VALUE ADDED TAX

Categories of Sale: Interstate sale (levied by Union Government by CST Act) Sale in course of import (No sales tax is payable but import duty is payable) Sale in course of export(No sales tax is payable but export duty is payable) Intra state (i.e within state) ( State VAT Act applicable)

Basic Concept of VAT: Basic concept of VAT is same for Cenvat applicable to Central Excise & Service Tax & State Vat. Generally any tax is related to selling price of product .In modern production technology, raw material passes through various stages & processes till it reaches the ultimate stage. Output for the first manufacturer becomes the input for the second manufacturer. This process continues till a final product emerges. This product then goes to distributor/wholesaler, who sells it to the retailer & then reaches the ultimate consumer. For example, steel ingots are made in a steel mill by A. These are rolled into plates by a rerolling unit B, while third manufacturer say C makes furniture from these plates. He sales it to D who is retailer. of tax on a product is 10% of selling price, transaction would go as follows. Details A B C D Purchase 110 165 220 Value Added 100 40 35 30 Sub-Total 100 150 200 250 Add: Tax @10% 10 15 20 25 Total 110 165 220 275 The value added by B is only Rs 40while he is paying tax on Rs 100 on which A has already paid the tax. He is also paying tax on Rs 10 which is actually tax paid by A. Similarly C is paying tax on material on which A & B have already paid the tax. Thus tax is paid again & again on the material which has already suffered tax. There is also a tax on tax. This is called as cascading effect. VAT to avoid cascading effect:

VAT was developed to avoid cascading effect of taxes. The basic principal is that at every stage ,tax should be paid only on value added at that stage & not on entire sale price.Value added is the difference between sale price & cost of material & other inputs on which tax has been paid. VAT removes these defects by tax credit system. Under this system, credit is given at each stage of tax paid at earlier stage. E.g B will get credit of tax paid by B & so on. The afore said example will be reworked as follows: Details A B C D Purchase 100 140 175 Value Added 100 40 35 30 Sub Total 100 140 175 205 Add Tax @10% 10 14 17.50 20.5 Total 110 154 192.50 225.50 B is purchasing goods from A. His purchase price is Rs 100 as he is entitled to Cenvat Credit of Rs 10 i.e tax paid on purchases. His invoice shows tax paid as Rs 14.He has got credit of Rs 10, effectively he is paying only Rs 4 as tax which is 10% of Rs 40 i.e 10% of Value added by him. Similarly C is paying tax of Rs 3.50(17.5014) & D is paying tax of Rs 3 (20.50-17.50)

Vat is Consumption based tax:

You will find that tax is collected by the Government only at final stage i.e consumption stage till then the credit is passed on to next buyer. Hence, Vat is termed as consumption based tax. Vat is based on the value addition to the goods & related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period. The essence of VAT is in providing set-off for the tax paid earlier & this is given effect through the concept of input tax credit/rebate. Rs Purchase Price 100 Tax Paid on Purchase (input tax) 10 Sale Price 180 Tax on sale price (i.e Output tax) 22.5 VAT payable 12.5

Example 2: Price without Gross VAT VAT Rs Rs 1000 125 6000 240 10000 1250 365 2125 1250 2750 2125 Net VAT Payable Rs 125 240

Raw Material Supplied by: P to X Ltd (12.5%) Q to X Ltd (4%) Manufactured Goods sold by X ltd to Y Ltd Less: VAT Credit available to X Ltd Goods Sold by Wholesaler Y Ltd to Z Ltd Less: VAT credit available to Y LTd Goods sold by retailer Z to Consumer Less: VAT credit available to Z

885

17000

875

22000

625

In the above case, VAT collected by Government is as follows: Who will pay the VAT to the Government Rs P 125 Q 240 X Ltd 885 Y Ltd 875 Z 625 Total VAT collected by the GOV 2750 Benefits of VAT Set-off will be given for input tax as well as tax paid on previous purchases. Other taxes such as turnover tax, surcharge, additional surcharge will be abolished. Overall tax burden will be rationalized. Prices will fall in general. There will be self-assessment by dealers. Transparency will increase. There will be higher revenue growth.

Merits of VAT: Eliminates multiple Tax: It eliminates cascading effect of sales tax system by setting off the tax paid earlier at every stage of sale. Simple: VAT helps in simplifying the indirect tax system because it is based simply on transaction & not on complicated definition like income or wealth. Lowering of tax burden: VAT reduces tax burden & helps reduce prices. Fairness: VAT is a move towards more efficiency, equal competition & fairness in the taxation system. Overall tax burden is rationalized.VAT helps common people, trade, industry & GOV. Tax evasion will be reduced: It induces the business to demand invoice from their suppliers to enable them to obtain credit for tax paid on their purchases against their total tax liability. Tax Transparency: Total burden of tax on a particular commodity is clearly seen from the transaction. Hence economic analysis of tax structure is convenient. Higher tax Revenue: There is higher revenue growth. Exports can be freed from domestic taxes ,which is permissible under WTO. Aids tax enforcement by providing audit trail through different stages of production & trade. Input tax credit for both inputs & capital goods is available.

