VALUE ADDED TAX (VAT)

CONCEPTS AND GENERAL PRINICIPLES

1. INTRODUCTION
The tax will be levied and collected at each stage of manufacture only on
the value added by the manufacturer represented by the purchase value and the
value of the work performed on such purchased commodities. This will not only
result in cost reduction but will also ensure equity. What we have talked about is a
value added tax on manufacture. In the same way, there can be a value added tax
in respect of trading in commodities also. In other words, the various taxes paid on
inputs purchased will be allowed as a credit and on the tax liability on the value of
sales of the commodity. Thus, there can be a system of VAT in respect of
manufacture and in respect of sales. In the same way, one can think of a system of
VAT in dealing with input and output services. When the individual systems of
manufacturing, sales and services VAT are ultimately combined to from a grand
system of VAT on goods and services, such a VAT system will be applicable
throughout the country as a common market.

2. HISTORICAL BACKGROUND
Ever since 1954, when the tax on value added was introduced in France it
has spread to a large number of countries. This tax was proposed for the first time
by Dr. Wilhelm Germany in 1919 as an improved turnover tax. In 1921, VAT was
suggested by Professor Thomas S. Adams for the United States of America who
recommended “sales-tax with a credit or refund for taxes paid by the producer or
dealer (as purchaser) on goods bought for resale or for necessary use in the
production of goods for sales.” VAT was also recommended by the Shoup Mission
for the reconstruction of the Japanese Economy in 1949. However, the tax was not
introduced by any country till 1953. France led the way in 1954 by adopting a
VAT that covered the industrial sector alone and the tax was limited up to the
wholesale level. The tax was limited to the boundaries of France until the fifties.

VAT has, however, been spreading rapidly since the sixties. The Ivory
Coast followed France by adopting VAT in 1960. The tax was introduced by
Senegal in 1961 and by Brazil and Denmark in 1967. The tax has gathered further
momentum as it was made a standard form of sales-tax required for the countries
of the European Union (them European Economic Community). In 1968, France
extended VAT to the retail level while the Federal Republic of Germany
introduced it in its tax system. The Netherlands and Sweden imposed this tax in
1969 while Luxembourg adopted it in 1970, Belgium in 1971, Ireland in 1972, and
Italy, the United Kingdom, and Austria in 1973. Of the other members of the
European Union, Portugal and Spain introduced VAT in 1986, Greece in 1987,
while this tax was adopted by Finland in 1994. Many other European countries
have adopted VAT. Similarly, many countries in the North and South America,
Africa and Oceania have introduced VAT.VAT has been spreading in the Asian
region as well. The Republic of Vietnam adopted VAT briefly in 1973, (VAT was
abolished soon but it was reintroduced in 1999 in Vietnam.) South Korea
introduced VAT in 1977, China in 1984, Indonesia in 1985, Taiwan in 1986,
Philippines in 1988, Japan in 1989, Thailand in 1992, and Singapore in 1994 while
Mongolia has been implementing this tax since 1998.
In the South Asian Association for Regional Cooperation (SMRC) region,
VAT in a different way under the name of Modified Value Added Tax
(MODVAT). Unlike the VAT system of other countries, the Indian MODVAT
system was designed to cover manufacturing of goods by giving credit of excise
duty paid on inputs. The scope of MODVAT has been extended over the years and
has since been renamed as Central Value Added Tax (CENVAT), which covers
services also.
Pakistan adopted VAT in 1990, Bangladesh in 1991, and Nepal in 1997
while Sri Lanka introduced VAT in 1998.
As VAT is less distortive and more revenue-productive, it has been
spreading all over the world. As on today, about 130 countries have adopted the
same.
3. TAXONOMY OF VAT
3.1 Different stages of VAT
The Value Added Tax (VAT) is a multistage tax levied as a proportion of
the value added (i.e. sale minus purchase) which is equivalent to wages plus
interest, other costs and profits. To illustrate, a chart of transactions is given below:
Manufacturer A Wholesaler B
Sale price Rs.300 Sale price Rs. 400
Gross VAT Rs.37.50 Gross VAT Rs. 50
Net VAT Rs.21 Net VAT Rs. 12.50
(Rs.37.50-(12.50+4) (50-37.50)

Inputs
For
Manufacturer
Product X Product Y Product X
Sale price Rs. 100 Sale price Rs. 100 Sale price Rs. 500
Gross VAT Rs. 12.50 Gross VAT Rs. 4 Gross VAT Rs.62.50
Net VAT Rs. 12.50 Net VAT Rs. 4 Net VAT Rs. 12.50
(62.50-50)

