1.
What is VAT?
2.
How is VAT different
from Sales Tax?
3.
Benefits of VAT
4.
Background of VAT
5.
About VAT
5.1 Input Tax Credit
5.2 Output Tax
5.3 Nett Tax
5.4 Tax Invoice
5.5 Tax Liability &
Registration
5.6 Tax Payer’s
Identification Number (TIN)
5.7 Return Filing
5.8 Assessment
5.9 Audit
5.10 Declaration Forms
5.11 Incentives
5.12 Other Taxes
5.13 Penal Provisions
5.14 Coverage of Goods
5.15 VAT Rates &
Classification
1. What is VAT?
VAT (Value Added Tax) is a
multi-point tax which is levied at every stage of sale with a provision for
setting-off of tax paid at the previous stage / tax paid on inputs. Thus, effectively, it is levied on the value
that is added to the price of a product at each stage, either due to the
passing of the product through various hands in a channel of distribution or
due to some process undertaken on it.
And hence the name.
2. How is VAT different
from Sales Tax?
The main difference between Sales Tax and VAT lies in the way the
tax is levied.
In case of Sales Tax, the tax is generally levied at either the
first point or the last point in the distribution chain. It is therefore a single-point tax system.
In case of VAT, the tax is levied at each point in the distribution
chain with a provision for setting-off of input tax paid on purchases. Thus, VAT is a multi-point tax system.
3.
Benefits of VAT
§ Simple,
transparent and dealer-friendly tax administration. This will improve tax compliance and also
augment revenue growth.
§ No
cascading effect of double taxation of commodities as it grants set-off of tax
paid at the previous stage / tax paid on inputs.
§ A
multiplicity of other taxes, such as turnover tax, surcharge on sales tax,
additional surcharge, etc. will be abolished.
§ In
addition, Central sales tax is also going to be phased out. As a result, overall tax burden will be
rationalised, and prices in general will also fall.
§ The
existing system of inspection will be replaced by a system of built-in
self-assessment by the dealers and auditing.
Thus, in general, VAT will help common people, traders,
industrialists and also the Govt. It is
indeed a move towards more efficiency, equal competition and fairness in the
taxation system.
4.
Background of VAT
VAT was introduced first in Brazil in mid 1960’s, then in
European countries in 1970’s and subsequently introduced in about 130
countries, including several federal countries.
In Asia, it has been introduced by a large number of countries from China to Sri Lanka . Even in India , there has been a VAT system
introduced by the Government of India for about last ten years in respect of
Central excise duties. At the
State-level, the VAT system as decided by the State Governments would now be
introduced in terms of Entry 54 in List II of VII schedule of the constitution
of India .
5.
About VAT
5.1 Input Tax Credit
The essence of VAT is in
providing set-off for the tax paid on purchases, and this is given effect
through the concept of Input Tax Credit.
Input Tax Credit is
the input tax paid on purchases of goods from within the state during the tax
period from VAT registered dealers that are to be used
§
For sales within the state / inter-state sale or export out of India .
§
as Raw Material or Capital Goods in manufacturing or processing of
goods other than those exempt from tax under this Act
§
for use as containers for packing of goods other than those exempt
from tax
No input tax credit is allowed for
§
purchase of goods from an unregistered dealer
§
purchase of goods from outside the state or
§
Purchase of goods, which are used exclusively for the mfg.,
processing, or packing of goods that are exempt from tax.
In case
of Stock transfer / Consignment sale
of goods out of the state, input tax paid in excess of 4 per cent is liable for
tax credit.
If the input tax credit exceeds the tax payable on sales in a month, the
excess credit will be carried over to the next tax period. If there is any excess unadjusted input tax
credit at the end of second year, then the same will be eligible for refund.
Input tax credit on capital goods will also be available for traders and manufacturers. Tax
credit on capital goods may be adjusted over a maximum of 36 equal monthly
instalments. The States may at their option reduce this number of instalments.
There will be a negative list for capital goods not eligible for input tax
credit.
For all Exports made out of the country, tax
paid within the State will be refunded in full, and this refund will be made
within three months. Units located in SEZ and EOU will be granted either
exemption from payment of input tax or refund of the input tax paid within
three months.
All tax-paid goods
purchased on or after April 1, 2004 and still in stock (Opening Stock) as on April 1, 2005 will be eligible to receive
input tax credit, subject to submission of requisite documents. VAT will be levied on the goods when sold on
and after April 1, 2005 and input tax credit will be given for the sales tax
already paid in the previous year. This
tax credit will be given in six monthly instalments after a period of 3 months
needed for verification.
5.2 Output Tax
Output tax is the tax collected on sales of goods in the tax
period.
5.3 Nett Tax
Nett VAT Liability =
O – I – C, where
O = Output Tax
collected on Sales
I = Input Tax Credit
C = Amount brought
forward from previous tax period
If, for example, input
worth Rs. 1,00,000/- is purchased and sales are worth Rs. 1,50,000/- in a
month, and input tax rate and output tax rate are 4% and 12.5% respectively,
then input tax credit, output tax and calculation of nett VAT will be as shown
below:
1. Input purchased within
the month : Rs. 1, 00,000/-
2. Output sold in the month : Rs.
1, 50,000/-
3. Input tax paid : Rs. 4,000/-
4. Output tax payable : Rs.
18,750/-
5. Nett VAT payable during
the month : Rs.
