the following tables: 4.1 ANALYSIS OF DEMOGRAPHIC VARIABLES OF VAT PAYERS Table #4.1 Table Showing the Gender of the Respondents Gender Male Female Total Frequency 108 22 130 Percent 83.1 16.9 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers)

The above data are presented diagrammatically in Fig # 4.1

150 100 50 0 Male Female

Interpretation
Among the 130 respondents Table # 4.1 shows 108 respondents are male (83.1%) and 22 are female respondents (16.9%).

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Table # 4.2 Table Showing the Age Group of Respondents Age Group Up to 19 years 20 to 29 years 30 to 39 years 40 to 49 years 50 to 59 years Above 60 years Total Frequency 1 74 28 23 1 3 130 Percent 0.8 56.9 21.5 17.7 0.8 2.3 100.0

(Source: Primary Data collected from business firms i.e. VAT payers) The above data are presented diagrammatically in Fig # 4.2
80 70 60 50 40 30 20 10 0 Up to 19 years 20 to 29 years 30 to 39 years 40 to 49 years 50 to 59 years Above 60 years

Interpretation Table # 4.2 it can be seen that 1 respondent is in the age group of below 19 years, 74 in the age group of 20 to 29 years (56.9%), 28 in the age group of 30 to 39 years (21.5%), 23 in the age group of 40 to 49 years (17.7%), and 4 in the age group of above 50 years. Thus 74% of respondents are in the age group of 20 to 29 years. i.e. Young Entrepreneurs.

49 Table # 4.3 Table Showing Marital Status of Respondents Marital Status Single Married Total Frequency 55 75 130 Percent 42.3 57.7 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.3

Marital status
80 70 60 50 40 30 20 10 0 0 0.5 1 1.5 2 2.5 Single, 55 Married, 75

Interpretation Table # 4.3 shows that 43.3% of respondents are unmarried and 57.7% are married. This tallies with the age group profile that 56.9% of respondents are in the age group of 20 to 29 years.

50 Table # 4.4 Table Showing Educational Qualifications of Respondents Education Up to 12th std Graduate Post Graduate Professional Degree Others Total Frequency 49 57 12 5 7 130 Percent 37.7 43.9 9.2 3.8 5.4 100.0

(Source: Primary Data collected from business firms i.e. VAT payers)

The above data are presented diagrammatically in Fig # 4.4

Education
Others Professional Degree Post Graduate Graduate Up to 12th std 0 10 20 30 40 50 60

Interpretation Among the 130 respondents 43.9% are graduates, 37.7% are below 12th standard, 9.2% are post graduates, 3.8% are professional degree holders and 5.4% come under the category of others. Thus the majority respondents are graduates and post graduates (52.2%).

51 Table # 4.5 Table Showing the Type of Business of Respondents Type of Business Pharmacy Shop Provisional Store Electrical and Electronics Shop Fancy Store General Merchant Textile Foot wear Jeweler Shop Automobile Shop Hard ware Others Total Frequency 13 20 6 8 12 7 10 8 11 17 18 130 Percent 10.0 15.4 4.6 6.2 9.2 5.4 7.7 6.2 8.5 13.1 13.8 100.0

(Source: Primary Data collected from business firms i.e. VAT payers) The above data are presented diagrammatically in Fig # 4.5
Pharmacy Shop, 13 Others, 18 Hard ware, 17 Provisional Store, 20 Electrical and Electronics Shop, 6 Fancy Store, 8 Jeweler Shop, 8 Foot wear, 10 Textile, 7 General Merchant, 12

Automobile Shop, 11

52 Interpretation Table # 4.5 revels 20 respondents are provisional store owners, 17 respondents are hard ware owners, 10,11,12,13 respondents are foot wear, automobile shop, general merchant, and pharmacy shop owners respectively. Thus the VAT payers do a variety of business and not concentrated on as single business. Table # 4.6 Table Showing Annual Turnover of Respondents Annual Turnover 1-10 Lakhs 10-20 Lakhs 20-30 Lakhs 30-40 Lakhs 40-50 Lakhs 50-60 Lakhs Total Frequency 60 30 11 6 16 7 130 Percent 46.2 23.0 8.5 4.6 12.3 5.4 100.0

(Source: Primary Data collected from business firms i.e. VAT payers) The above data are presented diagrammatically in Fig # 4.6

50-60 Lakhs 40-50 Lakhs 30-40 Lakhs 20-30 Lakhs 10-20 Lakhs 1-10 Lakhs 0 10 20 30 40 50 60

Interpretation As per table # 4.6, 60 out of 130 respondents annual turnover is Rs.1-10 lakhs, 30 respondents turnover is from Rs.10 to 20 lakhs, 16 respondents turnover is Rs.40-50 lakhs, and 7

53 respondents turnover is Rs.50-60 lakhs. 46.2% of respondents are small traders with an annual turnover falling in the range of Rs.1-10 lakhs. Table # 4.7 Table Showing Respondents Business Age Age 0-5 Years 5-10 Years 10-15 Years 15-20 years More than 20 Years Total Frequency 53 39 16 19 3 130 Percent 40.8 30.0 12.3 14.6 2.3 100.0

(Source: Primary Data collected from business firms i.e. VAT payers) The above data are presented diagrammatically in Fig # 4.7

0-5 Years 5-10 Years 10-15 Years 15-20 years More than 20 Years

Interpretation Table # 4.7 shows 53 respondents are doing business for 0-5 years, 39 respondents for 5-10 years, 19 respondents for 15-20 years, 16 respondents for 10-15 years and only 3 respondents out of 130 are doing business for more than 20 years. Thus out of 130 respondents nearly 41% of respondents are relatively new to business world.

54 4.2 ANALYSIS OF DEMOGRAPHIC VARIABLES OF VAT OFFICIALS Table # 4.8 Table Showing Gender Status of Respondents Gender Male Female Total Frequency 70 60 130 Percent 53.8 46.2 100.0

(Source: Primary Data collected from VAT officials and consultants) The above data are presented diagrammatically in Fig # 4.8

Gender
Female Female, 60

Male

Male, 70

55

60

65

70

75

Interpretation Out of the 130 respondents 53.8% of respondents are male i.e.70 respondents and 60 of 130 respondents are female i.e.46.2%. Thus major portion of respondents are male members.

55 Table # 4.9 Table Showing Age Group of Respondents


Age Group 20-29 Years 30-39 Years 40-49 Years 50-59 Years Total Frequency 19 37 36 38 130 Percent 14.6 28.5 27.7 29.2 100.0

(Source: Primary Data collected from VAT officials and consultants) The above data are presented diagrammatically in Fig # 4.9

50-59 Years

40-49 Years

30-39 Years

20-29 Years

10

15

20

25

30

35

40

Interpretation Table # 4.9 shows that nearly 15% of respondents are young officials falling in the age group of 20-29 years, 56% of them are middle aged officials falling in the age group of 30-49 years and 29% of the respondents are senior officials in the age group of 50-59 years.

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Table # 4.10 Table Showing Marital Status of Respondents Marital Status Single Married Total Frequency 19 111 130 Percent 14.6 85.4 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data are presented diagrammatically in Fig # 4.10

Marital status
120 100 80 60 40 20 0 Single Married 19 111

Interpretation The majority respondents are married i.e. 111 out of 130 (85.4%).

57 Table # 4.11 Table Showing Education Level of Respondents Education Up to 12th STD Graduate Post Graduate Professionals Others Total Frequency 29 62 29 6 4 130 Percent 22.3 47.7 22.3 4.6 3.1 100.0

(Source: Primary Data collected from VAT officials and consultants)

The above data presented diagrammatically in Fig # 4.11

Up to 12th STD Graduate Post Graduate Professionals Others

Interpretation Table # 4.11 reveals that 62 respondents out of 130 (i.e.47.7%) are graduates. Only 22% of respondents have an educational qualification up to 12th standard. These respondents belong to clerical cadre and also include assistants to tax consultants.

