PROJECT REPORT ON

CEN VAT V/S M-VAT

Submitted in partial fulfillment of the requirement
For
MCOM PART II SEM - IV
{2015-2016}
BY
MISS: RAJESHRI .D.GIRI
Under the guidance of MISS ANURADHA PARMAR

UNIVERSITY OF MUMBAI
SHETH T.J.EDUCATION SOCIETYS

SHETH N.K.T.T COLLEGE OF COMMERCE &

SHETH J.T.T COLLEGE OF ARTS, THANE (WEST)

SHETH T.J.EDUCATION SOCIETYS

SHETH N.K.K.T COLLAGE OF COMMERCE &
SHETH J.T.T COLLEGE OF ARTS

CERTIFICATE

This is to certify that MISS: RAJESHRI DHARMENDRA GIRI

of

M.com Part II, semester - IV , Roll No 46 has undertaken and completed

the project report on- CENVAT V/S M-VAT During the academic year
2015 2016 Under the guidance of MISS ANURADHA PARMAR
submitted on
/
/ 2015 date to this, College in fulfillment of
curriculum of M.COM UNIVERSITY OF MUMBAI This is bonafide
project work and information presented is true and to the best of my
knowledge and belief.

PROJECT GUIDE

EXTERNAL EXAMINER

COURSE COORDINATTOR

PRINCIPAL

DECLEARATION

I RAJESHRI DHARMENDRA GIRI here by declared that project report

entitled

COMPARATIVE

STUDY

OF

CENVAT

V/S

M-VAT

under the guidance of MISS ANURADHA PARMAR submitted in partial

Fulfillment of the requirement for the award of degree of MASTER OF
COMMERCE by UNIVERSITY OF MUMBAI is my original work.

RAJESHRI DHARMENDRA GIRI

CLASS: MCOM PART II
DIVISION: A
ROLL NO: 46
PLACE: THANE,(W).
SIGNATURE:

ACKNOWLEDGMENT

I take this opportunity to express and record my thanks and gratitude to

SHETH N.K.T.T. COLLEGE THANE and entire faculty of semester IV of
M.COM course in the college.
Further I also acknowledgment my sincere and special thanks and
gratitude to my project guide, MISS ANURADHA PARMAR Project
COORDINATTOR and PRINCIPAL DR P.M.KARKHELE without whose
continues guidance and encouragement It would not been possible for me
to complete this project work.
I express my thanks to all my colleagues, friend with whom I have had
debates and discussion on the subject which has also helped.

CONTENT

Sr. No.

Topics Covered

Page No.

CERTIFICATE

DECLEARATION

ACKNOWLEDGMENT

Section I Value Added Tax. in Maharashtra

1-25

Introduction.

Registration under Value Added Tax.

2-7

Explaining Value Added Tax.

7-10

Calculating Tax Liability.

11-19

Filing of Return and Paying Tax.

20-25

Section II CEN VAT

26-40

Section III Appendix.

41-43

Section IV Conclusion.

44

Section V Bibliography.

45

WHAT IS VALUE ADDED TAX?

Value Added Tax is a broad-based commodity tax that is levied at multiple stages of
production. The concept is akin to excise duty paid by the manufacturer who, in turn, claims a
credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale and both work
in the same manner, according to the white paper on VAT released by finance minister
Chidambaram. The document was drawn up after all states, barring UP, were prepared to
implement VAT from April. It is usually intended to be a tax on consumption, hence the
provision of a mechanism enabling producers to offset the tax they have paid on their inputs
against that charged on their sales of goods and services. Under VAT revenue is collected
throughout the production process without distorting any production decisions.

WHY VAT IS PREFERRED OVER SALES TAX?

While theoretically the amount of revenue collected through VAT is equivalent to sales tax
collections at a similar rate, in practice VAT is likely to generate more revenue for
government than sales tax since it is administered on various stages on the production
distribution chain. With sales tax, if final sales are not covered by the tax system e.g. due to
difficulty of covering all the retailers, particular commodities may not yield any tax.
However, with VAT some revenue would have been collected through taxation of earlier
transactions, even if final retailers evade the tax net.

In addition, the audit trail that exists under the VAT system makes it a more effective tax in
administration terms than sales tax as it helps with the verification of VAT amounts declared
as due. This is made possible by the fact that one persons output is anothers input. As with
sales tax imports are treated the same way as local goods while exports are zero- rated to
avoid anti-export bias.

Notwithstanding the advantages mentioned above, it is worth noting that VAT is a

considerably complex tax to administer compared with sales tax. It may be difficult to apply
to small companies due to difficulties of record keeping and its coverage in agriculture and
the services sector may be limited. To cover the high administration costs, VAT rates of 1020 per cent are generally recommended. The equity impact of the relatively high rates have
been a cause for concern as it is possible that the poor spend relatively high proportions of
their incomes on goods subject to VAT. Thus the concept of zero VAT rate on some items has
been introduced.

DIFFERENCE BETWEEN VAT AND CST

Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore,
the burden of the full tax bond is borne by only one dealer, either the first or the last dealer.
However, under the VAT system, the tax burden would be shared by all the dealers from first
to last. Then, such tax would be passed upon the final consumers.
Under the CST Act, the tax is levied at a single point. Under the VAT system, the retailers are
not subject to tax except for the retail tax.
Under the CST Act, general and specific exemptions are granted on certain goods while VAT
does not permit such exemptions. Under the CST law, concessional rates are provided on
certain taxes. The VAT regime will do away with such concessions as it would provide the
full credit on the tax that has been paid earlier.

