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VALUE ADDED TAX IN INDIA

VAT IS BEING INTRODUCED PRIMARILY IN
REPLACEMENT OF THE EXISTING SALES TAX
IN MOST OF THE STATES OF INDIA WITH
EFFECT FROM 1ST APRIL, 2005.
THE PROPOSED VAT STRUCTURE HAS BEEN
EVOLVED ON THE BASIS OF A CONSENSUS
AMONG THE STATES. THE BASIC FEATURES
OF VAT WILL THEREFORE BE SAME
THROUGHOUT THE COUNTRY.
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WHY VAT ?
VAT STRUCTURE IS SUPERIOR TO THE PRESENT SALES
TAX SYSTEM BECAUSE OF THE FOLLOWING
ADVANTAGES :
1. IT ELIMINATES CASCADING EFFECT OF EXISTING SALES TAX
SYSTEM BY SETTING OFF THE TAX PAID EARLIER AT EVERY
STAGE OF SALE.
2. THE TAX STRUCTURE BECOMES SIMPLER, MORE
TRANSPARENT AND IT IMPROVES COMPLIANCE.
3. IN GENERAL, VAT REDUCES TAX BURDEN AND HELPS
REDUCE PRICES.
4. VAT HELPS EFFICIENCY, COMPETITION & EXPORTS.
5. VAT, THUS, HELPS COMMON PEOPLE, TRADE, INDUSTRY AND
ALSO THE GOVERNMENT.
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INPUT TAX CREDIT
ESSENCE OF VAT LIES IN GIVING SET-OFF FOR
THE TAX PAID EARLIER, AND IS GIVEN EFFECT
THROUGH INPUT TAX CREDIT/ REBATE.
THIS INPUT TAX CREDIT/ REBATE IN RELATION TO
ANY PERIOD MEANS THE SETTING OFF THE
AMOUNT OF INPUT TAX BY A REGISTERED
DEALER, AGAINST THE AMOUNT OF HIS OUTPUT
TAX.

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CARRYING OVER OF TAX CREDIT:

IF THE TAX CREDIT EXCEEDS THE TAX

COLLECTED IN A MONTH ON SALE WITHIN
THE STATE, THE EXCESS CREDIT WILL BE
CARRIED OVER TO THE NEXT MONTH. TAX
CREDIT WILL BE CARRIED UP TO THE END OF
NEXT FINANCIAL YEAR. EXCESS UNADJUSTED
VAT AT THE END OF TWO CONSECUTIVE
YEARS, IF ANY, WILL BE ELIGIBLE FOR
REFUND.
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TAX CREDIT ON CAPITAL GOODS:

INPUT TAX CREDIT ON CAPITAL GOODS WILL BE

AVAILABLE FOR TRADERS AND MANUFACTURERS.

TAX PAID ON CAPITAL GOODS WILL BE ELIGIBLE

FOR TAX CREDIT. THE SAME WILL BE ADJUSTED
OVER A MAX. PERIOD OF 36 EQUAL MONTHLY
INSTALMENTS.

TAX CREDIT IN THE SAME MONTH FOR PURCHASE OF

CAPITAL GOODS UPTO VALUE OF RS. 1 CRORE.

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TREATMENT OF EXPORTS:
FOR ALL EXPORTS MADE OUT OF THE COUNTRY, TAX PAID
WITHIN THE STATE WILL BE REFUNDED IN FULL. THERE WILL
BE PROVISION FOR APPLICATION AFTER THE END OF EACH
QUARTER AND REFUND WILL BE MADE WITHIN THREE
MONTHS. IN CASE OF DELAY, INTEREST WILL BE PAID FOR THE
DELAYED PERIOD. .
INPUT TAX CREDIT, OF COURSE, MAY ALSO BE ADJUSTED
AGAINST LOCAL SALES.

STOCK TRANSFER OUT OF THE STATE:

FOR STOCK TRANSFER OF THE OUTPUT, INPUT TAX PAID IN
EXCESS OF 4% WILL BE ELIGIBLE FOR TAX CREDIT.
SINCE INTER-STATE SALE CARRIES CST @ 4% AND THIS IS NOT
VATABLE IN THE IMPORTING STATE, CORRESPONDING TAX
INCIDENCE HAS TO BE KEPT FOR INTER-STATE STOCK
TRANSFERS.
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INPUTS PROCURED FROM OTHER STATES :

TAX PAID ON INPUTS PROCURED FROM OTHER

STATES THROUGH STOCK TRANSFER OR INTER-
STATE SALE WILL NOT BE ELIGIBLE FOR CREDIT.