58 Table # 4.12 Table Showing Respondents Designation Designation Professional Cadre Assistant Commissioner Commercial Tax Officer Assistant Commercial Tax Officer Tax Analyst Total Frequency 9 21 17 42 41 130 Percent 6.9 16.2 13.1 32.3 31.5 100.0

(Source: Primary Data collected from VAT officials and consultants) The above data are presented diagrammatically in Fig # 4.12

Designation
45 40 35 30 25 20 15 10 5 0 Assistant Commercial Tax Officer, 42 Assistant Commissioner, 21 Tax Analyst, 41

Professional Carde, 9 Professional Carde Assistant Commissioner

Commercial Tax Officer, 17

Commercial Tax Assistant Officer Commercial Tax Officer

Tax Analyst

Interpretation 42 respondents out of 130 are Assistant Commercial Tax Officers, 41 respondents are tax consultants, 21are Assistant Commissioners and 17 respondents are Commercial Tax Officers. Hence the majority respondents among VAT administrators are Assistant Commercial Tax Officers.

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Table # 4.13 Table Representing the Income of Respondents Income 1-4 Lakhs 4-8 Lakhs Total Frequency 121 9 130 Percent 93.1 6.9 100.0

(Source: Primary Data collected from VAT officials and consultants) The above data are presented diagrammatically in Fig # 4.13

140 120 100 80 60 40 20 0 1-4 Lakhs 4-8 Lakhs

Interpretation Table # 4.13 shows 93% of respondents earn Rs.1-4 lakhs per annum, and only 7% respondents earn Rs.4-8 lakhs per annum.

60 4.3 RESULT OF FACTOR ANALYSIS OF VAT OFFICIALS Factor analysis is used to reduce the number variables as one factor. Table # 4.14(a)
KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square Df Sig.

.627
2.434 435 .000

The table # 4.14 (a) The Kaiser-Meyer-Olkin (KMO) and Bartlett's test. The KMO measures the sampling adequacy which should be greater than 0.5 for a satisfactory factor analysis to proceed. From the same table, it can be seen that the Bartlett's test of sphericity is significant. That is, its associated probability is less than 0.05. In fact, it is actually .000. This means that the correlation matrix is not an identity matrix. In addition, the overall MSA for the set of variables included in the analysis was 0.627, which exceeds the minimum requirement of 0.50.Kaiser recommends the accepting value greater than 0.5 is acceptable. Values between 0.5 to 0.7 are mediocre, values between 0.7 to 0.8 are good; values between 0.8 to 0.9 are great and values above 0.9 are superb. Since the KMO value is 0.627 it shows the mediocre adequacy. Principal component analysis requires that the probability associated with Bartlett's Test of Sphericity be less than the level of significance. The probability associated with the Bartlett test is <0.001, which satisfies this requirement. Table # 4.14(b)
Total Variance Explained

Initial Eigen values

Extraction Sums of Squared Loadings % of Variance 21.008 12.674 9.365 Cumulative % 21.008 33.683 43.048

Rotation Sums of Squared Loadings Total 4.867 2.553 2.466 % of Variance 16.224 8.508 8.219 Cumulative % 16.224 24.733 32.952

% of Cumulative Component Total Variance % Total 1 6.302 2 3.802 3 2.810 21.008 12.674 9.365 21.008 6.302 33.683 3.802 43.048 2.810

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4 2.358 5 1.847 6 1.646 7 1.342 8 1.255 9 1.039 10 11 12 13 .921 .826 .768 .692

7.861 6.158 5.487 4.473 4.184 3.464 3.072 2.753 2.559 2.307

50.909 2.358 57.067 1.847 62.554 1.646 67.027 1.342 71.212 1.255 74.676 1.039 77.747 80.501 83.060 85.367

7.861 6.158 5.487 4.473 4.184 3.464

50.909 57.067 62.554 67.027 71.212 74.676

2.277 2.185 2.174 2.119 2.114 1.648

7.589 7.284 7.245 7.065 7.048 5.493

40.540 47.825 55.070 62.135 69.183 74.676

Extraction Method: Principal Component Analysis. Table # 4.14 (b) reveals the factors extractable from the analysis along with their Eigen values, the percent of variance attributable to each factor, and the cumulative variance of the factor and the previous factors. Notice that the first factor accounts for 21.008% of the variance, the second 12.674%, the third 9.365%, the forth 7.861%, the fifth 6.158%, the sixth 5.487%, the seventh 4.473%, the eighth 4.184% and ninth 3.464%. All the remaining factors are not significant. Using the output from iteration 9, there were 9 Eigen values greater than 1.0. The latent root criterion for number of factors to derive would indicate that there were 9 components (factors) to be extracted for these variables. Since the SPSS default is to extract the number of components indicated by the latent root criterion, our initial factor solution was based on the extraction of 9 components. In addition, the cumulative proportion of variance criteria can be met with 9 components to satisfy the criterion of explaining 60% or more of the total variance. The scree plot figure # 4.14 is a graph of the Eigen values against all the factors. The graph is useful for determining how many factors to retain. The point of interest is where the 10curve starts to flatten. It can be seen that the curve begins to flatten between factors 9 and 10. It may also be noted that factor 10 has an Eigen value of less than 1, so only nine factors have been retained

62

Scree Plot figure # 4.14

Table # 4.14(c) Rotated Component Matrix


Component 1 Economic Reform Convenient Mechanism Transparency Fiscal Responsibility Evolution .847 .761 .761 .739 .689 .663 2 3 4 5 6 7 8 9

63

Registration Revenue Security Tax Loss Good Economy Coverage Facilitate To VC Growth Procedures Conditions Work Burden Penalty System Lack Of Clarity Reduce A and E Educational Visit Bookkeeping Voluntary Compliance TIN Filing Return RVAT Appropriate System Uniform Tax Fraudulent Misconception Collection

.596 .557 .825 .797 .743 .746 .746 .636 .812 .702 .754 .637

.818 .643 .637 .759 .615 .845 .586 .422 .515 .748 .513

Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization.

From the table # 4.14 (b) Rotated Component Matrix, the information in 30 of the variables can be represented by 9 components. Component 1 includes the variables; Economic Reform, Convenient, Mechanism, Transparency, Fiscal Responsibility, Evolution, Registration, Revenue Security, Tax Loss, Good Economy, Collection and Coverage.

64

Component 2 includes the variables; Facilitate To VC, Growth and Procedures. Component 4 includes the variables; Conditions, Work Burden and Fraudulent. Component 5 includes the variables; Lack of Clarity and Penalty System. Component 6 includes the variables; Educational Visit, Book Keeping and Voluntary Compliance. Component 7 includes the variables; TIN and Filing Return. Component 8 includes the variables; RVAT, Appropriate System and Uniform Tax Component 9 includes the variables; Misconception. Table # 4.14(d) List of Factors Factor 1 Economic Reform convenient Mechanism Transparency Fiscal Responsibility Evolution Registration Factor 2 Tax Loss Good Economy coverage Factor 6 Factor 5 .825 .797 Penalty System .743 Lack Of Clarity Factor 7 .754 .637 Factor 3 .847 Facilitate To VC .761 Growth .761 Procedures .739 Factor 4 .689 .663 Conditions .596 Work Burden Fraudulent .746 .746 .636

.812 .702 .515

65 Educational Visit Book Keeping Voluntary Compliance Factor 9 Misconception .818 TIN .643 Filing Return .637 Factor 8 RVAT .748 Appropriate System Uniform Tax .845 .586 .422 .759 .615

From the table # 4.14(d) the researcher identifies nine factors. When the researcher done factor analysis for 30 variables, it results in nine factors as shown in rotated component matrix table # 4.14 (c). It denotes these variables are inter-correlated variables. The seven variables that load highly on factor 1 seem to all relate to convenience. So the researcher may label this factor convenience. The variables that load highly on factor 2 seem to all relate to profit nature. Therefore the researcher may label this factor profitability. The variables that load highly on factor 3 seem to all relate to growth and procedures. Hence the researcher may label this factor procedure. The variables that load highly on factor 4 seem to all relate to conditions and work burden. Therefore the researcher may label this factor registration. The variables that load highly on factor 5 seem to all relate to lack of clarity and penalty system. The researcher may label this factor penalty system. The variables that load highly on factor 6 seem to all relate to book keeping. So the researcher may label this factor basic rule. The variables that load highly on factor 7 seem to all relate to Tax payer Identification Number. Therefore the researcher may label this factor compulsory requirement. The variables that load highly on factor 8 seem to all relate to appropriate system. Hence the researcher may label this factor uniformity to the state. Finally only one variable shows one factor, so the researcher labels this factor misconception.

