GST IN INDIA

1 July 2017
The Goods and Services Tax was launched at
midnight on 1 July 2017 by the President of
India, Pranab Mukherjee, and Prime Minister
of India, Narendra Modi. The launch was
marked by a historic midnight (30 June 1
July) session of both the houses of parliament
convened at the Central Hall of the
Parliament.
 GST
NEW DELHI: As much as Rs 42,000 crore has already come in as taxes so far in the
first monthly filing under the new Goods and Services Tax (GST) regime and the
revenues are expected to swell further as the filing cycle closes this later this week.
A senior official said that about Rs 15,000 crore has come in as Integrated-GST,
which is levied on inter-state movement of goods, and another Rs 5,000 crore by
way of cess on demerit goods like cars and tobacco.
The remaining Rs 22,000 crore has come in as Central-GST and State-GST, which
would be split equally between the Union and state government.
"Tax deposited till this morning was Rs 42,000 crore," the official said.
So far, 10 lakh tax payers have filed returns and another 20 lakh have logged in and
saved return forms.
"We are seeing good compliance and our estimation is that 90-95 per cent of the
assesses will file returns and pay taxes," he said.
.
 Under the GST regime, which was implemented from July 1, businesses are expected to file the
monthly tax return.
Tax for the first month is to be filed by an extended deadline of August 25. The deadline was
extended as the tax return filing website snapped just a day before the due date ended on August
20.
GST unifies more than a dozen central and state levies including excise duty, service tax and VAT,
and the revenue generated is to be split equally between the Centre and states.
In July last year, Rs 31,782 crore of excise duty was collected and Rs 19,600 crore of service tax.
Estimate for the combined sales tax or VAT collection by states was available.
While 72 lakh assessees of the old indirect tax regime have migrated to the GST Network portal,
nearly 50 lakh have completed the migration process.
Besides, of the 15 lakh fresh registrations that have happened, as many as 10 lakh are expected to
file returns for July.
A total of 60 lakh businesses are expected to file returns and pay taxes for July, the official added
 TAX
Tax is a financial charge or other levy upon a taxpayer (an individual or
legal entity) by a state or the functional equivalent of a state such that
failure to pay is punishable by law.

The term direct tax generally means a tax paid directly to the
government by the persons on whom it is imposed.

An indirect tax (such as sales tax, a specific tax [a tax per unit], value
added tax (VAT), or goods and services tax (GST)) is a tax collected by
an intermediary (such as a retail store) from the person who bears the
ultimate economic burden of the tax (such as the customer).
 Types of Taxes
In India Tax is regulated and administered by
the Ministry of Finance under the
Government of India. Taxation is the
government's main source of revenue and
several types of taxes are applied to different
categories of the population.
The following is a brief description of some of
the taxes that are levied in India by the
government:
 Income Tax: The Income Tax Act of 1961 stipulates that
any person who qualifies as an assessee and whose
gross income is more than the exemption limit is
required to pay Income Tax in accordance with the
rates indicated by the Finance Act.
Corporate Tax is the tax charged on the profits earned
by associations and companies by several jurisdictions.
The rate of Corporate Tax in India depends on whether
the profits have been passed on to the shareholders or
not.
Value Added Tax: This is the tax that a
manufacturer needs to pay while purchasing
raw materials and a trader needs to pay while
purchasing goods. VAT is eventually expected to
replace Sales Tax. All goods and services
provided by business individuals and companies
come under the ambit of VAT.
 Capital Gains Tax: A Capital Gain can be
defined as an, any income generated by selling
a capital investment (business stocks,
paintings, houses, family business, farmhouse,
etc.). The 'gain' here is the difference between
the price originally paid for the investment
and money received upon selling it, and is
taxable.
 Service Tax As per the Finance Act of 1994, all service providers in
India, except those in the state of Jammu and Kashmir, are required
to pay a Service Tax in India.
Fringe Benefit Tax: As per Section 115WB of the Finance Bill,
expenses incurred for employees, by an employer
(individual/company/local authority/trader) for purposes of
entertainment, gifts, telephone, clubbing, festivals etc., will be treated
as Fringe Benefits and will be taxed.
Sales Tax: a tax based on the cost of the item purchased and
collected directly from the buyer
Tax Planning is an application to reduce tax liability through the
finest use of all accessible allowances, exclusions, deductions,
exemptions, etc, to trim down income and/or capital profits.
 Tax evasion

It is the general term for efforts not to pay

taxes by illegal means
o An illegal practice where a person,
organization or corporation intentionally
avoids paying his/her/its true tax liability
 NEED FOR TAX PLANNING