Note: The rate of tax is assumed to be 12.5 per cent on the transactions
relating to goods manufactured by A

For a manufacturer A, inputs are product X and product Y which are

purchased from a primary producer. In practice, even these producers use inputs.
For example, a farmer would use seeds, feeds, fertilizer, pesticides, etc. However,
for this example their VAT impact is not considered. B is a wholesaler and C is a
retailer.
The inputs X and Y are purchased at Rs. 100 each on which tax is paid
@12.5% and 4% respectively. The manufacturer A would, therefore, take the
credit for tax paid by him for the use of such inputs. The input price of Rs.200 plus
tax would include wages, salaries and other manufacturing expenses. For all this,
he would also add his own profit. Assuming that after the addition of all these
costs his sale price is Rs.300, the gross tax (at the rate of 12.5 per cent) would be
Rs.37.50. As manufacturer A has already paid tax on Rs.200, he would get credit
for this tax (i.e. 12.50+4=16.50). Therefore, his net VAT liability would be
Rs.37.50 minus Rs.16.50. Thus, manufacture A would pay Rs.21 only (because of
this he would take the cost of his inputs to be only Rs.200)
Similarly, the sale price of Rs.400 fixed by wholesaler B would have net
VAT liability of Rs.12.50 (Rs.50-37.50= Rs.12.50) and the sales price of Rs.500
by Retailer C would also have net VAT liability of Rs.12.50 (Rs.62.50 – 50=
Rs.12.50). Thus, VAT is collected at each stage of production and distribution
process, and in principle, its entire burden falls on the final consumer, who does
not get any tax credit. Thus, VAT is a broad- based tax covering the value added to
each commodity by parties during the various stages of production and
distribution.

4. VARIANTS OF VAT
VAT has three variants, viz., (a) gross product variant, (b) income variant,
and (c) consumption variant. These variants, as presented in a schematic diagram
given below could be further distinguished according to their methods of
calculation, viz., addition method and subtraction method. The subtraction method
could be further divided into:
(a) direct,
(b) intermediate, and
(c) indirect subtraction methods
 Different variants of VAT

Gross product variant Income variant Consumption variant

Tax is levied on all sales Tax is levied on all Tax is levied on all sales
and deduction for tax sales with set-off for with deduction for tax
paid on inputs excluding tax paid on inputs and paid on all business
capital inputs is allowed only depreciation on inputs (including capital)
capital

Addition method Invoice method Subtraction Method

Aggregating all the Deducting tax on

factor payments and inputs from tax on
profit. sales.

Direct subtraction Intermediate

method Subtraction method
Deducting tax inclusive
value of purchases
Deducting aggregate form the sales and
value of purchase taxing difference
exclusive of tax from between them.
the aggregate value of
sales exclusive of tax

The gross product variant allows deductions for taxes on all purchases of raw
materials and components, but no deduction is allowed for taxes on capital inputs.
That is, taxes on capital goods such as plant and machinery are not deductible form
the tax base in the year of purchase and tax on the depreciated part of the plant and
machinery is not deductible in the subsequent years. Capital goods carry a heavier
tax burden tax burden as they are taxed twice. Modernization and upgrading of
plant and machinery is delayed due to this double tax treatment.
The income variant of VAT on the other hand allows for deductions on
purchase of raw materials and components as well as depreciation on capital
goods. This method provides incentives to classify purchase a current expenditure
to claim set-off. In practice, however, there are many difficulties connected with
the specification of any method of measuring depreciation, which basically
depends on the life of an asset as well as on the rate of inflation.
Consumption variant of VAT allows for deduction on all business
purchases including capital assets. Thus, gross investment is deductible in
calculation value added. It neither distinguishes between capital and current
expenditures nor specifies the life of assets or depreciation allowances for different
assets. This form is neutral between the methods of production; there will be no
effect on tax liability due to the method of production (i.e. substituting capital for
labour or vice versa). The tax is also neutral between the decision to save or
consume.
Among the three variants of VAT, the consumption variant is widely used.
Several countries of Europe and other continents have adopted this variant. The
reasons for preference of this variant are:
Firstly, it does not affect decisions regarding investment because the tax on
capital goods is also set-off against the VAT liability. Hence, the system is tax
neutral in respect of techniques of production (labour or capital-intensive).
Secondly, the consumption variant is convenient form the point of
administrative expediency as it simplifies tax administration by obviating the need
to distinguish between purchases of intermediate and capital goods on the one
hand and consumption goods on the other hand.
5. METHODS FOR COMPUTATION OF TAX
The are several methods to calculate the ‘Value Added’ to the goods for
levy of tax. The three commonly used methods are
(a) addition method.
(b) invoice method and
 (c) subtraction method.