66

4.4 RESULT OF FACTOR ANALYSIS OF VAT PAYERS Table # 4.15(a)


KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity Approx. Chi-Square df Sig.

.515
275.513 45 .000

The table # 4.15(a) The Kaiser-Meyer-Olkin (KMO) and Bartlett's test. The KMO measures the sampling adequacy which should be greater than 0.5 for a satisfactory factor analysis to proceed. From the same table, it can be seen that the Bartlett's test of sphericity is significant. That is, its associated probability is less than 0.05. In fact, it is actually .000. This means that the correlation matrix is not an identity matrix. In addition, the overall MSA for the set of variables included in the analysis was 0.515. Table # 4.15(b) Total Variance Explained
Extraction Sums of Squared Loadings Total 2.647 1.545 1.350 1.020 % of Cumulative Variance % 26.471 15.452 13.495 10.201 26.471 41.923 55.419 65.620 Rotation Sums of Squared Loadings Total 1.789 1.666 1.588 1.518 % of Cumulative Variance % 17.893 16.664 15.880 15.183 17.893 34.557 50.437 65.620

Initial Eigen values Component 1 2 3 4 5 6 7 8 9 10 Total 2.647 1.545 1.350 1.020 .889 .835 .626 .499 .343 .245 % of Cumulative Variance % 26.471 15.452 13.495 10.201 8.893 8.351 6.257 4.993 3.434 2.453 26.471 41.923 55.419 65.620 74.512 82.863 89.121 94.114 97.547 100.000

67

Extraction Method: Principal Component Analysis. The total variance explained table # 4.15 (b), shows all the factors extractable from the analysis along with their Eigen values, the percent of variance attributable to each factor, and the cumulative variance of the factor and the previous factors. It may be noticed that the first factor accounts for 26.647% of the variance, the second 15.452%, third 13.495% and the fourth 10.202%. All the remaining factors are not significant. Scree Plot figure # 4.15

The scree plot is a graph of the Eigen values against all the factors. The graph is useful for determining how many factors to retain. The point of interest is where the curve starts to flatten. It can be seen that the curve begins to flatten between factors 4 and 5. Note also that factor 5 has an Eigen value of less than 1, so only four factors have been retained.

68 Table # 4.15(c) Rotated Component Matrix


Component 1 Mechanism Tax payable Growth Incidence Evasion Work Burden Procedures Avoidance Simplicity Convenient Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. .833 .714 .670 .844 .669 .642 .745 .716 .820 .688 2 3 4

The table # 4.15 (c), reduce the number factors on which the variables under investigation have high loadings. Rotation does not actually change anything but makes the interpretation of the analysis easier. Looking at the table below, it can be seen that simplicity and convenient are substantially loaded on Factor (Component) 4 while procedures and avoidance are substantially loaded on Factor 3. The factors Incidence, evasion and Work burden are loaded in factor 2. All the remaining variables are substantially loaded on Factor 1. Table # 4.15(d) List of Factors Assistance Mechanism Tax payable Growth Procedures .833 Incidence .714 Evasion .670 Work Burden .844 .669 .642

Regulations Procedures Avoidance .745 Simplicity .716 Convenient

Convenience .820 .688

69 From the table # 4.15(d) the researcher identifies 4 factors. When the researcher done factor analysis for 10 variables, it results in 4 factors as shown in rotated component matrix table # 4.15(c). It denotes these variables are inter-correlated variables. The first three variables that load highly on factor 1 seem to all relate to help VAT payers. So the researcher may label this factor Assistance. The variables that load highly on factor 2 seem to all relate to work burden and incidence. Therefore the researcher may label this factor procedure. The variables that load highly on factor 3 seem to all relate to procedures. Hence the researcher may label this factor regulation. The variables that load highly on factor 4 seem to all relate to simplicity. Therefore the researcher may label this factor convenience.

4.5 RESULTS OF CHI SQUARE TEST RELATING TO VAT PAYERS This section gives the results of chi-square test as applied on VAT payer responses:

Table # 4.16: To test whether the male and female respondents differ or do not differ about the work burden in case of VAT filling. H0: The attributes, sex and work burden are independent i.e. the work burden of the respondents does not depend on the sex of such respondents. H1: The attributes sex and work burden are dependent. Table # 4.16 Gender * Work Burden Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .008*

Value Pearson Chi-Square N of Valid Cases 11.954 130

df 3

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is lesser than table value. Since the probability value is 0.008 (p<0.05), there is an evidence to reject the null hypothesis and conclude that the two attributes, sex and work burden in case of filling VAT

70 returns is dependent. Therefore it is further concluded that work burden of the respondents depend on the sex of such respondents.

Table # 4.17: To test whether the education and work burden differ or do not differ about the filling of VAT returns. H0: There is no significant relation between education and work burden of respondents. H1: There is a significant relation between education and work burden of respondents. Table # 4.17 Education * Work Burden Cross Tabulation Chi-Square Tests Asymp. Sig. (2-sided) .516*

Value Pearson Chi-Square N of Valid Cases 11.147 130

df 12

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is greater than table value. As per the above chi square test results the probability value is 0.516 (p>0.05). Hence there is no evidence to reject the null hypothesis and it is concluded that there is no significant relation between education and work burden of respondents. Table # 4.18: To test whether the type of business and work burden differ or do not differ. H0: There is no significant relation between type of business organization and work burden of respondents. H1: There is a significant relation between the type of business organization and work burden of respondents.

71 Table # 4.18 Business * Work Burden Cross tabulation Chi- square tests Asymp. Sig. (2-sided) .004*

Value Pearson Chi-Square N of Valid Cases 54.187 130

Df 30

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is lesser than table value. The chi square results show the calculated value as .004. The probability value is lesser than the table value (p<0.05). This shows that eleven business groups differ in their view about the work burden. i.e. there is a significant relation between the type of business organization and work burden.

Table # 4.19: To test whether the turnover of respondents influences or do not influence the work burden of respondents. H0: There is no significant influence of turnover on work burden of respondents H1: There is a significant influence of turnover on work burden of respondents Table # 4.19 Turnover * Work Burden Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .017*

Value Pearson Chi-Square N of Valid Cases 28.854 130

df 15

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is lesser than table value. Since the probability value is 0.017 (p<0.05), there is an evidence to reject the null hypothesis and conclude that there is a significant influence of turnover over work burden of respondents. Therefore, it is concluded that work burden of the respondents depend on the turnover of such respondents.

72 Table # 4.20: To test whether the turnover of respondents influence or do not influence the incidence of tax of respondents. H0: There is no significant difference between the turnover and incidence of tax H1: There is a significant difference between the turnover and incidence of tax. Table # 4.20 Turnover * Incidence Cross tabulation Chi-Square Tests Value Pearson Chi-Square N of Valid Cases 58.226 130 df 15 Asymp. Sig. (2-sided) .000*

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is lesser than table value. The probability value of above chi square table is 0.000 (p<0.05), There is an evidence to reject the null hypothesis and conclude that there is significant difference between turnover and incidence of tax. Therefore, it is concluded that the incidence of tax is depending on the turnover of such respondents.

