Many states have brought out tax laws but most of them have not prepared VAT procedures. The states that have the procedures find that these have many aberrations and anomalies in them. Since the procedures affect the cost of compliance and causes harassment to the taxpayers, it is imperative that the states not only bring out VAT laws and procedures well in time, but also seek public reaction to them prior to their implementation.
Empirical studies indicate that the cost of compliance for small dealers is greater as compared to that for large dealers. Hence, most countries have different procedures for small dealers. Procedures for such dealers are distinguished in terms of system of registration, payment of tax, processing of returns, and selection of cases for assessment etc. Preparedness on the part of taxpayers is equally important. VAT being a new tax, taxpayers have apprehension of harassment and corruption, especially when the existing non-taxpaying dealers enter into the tax net. Hence, the laws and procedures should be made public as early as possible.
Unfortunately, the states that have already brought out VAT laws find that some of the provisions made are not suitable. For instance, these states have provided for lump sum payment of VAT by small dealers (turnover of Rs 5 to 40 lakh) but debarred them from issuing invoice showing VAT. Such provisions allow the taxpayers to have minimum accounting obligations but disallow them to claim set-off for the taxes paid by them. Hence, these provisions discriminate small dealers against large dealers. Also, such a system would create two systems sales tax for the small and VAT for the large dealers.
Such inconsistencies are caused because the tax department, which controls tax operations, prepares the law and procedures. In most other countries, the VAT law and procedures are prepared by the finance department with help from experts. Such practices provide a broader outlook and wider perspective. This also helps in framing procedures that minimises interaction of the taxpayers with the tax department.
On the part of the taxpayers, VAT is associated with fears of a new tax. Consequently, creating tax awareness amongst them is crucial for the success of VAT. While such preparations would be different for small dealers, depending upon the provisions in the respective tax laws, for the large dealers, the experience of most countries indicates that there is a need to establish a project management team. This enables taxpayers to plan and chart a time path indicating different activities for its introduction. The implementation team plays the role of a leader and visualises problems, both real and imaginary, and interacts with government as well as business organisations.
Empirical surveys of businesses world over show that 91 per cent of them had appointed an implementation team comprising of their employees and had also sought help from external advisors in taxation and accounting systems. These surveys further indicate that the implementation of VAT was problematic in only 9 per cent of the companies these had not appointed such teams. All the organisations that had appointed teams for implementation got enormous success. The surveys suggest that 36 per cent of the companies achieved highly effective implementation while 55 per cent of the companies had attained effective implementation.
Empirical studies have also indicated that the introduction of VAT has resulted in savings in the cost of business operations. In fact, 82 per cent have reported savings in their operative expenses due to the introduction of VAT. In India, a study of CenVAT indicated that during April 1986 and September 1987, there was considerable saving on account of reduction in quantum of interest on borrowings.
Another important aspect relates to the obligations of taxpayers in terms of accounting requirements under VAT. The differences in maintaining books of accounts between the present system of sales tax and in the new system are crucial. A dealer has to accomplish changes in the accounting system before the new system is introduced. These changes are all the more important for those who are second sellers and hence do not pay any tax under the present system. Owing to differences in the two systems, most authorities feel that the smooth functioning of VAT would critically depend upon taxpayers maintaining complete records. However, asking dealers to maintain more detailed accounts increases their compliance costs. The dealers must, therefore, maintain sufficient details in order to have information on the following aspects: Particulars of invoices giving details of tax on sales, and credit on purchases, details of accounts giving information of all purchases and sales, and interactions between invoices, purchase and sales accounts with the tax return form.
The taxpayers, while preparing for the introduction of VAT, should attempt to involve all the concerned departments of their companies. These include sales, pricing, accounting and shipping. In fact, the most important change will be in the invoicing and the accounting systems. To cope with this, it is important for taxpayers to seek information and possible advice on the specific situation for a particular type of business. It is equally important that taxpayers and consumers are provided with the requisite information to enable them to understand VAT. Our experience also suggests that lack of understanding of VAT has resulted in resistance from taxpayers.
Finally, to take dealers into confidence and to have taxpayer-friendly procedures, it is important that government spends time and resources towards client services and takes into account dealers views. With a view to having interaction with taxpayers in the process of formulating procedures, states must appoint an advisory committee comprising taxpayers, experts and state representatives to have a trouble-free switchover to VAT.
The author is Director of the Foundation for Public Economics and Policy Research, New Delhi