5.1 Addition Method

The method aggregates all the factor payments including profits to arrive at
the total value addition on which the rate is applied to calculate the tax. This type
of calculation is mainly used with income variant of VAT. Addition method does
not easily accommodate exemptions of intermediate dealers. A drawback of this
method is that it does not facilitate matching of invoices for detecting evasion.

5.2 Invoice Method

This is the most common and popular method for computing the tax
liability under ‘VAT’ system. Under this method, tax is imposed at each stage of
sales on the entire sale value and the tax paid at the earlier stage is allowed as set-
off. In other words, out of tax so calculated, tax paid at the earlier stage i.e., at the
stage of purchases is set-off, and at every stage the differential tax is being paid.
The most important aspect of this method is that at each stage, tax is to be charged
separately in the invoice. This method is very popular in western countries. In
India also, under Central Excise Law this method is followed. This method is also
called the ‘Tax Credit Method’ or ‘Voucher Method’. From the following
illustration, the mode of calculation of tax under this method will become clear:
 STAGE
VAT Less VAT Tax to
PARTICULARS Liability Credit Government

1 Manufacturer/first seller in the State sells the 125 - 125

goods to distribution for Rs.1000. Rate of tax
is 12.50%. Therefore, his tax liability will be
Rs.125. He will not get any vat credit, being
the first seller.
2 Distributor sells the goods to a wholesale 150 125 25
dealer for say Rs.1200 @ 12.50% and will
get set-off of tax paid at earlier stage at Rs.
125. His tax liability will be Rs. 25.
3 Wholesale dealer sells the goods to a retailer 187.50 150 37.50
at say Rs. 1500. Here again he will have to
pay the tax on Rs. 1500. He will get credit of
tax paid at earlier stage of Rs. 150. His tax
liability will be Rs. 37.50.
4 Retailer sells the goods to consumers at say 250 187.50 62.50
Rs. 2000. Here again he will have to pay tax
on Rs. 2000. He will get credit for tax paid
earlier at Rs. 187.50. His tax liability will be
Rs 62.50
Total 712.50 462.50 250

Thus, the Government will get tax on the final retail sale price of Rs. 2,000.
However, the tax will be aid in instalments at different stages. At each stage, tax
liability is worked out on the sale price and credit is also given on the basis of tax
charged in the purchase invoice. If the first seller is a manufacturer, he gets the
credit of tax paid on raw materials, etc. which are used in the manufacturing. Form
the above illustration, it is clear that under this method, tax credit cannot be
claimed unless and until the purchase invoice is produced. As a result, in a chain, if
at any stage the transaction is kept out of the books, still there is no loss of
revenue. The department will be in a position to recover the full tax at the next
stage. Thus, the possibility of tax evasion, if not entirely ruled out, will be reduced
to a minimum. However, proper measures should be implemented to prevent the
production of fake invoices to claim the credit of tax at an earlier stage.
It is said that in this method the beneficiary is the trade and industry
because in the above example, the total tax collection at all the stages is Rs. 712.
50 whereas tax received by the State is only Rs. 250. The set-off available is also
tax paid. If the profit margin is to be kept at the constant level then the set-off will
have to be considered to avoid cascading effects of taxes.

5.3 Subtraction Method

While the above-stated invoice or tax-credit method is the most common
method of VAT another method to determine the liability of a taxable person is the
cost subtraction method, which is also a simple method. Under this method, the tax
is charged only on the value added at each stage of the sale of goods. Since, the
total value of goods sold is not taken into account, the question of grant of claim
for set-off or tax credit does not arise. This method is normally applied where the
tax is not charged separately. Under this method for imposing tax, ‘value added’ is
simply taken as the difference between sales and purchases. The following
illustration will make the working of this system clear:
Stage

Turnover
Tax
Particulars for tax under
@ 12.50%
VAT
1 First seller sells the good to a (Rs) (Rs)
 distributor at say, RS.1125 inclusive 1,125 125
of tax   1125×12.50  
 