Table # 4.21: To test whether the age of business and incidence of tax differ or do not differ. H0: There is no significant relation between age of business and incidence of tax. H1: There is a significant relation between the age of business and incidence of tax. Table # 4.21 Age of Business * Incidence Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .756*

Value Pearson Chi-Square N of Valid Cases 8.360 130

df 12

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is greater than table value.

73 As per the above chi square test results the probability value is 0.756 (p>0.05). It leads to the acceptance of null hypothesis. I.e. there is no significant relation between the age of business and incidence of tax. Table # 4.22: To test whether the education level and knowledge of VAT rates are related or not related. H0: There is no significant relation between education level and knowledge of VAT rates of respondents. H1: There is a significant relation between education level and knowledge of VAT rates of respondents. Table # 4.22 Education * Rate Knowledge Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .026*

Value Pearson Chi-Square N of Valid Cases 17.416 130

df 8

(Source: Primary Data collected from VAT payers) *Significance at 5% level - calculated value is lesser than table value. The chi square table probability value is 0.026 (p<0.05). There is an evidence to reject the null hypothesis and to conclude that there is a significant relation between the respondents education and knowledge of VAT rates.

4.6 RESULTS OF CHI SQUARE TEST RELATING TO VAT OFFICIALS This section gives the results of chi-square test as applied for VAT officials responses Table # 4.23: To test whether the male and female respondents differ or do not differ about the work burden in case of VAT administration. H0: The attributes, sex and work burden are independent I.e. the work burden of the respondents does not depend on the sex of such respondents. H1: The attributes sex and work burden are dependent.

74 Table # 4.23 Gender * Work Burden Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .468*

Value Pearson Chi-Square 3.563

df 4

N of Valid Cases 130 (Source: Primary Data collected from VAT Officials and consultants) *Significance at 5% level - calculated value is greater than table value. As per the above chi square test results the probability value is 0.468 (p>0.05). It leads to the acceptance of null hypothesis i.e. there is no significant difference between the gender and work burden of respondents. Table # 4.24: To test whether the designation and work burden of respondents are related or not. H0: There is no significant relation between designation and work burden of respondents. H1: There is a significant relation between designation and work burden of respondents. Table # 4.24 Designation * Work Burden Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .399*

Value Pearson Chi-Square N of Valid Cases 16.794 130

df 16

(Source: Primary Data collected from VAT Officials and consultants) *Significance at 5% level - calculated value is greater than table value. The above chi square test results show the probability value is 0.399 (p>0.05). It leads to the acceptance of null hypothesis i.e. there is no significant relation between the designation and work burden of respondents. Table # 4.25: To test whether there is any relation between age group of respondents and work burden in case in case of VAT administration. H0: The attributes, age groups and work burden are independent H1: The attributes age groups

75 Table # 4.25 Age Group * Work Burden Cross tabulation Chi-Square Tests Asymp. Sig. (2-sided) .000*

Value Pearson Chi-Square N of Valid Cases 74.728 130

df 12

(Source: Primary Data collected from VAT Officials and consultants) *Significance at 5% level - calculated value is lesser than table value. The probability value of above chi square table is 0.000 (p<0.05), there is an evidence to reject the null hypothesis and conclude that there is a significant relation between the age groups and their work burden.

4.7 RESULTS OF ONE WAY ANOVA RELATING VAT PAYERS H0: The age of business do not influence the work burden of respondents. F test was conducted and the table # 4.26 depicts the same. Table # 4.26 Age of Business and Work burden Sum of Squares Between Groups Within Groups Total 8.736 162.495 171.231 df 3 126 129 Mean Square 2.912 1.290 F 2.258 Sig. .085*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 2.258. Since the probability value is 0.085 (p>0.05) the null hypothesis is accepted and it is concluded that the age of business does not influence the work burden of respondents. H0: There is no relation between the education and awareness of exemptions. F test was conducted and the table # 4.27 depicts the same.

76 Table # 4.27 Education and Awareness of Exemptions Sum of Squares Between Groups Within Groups Total 3.904 139.819 143.723 df 1 128 129 Mean Square 3.904 1.092 F 3.574 Sig. .061*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 3.574. Since the probability value is 0.085 (p>0.05) the null hypothesis is accepted and it is concluded that there is no significant relation between education and exemptions awareness of respondents. H0: There is no relation between the registration and incidence of tax. F test was conducted and the table # 4.28 depicts the same. Table # 4.28 Registration and Incidence of Tax Sum of Squares Between Groups Within Groups Total 2.248 20.829 23.077 Df 3 126 129 Mean Square .749 .165 F 4.534 Sig. .005*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 4.534. Since the probability value is 0.005 (p<0.05) the null hypothesis is rejected and it is concluded that there is significant relation between registration and incidence of tax.

77 H0: There is no relation between the turnover and convenience to pay tax. F test was conducted and the table # 4.29 depicts the same. Table # 4.29 Turnover and Convenience to pay tax Sum of Squares Between Groups Within Groups Total 81.754 257.546 339.300 df 4 125 129 Mean Square 20.439 2.060 F 9.920 Sig. .000*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 9.920. Since the probability value is 0.000 (p<0.05) the null hypothesis is rejected. There is a significant relation between turnover and convenience to pay tax. H0: There is no relation between the age of business and tax evasion. F test was conducted and the table # 4.30 depicts the same. Table # 4.30 Age and business and Tax evasion Sum of Squares Between Groups Within Groups Total 11.717 159.514 171.231 Df 4 125 129 Mean Square 2.929 1.276 F 2.296 Sig. .063*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 2.296. Since the probability value is 0.063 (p>0.05) the null hypothesis is accepted. There is no significant relation between age of business and tax evasion.

78 H0: There is no relation between the turnover and tax avoidance. F test was conducted and the table # 4.31 depicts the same. Table # 4.31 Turnover and Tax avoidance Sum of Squares Between Groups Within Groups Total 41.015 298.285 339.300 Df 4 125 129 Mean Square 10.254 2.386 F 4.297 Sig. .003*

(Source: Primary Data collected from VAT payers) *Significance at 5% level The result shows that calculated F value is 4.297. Since the probability value is 0.003 (p<0.05) the null hypothesis is rejected. There is a significant relation between turnover and tax avoidance.

4.8 RESULTS OF ONE WAY ANOVA RELATING TO VAT OFFICIALS H0: There is no influence of education on work burden. F test was conducted and the table # 4.32 depicts the same. Table # 4.32 Education and Work burden Sum of Squares Between Groups Within Groups Total 7.827 105.743 Df 4 125 Mean Square 1.957 .846 F 2.313 Sig. .061*

113.569 129 (Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level The result shows that calculated F value is 2.313. Since the probability value is 0.061 (p>0.05) the null hypothesis is accepted. That shows there is no significant influence of education on work burden.

79 H0: There is no relation between the designation and registration. F test was conducted and the table # 4.33 depicts the same. Table # 4.33 Designation and Registration Sum of Squares Between Groups Within Groups Total 20.597 315.872 Df 4 125 Mean Square 5.149 2.527 F 2.038 Sig. .093*

336.469 129 (Source: Primary Data collected from VAT Officials and consultants)

*Significance at 5% level The result shows that calculated F value is 2.038. Since the probability value is 0.093 (p>0.05) the null hypothesis is accepted. i.e. there is no significant relation between designation and registration.

4.9 RESULT OF CORRELATION

Table # 4.34(a) Commercial Tax Department Gross Receipts Year 2006-07 2007-08 2008-09 2009-10 VAT(Rs in crores) 2290 16473 19305 21336 TNGST 1959 (Rs in crores) 13347 329 292 272

(Source: Secondary Data collected from Tamil Nadu statistical report)

80 Table # 4.34(b) Correlations VAT VAT Pearson Correlation Sig. (2-tailed) N TNGST Pearson Correlation Sig. (2-tailed) N 4 -.974* .026 4 4 1 TNGST -.974* .026 4 1

* Correlation is significant at the 0.05 level (2-tailed). The correlation between VAT and TNGST is -0.974 which is highly negative

indicating that higher revenue derived from the VAT is not associated with TNGST and vice versa.

