Summary Proceedings of the Business Seminar on "Value Added Tax-Implications for Business and Industry", organised by the Council in conjunction with its 40^th Annual General Meeting at 11.00 a.m. on Wednesday, 16^th January 2002, at Crystal Room, (Central), Taj Mahal Hotel, Mumbai.  

Mr. Swadhin Kshatriya, Commissioner of Sales Tax, Govt. of 
Maharashtra, is addressing the Seminar.  Others from L to R are 
Mr. Nandkishore Kagliwal, Mr. M. N. Chaini, Mr. Sharad Kulkarni, 
Mr. Nihal Kothari, Mr. Uday Phadke, Mr. R. S. Bhat & Dr. C.S. Deshpande.

Maharashtra Economic Development Council (MEDC) organised a Business Seminar on "Value Added Tax-Implications for Business and Industry" in conjunction with its 40^th Annual General Meeting at 11.00 a.m. on Wednesday, 16^th January 2002, at Crystal Room, (Central), Taj Mahal Hotel, Mumbai.

At the inaugural session of the Business Seminar, the main speech was delivered by Shri Swadhin Kshatriya, Commissioner of Sales Tax, Govt. of Maharashtra. Shri Uday Phadke, Executive Vice President ( Finance, Accounts and Legal Affairs), Mahindra & Mahindra Ltd , Shri R.S. Bhat, Senior Executive Vice- President, Reliance Industries, and Shri Nihal Kothari, Head of Taxation, Hindustan Lever Ltd made presentation on VAT.

At the inaugural session, the eminent speakers were welcomed by Shri Sharad Kulkarni, President, MEDC. In his Welcome Address, Shri Sharad Kulkarni highlighted the pros and cons of adopting the VAT(Value Added Tax) regime. "VAT, unlike the turnover tax eliminates cascading as well as distortions in economic decision". Shri Kulkarni said. "VATs superiorities in the fact that it checks evasion more effectively and is perfectly neutral as regards allocation of resources" , he added . However, in this view VAT suffers from a major limitation , in that , it involves high cost to the administration, of assessment, collection and verification. Moreover, the revenue collected under the system may also turn out to be far less than the revenue collected under the multistage turnover tax system. "Significantly, the twin issues of central sales tax and State incentives continue to be contentious", he stressed.

In his presentation Shri Nihal Kothari, Head of Taxation, Hindustan Lever Ltd, elaborated on the implications of VAT for business and industry. The present domestic tax structure, he said, has made indigenous manufacturing less competitive. The FMCG (Fast Moving Consumer Goods) sector in particular has been affected by this tax structure. The tax incidence, on products like toilet soap and shampoos , he said , ranges from a high of 51% to a low of 33% (excluding input taxes). In Maharashtra, in the post- reforms period, the effective sales tax rates on FMCG products has virtually doubled. Shri Kothari felt that VAT needed to be introduced because of its overwhelming advantages- it is transparent, it eliminates cascading effect on the cost of domestic goods, reduces evasion due to self-check machanism, widens the tax base, and leads to efficient use of resources. Shri Kothari also drew a roadmap for the introduction of VAT. In the first stage the emphasis , he said , should be on the introduction of State VAT . In the first stage the CST (Central Sales Tax) should also be eliminated. In the Second Stage the focus should be on the introduction of the National VAT, coupled with the introduction of a uniform documentary procedure, while in the third stage a comprehensive VAT ( i.e all indirect taxes covering both goods & services), should be introduced. For the implementation of VAT in Maharashtra, he said, the State should first merge all State taxes ( sales tax, turnover tax, Works Contract tax, entry tax and octoi). It should also insist on a common commodity classification and focus on introducing simplicity in documentation and procedures. The rate structure should recognise price elasticity of demand and in the final analysis all States should adopt uniform rates. The Revenue neutral rates in different States should converge at an early date, Shri Kothari stressed. On exemption units, he said, that exemption should be replaced by remission . A National VAT, can only enhance competitiveness, while a Comprehensive VAT will confer tremendous benefits to trade and industry by eliminating cascading and multi- agency levies, he added.

Shri Uday Phadke, Executive Vice-President, (Finance, Accounts & Legal Affairs, Mahindra and Mahindra Ltd), initially traced the historical background of VAT in his presentation. Regarding VAT implementation in Maharashtra, he said, that the revenue neutral rate has yet to be announced under the proposed draft VAT Act. The issue of sales tax refunds will also have to be resolved and refunds will most likely have to be granted on submission of bank guarantees, he said. Comparing the draft VAT act in Maharashtra with other States, he said , that unlike in Delhi and Madhya Pradesh, the provision relating to the refund of excess input tax credit in Maharashtra has yet to be notified. Shri Phadke made some vital suggestions on the implementation of VAT in Maharashtra. On revenue neutral rate ( RNR), he felt that it should be introduced as the minimum rate and could be reviewed depending on the experience. On benefits of sales tax under the State incentive schemes, he felt, that there should be a deferral system in a modified format so that the units could avail higher quantums or an alternative should be devised where units could be helped by way of subsidies, interest free loans etc. The Government of Maharashtra, Shri Phadke stressed will have to gear its administrative machinery to suit the new system- it will have to modernise its administrative methods, train and re-orient its staff, educate the tax payers, minimise compliance costs, and minimise interactions between tax authorities and tax payers.