 100 +12.50 
2 Distributor sells the goods to a whole- 225 25
seller at say, Rs. 1,350. Here taxable   125×12.50  
 
turnover will be Rs. 1,350-Rs. 1,125  100 +12.50 
3 Wholesaler sells the goods to a 337.50 37.50
retailer at say, Rs 1,687. 50. Here   337.50×12.50  
 
taxable turnover will be Rs. 1,687.50-  100 +12.50 
Rs. 1,350
4 Retailer selling the goods at say, Rs. 562.50 62.50
2250. Taxable turnover will be Rs.   562.50×12.50  
 
2250 – Rs. 1687.50  100 +12.50 
2,250 250
T×R
Tax is calculated by the formula
100×R

T= Taxable turnover, R=Rate of Tax

6. MERITS AND DEMERITS OF VAT

6.1 MERITS
1. No tax evasion:
It is said that VAT is a logical beauty. Under VAT, credit of duty paid is
allowed against the liability on the final product manufactured or sold. Therefore
unless proper records are kept in respect of various inputs, it is not possible to
claim credit. Hence, suppression of purchases or production will be difficult
because it will lead to loss of revenue. A perfect system of VAT will be a perfect
chain where tax evasion is difficult.

2. Neutrality
The greatest advantage of the system is that it does not interfere in the
choice of decision for purchase. This is because the system has anti-cascading
effect. How much value is added and at what stage it is added in the system of
production/distribution is of no consequence. The system is neutral with regard to
choice of production technique, as well as business organisation. All other things
remaining the same, the issue of tax liability does not vary the decision about the
source of purchase. VAT facilitates precise identification and rebate of the tax on
purchases and thus ensures that there is no cascading effect of tax. In short, the
allocation of resources is left to be decided by the free play of market forces and
competition.
3. Certainty
The VAT is a system based simply on transactions. Thus there is no need to
go through complicated definitions like sales, sales price, turnover of purchases
and turnover of sales. The tax is also broad-based and applicable to all sales in
business leaving little room for different interpretations. Thus, this system brings
certainty to a great extent.
4. Transparency
Under a VAT system, the buyer knows, out of the total consideration paid
for purchase of material, what is tax component. Thus, the system ensures
transparency also. This transparency enables the State Governments to know as to
what is the exact amount of tax coming at each stage. Thus, it is a great aid to the
Government while taking decisions with regard to rate of tax etc.
5. Butter revenue collection and stability
The Government will receive its due tax on the final consumer/retail sale
price. There will be a minimum possibility of revenue leakage, since the tax credit
will be given only if the proof of tax paid at an earlier stage is produced. This
means that if the tax is evaded at one stage, full tax will be recoverable from the
person at the subsequent stage or form a person unable to produce proof of such
tax payment. Thus, in particular, an invoice of VAT will be self enforcing and will
induce business to demand invoices form the suppliers. Anther attribute of VAT is
that it is an exceptionally stable and flexible source of government revenue.
6. Better accounting systems
Since the tax paid on an earlier stage is to be received back, the system will
promote better accounting systems.
7. Effect on retail price
 A persistent criticism of the VAT from has been that since the tax is
payable on the final sale price, the VAT usually increases the prices of the goods.
However, VAT does not have any inflationary impact as it merely replaces the
existing equal sales tax. It my also be pointed out that with the introduction of
VAT, the tax impact on raw material is to be totally eliminated. Therefore, there
may not be any increase in the prices.
6.2 DEMERITS
1. The merits accrue in full measure only under a situation where there is
only one rate of VAT and VAT applies to all commodities without any question of
exemptions whatsoever. Once concessions like differential rates of VAT,
composition schemes, exemption schemes, exempted category of goods etc. are
built into the system, distortions are bound to occur and the fundamental principle
that VAT will totally eliminate cascading effects of taxes will also be subject to
qualifications.

2. In the federal structure of India in the context of sales-tax, so long as

Central VAT is not integrated with the State VAT, it will be difficult to put the
purchases form other States at par with the State purchases. Therefore, the
advantage of neutrality will be confined only for purchases within the State.

3. For complying with the VAT provisions, the accounting cost will
increase. The burden of this increase may not be commensurate with the benefit to
traders and small firms.