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OPENING STOCKS ON THE APPOINTED DAY

 ALL TAX-PAID GOODS PURCHASED ON OR AFTER 1-4-04 &

STILL IN STOCK ON THE APPOINTED DAY WILL BE
ELIGIBLE TO RECEIVE INPUT TAX CREDIT, SUBJECT TO
SUBMISSION OF REQUISITE DETAILS.

 RESELLERS HOLDING TAX-PAID GOODS ON THE

APPOINTED DAY WILL ALSO BE ELIGIBLE.

 THE CLAIM OF INPUT TAX CREDIT SHOULD BE SUPPORTED

WITH THE PRODUCTION OF ORIGINAL TAX INVOICE.

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OPENING STOCKS -(Contd.)

 INPUT TAX CREDIT TO BE AVAILABLE OVER A PERIOD OF 6

MONTHS AFTER AN INTERVAL OF 3 MONTHS, TO BE USED
FOR VERIFICATION.

 THE DEALERS CLAIMING INPUT TAX CREDIT SHOULD BE

CAREFUL IN PRESERVING CASH MEMOS/ TAX INVOICES.

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REGISTRATION :

REGISTRATION WILL BE COMPULSORY FOR DEALERS HAVING

TURNOVER ABOVE A THRESHHOLD TO BE DECIDED BY EACH STATE.

THERE WILL BE PROVISION FOR VOLUNTARY REGISTRATION. THE

MINIMUM GROSS TURNOVER FOR VOLUNTARY REGISTRATION
WILL BE NOTIFIED BY THE GOVERNMENT.

EXISTING DEALERS WILL BE AUTOMATICALLY REGISTERED UNDER

THE VAT ACT.

A DEALER SHALL BE ALLOWED 30 DAYS TIME FROM THE DATE OF

LIABILITY TO GET HIM-SELF REGISTERED.

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SMALL DEALERS
EXEMPTION FROM VAT

• SMALL DEALERS WITH GROSS TURNOVER NOT

EXCEEDING RS. 5 LAKH PER ANUM WILL NOT BE
LIABLE TO VAT.

• STATES WILL BE AT LIBERTY TO FIX THRESHOLD

LIMIT WITHIN RS. 5 LAKH.

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SMALL DEALERS (CONTD.)
COMPOSITION SCHEME
• SMALL DEALERS WITH ANNUAL GROSS TURNOVER NOT
EXCEEDING Rs. 40 LAKH, WHO ARE OTHERWISE LIABLE TO VAT,
SHALL, HOWEVER, HAVE OPTION FOR A COMPOSITION SCHEME
WHERE HE PAYS TAX AT A SMALL PERCENTAGE OF GROSS
TURNOVER.

• STATES AT LIBERTY TO FIX UPPER CEILING WITHIN RS. 40 LAKH

FOR COMPOSITION SCHEME.

• SUCH DEALERS WILL NOT BE ELIGIBLE TO ISSUE TAX INVOICE.

• CERTAIN CATEGORY OF DEALERS, SUCH AS MANUFACTURERS,

IMPORTERS WILL NOT BE ELIGIBLE FOR COMPOSITION SCHEME.
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PROPOSED TAXPAYER’S IDENTIFICATION NUMBER

1. THE TAXPAYER’S IDENTIFICATION NUMBER

(TIN) WILL CONSIST OF 11 DIGIT NUMERALS
THROUGHOUT INDIA, AS PER CONSENSUS.

2. FIRST TWO CHARACTERS WILL REPRESENT THE

STATE CODE AS USED BY THE MINISTRY OF
HOME AFFAIRS, GOVERNMENT OF INDIA
(CENSUS CODE).

3. THE SET-UP OF THE NEXT NINE CHARACTERS,

HOWEVER, MAY BE DIFFERENT. THIS WILL
INCLUDE 2 CHECK DIGITS
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STRUCTURE OF PROPOSED 11 DIGIT REGISTRATION NUMBER

1 9 4 8 2 0 1 7 0 6 4

Number Proper

Check Digits
State Code

Charge Code
Act
Identification
Code

VAT=0 SST=1 CST=2

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RETURN :

• SIMPLIFIED FORM OF RETURNS WILL BE NOTIFIED

• RETURNS ARE TO BE FILED MONTHLY/ QUARTERLY AS

IN THE EXISTING SYSTEM

• RETURNS SHALL BE ACCOMPANIED WITH PAYMENT

CHALLANS.