1.It enables the assessee to make proper expense

planning, capital budget planning, sales promotion
planning.
2. It provides option to the taxpayer to avail of
incentives in the nature of exemption, deduction,
concessions, rebates and reliefs.
3. It aims at devising or adopting an arrangement so
as to bring about the least incidence of tax.
4. It is more reliable then tax evasion & tax
avoidance techniques.
5. High taxation leaves an assesse with lesser
money.
6. Every organization should aim at not
maximum profit but maximum after tax profits
which are possible only by proper tax planning.
 Corporate tax
A corporate tax, also called corporation tax or
company tax, is a direct tax imposed by a
jurisdiction on the income or capital
of corporations or analogous legal entities.
Corporation tax is a tax imposed on the net
income of the company.
Description: Companies, both private and public
which are registered in India under the
Companies Act 1956, are liable to pay corporate
tax.
 Corporate Tax Planning
The term "corporate tax planning" encompasses the strategic
structuring of business operations in order to minimize tax
liabilities.
Corporate tax planning activities generally seek to avoid legally
triggering tax costs rather than illegally evading an existing
obligation to pay taxes.
Tax planning represents a forward-looking activity, as opposed to
tax compliance or reporting, which reflects back on events that
have already taken place.
Corporations typically engage certified public accountants or tax
attorneys for technical advice in this complicated area.
Corporate tax planners design a blueprint for businesses to
minimize tax liabilities.
Objectives of Corporate Tax Planning
1. Reduction of Tax liability:
By proper tax planning, a tax payer may avail of
deduction and exemptions admissible to him
and thus tax burden could have been reduced to
nil.
 2.Health Growth of Economy:
A savings by legally sanctioned devices is the
prime factor for the healthy growth of the
economy of a nation and its people. An income
saved and wealth accumulated in violation of
law is the burdens on the economy where the
nations awaken in the atmosphere of peace and
prosperity.
 3.Productive Investment:
The tax laws offer large avenues for the
productive investment of the earnings by
granting absolute or substantial relief from
taxation
 4.Minimization of litigation
There is the greatest desire in the hearts of the
taxpayers to pay the taxes in the minimum and
sometimes overzealous tax administrators are
out to extract the maximum. This results in
unscrupulous litigation between the taxpayers &
tax collectors.
 5.Economic Stability
Avenues on productive investments are largely
availed by the taxpayers. The tax planning
thereby creates economics of the nation and
its people by even distribution of economic
resources
 Central Sales Tax, 1956
Constitutional Background

INDIA IS UNION OF STATES - Our Constitution generally follows

British pattern, though concepts of federal structure are borrowed
from American and other Constitutions.

India is a Union of States. The structure of Government is federal

(centralized) in nature. Government of India (Central Government) has
certain powers in respect of whole country.