4.10 RESULT OF PAIRED t-TEST Table # 4.35(a) Total Revenue of the Government Amount in Crores Total income before VAT 8499(02-03) 9767(03-04) 11421(04-05) 13597(05-06)

Total income after VAT 15637(06-07) 16802(07-08) 19597(08-09) 21606(09-10) (Source: Secondary Data collected from Tamil Nadu statistical report) Ho: There is no difference in mean revenue before and after the implementation VAT H1: There is difference in mean revenue before and after implementation of VAT Table # 4.35(b) Paired samples statistics Mean Before VAT After VAT 1.0821E4 1.84E4 N 4 4 Std. Deviation 2203.69205 2701.763 Std. Error Mean 1101.84603 1350.882

81 Table # 4.35(c) Paired samples test Mean -7.58950E3 Std. Deviation 586.31192 Std. Error Mean 293.15596 t -25.889 df 3 Sig. (2-tailed) .000*

*Significance at 5% level Since the probability value is 0.000 (p<0.01), the null hypothesis is rejected and it is concluded that the mean revenue derived after implementation of VAT is significantly higher than the mean revenue derived before implementation of VAT. Thus the implementation of VAT is effective in significantly increasing the total revenue of the Tamil Nadu Government.

4.11 COMPILATION OF OPINION OF VAT PAYERS AND OFFICIALS: VAT payers opinion: Table #4.36 Table showing the knowledge of VAT rates Knowledge of Rates High Moderate Low Total Frequency 44 50 36 130 Percent 33.8 38.5 27.7 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers) Table # 4.36 shows the respondents knowledge of VAT rates. Out of 130 respondents 44 respondents have high level knowledge about VAT rates. 50 respondents have moderate knowledge and 36 respondents have minimum knowledge.

82 Table #4.37 VAT or TNGST Continue in Tamil Nadu VAT System TNGST Total Frequency 105 25 130 Percent 80.8 19.2 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers) Table # 4.37 reveals more than 80% of responds vote for VAT system. It means they recommend VAT system to continue in Tamil Nadu. Only 25 respondents vote for TNGST system.

Table #4.38 Table showing the awareness of proposed GST Proposed GST Yes No Total Frequency 87 43 130 Percent 66.9 33.1 100.0

(Source: Primary Data collected from business firms i.e. VAT Payers) Table # 4.38 shows VAT payers awareness about proposed GST. 67% of respondents have awareness about proposed GST. 33% of respondents are not aware of GST. Table #4.39 Assistant from VAT consultant Help of others Yes No Frequency 66 64 Percent 50.8 49.2

Total 130 100.0 (Source: Primary Data collected from business firms i.e. VAT Payers) Table # 4.39 reveals that 66(50.8%) respondents need the help of consultants at the time of filling returns. 64 (49.2%) respondents may ask help from others like follow VAT payers etc.

83 Table # 4.40 Table Showing about the Registration Registration Yes No Total Frequency 100 30 130 Percent 76.9 23.1 100.0

(Source: Primary Data collected from business firms i.e. VAT payers) Table # 4.40 shows 100 respondents out of 130 (77%) are registered VAT dealers and only 23% of respondents are unregistered dealers. Unregistered dealers (URDs) are those whose annual turnover is less than Rs.10, 00,000. They need not file separate return for VAT. However they pay VAT as part of their purchase price. VAT officials opinion: Table #4.41 Table showing which system to continue in Tamil Nadu Continue in Tamil Nadu Frequency Percent VAT System TNGST Proposed GST Other System Total 86 10 31 3 130 66.2 7.7 23.8 2.3 100.0

(Source: Primary Data collected from VAT officials and consultants) Table # 4.41 shows the opinion of VAT officials of which system to continue in Tamil Nadu. 66.2% of respondents recommend VAT system, 23.8% of respondents recommend proposed GST, only 7.7% of respondents recommend continuation of TNGST and 2.3% respondents recommend other systems.

84

4.12 This section complies the opinion given by VAT officials for the open ended questions included in the questionnaire. 1. If the main aim of introducing VAT is to implement uniform tax system throughout the country then why each state has its own VAT Act? i. VAT phase is a transitional phase between General Sales Tax and Goods and Service Tax Act. Sales tax comes under the State subject as per Indian constitution. Hence, it is difficult rather impossible to expect every State to follow a single rate structure. The forthcoming GST is expected to do this job as it would be rolled out only after constitutional amendment. ii. iii. iv. v. It Depends upon State Government Policy. Own state Government Policy. These are all tactics for getting income from a dealer and confusing them. Manufacturing rates; trading rates differ from State to State.

2. How do you consider VAT as a better system as compared to TNGST? i. Set-off tax already paid i.e. Input Tax Credit. It easer the burden of traders and manufactures. All units of supply chain are brought under tax net and tax evasion is checked to a certain extent. ii. VAT Act is systematically examined and implemented, so it is a better system as compared to TNGST. iii. In TNGST lot of operational difficulties. i.e. turn over tax and surcharge, but VAT has only one tax. i.e. there is no additional tax. iv. VAT is more clear and has well framed rules and regulations of the products as compared to TNGST. v. In TNGST work burden of officers is more when compared to VAT.

3. What difficulties you encounter in the VAT system? i. Commodity codes cannot be found exactly. Incomplete implementation. New entries to be made both in system and ledger.

85 ii. The main difficulties of VAT system in practices and lack of implementation of technical progress. iii. iv. v. More exemptions. e Mode is not working 100%. Inadequate man power.

4. How do you compare the present VAT with the proposed GST? i. ii. iii. iv. v. After the GST implementation the rate of levy of tax would increase. No idea about this topic. GST system is the best one. In VAT state Government has a lot of income but in CST central income. Undecided

5. Give general suggestions in the context of VAT? i. ii. iii. iv. Needs to be simplified more; inter-state purchase set-off should be made available. Needs to be fully computerized. Commodity code is needed. Presently VAT follows different set of rules and regulation in the Indian Union. Suggest a single uniform tax system in all the states. v. If exemptions are withdrawn VAT system would give more revenue to Government. vi. The Government of India raises the tax rates by slabs. But better to remove the tax slabs. Then only India will grow. vii. Equal treatment and equality for all.

86 4.13 REVENUE COLLECTION UNDER VAT

Table # 4.42 Commercial Tax Department Gross Receipts (Amount in Crores) Year VAT 01-02 02-03 8499 03-04 9767 04-05 11421 05-06 13597 06-07 2290 13347 07-08 16473 329 08-09 19305 292 09-10 21335 271

TNGST 7541

(Source: Secondary Data collected from Tamil Nadu statistical report)

The above data are presented diagrammatically in Fig # 4.16

Commercial Tax Department Gross Receipts


25000 Revenue in Crors 20000 15000 10000

VAT
5000 0

TNGST

Year

The Table and Bar Diagram show the clear picture about the revenue growth of the state after implementation of VAT. The VAT has come in to force in Tamil Nadu in the year of 200607. If one compares the revenue growth of TNGST and VAT, VAT is most preferable to the State compared to TNGST. Because from 2001-02 financial year to 2005-06 financial years TNGSTs highest collection was Rs.13597 crores in the year of 2005-06. On the other hand VAT was introduced in 2006-07 financial year. In the next financial year itself (2007-08) it collected Rs.16473 crores. From that one may conclude that after introducing the VAT the revenue of the state would grow every financial year.

87

Table # 4.43 Commercial Tax Department Total Receipts (Amount in Crores) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 VAT 2290 16473 19305 21335 TNGST 7541 8499 9767 11421 13597 13347 329 292 271 Total
7541

Variance 958 1268 1654 2176 2040 1165 2795

Growth Rate (Y-O-Y) 12.70 14.92 16.93 19.05 15.00 7.45 16.63

8499

9767

11421

13597

15637

16802

19597

2009 10.25 (Source: Secondary Data collected from Tamil Nadu statistical report)

21606

The above data are presented diagrammatically in Fig # 4.17 TOTAL


25000 20000 15000 10000 5000 0 TOTAL Linear (TOTAL) y = 1797.x + 4843 R = 0.988

Table # 4.43 and Figure # 4.17 represent the revenue growth of Tamil Nadu Government. The total revenue of the Government has consistently increased. Hence the implementation of VAT does not affect the total revenue of the State Government.

