One important issue for the state governments is related to evasion of tax. It is felt that while VAT has been a remarkable reform in the history of state taxation, the magnitude of evasion under VAT is much more than it was under sales tax. It is feared that evasion would further escalate under GST due to the fact that the dealers who sell goods without receipt under VAT would continue to do so under GST and the dealers under service tax would be added to this list.
In addition, the amount of tax involved in GST would be much more than the amount of tax presently shown on the invoice. This is because under the current VAT regime the invoice contains the tax element of state-VAT only, as the amount of CenVAT at the manufacturing level gets absorbed into the price of the commodity and, therefore, does not remain transparent. When the GST is introduced, the total tax element would be transparent and will be shown in the invoice of the consumer. This would further encourage the consumers to avoid asking for an invoice and be an incentive for the dealer to sell goods without issuing an invoice.
The experience in most of the states corroborates the fact that consumers buy commodities after a price is quoted by the dealer. When the deal is over and the purchaser asks for a cash memo, the dealer does not issue the cash memo without charging tax in addition to the price already quoted for the commodity. This dissuades the consumer from asking for a cash memo; the consumer is content with the kachha invoice without any name or registration number of the dealer on it.
This being the general phenomenon in most of the shops (except in big departmental stores with cash registers), the continuation of such a practice under GST would further increase tax evasion, not only because the number of dealers would increase but also because of the enhanced amount of the tax element under GST.
In such cases, the transaction remains unrecorded in the accounts of the dealers resulting in the under reporting of sales. Such a practice also breaks the chain of transactions. In the past, under the VAT regime, some of the states have made efforts to encourage consumers to insist upon getting a cash memo for each and every transaction. For example, the government of Assam has spent large sums on advertisements to educate the public to help check this evasion of tax. However, this has not yielded any substantial result due to the fact that the consumers would ask for invoices if they do not have to pay more than the price already quoted. They would not like to get an invoice by paying tax in addition to the price quoted for the commodity. Even in transactions of consumer durables where some form of guarantee and warranty are involved, the invoice is not issued. The dealer adopts the modus operandi of giving his visiting card with his signature rather issue a cash memo for the transaction.
This situation needs to be rectified in order to administer GST properly. With a view to doing so, we suggest that our tax laws should be suitably amended to force dealers to quote tax inclusive price for the commodity as well as services. When the dealer quotes tax-inclusive-price (TIP) the consumers will not hesitate in asking for a cash memo. He would, in fact, then be helping in the administering of the GST. This would go a long way in helping to record the transactions in the books of accounts of the dealers.
In principle, the burden of GST falls on the final consumer. The tax is generally collected through the issue of invoice. Hence tax liability is calculated as:
VAT = t(O)-t(I), where VAT = the amount of tax payable to the government, t = tax rate, O = gross output sold, and I = input for which credit is claimed.
The Model Statute for Value Added Sales Tax (1998) prepared by a team of experts (the author being one of the members of the team) recommends the introduction of provisions similar to tax-inclusive price. The Model Statute states that where a taxable sale is made without a separate amount of the consideration being identified as a payment of tax, the taxable turnover of that sale is the total amount of the consideration paid multiplied by the tax fraction. It was further stipulated that for such calculations, tax fraction would mean the amount ascertained through the formula: Pf = P/1+R, where Pf = the tax exclusive price; P = the tax inclusive price; and R = the rate of tax payable to the taxable supply.
This system could be adopted for all transactions including those for commodities with maximum retail price (MRP) printed on the pack. Under the present VAT regime, the system of TIP is followed in the case of medicines. It would be more convenient to follow the system of TIP for all the commodities under the GST regime because the tax rates would be almost the same across states. It would, therefore, be appropriate if the government instructs the agencies working on MRP to follow TIP.
From the point of taxonomy of GST, it does not matter whether we follow the present system of tax exclusive price or the proposed system of TIP. The structure of the tax could be so designed that it generates the same amount of revenue. Thus a 9.1% tax on a price of R110 would yield the same revenue as a 10% tax on a price of R100. Therefore, under the system of TIP, the structure of the tax could be re-designed.
The issue of tax inclusive price would be a boon to check evasion of tax by involving consumers in the overall tax system. A formula prescribed by law would help implementing the system of TIP. This would also be useful in the taxation of such trades that have initial psychological problems related to trade margins.
The author is director, Foundation for Public Economics and Policy Research, New Delhi