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PROCEDURE OF ASSESSMENT OF VAT LIABILITY :

• SIMPLIFICATION IN VAT IS THAT VAT LIABILITY WILL BE

SELF-ASSESSED BY THE DEALER IN TERMS OF SUBMISSION
OF RETURNS UPON SETTING OFF THE TAX CREDIT HIMSELF.
RETURN FORMS AS WELL AS OTHER PROCEDURES WIL BE
SIMPLE AND SIMILAR IN ALL STATES.
• THERE WILL NO LONGER BE COMPULSORY ASSESSMENT AT
THE END OF EACH YEAR AS IS EXISTING NOW.
• DEEMED ASSESSMENT, IF NO NOTICE IS ISSUED PROPOSING
ASSESSMENT.
• ASSESSMENTS ARE TO COMPLETED WITHIN TWO YEARS
FROM THE END OF JUNE OF THE YEAR.
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AUDIT :

• CORRECTNESS OF SELF ASSESSMENT WILL BE

CHECKED THROUGH A SYSTEM OF DEPARTMENTAL
AUDIT.
• A CERTAIN PERCENTAGE OF THE DEALERS WILL BE
TAKEN UP FOR AUDIT EVERY YEAR ON A SCIENTIFIC
BASIS.

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DECLARATION FORM:

THERE WILL BE NO NEED FOR ANY PROVISION FOR

CONCESSIONAL SALE UNDER THE VAT ACT SINCE THE
PROVISION FOR SET-OFF MAKES THE INPUT ZERO-
RATED. NO DECLARATION FORM WILL BE NEEDED.
HENCE, DECLARATION FORMS WILL BECOME
REDUNDANT, EXCEPT IN CASE OF INTER-STATE SALE
OR SALE IN THE COURSE OF EXPORT.

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INCENTIVES

• THE EXISTING INCENTIVE SCHEME WILL BE CONTINUED

AFTER ENSURING THAT THE VAT CHAIN IS NOT AFFECTED.
• IN CASE OF DEFERMENT, THE CHAIN CONTINUES IN THE
SAME MANNER. IN CASE OF EXEMPTION / REMISSIONS,
EITHER DEDUCTION METHOD WILL BE USED OR TAX WILL BE
SHOWN IN THE INVOICE AND THEN REMITTED. THUS, VAT
CHAIN WILL CONTINUE.

• THE SCHEME OF INCENTIVE WILL BE NOTIFIED SEPARATELY.

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OTHER EXISTING TAXES SUCH AS TURNOVER
TAX, SURCHARGE, ADDITIONAL SURCHARGE
ETC. WILL BE ABOLISHED.

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COVERAGE
GOODS OUTSIDE VAT

LIQUOR, PETROL, DIESEL, AVIATION TURBINE FUEL AND

OTHER MOTOR SPIRIT WILL REMAIN OUTSIDE VAT. THOSE
WILL CONTINUE TO BE TAXED UNDER THE SALES TAX ACT.

OTHER GOODS

ALL OTHER GOODS INCLUDING DECLARED GOODS WILL BE

SUBJECTED TO VAT AND WILL GET THE BENEFIT OF INPUT
TAX CREDIT.

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RATES OF VAT:
* A FEW ITEMS WHICH ARE NOT TAXED AT PRESENT, WILL
ALSO REMAIN EXEMPTED FROM VAT

* THERE WILL BE ONLY TWO BASIC RATES OF VAT.

* SOME OF THE ESSENTIAL COMMODITIES, DECLARED

GOODS AND BASIC INPUTS WILL BE TAXED @ 4%

* FOR ALL OTHER GOODS THERE WILL BE A GENERAL

VAT RATE OF 12.5% AS PER CONSENSUS AMONG THE
STATES.
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THERE WILL BE TWO EXCEPTIONS:

a) GOLD & SILVER-ORNAMENTS AND ARTICLES THEREOF,

PRECIOUS AND SEMI-PRECIOUS STONES WILL HAVE A
VAT RATE OF 1% .

b) TEA SOLD UNDER THE AUSPICES OF ANY TEA AUCTION

CENTRE IN WEST BENGAL DULY AUTHORISED BY THE
INDIAN TEA BOARD, WILL BE TAX @1%.

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PROPOSED EXEMPTED GOODS

1. Natural and Unprocessed products - which are in un-

organised sector .