India is divided into various States and Union Territories and each
State and Union Territory has certain powers in respect of that
particular State.
 Taxation under Constitution
In the basic scheme of taxation in India, it is
envisaged that
(a) Central Government will get tax revenue from
Income Tax (except on Agricultural Income),
Excise (except on alcoholic drinks) and Customs
(b) State Government will get tax revenue from
sales tax, excise on liquor and tax on Agricultural
Income
(c) Municipalities will get tax revenue from octroi
and house property tax.
 Excise Duty is an indirect tax levied and collected
on the goods manufactured in India.
Customs duty is a kind of indirect tax which is
realized on goods of international trade. In
economic sense, it is also a kind of consumption
tax. Duties levied by the government in relation to
imported items are referred to as import duty.
In the same vein, duties realized on export
consignments is called export duty
 Octroi (O. Fr. Octroyer, to grant, authorize) is a
local tax collected on various articles brought
into a district for consumption.
The Central sales tax Act 1956 was enacted by
the Parliament and received the assent of the
president on 21.12.1956.
 Objectives of CST
To formulate principles regarding when a sale or
purchase of goods takes place:
In the course of inter state trade
In the course of import/export trade
It aims to find out determination of taxable
turnover
It aims to find out Registration of dealers
It implies how and when central sales tax is
imposed
 Constitutes Of Sales Tax Act in India
According to S2 (g), a sale refers to any transfer of
property in goods by one person to another for cash or,
deferred payment or, for any other valuable
consideration. It also includes the following:
1. A sale or purchase of goods is said to take place when
the transfer of property in the existing goods or future
goods takes place for consideration of money.
2. The goods have been divided into different categories
and different rates of sales tax are charged for different
categories of goods.
3.In most of the cases related to the sales tax,
the tax on the sale or purchase of goods is at
single point.
4. Under the provisions of some state laws the
assesses are divided into several categories such
as manufacturer, dealer, selling agent etc. and
such as assess is required to obtain a
registration certificate to that effect
 What are goods?
Goods, for the purposes of the Act, include
the following:
Materials.
Articles.
Commodities.
 All kinds of movable property. (Movable
property is property, which is capable of being
lifted, carried, drawn, turned or conveyed or
in any way made to change place or position.
 Sales Tax In India
Sales tax is levied on the sale of a commodity
which is produced or imported and sold for the
first time. If the product is sold subsequently
without being processed further, it is exempt
from sales tax.
Sales tax can be levied either by the Central or
State Government, Central Sales tax department.
Also, 4 per cent tax is generally levied on all inter-
State sales. State sales taxes that apply on sales
made within a State have rates that range from 4
to 15 per cent.
 Sales tax is also charged on works contracts in
most States and the value of contracts subject
to tax and the tax rate vary from State to
State.
However, exports and services are exempt
from sales tax.
Sales tax is levied on the seller who recovers
it from the customer at the time of sale.
 Sales Tax in India is that form of tax which is imposed
by the government on sale/purchase of a particular
commodity within the country.
It is imposed under Central Government (Central Sales
Tax) and the State Government (Sales Tax) Legislation.
Normally, each state has its own sales tax act and levies
the tax at various rates.
Apart from sales tax, certain states also impose extra
charges such as works contracts tax, turnover tax &
purchaser tax. Thus, sales tax plays a major role in
acting as a major generator of revenue for the various
State Governments.
 The Central Sales Tax (CST) Act that comes under
the direction of Central Government takes into
consideration all the interstate sales of
commodities.
Hence, we see that sales tax is to be paid by every
dealer when he sells any commodity, during
inter-state trade or commerce, irrespective of the
fact that there may be no liability to pay tax on
such a sale of goods under the tax laws of the
appropriate state.
 Municipal/Local Taxes
Octroi/entry tax: Certain municipal
jurisdictions levy an Octroi/entry tax on the
entry of goods

Other State Taxes

Stamp
 Other State Taxes

Stamp duty on the transfer of assets

Property/building tax that is levied by local
bodies
Agriculture income tax levied by the State
Governments on the income from plantations
Luxury tax that is levied by certain State
Government on specified goods
 Who Pays Sales Tax In India?
Sales Tax i.e. the Central Sales Tax (CST) is an
indirect tax as it is recovered from the
buyers/consumers as a part of the consideration
for the sale of goods.
However, for the purpose of CST, the actual
payment of the Sales Tax is made by every dealer
on the goods sold by him in the course of inter-
state trade or commerce.
This tax is payable even though there may be no
liability to pay the tax on the sale of goods
according to the tax laws of that particular state.
Person Liable to Pay Central Sales Tax
Section 8(1) of the Central Sales Tax states
that every dealer who is in the course of inter-
state trade or commerce will be liable to pay
tax on sale of goods under this Act
 Central Sales Tax Act In Brief

It is a tax on sale
Though it is a Central Tax But it is collected and retained by the
State from where movement of goods commences
Sale of goods shall be deemed to take place in the course of
inter-State trade or commerce, if
Occasions the movement of goods; or
Transfer of documents of title during movement of goods
A sale within the State, which is not an inter-State sale or export
or import, is a intra-State sale
Tax generally depends upon location of goods That is, state
where invoice is raised is immaterial
WHAT ARE THE CONDITIONS FOR CST
ACT TO BECOME APPLICABLE.