88

CHAPTER V SUMMARY, FINIDINGS AND CONCLUSIONS


Summary of the Study
A tax is a back bone of every country to meet their social obligations. Without tax the Government cannot do any social benefit activities. Government is the only person to levy tax. Hence tax is compulsory payment or contribution by the people to the government for which there is no direct return to the tax payers. Sales Tax began in India with petrol tax introduced by the government of Madhya Pradesh. During the British rule, arrack and toddy shops were functioning in Madras Presidency. Following the Madhya Pradesh petrol tax, Madras Presidency introduced Sales Tax in 1939. The concept of VAT was first adopted by France in 1954. By 2000, it was used by Canada and 40 other industrialized countries. Tamil Nadu is one of the 21 states in india which have introduced the Value Added Tax (VAT) system of taxation from 1 st April 2007. With introduction of VAT, the sales tax department has moved to a globally recognized sales taxation system that has been adopted by more than 130 countries. The design of Tamil Nadu state VAT is generally guided by the best international practices with regard to legal frame work, as well as operating procedures. Another key factor in preparation of the design of state level VAT is the national consensus on certain issues. The consensus has been arrived at through the discussion in the empowerment committee of state finance ministers on implementation of state level VAT. On 1st April 2007, VAT replaced the single point tax which had a number of disadvantages, primarily that of double taxation. VAT is a modern and progressive taxation system which avoids double taxation. In the addition to offering the possibility of a set-off tax paid on purchases, VAT has other advantages for both business and government. It eliminates cascading impact of double taxation and promotes economic efficiency. It is primarily a self-policing; self-assessment system with more trust put on dealers.

89 It provides the potential for a stronger manufacturing base and more competitive export pricing. It is invoice based, and as a result it offers a better financial system with less scope of error. It has an improved control, mechanism resulting in better compliance. It widens the, tax base and promotes equity. VAT in Tamil Nadu is levied under a legislation known as the Tamil Nadu Value Added Tax Act (TNVAT Act), supported by the Tamil Nadu Value Added Tax Rules (TNVAT Rules). VAT is levied on sale of goods including intangible goods.

Objectives of the Study


To study about value added tax system in general. To study the profile of VAT payers and VAT administrators. To examine the influence of various factors on the work burden VAT officials. To examine the influence of various factors on VAT compliance by VAT payers. To examine whether value added tax system helps to revenue appreciation to the government compare to other tax system like TNGST and finally To find whether VAT system is convenient to the government as well as the VAT payers

Methodology
In the present study both primary and secondary data were used with the help of questionnaire from the respondents. The total population of the study consists 260 respondents, which include 130 VAT officials and VAT consultants/and 130 VAT payers. Convenience cum Judgment sampling techniques were adopted in this research. The study has been conducted in a period of six months from December 2010 to May 2011. The statistical tools used for the purpose of analysis of data were Chi-square test, One Way ANOVA, correlation, Paired t-Test and Factor Analysis.

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The major findings of the study are as follows


VAT payers: (sample size is 130) Among the 130 respondents more than 80% (i.e. 83.1%) of respondents are male and 22 respondents are female. More than 50% (i.e. 56.9%) respondents are 20-29 years, 21.5% (i.e. 28 respondents) are 30-39, and 23 respondents are 40-49 years old. 57.7% respondents are married and 42.3% are unmarried. Majority respondents are graduate i.e.57 respondents, 37.7% respondents have completed 12th standard, and 12 respondents are post graduates. The respondents are engaged in different business like Provisional store, Hardware, Pharmacy shop, etc, 60 out of 130 respondents turnover is Rs.1-10 lakhs, 30 respondents turnover is from Rs.10 to 20 lakhs, and 16 respondents turnover Rs.40-50 lakhs. 53 respondents are doing business 0-5 years, 39 respondents 5-10 years, 19

respondents 15-20 years, 16 respondents 10-15 years, only 3 respondents out of 130 are doing business for more than 20 years. 100 respondents out of 130 are registered VAT dealers. VAT Officials: (Sample Size is 130) Out of the 130 respondents 53.8% of respondents are male i.e.70 respondents and 60 respondents are female. Age group about VAT officials tells 29% of respondents are between 50-59 years old, 37 respondents are 30-39 years, 36 respondents are 40-49 years and only 19 are tn the age group of 20-29 years. The majority respondents are married i.e. 111 out of 130. Qualification wise majority respondents are graduates i.e.62, 29 are post graduates and 6 are professional degree holders.
42 respondents out of 130 are Assistant Commercial Tax Officers, 41 respondents are

tax consultants, 21 are Assistant Commissioners, and 17 respondents are Commercial Tax Officers.

91 Income wise 93% of respondents earn 1-4 lakhs per annum and only 9 respondents out of 130 earns 4-8 lakhs per annum. Findings of factor Analysis The factor analysis for VAT officials resulted in clubbing of 30 variables into 9 components i.e. 9 factors. The factor analysis for VAT payers resulted in of 4 factors out of 10 variables. Findings of Chi-square Test The work burden of the VAT payers is dependent the gender. There is no relation between education and work burden VAT payers. It shows both attributes are independent. Work burden VAT payers are related to type of business. There is a significant relation between turnover and work burden of VAT payers. There is significant relation between turnover and incidence of tax. There is no significant relation between the age of business and incidence of tax. There is a significant relation between the respondents education and knowledge of VAT rates. The gender and work burden of VAT officials are independent. There is no significant difference between the designation and work burden of VAT officials. It denotes the designation and work burden of respondents are independent. There is a relation between age and work burden of VAT officials.

Findings of ANOVA The age of business does not influence the work burden of VAT payers. There is no significant relation between Education and Exemptions awareness of VAT payers. There is a significant Registration and Incidence of tax of VAT payers. There is a relationship between Turnover and Convenient to pay tax There is no difference between the Age of business and Tax evasion of VAT payers. There is a relationship between turnover and tax avoidance.

92 There are no variations of vat officials education and their work burden of VAT officials. Findings of Correlation There was a highly negative correlation indicating that higher the revenue derived from the VAT is not associated with TNGST. Findings of Paired t-Test On based a paired t-Test finds the implement of VAT is derived revenue is significantly very more. Compilation of opinion/suggestions of respondents I. VAT payers 44 respondents have high level knowledge about VAT rates. 50 respondents have moderate knowledge and 36 respondents have minimum knowledge.
80% of responds vote for VAT system and 25 respondents vote for TNGST

system. 67% of respondents have awareness about proposed GST. 33% of respondents are not aware of GST. 66 respondents need the help of consultants at the time of filling returns. 64 (49.2%) respondents may ask help from others. II. VAT officials 66.2% of respondents recommend VAT system, 23.8% of respondents recommend proposed GST, only 7.7% of respondents recommend continuation of TNGST and 2.3% respondents recommend other systems. Each state has its own VAT Act. Because of Own state Government Policy. These are all tactics for getting income from a dealer and confusing them. Manufacturing rates; trading rates differ from State to State.

93 VAT is a better system compared to TNGST because of: In TNGST lot of operational difficulties. i.e. turn over tax and surcharge, but VAT has only one tax. i.e. there is no additional tax. VAT is clear and has well framed rules and regulations of the products as compared to TNGST. In TNGST work burden of officers is more when compared to VAT. Difficulties of VAT system. Commodity codes cannot be found exactly. Difficulty in implementation. New entries to be made both in system and ledger. More exemptions. e Mode is not working 100%. Inadequate man power. General suggestion for VAT. Needs to be fully computerized. Commodity code is needed. Presently VAT follows different set of rules and regulation in the Indian Union. Suggest a single uniform tax system in all the states. If exemptions are withdrawn VAT system would give more revenue to Government. The Government of India raises the tax rates by slabs. But better to remove the tax slabs. Then only India will grow.

