value added tax (VAT)

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Indirect tax on the domestic consumption of goods and services, except those that are zero-rated (such as food and essential 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 members, and whereas its full brunt is borne by the end consumer, it avoids the double taxation (tax on tax) of a direct sales tax. Introduced by the European Economic Community (now the European Union) in the 1970s.

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 us not experience the same with VAT in India. It has a baggage full of benefits. Few advantages of VAT in India are mentioned below. m It will be a virtual crime not to look to the other side of the coin of the Indian VAT system. Disadvantages will always give birth to amendments to the existing policy so that traders can ride jerk free on it adding value to the existing Indian taxation system. We have also discussed upon the friction of VAT below. Advantages of VAT In the advantages part we will first look after the broad coverage of VAT in the Indian market. Then we will consider the level of security the Indian VAT is having on our revenues. Obviously the selection of items to be covered by VAT in India will be given a bullet to think upon and at last we will check out the co-ordination VAT in India will be having with our existing direct tax system. 1) 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. 2) 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 underdeclaring 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 is there 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. 3) Selectivity VAT may be selectively applied to specific goods or business entities. We have already addressed essential goods and small business. 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 them. 4) 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 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.

Q10 )Definition of 'Income Tax'

A tax that governments impose on financial income generated by all entities within their jurisdiction. By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public.
SALIENT FEATURES INCOME TAX 1. For the welfare of individuals with low income earnings, the basic exemption limit is proposed to be enhanced from Rs.300,000/- to Rs.350,000/-. However individual taxpayers whose normal income is between Rs.300,000/- to Rs.350,000/- shall be required to file return of income and statement, for the purposes of documentation.

2. In order to encourage enhanced equity financing, and to provide relief to new corporate industrial undertakings established on or after 1st July 2011, with 100% equity financing, a tax credit equal to 100% of tax payable is proposed. The existing companies may also take benefit under this arrangement if investment in BMR is financed through their 100% equity, on or after by 1st July 2011.

3. The rate of tax deductible on Cash Withdrawals from Banks is proposed to be reduced to 0.2% from existing 0.3%, for bringing in improvement in the liquidity position of eligible taxpayers.

4. In order to harmonize the existing tax credits available to individuals for investment in shares and for premium paid to Insurance Company, the maximum cumulative limit for both the investments is fixed @ 15% of the taxable income, with maximum upper limit for investment upto five hundred thousand.

5. Tax relief is proposed to be provided to withdrawals exceeding Rs.500,000/from a Voluntary Pension Fund.

6. For encouraging companies enlistment on stock exchange, the existing tax credit equal to 5% is proposed to be enhanced to 15%. 2

7. For the national cause of Broadening of Tax Base and utilization of third party databases, NTN and CNIC of eligible taxpayers are proposed to be provided expressly alongwith other particulars, in the withholding tax statements filed by withholding agents.

8. For the purpose of identification of eligible taxpayers, the requirement of mandatory filing of return of income by the commercial and Industrial consumers of electricity with annual billing above one million rupees, is proposed. This measure will also help in Broadening of Tax Base in the country.

9. In order to discourage the practice of arbitrage by banks for receiving dividends

from Asset Management Companies, the rate of tax on such return is proposed to be enhanced from 10% to 20%.

10. For encouraging investments made by non-residents in Government Securities, the withholding tax on profit on debt deductible @ 10% is proposed to be a final tax. This measure will relieve the non-residents from the statutory requirement of filing of return of income, and will boost national economy.

11. The withholding tax on profit on debt deductible @ 10% arising from investment in Government securities by individual is also proposed to be a final tax. This measure will relieve such taxpayers from the statutory requirement of filing of return of income, and will also encourage domestic investments in the Government Securities.

12. After imposition of capital gain tax on Modarba certificates and instruments of redeemable capital traded at stock exchange through Finance Act 2010, the 0.01% CVT on such instruments is proposed to be withdrawn in order to encourage their trade.

Q15
8. OFFENCES AND PENALTIES [ 39 (1) 39 ] Whoever commits any of the following offences, namely : [ 40 (a) contravenes any of the provisions of section 8 or of a rule made under clause (iii) or clause (xxvii) of sub-section (2) of section 37; 40 ] (b) evades the payment of any duty payable under this Act; [ 41 (bb) removes any excisable goods in contravention of any of the provisions of this Act or any rules made thereunder or in any way concerns himself with such removal; (bbb) acquires possession of, or in any way concerns himself in transporting, depositing, keeping, concealing, selling or purchasing, or in any other manner deals with any excisable

goods which he knows or has reason to believe are liable to confiscation under this Act or any rule made thereunder; 41 ] [ 41a (bbbb) contravenes any of the provisions of this Act or the rules made thereunder in relation to credit of any duty allowed to be utilized towards payment of excise duty on final products; 41a ] (c) fails to supply any information which he is required by rules made under this Act to supply, or (unless with a reasonable belief, the burden of proving which shall be upon him, that the information supplied by him is true) supplies false information; (d) attempts to commit, or abets the commission of, any of the offences mentioned in clauses (a) and (b) of this section; [ 42 shall be punishable, (i) in the case of an offence relating to any excisable goods, the duty leviable thereon under this Act exceeds one lakh of rupees, with imprisonment for a term which may extend to seven years and with fine : Provided that in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court such imprisonment shall not be for a term of less than six months; (ii) in any other case, with imprisonment for a term which may extend to three years or with fine or with both. 42 ] [ 43 (2) If any person convicted of an offence under this section is again convicted of an offence under this section, then, he shall be punishable 'for the second and for every subsequent offence with imprisonment for a term which may extend to seven years and with fine : Provided that in the absence of special and adequate reasons to the contrary to be recorded in the judgment of the Court such imprisonment shall not be for a term of less than six months. (3) For the purposes of sub-sections (1) and (2), the following shall not be considered as special and adequate reasons for awarding a sentence of imprisonment for a term of less than six months, namely :(i) the fact that the accused has been convicted for the first time for an offence under this Act; (ii) the fact that in any proceeding under this Act, other than a prosecution, the accused has been ordered to pay a penalty or the goods in relation to such proceedings have been ordered to be confiscated or any other action has been taken against him for the same act which constitutes the offence; (iii) the fact that the accused was not the principal offender and was acting merely as a carrier of goods or otherwise was a secondary party in the commission of the offence; (iv) the age of the accused. 43 ]

Q9