4. Another possible weak point in the introduction of VAT, which will have
an adverse impact on it is that, since the tax is to be imposed or paid at various
stages and not on last stage, it would increase the working capital requirements and
the interest burden on the same. In this way it is considered to be non-beneficial as
compared to the single state-last taxation system.
 5. VAT is a form of consumption tax. Since, the proportion of income spent
on consumption is larger for the poor than for the rich, VAT tends to be regressive.
However, this weakness is inherent in all the forms of consumption tax. While it
may be possible to moderate the distribution impact of VAT by taxing necessities
at a lower rate, it is always advisable to moderate the distribution considerations
through other programmes rather than concessions or exemptions, which create
complications for administration.

6. As a result of introduction of VAT, the administration cost to the State

can increase significantly as the number of dealers to be administered will go up
significantly.
7. VAT IN INDIAN CONTEXT
The Indian Union is a federal structure under the Constitution of Indian.
The Central Government and the state Governments derive their powers through
the instrumentality of the Union List, the State List and the Concurrent List. So far
as power of taxation are concerned there are clearly specified areas over which the
Central Government and the States can exercise their jurisdiction.
While Income-tax, excise duty and customs duty constitute the major
sources of tax revenue to the Central Government, the State Governments
substantially depend on sales-tax as the main source of revenue. The Central
Government undertook a series of reforms in indirect taxes, the major among
which was the introduction of Modified VAT, which is currently in operation as
CENVAT. However, in view of the constitutional constraints, CENVAT applies to
goods and services but not to sales tax and State-Level VAT.

7.1 Central value added tax (CENVAT)

At the Central level, at the time of Independence, India inherited a system
of commodity taxes in which excise duties were levied on about a dozen articles
yielding a small proportion of total tax revenue to the Centre. Following
Independence, the rates were raised, the base was enlarged, and more and more
and more items were brought into its net. Over time, there was a speedy extension
of Excise duties. It was not only levied on finished goods but also covered raw
materials, intermediate goods and capital goods.
7.1.1 Structure of CENVAT
As if now, the Central Government levies excise duties on all goods
manufactured or produced in the country. Such duty is paid by the
manufacturer/producer at the time of removal of goods form the factory at
prescribed rates. The prevailing structure of such duties includes (i) CENVAT, (ii)
special excise duty (SED), (iii) additional excise duty on goods of special
importance, AED (GSI) (iv) additional duty of excise on textiles and textile
articles, AED (T&TA), and (v) cesses on specified commodities.
With effect form March 1, 1986, MODVAT was introduced under the
union excise duty as a system of giving credit for excise duty on inputs. Initially, it
was introduced for a selected number of commodities. Over time, MODVAT was
extended and was finally replaced by Central VAT, know as CENVAT in the
Budget 2000-01. CENVAT has in general a single rate of 16% with some
variations for select commodities.
The CENVAT scheme initially allowed instant credit for specified excise
duties paid on inputs and capital goods received in a factory for the manufacture of
and dutiable final products. The credit could be utilized to pay excise duty on any
final product.
The Finance Act, 2004 marked a beginning for an integrated goods and
service tax system wherein the duties of excise paid on inputs/capital good and
service tax paid on input services could be adjusted against a manufacturer’s
excise duty liability or a service provider’s service tax liability. At present, the
CENVAT scheme is governed by CENVAT Credit Rules, 2004.
7.1.2 Committee of State Finance Ministers
After the introduction of VAT in the area of manufacture and services, a
need for uniformity arose wherein similar system was proposed to be incorporated
in the area of sales thereby replacing the existing sales tax system. To materialize
this concept, the then Union Finance Minister called a meeting of the State Finance
Ministers in May 1994 and a Committee of Stat Finance Ministers was constituted
on sales tax reform following this meeting. The Committee had to examine all
aspects of sales tax reform, including the introduction of VAT.
The Committee recommended several measures to rationalize the existing
sales tax with the ultimate aim of introducing VAT at the State level. The major
recommendations included simplification of the rate structure, minimization of the
exemptions and enhancement of transparency. To this end, the Committee
recommended.
(i) The adoption of four general floor rates (0, 4, 8, 12) and two special
floor rates (1 and 20) in place of the existing multiple rates being
levied in different States;
(ii) Keeping the exemptions to a minimum;
(iii) Preparing a list of exempt goods and fixing a target date beyond
which on State/Union Territory should exempt goods other than
those mentioned in the list, and;
(iv) Doing away with sales tax incentives for industrialization. No new
tax incentives should be given after 1 April, 1997, and the existing
ones should be allowed to lapse in due course.