14,750/- (Rs. 18,750 – 4,000)
5.4 Tax Invoice
This entire design of VAT
with input tax credit is crucially based on documentation of tax invoice, cash
memo or bill. Every registered dealer
shall issue to the purchaser serially numbered tax invoice with the prescribed
particulars. This tax invoice will be
signed and dated by the dealer or his regular employee, showing the required
particulars. The dealer shall keep a
duplicate copy of such tax invoice duly signed and dated. Failure to comply with the above will attract
penalty.
5.5 Tax Liability & Registration
All dealers whose taxable
quantum is Rs. 5 Lacs or more are
liable to register themselves under this Act.
For importers, the taxable quantum is zero. All existing dealers registered under the
Sales Tax Act will be automatically registered under the VAT Act.
Dealers with gross annual
turnover not exceeding Rs. 5 lakh will not be liable to pay VAT. States will have flexibility to fix threshold
limit within Rs. 5 lakh.
For dealers, whose
annual gross turnover exceeds the taxable quantum under this Act but doesn’t exceed
Rs. 50 Lacs shall have the option of Composition
Scheme. The nett tax in this case
will be 1% of the dealer’s turnover.
Dealers opting for this scheme will not be entitled to input tax credit.
5.6 Tax Payer’s Identification Number (TIN)
All registered dealers will
be issued a Tax Payer’s Identification Number (TIN). The number will consist of 11 digit numerals,
throughout the country. First two
characters will represent the State Code as used by the Union Ministry of Home
Affairs. The set-up of the next nine
characters may, however, be different in different States.
5.7 Return Filing
Returns are to be filed
monthly / quarterly as specified in the respective State Act / Rules, and will
be accompanied with payment challans.
5.8 Assessment
The basic simplification in VAT is that VAT liability will be
self-assessed by the dealers themselves in terms of submission of returns. There will no longer be compulsory assessment
at the end of each year as exists now.
If no specific notice is issued for departmental audit of the books of
accounts of the dealer within the time limit specified in the Act, the dealer
will be deemed to have been self-assessed on the basis of returns submitted by
him.
5.9 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. If, however, evasion is detected on audit,
the concerned dealer may be taken up for audit for previous periods also. This Audit Wing will remain delinked from tax
collection wing to remove any bias. The
audit team will conduct its work in a time bound manner and audit will be
completed within six months. The audit
report will be sent to the dealer also.
5.10
Declaration Forms
There
will be no need for any provision for concessional sale under the VAT Act since
the provision for set-off makes the input tax zero-rated. Hence, there will be no need for declaration
form, which will be a further relief for dealers.
5.11
Incentives
Under the VAT system, the
existing incentive schemes may be continued in the manner deemed appropriate by
the States after ensuring that VAT chain is not affected.
5.12
Other Taxes
As mentioned
earlier, all other existing taxes such as Turnover
Tax, Surcharge, Additional Surcharge and Special Additional Tax (SAT) would be
abolished. There will not be any
reference to these taxes in the VAT Bills.
The States that have already introduced entry tax and intend to continue
with this tax should make it vatable. If not made vatable, entry tax will need to
be abolished. However, this will not
apply to entry tax that may be levied in lieu of octroi.
5.13
Penal Provisions
Penal provisions in the VAT
Bills should not be more stringent than in the existing Sales Tax Act.
5.14
Coverage of Goods
In general, all the goods, including declared goods will be covered
under VAT and will get the benefit of input tax credit.
The
only few goods which will be outside VAT will be liquor, lottery tickets, petrol,
diesel, aviation turbine fuel and other motor spirit since their prices are not
fully market determined. These will
continue to be taxed under the Sales Tax Act or any other State Act or even by
making special provisions in the VAT Act itself, and with uniform floor rates
decided by the Empowered Committee.
5.15
VAT Rates &
Classifications
Under the VAT system covering about 550 goods, there will be only
two basic VAT rates of 4% and 12.5%. Plus,
there will be a category of tax-exempted goods and a special VAT rate of 1%
only for gold and silver ornaments.
Under exempted category, there will be about 46 commodities comprising of
natural and unprocessed products in unorganised sector, items which are legally
barred from taxation and items which have social implications. Included in this
exempted category is a set of maximum of 10 commodities flexibly chosen by
individual States from a list of goods (finalised by the Empowered Committee)
which are of local social importance for the individual States without having
any inter-state implication. The rest of the commodities in the list will be
common for all the States.
Fewer than 4% VAT rate category, there will be the
largest number of goods (about 270), common for all the States, comprising of
items of basic necessities such as medicines and drugs, all agricultural and
industrial inputs, capital goods and declared goods. The schedule of such
commodities will be attached to the VAT Bill of every State.
The remaining commodities,
common for all the States, will fall under the general VAT rate of 12.5%.
In terms of decision of the Empowered Committee, VAT on Additional
Excise Duty items (namely sugar, textile and tobacco), because of initial
organisational difficulties, will not be imposed for one year after the
introduction of VAT, and till then the existing arrangement will continue. The
position will be reviewed after one year.
Thanks a lot for detailed explanation!! its really helpful post.
ReplyDeleteIf possible please post an article on With Holding Tax with suitable example and how its different in view of VAT/Input-Output tax...