2. Items which are legally barred from taxation on sale .

3. Items which have social implications .

4. AED goods, namely Sugar, Textile and Tobacco.

(until further notification).

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GOODS PROPOSED TO BE TAXED @ 4%

1. Goods of basic necessities.

2. Industrial & Agricultural inputs.

3. Declared goods.

4. Capital Goods.

5. Drug & Medicine.

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CENTRAL SALES TAX

CST
CST TO
TO CONTINUE
CONTINUE FOR
FOR THE
THE YEAR
YEAR 2005-06.
2005-06.

POSITION
POSITION TO
TO BE
BE REVIEWED
REVIEWED BY
BY EMPOWERED
EMPOWERED COMMITTEE
COMMITTEE IN
IN ABOUT
ABOUT
OCTOBER
OCTOBER 2005
2005 FOR
FOR ADVISING
ADVISING MINISTRY
MINISTRY OF
OF FINANCE.
FINANCE.

SIMILARLY
SIMILARLY SYSTEM
SYSTEM OF
OF AED
AED ONON SUGAR,
SUGAR, TEXTILE
TEXTILE AND
AND TOBACCO
TOBACCO WOULD
WOULD
CONTINUE
CONTINUE FOR
FOR 2005-06.
2005-06.

AED
AED ON
ON THESE
THESE ITEMS
ITEMS LIKELY
LIKELY TO
TO BE
BE REPLACED
REPLACED BY
BY VAT
VAT W.E.F.
W.E.F. 1.4.2006
1.4.2006

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LEGISLATION

26
26 STATES
STATES HAVE
HAVE ALREADY
ALREADY DRAFTED
DRAFTED THEIR
THEIR VAT
VAT LEGISLATION.
LEGISLATION.

OUT
OUT OF
OF THESE
THESE 99 STATES
STATES ARE
ARE LIKELY
LIKELY TO
TO RECEIVE
RECEIVE PRESIDENTIAL
PRESIDENTIAL
ASSENT
ASSENT WITHIN
WITHIN THE
THE NEXT
NEXT ONE
ONE WEEK.
WEEK.

7
7 STATES
STATES HAVE
HAVE INDICATED
INDICATED THAT
THAT THEY
THEY WOULD
WOULD PROMULGATE
PROMULGATE VAT
VAT
LEGISLATION
LEGISLATION THROUGH
THROUGH ORDINANCE
ORDINANCE ROUTE.
ROUTE.

HARYANA
HARYANA HAS
HAS ALREADY
ALREADY INTRODUCED
INTRODUCED VAT.
VAT.

AS
AS MANY
MANY AS
AS 10
10 ASSEMBLIES
ASSEMBLIES ARE
ARE SCHEDULED
SCHEDULED TO
TO MEET
MEET THIS
THIS MONTH
MONTH
AND
AND TAKE
TAKE UP
UP VAT
VAT LEGISLATION.
LEGISLATION.
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LEGISLATION (Contd.)

ALMOST
ALMOST ALL
ALL 26
26 STATES
STATES HAVE
HAVE REPORTED
REPORTED THAT
THAT THEIR
THEIR DRAFT
DRAFT RULES
RULES
ARE
ARE READY
READY AND
AND CAN
CAN BE
BE NOTIFIED
NOTIFIED AFTER
AFTER THE
THE ACT
ACT HAS
HAS RECEIVED
RECEIVED
PRESIDENTIAL
PRESIDENTIAL ASSENT.
ASSENT.

THE
THE TARGET
TARGET FOR
FOR NOTIFICATION
NOTIFICATION OF
OF RULES,
RULES, SCHEDULES
SCHEDULES AND
AND FORMS
FORMS IS
IS
31
31SSTT OF
OF DECEMBER,
DECEMBER, 2004.
2004.

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TINXSYS

IN
IN ORDER
ORDER TO
TO TRACK
TRACK INTER-STATE
INTER-STATE TRANSACTIONS
TRANSACTIONS A A COMPUTERISED
COMPUTERISED
TAX
TAX INFORMATION
INFORMATION EXCHANGE
EXCHANGE SYSTEM
SYSTEM IS
IS BEING
BEING INSTALLED.
INSTALLED.

THE
THE PILOT
PILOT PROJECT
PROJECT LIKELY
LIKELY TO
TO BE
BE READY
READY BY
BY 11SSTT APRIL,
APRIL, 2005
2005 WILL
WILL
COVER
COVER 10
10 STATES.
STATES.