Shri R.S. Bhat, Senior Executive Vice- President, Reliance Industries,also made a presentation at the Seminar. VAT, he said " is a cherished dream of every trade , industry and Government because of its simplicity and transparency". But "several sales tax experts have voiced their apprehension that the proposed VAT in India will prove to be a nightmare because it lacks some basic and critical features of ideal VAT ",he added. In case of the proposed VAT in India, input taxes such as octroi, cess, entry tax, excise duty , works contracts tax , lease tax etc will co-exist. Besides there is no provision for set- offs of such input taxes against payable VAT. There is no tax on imports and service tax will co-exist without provision for set- off . The biggest flaw in the proposed system , he said, is that there is "neither an abolition nor a set-off for the Central Sales Tax" . The international concept of considering inter-company group transactions as not taxable under the VAT, is also missing from the proposed VAT system in India. On incentive schemes, he categorically stated that promises given, must be fulfilled legally and morally because, otherwise the conversion of exemption incentives into deferral incentives may make many units economically non- viable. To avert this , he said, on the purchase side, the BC forms should be continued or sales tax paid could be refunded every month as subsidy. On the sales side, the purchase price deduction method as it operated during 1990-95 in Maharashtra could be adopted, or there could be perpetual deferral or a very long deferral period of say 30 years.

Shri Swadhin Kshatriya, Commissioner, Sales Tax, Govt. of Maharashtra responded to the issues raised by the President , Maharashtra Economic Development Council , in his inaugural address and also to the issues raised by the main speakers at the Seminar. Shri Kshatriya said, that the paradigm of VAT system should conform to four parameters- it should yield adequate revenue, be fair and equitable to different classes of traders and manufacturers, it should be easy to administer and should not lead to economic distortions. Keeping this in mind, the second Draft of the Proposed Maharashtra Value Added Sales Tax Act, has included new and important features like the amalgamation of works contract Act and lease act , self assessment , advance ruling , audit of business automation and simplified procedures. He exhorted those present to peruse through the Second Draft as also through the Citizens Charter and a pamphlet published by the Sales Tax department on VAT. He also invited the audience to come forward with their suggestions on the same. The Draft rules , and the new forms he promised will be circulated within a fortnight. He also assured those present that the return-cum-challan system would be continued . the new system, Shri Kshatriya said, will be a simple system with only two rates. All exports, he said will be zero rated. The Government of Maharashtra , he said, has suggested to the Centre, that additional areas of taxation (especially of services) should be made available to the States. However, the implementation of VAT demands tackling of two major issues- stock in hand and the CST". For a comprehensive VAT, " an amendment of the CST Act as also a merger of other taxes is technically necessary", he added . At the moment the consensus is that VAT will be introduced, without touching CST. Regarding merger of other taxes, he felt that the Sugarcane Purchase Tax Act may have to be repealed, but octroi will have to continue. Exemption units, he added are not compatible with VAT and these exemption units will have to be converted into deferral units. A massive task of computerization of sales tax offices has now been undertaken in order to meet the requirement of VAT, and a common identification number may also be issued, Shri Kshatriya said. A composition scheme facilitating easy switch over of retailers to VAT is being devised, he added.

Mr. Jayantrao Patil, Hon'ble Minister for Finance, 
Govt. of Maharashtra addressing the Seminar in concluding session. 
Others from L to R are Mr. Nandkishore Kagliwal, Mr. M.N. Chaini 
& Mr. Sharad Kulkarni.

Shri Jayantrao Patil, the Hon'ble Minister for Finance, Government of Maharashtra, addressed the Concluding Session at the Seminar . He was welcomed by Shri M.N. Chaini, President - Elect, MEDC. At this session, he elaborated on the likely impact of VAT on the State Finances . "VAT is likely to become operational from October 2002, although the final decision will be taken only on January 23, 2002 in a meeting of State Finance Ministers with the Union Minister of Finance" he said. The pre-condition for a comprehensive and successful nation-wide VAT are -adoption of a uniform rate of tax, harmonised system of commodity classification and elimination of all exemptions by all States", he said. However, irrespective of the adoption of VAT Maharashtra continued to be the most preferred destination for investments , he added. The current system of taxation suffers from several limitations, -" the tax base is narrow , and the tax rate is very high", he said. VAT on the other hand is transparent and simple.VAT is also invoice based . Besides it has few rates - 4% on essential commodities and the RNR (Revenue neutral rate). Ideally, he said, there should be a common RNR but this is not possible owing to the diversity amongst States. However, the difference in RNR will lead to diversion of trade, he warned. The States, he said will be fixing the RNR within the range of 10 to 12.5%. The Government of Maharashtra, Shri Patil said, has recommended that States should be permitted to "levy multi-point tax on imported goods, services and declared goods". Responding to a question, he said, that Maharashtra can retain its competitiveness only if it introduces labour reforms and cuts down its establishment costs". He also informed the audience that performance indicators are being framed for sales tax officers and new posts have been created to take care of pending assessment cases.

The inaugural session ended with summing up remarks by Shri M. N. Chaini, President (Elect), Maharashtra Economic Development Council, while the concluding session ended with a Vote of Thanks by Shri Nandkishor Kagliwal, Vice- President, MEDC.

Over 200 delegates and special invitees participated in the deliberations at the Seminar., and sought clarification on vital issues.

Audience at the Seminar