Disadvantages of VAT:
Heavy compliance cost- detailed accounting & paper work required as is not as simple as a single point sales tax. Hindrance in interstate movement of goods-Each State wants to keep record of goods coming in & going out of state for which check post are required. This delays the movement & increases corruption. State where goods are produced do not get any tax revenue as all revenue goes to State where goods are consumed as Vat works on destination principal. For example major quantity of wheat produced in Punjab goes

outside the state .Similar situation exist in case of minerals in Jharkhand ,software in Karnataka .Of course the state get indirect benefits like growth of employment ,improved economy but no direct benefit of Vat/Sales Tax. Tax evasion through bogus invoices.

What is Input tax Credit:

Tax Credit: Manufacturer will be entitled to credit of tax paid on inputs used by him in manufacturer .A trader will be entitled to get credit of tax paid on goods which he has purchased for re-sale. Input Tax Credit: Credit will be available of tax paid on inputs purchased within the state Credit will not be available of certain goods purchased like petroleum products, liquor, petrol, diesel, motorspirit. No credit is available in case of Interstate purchase. No credit of CST paid: Credit of Central Sales Tax (CST) paid on inputs & capital goods purchased from other States will not be available. Tax rates: Rate 0% 1% 5%

Commodities Goods having social implication (e.g newspaper) Gold & Silver Ornament Goods of Basic necessities (including medicine & drugs) all industrial & agricultural inputs 12.5% Normal rate on all goods other than those mentioned elsewhere 20% Petroleum products

VAT rates of all states follow this pattern, but still there are many variations. Concession for Small Dealers: VAT tax will be payable only by those dealers whose turnover exceeds Rs Five lakhs per annum. They can register on optional basis. Composition Scheme for dealers with the turnover upto 50 lakhs: Vat requires heavy compliance cost due to detailed accounting & paper work involved .small dealers do not have sufficient knowledge & expertise to comply

with requirements relating to records & accounts. Hence for them, simple composition scheme has been provided. It is optional. Small dealers having gross turnover exceeding Rs 5 lakhs but less than Rs 50 lakhs have option of composition Scheme. They will have to pay small percentage of gross turnover. They will not be entitled to any input tax credit. Dealers whose all purchases & sales are within the State are alone eligible for simplified Scheme. Dealers who opt for composition schemet cannot charge vat in their invoice & cannot show Vat in their invoice. In Maharashtra, tax payable under composition scheme is 8%. Dealers not eligible for composition scheme: Dealers who make interstate purchases. Dealers who make interstate sales. Dealers who import the goods & then sale in India. Dealers who stock transfer goods outside the state. Dealers who export the goods. Dealers who want to show Vat in their Invoices. Disadvantages of Composite Scheme: The composition scheme is simple. Small dealers are not required to maintain record. This result in cost saving to them. However, Dealer under the composition scheme can not avail any input tax credit. He can not charge vat in his invoice. Hence, customer of such dealer can not avail the Cenvat Credit. Thus vat chain is lost & input credit is lost. Hence, the scheme is mainly useful to dealers who are making direct sale to consumer who can not avail any input credit. No input credit in certain cases: In following cases the dealer is not entitled to input credit: Inputs used in exempted final product. Final product not sold but given as free sample. Inputs lost/damaged stolen before use. If credit was availed, it will have to be reversed. Following purchases are not eligible for Vat Credit: Inter-state purchases i.e goods purchased from outside the State. Goods imported. Goods purchased from unregister dealer (as he cannot charge vat).

 Goods purchased from dealer who is paying Vat under composition Scheme. Purchase where final goods sold are exempt from Vat. Final product is given free i.e goods are not sold. Inputs stolen/lost/damaged before use /sale as there is no sale. Coverage of Set-off of Input Tax Credit: Input tax credit is generally given for the entire VAT paid within the state on the purchase of taxable goods meant for resale of taxable goods. No credit is available in respect of purchases given below: Goods purchased from unregistered dealers. Goods purchased from other states /countries Purchase of capital goods. Purchase of goods used in the manufacture of exempted goods.

Invoice based Credit: Tax credit will be given on the basis of document,which will be a Tax Invoice.Such invoice will be issued by a registered dealer,who is liable to pay tax.The invoice should be serially numbered & duly signed containing prescribed details.The tax payable should be shown separately in the Invoice. Contents of Invoice: Name & address of selling dealer. His TIN No. Serial No & date of Invoice. Name & Address of Buyer. Full description of goods with details like weight ,markings etc. Quantity Price Total value Vat Rate Total Vat Paid Declaration as required under the State Vat Act. Transport Details. Signature of authorized Person.

Carrying over of tax Credit: If tax Credit exceeds the tax payable on sales in a tax period, it shall be carried over to the next tax period. If there is any excess unadjusted input tax credit at the end of financial year. it shall be eligible for the refund.

Different modes of Computation of VAT: Addition Method Subtraction Method Tax Credit Method. Administrative procedures which are generally adopted by different states: Compulsory issue of tax invoice, cash memo or bill: The entire design of VAT with input tax credit is based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice. The tax invoice shall be signed & dated by the dealer. Registration, Small dealer: A new dealer is allowed 30 days time from the date of liability to get registered. Moreover all dealers under the old system of local sales tax have been automatically registered under the VAT Act. Cancellation of Registration: The registration can be cancelled in the following case: a) A discontinuance of business b) Disposal of business c) Transfer of a business to new location. Tax Identification NO: The TIN no will constitute of 11 digit. Return: Returns are required to be filed monthly/Quarterly. Following records should be maintained: 1) 2) 3) 4) Purchase Account Sales Record VAT Account Separate record of any exempted sale.