IT
IT IS
IS EXPECTED
EXPECTED THAT
THAT THE
THE ENTIRE
ENTIRE COUNTRY
COUNTRY WOULD
WOULD BE
BE COVERED
COVERED BY
BY
THE
THE END
END OF
OF 2005.
2005.

ALL
ALL STATE
STATE GOVERNMENTS
GOVERNMENTS HAVE
HAVE BEENBEEN ADVISED
ADVISED TO
TO COMPUTERISE
COMPUTERISE
THEIR
THEIR DEPARTMENTS
DEPARTMENTS FULLY
FULLY BY
BY 30
30TTHH JUNE
JUNE 2005.
2005.

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PUBLICITY

A
A NATION
NATION WIDE
WIDE PUBLICITY
PUBLICITY CAMPAIGN
CAMPAIGN ABOUT
ABOUT VAT
VAT WOULD
WOULD BE
BE
LAUNCHED
LAUNCHED IN
IN THE
THE PRINT
PRINT AND
AND ELECTRONIC
ELECTRONIC MEDIA
MEDIA AFTER
AFTER DIWALI.
DIWALI.

THE
THE STATE
STATE GOVERNMENTS
GOVERNMENTS HAVE
HAVE AGREED
AGREED TO
TO LAUNCH
LAUNCH THIS
THIS
PROGRAMME
PROGRAMME IN
IN THE
THE LOCAL
LOCAL LANGUAGES.
LANGUAGES.

THERE
THERE WILL
WILL BE
BE REGIONAL
REGIONAL MEETINGS
MEETINGS FOR
FOR EXPLAINING
EXPLAINING THE
THE CONCEPT
CONCEPT
OF
OF VAT
VAT TO
TO TRADE
TRADE AND
AND INDUSTRY.
INDUSTRY.

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CENTRAL ASSISTANCE
THE
THE CENTRAL
CENTRAL GOVERNMENT
GOVERNMENT IS
IS FULLY
FULLY COMMITED
COMMITED TO
TO THE
THE INTRODUCTION
INTRODUCTION OF
OF
VAT
VAT AND
AND ASSISTING
ASSISTING THE
THE STATE
STATE GOVERNMENTS.
GOVERNMENTS.

CENTRE
CENTRE WOULD
WOULD MEET
MEET 100%
100% OF
OF THE
THE LOSS
LOSS TO
TO THE
THE STATES
STATES ON
ON ACCOUNT
ACCOUNT OF
OF
INTRODUCTION
INTRODUCTION OF
OF VAT
VAT DURING
DURING 2005-06.
2005-06.

THIS
THIS PERCENTAGE
PERCENTAGE WOULD
WOULD BE
BE 75%
75% FOR
FOR 2006-07
2006-07 AND
AND 50%
50% DURING
DURING 2007-08.
2007-08.

GOI
GOI HAS
HAS AGREED
AGREED TO
TO MEET
MEET A
A SUBSTANTIAL
SUBSTANTIAL PERCENTAGE
PERCENTAGE OF
OF THE
THE COST
COST OF
OF
INSTALLING
INSTALLING TINXSYS.
TINXSYS.

GOI
GOI HAS
HAS ALSO
ALSO MADE
MADE PROVISIONS
PROVISIONS FOR
FOR THE
THE NATION
NATION WIDE
WIDE PUBLICITY
PUBLICITY
CAMPAIGN.
CAMPAIGN.

GOI
GOI HAS
HAS AGREED
AGREED TO
TO ALLOT
ALLOT A
A PIECE
PIECE OF
OF LAND
LAND TO
TO EC
EC FOR
FOR ITS
ITS OFFICE
OFFICE IN
IN DELHI.
DELHI.
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EC

EMPOWERED
EMPOWERED COMMITTEE
COMMITTEE OFOF STATE
STATE FINANCE
FINANCE MINISTERS
MINISTERS TO
TO
CONTINUE
CONTINUE IN
IN ITS
ITS PRESENT
PRESENT FORM.
FORM.

IT
IT WOULD
WOULD ALSO
ALSO CONTINUE
CONTINUE TO
TO AID,
AID, ADVISE
ADVISE AND
AND ASSIT
ASSIT THE
THE CENTRAL
CENTRAL
AND
AND STATE
STATE GOVERNMENTS
GOVERNMENTS IN
IN THE
THE SMOOTH
SMOOTH IMPLEMENTATION
IMPLEMENTATION OFOF
VAT.
VAT.

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THANK YOU

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