1.The sale should take place in the course of

import into or export from India.
2 There should be a Dealer and such dealer
must be registered under the CST Act.
3. He should made a sale to any buyer (
registered dealer or unregistered dealer)
4. He should carry on any business.
5. He should made a sale of any goods (
declared or undeclared)
6. The sale should be made in the course of
interstate trade or commerce ( i.e. the sale
should not be a sale inside a state
 Appropriate State
Sec. 2 : Defines (a) appropriate State means -
(i) in relation to a dealer who has one or more
places of business situate in the same State,
that State;
(ii) in relation to a dealer who has 3 places of
business situate in different States, every such
State with respect to the place or places of
business situate within its territory;
 Dealer
Section 2(b) of the CST Act defines the word
dealer. Dealer means any person who carries
on the business of buying, selling, supplying or
distribution of goods. The business could be
carried on either regularly or otherwise, either
directly or indirectly, either for cash or for
deferred payment or for valuable
consideration.
 Any person who is a dealer would be
liable to pay Sales Tax. The term dealer
includes:
local authority, a body corporate, a company, any
cooperative society, club, firm, Hindu Undivided
Family (HUF) or other Association Of Persons
(AOP) which carries on such business;
a factor, broker, commission agent, del credere
agent, or any other mercantile agent, by
whatever name called who carries on the
business of buying, selling, supplying or
distribution of goods belonging to any principal
whether disclosed or not; and
 an auctioneer who carries on the business of
selling or auctioning goods belonging to any
principal, whether disclosed or not and
whether the offer of the intending purchaser
is accepted by him or by the principal or a
nominee of principal.
 Declared Goods
DEFINITION: Section 2(c) of CST Act defines Declared Goods as those
declared u/s 14 of the CST Act as Goods of special importance in inter
state trade or commerce.
Section 14 gives the list of goods of special importance called
Declared Goods important among them are numerated as below:
(i) cereals i.e -paddy, rice, wheat,Jowar,bajra( ), maize
, barley etc.
(ia) coal, including coke in all its forms, but excluding charcoal:
(ii) cotton, that is to say, all kinds of cotton (indigenous or imported) in
its unmanufactured state, whether ginned or unginned, baled, pressed
or otherwise, but not including cotton waste;
(Coke is a fuel with few impurities and a high carbon content, usually
made from coal.)
 Objectives of CST ACT
The objective of the Act, is:
1.To formulate principles for determining:
(i) When a sale or purchase takes place in the
course of inter-state trade or commerce
(ii) When a sale or purchase takes place outside
a state.
(iii) When a sale or purchase takes place in the
course of imports into or export from India.
2. To provide for levy, collection and distribution
of taxes on sales of goods in the course of inter-
state trade or commerce.
3. To declare certain goods to be of special
importance in inter- state trade or commerce
and specify the restrictions and conditions to
which state laws imposing taxes on sale or
purchase of such goods of special importance.
PRINCIPLES FOR DETERMINING PLACE
OF SALE OR PURCHASE
It is necessary to determine when a sale or purchase of
goods takes place in the course of inter-state trade in
order to impose central sales-tax.

1. IN THE COURSE OF INTER STATE TRADE

2. SALE OR PURCHASE OF GOODS OUTSIDE A STATE

3. SALE OR PURCHASE OF GOODS IN THE COURSE OF

IMPORT AND EXPORT
 1. IN THE COURSE OF INTER STATE
TRADE
Section 3 of CST Act defines a sale or
purchase of goods shall be deemed to take
place in the course of inter-State trade or
commerce if the sale or purchase, -
(a) Occasions the movement of goods from one
State to another; or
(b) is effected by a transfer of documents of title
to the goods during their movement from one
State to another.
 (a)Occasions the movement of goods
from one State to another
This means there is a completed sale in pursuance
of contract of sale or purchase where by goods
move from one state to another.
A sale can be treated as an inter- state sale if, all the
following conditions are satisfied.
1. Transaction is a Completed sale.
2. The contract of sale contains a condition for the
movement of goods from one state to another.
3. There should be physical movement of good
from one state to another
4. The sale concludes in the state where the goods
are sent and that state is different from the state
from where the goods actually moved.
5. It is not necessary that sale precedes the inter-
state movement of goods, sale can be entered
before or after the movement of goods.
6. It is immaterial in which state the ownership of
goods passes from seller to buyer.
Example:A in Orissa sells and delivers goods to
B in Gujarat.
 Illustrations

A of Delhi sells goods to B of Mumbai, As per

contract goods are to be delivered to Mumbai.
(It is a inter state sale as sale of occasion movement
of goods outside state.)
A of Delhi sells goods to B of Mumbai,Goods are
sold at As shop and B takes it to Mumbai.
(it is a local sale/ it is not interstate sale as sale
does not occasions movement of goods outside
state.
A of Delhi sells goods to B of Mumbai, As per
contract goods are to be delivered to Bs branch
in Delhi
( it is local sale and not interstate sale/hence
even the buyer is outside the state, sale is not
inter state sale if the goods does not move
outside the state.
 (b) Sale by transfer of documents
Section 3 (b)