The Committee also recommended several preparatory steps to be taken for

the implementation of a full-fledged State-level VAT. They included a
massive taxpayers education programmer, computerization of sales tax
administration, and preparation of model VAT legislation. For
implementing the above decisions, an Empowered Committee of State
Finance Ministers was set up.

7.1.3 White Paper on State Level VAT in India

The Empowered Committee of State Finance Ministers met regularly and
with the repetitive discussions and collective efforts brought out a White paper,
which provided a base for the preparation of various State VAT legislations. It has
been recognized that VAT is a State subject and therefore, the States will have
freedom for appropriate variations consistent with the basic design as agreed upon
at the Empowered Committee. Broadly, the White Paper consists of the following:
(a) Justification of VAT and Background
(b) Design of State-Level VAT.
(c) Steps taken by the States.
8. PRESENT POSITION
Many States have passed State-Level VAT Legislations which are modeled
on draft model VAT law, prescribed by the Central Government. They also
incorporate he various principles of State-Level VAT as contained in the white
Paper released by the Empowered Committee. However, such State Legislations
contain provisions to cater to the specific needs of the State finances.
8.1 Discontinuance of the Central sales tax
With the introduction of State-Level VAT system, it is proposed to phase
out the Central sales tax (CST). However, since the states will stand to lose large
revenue on account of its discontinuance a mechanism is being thought of for
compensating the States for such loss of revenue.

9. AUDIT PROVISIONS UNDER VAT

Like majority of the developing economies our country is also facing the
problem of lack of education and awareness about tax laws, more particularly
amongst the trading community. Further, the VAT system of taxation is new to
them. Since the trading community is not educated enough and equipped to
understand the implications of the VAT system of taxation immediately, there is
every possibility that they may not be in a position to arrange their business affairs
to fall in line with the requirements of the State-Level VAT, calculate and
discharge their exact tax liability under the VAT Law. On the other hand, the tax
administrator i.e. the authorities in the taxation department also find themselves
devoid of sufficient resources to educate the tax payers and inform them about the
procedural and accounting changes that are necessitated by the implementation of
VAT system.
Another reason for prescribing an audit under the VAT law by a chartered
Accountant, is that under the VAT system a major thrust is to be laid on the ‘self
assessment’ meaning thereby that the tax liability calculated and paid by the tax
payers through their periodical returns will be accepted by and large and the tax
payers will not be called to substantiate the tax liability shown by them in the
returns by producing books of account and other relevant material. The
assessments with books of account will be an exception. Therefore, there is a
strong need to see that the tax payers discharge their tax liability properly while
filing the returns. This can be ensured only where the particulars furnished by the
tax payers are verified by an independent auditor in minute details by going not
only through the books of account but also by analyzing and interpreting the
provisions of the State-Level VAT Laws and reporting, whether any under-
assessment was made by the dealer requiring additional payment or whether there
was any excess payment of tax warranting refund to the tax payer. In most of the
countries tax evasion is rampant under the existing tax systems. In Indian too,
evasion of excise and sales-tax is estimated to be very high. If no audit id
prescribed under VAT law, the chances of evasion of VAT tax will increase
causing revenue leakage for the Government. It is, therefore, essential that the
audit of the proposed VAT system is attempted on a regular basis. However, it is
not possible to conduct the audit of all the VAT dealers. Therefore, the criteria for
audit can be the amount of turnover or the class of dealer dealing in specified
commodities.

The concept of audit is popular even in foreign counties where the system
of VAT is in practice since long in the field of indirect taxation. In counties like
France and Korea the audit has proved to be an effective toll to check the evasion
of tax, which was mostly done by producing fake invoices etc.
Since VAT is a new concept, some of the States want to keep the
procedural formalities to the minimum. Hence, at the initial stage their law makers
refrain from keeping any audit provisions in their Act and rules. Perhaps, this may
be due to the initial stage of introduction VAT. But most of the States, keeping in
mind the importance of audit, have incorporated the audit provisions since
inception.

Some States like the State of Maharashtra and State of Kerala have
provided detailed particulars to be furnished by various dealers in respect of their
VAT assessment.
11. CONCLUSION
The ultimate system of an indirect tax in India will be a goods and service
tax. Under such a system there will be one central authority administering a
uniform goods and service tax. Input tax credit will be available as between goods
and services through out the country. However, such a development will require
constitutional amendment. Under such a uniform tax system, there will be no trade
barriers like octroi and entry tax. There will be a free flow of trade and commerce
through out the length and breadth of the country. India will then become a vast
common market.