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Conclusion and Suggestions The suggestions and conclusion are based upon the results of the study. Suggestions are made based on the respondents opinion. VAT payers feel heavy work burden in case of filing of VAT return, for that they need the assistance of VAT consultants. It happens because of lack of sufficient knowledge. It reavels one of the drawbacks of VAT. For that, the State Government should issue suitable manual of VAT to the assesses, which should contain the practical application of VAT procedures. It must be in local language. VAT officials also feel heavy work burden to administer the VAT, because of inadequate staff members. So the authorities of the Commercial Tax Department should fill the vacancies in Commercial Tax Offices immediately. This will overcome the limitation in future. So the authorities should concentrate on recruitment of staff members. Finally it is concluded VAT helps to have more revenue collection to the Government of Tamil Nadu. From 11th July 2011onwords the government of Tamil Nadu has increased the VAT rates from 1%,4%,12.5% to 1%,5%,14.5%, Definitely it would help to further increase the revenue. So the government should take utmost care in the matter of issuing manual and recruitment of staff members.

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BIBLIOGRAPHY Books and Hand Materials


A guide on value added tax by The Coimbatore district small industries association (CODSSIA) Ajai S.Gaur and Sanjaya S.Gaur Statistical Methods For Practice and Research (A Guide to Data Analysis using SPSS), Response Book, Business Books from SAGE Publications Ltd, New Delhi-110 044. Balachandran.V Indirect Taxation, Sultan Chand Publications, New Delhi-02, 10th Edition, 2005. First Discussion Paper on Goods and Service Tax in India, the Empowered Committee of State Finance Ministers, New Delhi, 2010. Kothari .C.R Research Methodology (Methods and Techniques), Wiley Eastern Ltd, New Age International Ltd, New Delhi-110 002, Second Edition, 1994. Srikanth Venkatesan (Advocate) Understanding Tamil Nadu Value Added Tax (Covering Case Laws of the Madras High Court and Supreme Court), c.Sitaraman & Co Private Ltd. Law Book Publisher, Chennai-14. Tamil Nadu Statistical Report of Commercial Tax Department. Journals and Articles Alan Schenk, Worldwide Versus Territorial Tax Systems: Comparison of Value Added Tax and Income Tax (Wayne State University Law School Legal Studies Research Paper Series No. 09-27 December 8, 2009). Andrea gebauer, chang woon nam & Rudiger parsche, Can Reform Models of Value Added Taxation stop the VAT Evasion and Revenue Shortfalls in the EU? (Journal of Economic Policy Reform Vol. 10, March 2007). Arindam Das Gupta and Ira N. Gang, Value Added Tax Evasion, Auditing And Transactions Matching (Social Science Research Network, 1996). Arvind Ashta, European Vat General Principles (Social Science Research Network 2007).

96 Benjamin A. Neil, VAT: The Elixir for Americas economic Ills? (Journal of Finance and Accountancy, 2009). Berhan, Bahro.A and Jenkins, Glenn.P, The High Costs Controlling CST and VAT Evasion (Canadian Tax Journal; 2005, Vol. 53 Issue 3, p720-736, 17p). Christian Hubert Ebeke, Remittances, Value Added Tax And Tax Revenue In Developing Countries (2010). Dr. K. Shankaraiah and D.N. Rao, Value Added Tax Accounting: Concepts And Issues (Social Science Research Network, 2010). Glenn P. Jenkins et al, Is the Value Added Tax Naturally Progressive? (Social Science Research Network 2006). Graham Harrison and Russell Krelove, VAT Refunds: A Review of Country Experience(International Monetary Fund, 2005). Helena Blazic and Mira Dimitric, The Reduced VAT Rate for Small Business in Croatia (Original scientific paper, 2009 page No 83-114). Laszlo Goerke, Value Added Tax versus Social Security Contribution Research Network ,Aug 1999). Lumumba Omweri Martin et al, The Effectiveness of Electronic Tax Registers in Processing of Value Added Tax Returns (African Journal of Business & Management -AJBUMA Vol. 1 (2010), 11 pages). Lyubomir P. Zabov, Value Added Tax And Sales Tax (Comparative Overview) (Social Science Research Network, 2007). Marna Kearney, Sherman Robinson and Karen Thierfelder, An Analysis Of South Africas Value Added Tax (World Bank Policy Research Working Paper 3671, August 2005). Michael Keen and Ben Lockwood, The Value-Added Tax: Its Causes and Consequences ( International Monetary Fund ,2007). Michael Keen and Jack Mintz: The Optimal Threshold for a Value Added Tax (Journal of Public Economics, 2004). Paresh Kumar Narayan, The Macroeconomic Impact of the IMF Recommended VAT Policy for the FIJI Economy: evidence from a CGE model (Blackwell Publishing Ltd. 2003). Rao, M. Govinda, Tax Reforms in India: Achievements and Challenges Ahead (Journal of Asian Economics; Dec2005, Vol. 16 Issue 6, p993-1011, 19p). (Social Science

97 Rawat Deepa Agarwal, Kalpna Agarwal And Gunjan, Macroeconomic Effects of VAT in India (Finance India; Jun2010, Vol. 24 Issue 2, p493-504). Renata Dombrovski and Sabina Hodzic, Impact Of Value Added Tax On Tourism (International business and economic research journal, vol.9, 2010). Roberto Steiner and Carolina Soto, Tax Evasion and Elusion of Value Added Tax in Colombia (Social Science Research Network, 1994). Sameer R. Rege, A General Equilibrium Analysis Of Vat In India (Blackwell Publishing Ltd, 2000).

Web Sites Used: www.tn.gov.in www.tax4india.com www.tnvat.gov.in www.uq.edu.au www.google.com www.indiamart.com www.emathzone.com

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QUESTIONNAIRE ANNEXURE-I

A QUESTIONNAIRE FOR VAT PAYERS Dear Sir/ Madam


I am A.HARIKUMAR an M.Phil scholar in commerce, Pondicherry University, puducherry. I am doing research in the area of value added tax with special reference to Thiruvallur Region. I request you to solicit the required information for research purpose. The opinion given would be treated as highly confidential and will be used only for academic purpose. Kindly put a tick for the right options and give your opinion. 1. Name: 2. Gender a) Male b) Female

3. Age Group a) 19 Years or Younger c) 30 - 39 Years e) 50 - 59 Years 4. Marital status a) single b) Married b) 20 - 29 Years d) 40 - 49 Years f)above60 Years

5. Educational qualification a) Upto12th standard c) Post Graduate e) Others b) Graduate d) Professional degree

please specify..

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6. Which type of business are you doing? a) Pharmacy shop b) Provisional store d)Fancy store

c) Electrical or Electronics shop e) General merchant g) Foot wear shop i) Automobile shop k) Others f) Textile

h) jewellery shop j) Hardware

Please mention

7. Annual turn over a) 1 to 10Lakhs d) 30 to 40Lakhs g) 60 to 70Lakhs j) 90 to 1 crore b) 10 to 20Lakhs e) 40 to 50Lakhs h) 70 to 80Lakhs k) Above 1 crore c) 20 to 30Lakhs f) 50 to 60Lakhs i) 80 to 90Lakhs

Please specify how much? .