If sale or purchase of goods is effected by

transfer of documents of title to the goods
during their movement from one state to
another then, such sale or purchase shall be
deemed to take place in the course of inter-
state trade.
 A Document of title to goods bears internal evidence of
ownership of goods by holder of document. Some of
the examples are Lorry Receipt (LR) in case of transport
by road; Railway receipt (RR) in case of transport by
rail, bill of Lading (BL)in case of transport by sea,
Airway bill (AWB) in case of transport by air.
X in Orissa delivers goods to Y in Calcutta. Y sells
it to C in Delhi by transferring the document of title
during the goods movement from Orissa to Delhi.
2. WHEN IS A SALE OR PURCHASE OF
GOODS SAID TO TAKE PLACE OUTSIDE
A STATE.
(1) Subject to the provisions contained in
section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2)
to take place inside a State, such sale or
purchase shall be deemed to have taken place
outside all other States.
 Illustration
A of Kanpur sends goods to B of Delhi. The
Railway Receipt is sent by post to B while the
goods are in transit B sells goods by transfer of
documents to C of Bombay. In this case sale was
effected by transfer of documents of title to
goods (Railway Receipt) to the buyer when the
goods were in movements from Kanpur to Delhi.
2) A sale or purchase of goods shall be deemed to
take place inside a State, if the goods are within the
State, -
(a) in the case of specific or ascertained goods, at
the time the contract of sale is made; and
(b) in the case of unascertained or future goods, at
the time of their appropriation to the contract of
sale by the seller or by the buyer, whether assent of
the other party is prior or subsequent to such
appropriation.
 3. WHEN IS A SALE OR PURCHASE OF
GOODS SAID TO TAKE PLACE IN THE
COURSE OF IMPORT OR EXPORT?
The sale shall be deemed to take place in the
course of export or import:
Sale either occasions export (Called export sale) or
sale is effected by a transfer of documents of title to
the goods after the goods have crossed the customs
frontiers of India (Called deemed export sale)
(Sec.5(1)).
 Sale either occasions import (Called import sale) or
sale is effected by a transfer of documents of title to
the goods before the goods have crossed the
customs frontiers of India (Called deemed import
sale) (Sec.5(2)).
 Export - Movement of goods from a place in
India to a place outside India. Import -
Movement of goods from a place outside
India to a place in India.
 Practical issues in CST
1.Sales tax is a single point tax and there is no
sales tax on the further distribution channel
( Single Point taxation means imposition
of tax at only one point between the production
and the sale of goods to ultimate consumers.
The tax is levied at only one point between
the point of production (first point) and
the point of ultimate sale to consumption
(final point).)
2.In the sales tax structure, there were problems
of double taxation of commodities and
multiplicity of taxes, resulting in a cascading tax
burden.
 Cascading tax means
Tax paid on tax .
'Cascade Tax' A tax that is levied on a good at
each stage of the production process up to the
point of being sold to the final consumer
 Cascading effect- Shirt manufacturing
Action Cost 10 % tax Total tax
Mft Buys Raw 100 10 110 VAT
materials
Mft adds value 150 15 165 Excise
@40
Wholeseller 195 19.5 214.5 VAT
adds @30
Retailes adds 234.5 23.45 257.95 CST
@20
Total 190 67.95 257.95
3. It increases the tax burden on the ultimate
consumer.
4. Application of sales tax is restricted only for
goods. Under the cst act goods have been classified
as declared and declared goods. The rates of tax on
declared goods are lower as compared to the rate of
tax on goods in the second category.
5.Dealers of reselling goods have no responsibility to
collect tax and to file return is sales tax has already
been paid on reselling goods.
6. In sales tax there is a ample scope for tax
evasion.
7.Computation of sales tax is too much
complicated. The rate of central sales tax is 4 %
or local state whichever is lower on the first
point of interstate sale if, the goods are sold to
government or to registered dealer , sales
during the movement of same goods will be
exempted form tax.
8.Sales tax returns are filed separately and in
returns the dealers have to give numerous
details which invite scrutiny in detail.
9. Assessment of sales tax is entrusted to the
sales tax department.
10.There is no exemption limit of turnover for
the levy of central sales tax. It is applicable for
all dealers.
Apart form the above problems the systems of sales tax had
managed to nurture four other problems such as:
Tax exportation- The raising of revenue for one jurisdiction
through the levying of taxes on residents of another
jurisdiction
Overlap in the tax base
Tax competition among the state
Tax disharmony among the states- Among the
indirect taxes, sales taxes contributed over 56 percent of
total states' taxrevenues. ... Given that revenue from
sales taxes predominates in the states' fiscal operations,
understanding the nature of disharmony in the levy of
sales taxation is important.
Direct tax
Burden cannot be passed
Tax is paid directly to the
govt.
Tax is levied by the central
govt
Do not cause inflation
Bad for the rich and do not
affect the poor.
Indirect tax
Burden can be passed
Tax is paid indirectly to the
govt.
The tax is levied by both
central and state govt.
Causes inflation
Bad for the poor and partly
effects the rich.
 Types of tax
Direct tax: Indirect tax.
Custom (export
Income tax /import)
Wealth tax Excise-(Manufacturing)
Service tax.
Sales tax
 Sales tax

Sales Tax

LOCAL SALE INTER STATE SALE

(VAT) (CST) EXPORT/IMPORT
SALE WITHIN THE SALE FROM ONE STATE (NO SALES TAX)
STATE TO ANOTHER STATE
 INDIRECT TAX FOLLOWS EITHER OF
TWO PRINCIPLES
DESTINATION PRINCIPLE
It imposes taxes where
consumption tax places.
TamilNadu Kerala
Kerala collects tax since
consumption of goods is in
Kerala.
Customs, excise, service tax,
VAT follows destination
principle.
ORIGIN PRINCIPLE
Origin principle imposes
taxes where production
takes place.
TamilNadu Kerala
TamilNadu collects tax since
production is in TamilNadu.
CST follows origin principle.
 System of sales tax
Single point tax Multi point tax
Sales tax is levied only once Commodity is subjected to
throughout the whole sales tax as every stage at
channel of distribution. uniform rate.
It is classified into :
First point sales tax and
Last point sales tax.
 First point sales tax- it is levied when the
commodity is sold first time in the state.
Last point sales tax- it is levied only when
goods are sold either to the unregistered
dealer or consumer.
 First point sales tax
M D W R C

TAX LEVIED
 Last point sales tax.

M D W R C

TAX LEVIED.
 Multi point sales tax.

M D W R C

TAX LEVIED
 Background of Vat in India

Tax on sale within the State is a State subject. Over

the period, many distortions had come in taxation
due to unhealthy competition among States by
giving sales tax incentives and tax rate war started
to attract more revenue to State.
Many steps were taken to remove the distortions
and rationalize tax structure since 1999.
It was decided to introduce uniform State Level
VAT. After lot of persuasion by Central Government,
all States ultimately agreed to introduce State Level
sales tax VAT w.e.f.1-4-2005.
What is
VAT???
 In simple terms value added
means difference between
selling price and purchase price.
VAT avoids cascading effect of a
tax.
 Value Added Tax is a multi
point sales tax with set off
for tax paid on purchases.
It is basically a tax on the
value addition on the
product.
 Day to Day example of VAT

V.A.T @ 5%
(Rs.700) Rs.14700

Nokia 5800
Rs.14000

Cellular Telephone (Mobile Phone) - Reduced to 5% (By Notification

G.o.Ms.No.45 dated 25.03.2015) in tamilnadu
 History in India

States Date No.

Haryana 01-04-2003 1
A.P, W.B, Kerala, Karnataka, Orissa, 01-10-2005 20
Delhi, Tripura, Bihar, Arunachal Pradesh,
Sikkim, Punjab, Goa, Mizoram, Nagaland,
J & K, Manipur, Maharashtra, Himachal
Pradesh, Assam & Meghalaya

Uttaranchal 01-04-2006 1
Rajasthan, Gujarat, MP, Chhattisgarh and 01-04-2006 4
Jharkhand
Uttar Pradesh and Tamil Nadu Tamil Nadu Value Added Tax Act
2006 has come into effect from 1st
January 2007
 For for more information on VATFOR
MORE INFORMATION ON VAT REFER:

www.tnvat.gov.in
 VAT
Value Added Tax (VAT) Definition Most of the
states in India, with effect from April1,2005
have adopted Value added Tax.
Value added tax or VAT is an indirect tax,
which is imposed on goods and services at
each stage of production, starting from raw
materials to final product.
VAT is levied on the value additions at
different stages of production.
 VAT
Value added tax (VAT) is an indirect tax on goods.
vat is imposed only on the amount of value
addition. It is a multi-point tax levied as a
proportion of value addition, where the tax
burden can be shifted from one person to
another person till the ultimate consumer can
consume the goods.
VAT is charged by state government
VAT is a intra state sales tax (sales within the
state)
 Concept of VAT

VAT being a multi stage levy, it allows

registered dealers to take credit for the tax
paid on purchase from registered suppliers
against the tax payable on the sales.
 'Cascade Tax'
A cascade tax or cascading tax is a
turnover tax that is applied at every stage in
the supply chain, without any deduction for
the tax paid at earlier stages.
 Objectives of VAT