8. How old your business is? a) 0-5 years c) 10-15 years b) 5-10 years d) 15-20 years please specify.

d) More than 20 years

9. Whether you are a registered VAT dealer? a) Yes b) No

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree 10. Value added tax system has less work burden, in case of filing of VAT return? a) 1 b) 2 c) 3 d) 4 e) 5 11. In Tamil Nadu state Value added tax system helps to most dealers growth? a) 1 b) 2 c) 3 d) 4 e) 5 12. Incidence of tax is more under value added tax system as compared to other systems like TNGST system. a) 1 b) 2 c) 3 d) 4 e) 5

13. The Value added tax system actually leads to a simpler tax system. a) 1 b) 2 c) 3 d) 4 e) 5

14. It is easy and convenient to pay tax under VAT a) 1 b) 2 c) 3 d) 4 e) 5

15. The assessment procedures under VAT are very simple and clear. a) 1 b) 2 c) 3 d) 4 e) 5

16. In Value Added Tax system there is some chance of tax evasion? a) 1 b) 2 c) 3 d) 4 e) 5

17. In Value Added Tax system there is some chance of tax avoidance? a) 1 b) 2 c) 3 d) 4 e) 5

18. Value added tax system is an alternative mechanism of collection of tax? a) 1 b) 2 c) 3 d) 4 e) 5 19. The computation of amount of tax payable is simple under VAT as compared to other systems. a) 1 b) 2 c) 3 d) 4 e) 5

20. Are you aware of exemptions available under Value Added Tax system? a) Yes b) No

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21. In your business, mention the goods you are dealing which are exempted? a) b) . c) d) . 22. What about your knowledge about Value added tax system in the matter of tax rates. a) High b) Moderate c) Low

23. Under which type you are paying VAT? a) MANVAT b) Whole sale VAT c) Retail VAT

24. Which tax system would you recommend to continue in Tamil Nadu? a) Value added tax system b) TNGST

25. Are you aware of the proposed GST system? a) Yes b) No

If yes would you like recommend for the adoption of GST system a) Yes b) No

26. Are you aware of incentives available to dealer under VAT? a) Yes b) No

If yes what type of incentives are availed of? Please mention a) b) c) d) . 27. Are you taking the help if tax consultants for filing tax VAT returns? a) Yes b) No

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If yes how much fees are you paying the.............................................

ANNEXURE-II

A QUESTIONNAIRE FOR VAT CONSULTANTS AND OFFICIALS Dear Sir/ Madam, I am A.HARIKUMAR an M.Phil scholar in commerce, Pondicherry University, puducherry. I am doing research in the area of value added tax with special reference to Thiruvallur Region. I request you to solicit the required information for research purpose. The opinion given would be treated as highly confidential and will be used only for academic purpose. Kindly put a tick for the right options and give your opinion.

1. Name:

2. Gender a) Male b) Female

3. Age Group a) 19 Years or Younger c) 30 - 39 Years e) 50 - 59 Years 4. Marital status b) 20 - 29 Years d) 40 - 49 Years f)above60 Years

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a) single

b) Married

5. Educational qualification a) upto12th standard c) Post Graduate e) Others b)Graduate d) Professionals

please specify.

6. Employment designation / Position currently held a) Professional cadre c)Deputy commissioner e) Commercial tax officer f) Assistant commercial tax officer g) Tax analyst/consultant b) Joint commissioner d)Assistant commissioner

7. Annual income a) 1 to 4Lakhs c) 8 to 10Lakhs b) 4 to 8Lakhs d) 10Lakhs above

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

8. Registration of all taxable persons is must for successful implementation of tax. a) 1 b) 2 c) 3 d) 4 e) 5

9. Value added tax system has less work burden? a) 1 b) 2 c) 3 d) 4 e) 5 10. In Tamil Nadu state Value added tax system helps to most dealers growth? a) 1 b) 2 c) 3 d) 4 e) 5

11. Value Added Tax system has lot of conditions imposed in registration. a) 1 b) 2 c) 3 d) 4 e) 5

12. The Value added tax system actually leads to a transparent tax system. a) 1 b) 2 c) 3 d) 4 e) 5

13. VAT payer feels it is easy and too convenient to pay a) 1 b) 2 c) 3 d) 4 e) 5

14. The Value added tax reforms are good for the economy of Tamil Nadu. a) 1 b) 2 c) 3 d) 4 e) 5

15. Implementation of VAT reduces tax avoidance and Evasion. a) 1 b) 2 c) 3 d) 4 e) 5

16. Value added tax system is expected to prevent tax loss to the state. a) 1 b) 2 c) 3 d) 4 e) 5

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree

17. The Value added tax procedures are very simple and clear. a) 1 b) 2 c) 3 d) 4 e) 5

18. There is a general belief that revenue collection under VAT is more than that under TNGST. a) 1 b) 2 c) 3 d) 4 e) 5

19. VAT covers all type of goods and services and experts say it is one of the important advantages. (I.e. coverage) a) 1 b) 2 c) 3 d) 4 e) 5

20. Value added tax system ensures that a tax payer does not involve in fraudulent activities. a) 1 b) 2 c) 3 d) 4 e) 5

21. Value Added Tax system provides revenue security to the government. a) 1 b) 2 c) 3 d) 4 e) 5

22. The Value Added Tax system shows a complete and true appreciation of fiscal responsibility. a) 1 b) 2 c) 3 d) 4 e) 5

23. Tax reforms in India have been initiated as a part of the economic reforms in 1991. a) 1 b) 2 c) 3 d) 4 e) 5

24. The recent evolution of VAT can be considered as the most important fiscal innovation. a) 1 b) 2 c) 3 d) 4 e) 5

25. Value added tax system is an alternative mechanism of collection of tax? a) 1 b) 2 c) 3 d) 4 e) 5

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1-strongly disagree; 2-disagree; 3-undecided; 4-agree; 5-strongly agree 26. Value Added Tax system suffers from lack of clarity on the treatment of interstate sales. a) 1 b) 2 c) 3 d) 4 e) 5 27. The main aim of the government in introducing Value Added Tax system is to implement the uniform tax system throughout the country. a) 1 b) 2 c) 3 d) 4 e) 5 28. Is VAT promotes voluntary tax compliance. a) 1 b) 2 c) 3 d) 4 e) 5 29. Value added tax system has appropriate tax structure and simple procedures and forms to facilitate, encourage and induce the dealer for voluntary compliance. a) 1 b) 2 c) 3 d) 4 e) 5 30. An appropriate system for registration and tax payer identification is required for administrating of VAT. a) 1 b) 2 c) 3 d) 4 e) 5 31. Value added system has a sound and effectively enforceable penalty system that stimulate dealers to go for voluntary compliance. a) 1 b) 2 c) 3 d) 4 e) 5 32. Tax payer Identification Number (TIN) is must to identify the dealers. a) 1 b) 2 c) 3 d) 4 e) 5 33. Large number of small scale businesses are under misconception that input tax has to be adjusted against output tax? a) 1 b) 2 c) 3 d) 4 e) 5 34. Retail VAT(R-VAT) is difficult to administer compared to MANVAT and W-VAT? a) 1 b) 2 c) 3 d) 4 e) 5 35. In TNVAT the filing of chartered accountant report and opting for self assessment is not mandatory. a) 1 b) 2 c) 3 d) 4 e) 5

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36. Dealers are highly satisfied at the time of your educational visit? a) 1 b) 2 c) 3 d) 4 e) 5 37. Suitable system of invoicing and bookkeeping is required? a) 1 b) 2 c) 3 d) 4 e) 5

38. Certain goods like lottery, petroleum products, etc, may not be taxed under VAT? Because, a) It is difficult to administer b) It is based upon their price fluctuations c) It is not considered goods under VAT act d) None of the above If you choose none of the above option please indicate the correct reason for that .. 39. Which tax system would you recommend to continue in Tamil Nadu? a) Value added tax system b) TNGST c) Proposed GST d) Other system (please mention ) 40. Whether incidence of tax avoidance and evasion has reduced considerable under VAT in comparison with TNGST? a) Yes b) No

41. If the main aim of introducing VAT is to implement uniform tax system throughout the country then why each state has its own VAT Act?

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42. How do you consider VAT as a better system as compared to TNGST?

43. What difficulties you encounter in the VAT system?

44. How do you compare the present VAT with the proposed GST?

45. Give the general suggestion in the context of VAT?