1.Eliminates multiplicity of taxes such as entry tax, turnover

tax, sales tax, surcharge, Excise duty etc,
2. Prevents double taxation with cascading effect.
3. Eliminates inter state tax (eg. Central Sales Tax)
4. Rationalize all tax burdens in the cases of goods and
services until sold for consumption.
5. Makes the tax structure, simple, efficient and transparent.
6. Improve tax compliance.
7. Development of fair and healthy competition in the interest
of consumers.
 Input Tax-
It is the Tax paid/payable on Purchases made by a
dealer from a registered dealer of the state.
Purchases will include all Local purchases made
for use in Business.

Output Tax-
It is the Tax Charged/Chargeable by a registered
Dealer on Local Sales effected by him.
 EXAMPLE:
A sells Goods to B of Rs 1,00,000 VAT Rate is
4%.Here VAT is 4% of 1,00,000. Here A will
collect Rs 4000 from B.
In this case Rs 4,000 is Output Tax for A and
Input Tax for B.
The Output Tax of A will become Input Tax for
B.And B can take credit of this Input Tax
provided A is a Registered Dealer.
 RATES OFVAT ITEMS
G
o 0% Natural and un-processed produces in unorganized sector
Good of social importance
o Life saving drugs
d Newspapers
National flag barred from taxation
s
1% Gold
Silver
U Precious and semi-precious stones
n
5% Basic necessities
d Industrial and agricultural inputs
e Declared goods
Medicines and drugs
r AED items
V Capital goods

A 14.50% RNR[revenue neutral rate] on other goods

T
SPECIAL ADDITIONAL TAX
(>20%) Aviation turbine fuel (ATF)
Petroleum products
Fuels
E-merit goods
 Methods of VAT calculation
The way to compute the base of a VAT for a
given period, say a quarter, is in the case of a
manufacturer, is to deduct the total cost of the
inputs used in production from the amount
for which the manufactured goods are sold.
 VAT is computed adopting three alternatives.
 Addition
method

This method is based on the identification of

value-added , which can be estimated by
summation of all the elements of value added
(i.e., wages, profit, rent and interest)
This method is known as addition method or
income approach.
This is in line with the income method of
calculating national income.
The chief drawback of this method is that it does
not require matching of invoices in order to check
tax evasion.
 Subtraction method

Tax is charged on value added.Hence,no credit shall be

allowed.
It is used when invoice does not show VAT separately.
VAT liability at each stage= Rate of VAT/100+Rate of
VAT X Taxable Turnover.
Taxable Turnover means value added at each stage.
Value added= Sale price-Purchase Price.
 Types of subtraction method:
1. Direct subtraction method: Value Added=
Aggregate value of Sales(excluding tax)-Aggregate
value of Purchases(excluding tax).

2. Intermediate subtraction method: Value

Added= Sales-Aggregate value of
Purchases(including tax).
.
Disadvantages:

1. Not suitable in case of inputs with different rates

of tax.
2. Not preferable for dealers as it leads to disclosure
of their profit margin.
3. As variety of outputs are produced from various
inputs,this method of computation of VAT becomes
very confusing
 Tax-credit method.

Under this method, VAT is imposed on the

total sale value and credit is allowed of the
amount of VAT paid earlier.

The VAT amount is recovered from the buyer by

charging it separately in the invoice.
VAT Payable= VAT on sales - VAT on inputs.
Advantages:
It minimizes the chances of tax evasion as it
necessitates the maintenance of purchase invoices.
Since,tax is charged at every stage of sale ,there is
no revenue loss to the government.

Disadvantages:
It promotes the acquisition of bogus bills by the
dealers for claiming false VAT credit.
 Example
'Mr.A'',a manufacturer, sold goods to distributor
''Mr. B'' for Rs.10,000.
B sells the same goods to C,a wholesaler, for
Rs.16,000.
C sells the goods to retailer D for Rs.24,000.and
D sells the goods to the final consumer E for
Rs.35,000.
VAT Rate is 12.5% which is charged separately.
Compute VAT liability as per Tax Credit Method.
Computation of VAT liability (in Rs.

Sale VAT on
Net VAT
Sale by Price(befo Sales @ VAT Credit
Payable
re VAT) 12.5%
A 10,000 1,250 0 1,250
B 16,000 2,000 1,250 750
C 24,000 3,000 2,000 1,000
D 35,000 4,375 3,000 1,375
Total VAT to the Government 4,375
 Advantages of VAT
Basically, the VAT was introduced as a better
alternative to sales tax, as to avoid the
economic distortions caused by the latter.
There are as many reasons in favor of the use
of VAT.
These are explained below:
 value Added Taxes (VAT) in India

Value Added Tax (VAT) is nothing but a general consumption tax that is assessed on the value added
to goods & services. It is the indirect tax on the consumption of the goods, paid by its original
producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It
is based on the value of the goods, added by the transferor. It is the tax in relation to the difference
of the value added by the transferor and not just a profit.
All over the world, VAT is payable on the goods and services as they form a part of national GDP.
More than130 countries worldwide have introduced VAT over the past 3 decades; India being
amongst the last few to introduce it.
It means every seller of goods and service providers charges the tax after availing the input tax
credit. It is the form of collecting sales tax under which tax is collected in each stage on the value
added of the goods. In practice, the dealer charges the tax on the full price of the goods, sold to the
consumer and at every end of the tax period reduces the tax collected on sale and tax charged to
him by the dealers from whom he purchased the goods and deposits such amount of tax in
government treasury.
VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle of production
of goods and services with the provision of a set-off for the tax paid at earlier stages in the
cycle/chain. The aim is to avoid 'cascading', which can have a snowballing effect on the prices. It is
assumed that because of cross-checking in a multi-staged tax; tax evasion would be checked, hence
resulting in higher revenues to the government.
 Neutral tax- the vat is regarded as a neutral tax
because it does not influence the business mans
decision as to how he carries on the business.
The VAT is applied only to value added by each
firm and not to gross receipts.
Spread over a large number of firms: the vat is
spread over a large number of firms instead of
being concentrated on a single point in the chain
of production as is the cause with sales tax or
purchase tax or a manufacturers tax.
 Importance of VAT in India
ndia, particularly being a trading community, has always believed in accepting and
adopting loopholes in any system administered by State or Centre. If a well-
administered system comes in, it will not only close options for traders and
businessmen to evade paying their taxes, but also make sure that they'll be
compelled to keep proper records of sales and purchases.
Under the VAT system, no exemptions are given and a tax will be levied at every
stage of manufacture of a product. At every stage of value-addition, the tax that is
levied on the inputs can be claimed back from tax authorities.
At a macro level, two issues make the introduction of VAT critical for India
Industry watchers believe that the VAT system, if enforced properly, will form part
of the fiscal consolidation strategy for the country. It could, in fact, help address
issues like fiscal deficit problem. Also the revenues estimated to be collected can
actually mean lowering of fiscal deficit burden for the government.
International Monetary Fund (IMF), in the semi-annual World Economic Outlook
expressed its concern for India's large fiscal deficit - at 10 per cent of GDP.
Moreover any globally accepted tax administrative system would only help India
integrate better in the World Trade Organization regime.
Minimum of loss of revenue through evasion-
with a single stage sales tax, successful evasion
means that the total tax yield is lost, but if the
value added tax is successfully evaded at any
stage of production, only a portion of the total
tax is yield at risk.
 Easier to Enforce- the VAT is regarded superior
to retail sales tax because it is easier to
enforce through cross checking.
Encourages exports
Increase efficiency in production and
distribution.
Selectivity- vat may be selectively applied to
specific goods or business entities.
 Disadvantages of VAT
VAT is regressive- it is claimed that the tax is
regressive. i.e., its burden falls
disproportionately on the poor, since the poor
are likely to spend more of their income than
than relatively rich person.
VAT is too difficult to operate from the
position of both the administration and
business
 VAT is inflationary- some businessmen seize
almost any opportunity to raise prices, and the
introduction of VAT certainly offers such an
opportunity.
VAT favors the capital Intensive Firm: it is also
argued that VAT places a heavy direct impact of
tax on the labor intensive firm compared to the
capital intensive competitor, since the ratio of
value added to selling price is greater for the
former.
 VAT replaces sales tax
However, most of the states in India, from April 01, 2005,
have supplemented the sales tax with the new Value Added
Tax (VAT). VAT in India is classified under the following tax
slabs:
0% for the essential commodities
1% on gold ingots as well as expensive stones
4% on capital merchandise, industrial inputs, and
commodities of mass consumption
12.5% on all other items
Variable rates (depending on state) are applicable for
tobacco, liquor, petroleum products, etc.
A Central Sales Tax which is at the rate of 4% is also levied
on inter-State sales but would be eliminated gradually