At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%. Therefore,
the net VAT would be 12.5%. At the second change of sale, the sale value is Rs.120 and the
tax thereon is 15%. The tax that is to be paid at every point is 15%. The input tax is 15%. The
dealer will get a credit for first change in sale of 2.5%-- i.e. 15% -12.5%. Therefore, 2.5%
will be the net rate. At the third change of sale, the sale value is Rs.150 and the tax on this is
18.75%. At the last stage, the tax paid is 18.75%. The Input Tax is 18.75%. Dealers get a
credit for second change in sale? i.e. 18.75% -15% = 3.75%. Therefore, 3.75% would be the
net VAT. This means that VAT is paid in the last point tax under the sale tax regime.

WHO GAINS?
State and Central governments gain in terms of revenue. VAT has in-built incentives for tax
compliance only by collecting taxes and remitting them to the government can a seller
claim the offset that is due to him on his purchases. Everyone has an incentive to buy only
from registered dealers purchases from others will not provide the benefit of credit for the
taxes paid at the time of purchase. This transparency and in-built incentive for compliance
would increase revenues. Industry and trade gain from transparency and reduced need to
interact with the tax personnel. For those who have been complying with taxes, VAT would
be a boon that reduces the cost of the product to the consumer and boosts competitiveness.
VAT would be major blow for tax evaders, both manufacturers who evade excise duty
payments and traders who evade sales-tax.

WHATLL BE THE TAX BURDEN?

The overall tax burden will be rationalized as itll be shared by all dealers, and prices, in
general, will fall. Moreover, VAT will replace the existing system of inspection by a system
of built-in self-assessment by traders and manufacturers. The tax structure will become
simple and more transparent and tax compliance will improve significantly. It will also be
simpler and offer easy computation and easy compliance. VAT will prevent cascading effect
through input rebate and help avoid distortions in trade and economy by ensuring uniform tax
rates.
WHO PAYS?
All dealers registered under VAT and all dealers with an annual turnover of more than Rs 5
lakh will have to register. Dealers with turnovers less than Rs 5 lakh may register voluntarily.
HOW TO PAY?
VAT will be paid along with monthly returns. Credit will be given within the same month for
entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated
over any month will be utilized to deduct from the tax collected by the dealer during that

month. If the tax credit exceeds the tax collected during a month on sale within the state, the
excess credit will be carried forward to the next month.

WHICH GOODS WILL BE TAXABLE UNDER VAT?

All goods except those specifically exempt. In fact, over 550 items will be covered under the
new tax regime, of which 46 natural and unprocessed local products would be exempt from
VAT. About 270 items, including drugs and medicines, all agricultural and industrial inputs,
capital goods and declared goods would attract 4% VAT. But, following opposition from
some states, it was decided that states would have option to either levy 4% or totally exempt
food grains from VAT but it would be reviewed after one year. Three items sugar, textile,
tobacco under additional excise duties will not be under VAT regime for one year but
existing arrangement would continue.

OTHER CONSIDERATIONS
It is imperative that policy makers in considering adoption of VAT should be interested in the
economy wide impact of this tax. Special emphasis is often placed on its effect on equity,
prices and economic growth. This is particularly important because of the potential effects on
consumption of certain commodities that have a direct or indirect effect on labour
productivity.

VAT EFFECT ON INFLATION

In considering the introduction of VAT, countries are often concerned that it would cause an
inflationary spiral. However there is no evidence to suggest that this is true. A survey of
OECD countries that introduced VAT indicated that VAT had little or no effect on prices. In
cases where there was an effect it was a onetime effect that simply shifted the trend line of
the consumer price index (CPI). To guard against any unforeseen price effects the authorities
may consider a tighter monetary policy stance at the introduction of VAT.
DISTRIBUTION EFFECTS OF VAT

Value added tax is widely criticized as being regressive with respect to income that is its
burden falls heavily on the poor than on the rich.

This emanates from the fact that

consumption as a share of income falls as income rises. Hence a uniform VAT rate falls
heavily on the poor than the rich. This criticism is valid when VAT payments are expressed
as a proportion of current income.

However if, following the premise that welfare is

demonstrated by the level of consumption rather than income, consumption is used as the
denominator the impact of VAT would be proportional.

A proportional burden would also

be demonstrated if lifetime income rather than current income is used. A lifetime income
concept considers the fact that many income recipients are only temporarily at lower income
brackets as their earnings increase. In order to address the regressivity of VAT the following
measures can be taken:

The VAT itself can be used to differentiate taxation of consumer items that are

consumed primarily by the poor such that they pay less or at zero rate or to tax luxury goods
at a higher than standard rate.

VAT exemptions may also be granted on goods and services that are consumed mostly

by the poor.

Equity concerns may also be addressed through other ways, outside the VAT system,

such as other tax and spending instruments of government. This could be in the form of
lower basic income tax rates on the poor or some pro-poor expenditures of government. The
use of multiple rates of VAT has however been widely discouraged for various reasons.
These include:

The fact that sometimes it is almost impossible to differentiate between higher

quality expensive products e.g. food, consumed by the rich and ordinary products
consumed by the poor. Thus any concessions extended may tend to benefit the rich much
more than the poor.

Increased costs of VAT administration as a differentiated rate structure brings

with it problems of delineating products and interpreting the rules on which rate to use.

significantly increased costs of tax compliance for small firms, which are usually

unable to keep separate records/accounts for sales of differently taxed items.

This results

in the use of presumptive methods of determining the tax liability, which leads to
more difficulties in monitoring the compliance. The higher compliance cost resultant from
differentiation of VAT rates may also be regressive with respect to income since smaller firms
with lower income tend to bear proportionately more of the burden than do larger firms.

Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional effects of
tax through the effect on incomes. The effects of exemption may be as follows:

falling of revenues exemptions break the VAT chain. If exemptions are granted at

prior to the final sale, it results in a loss of revenue since value added at the final stage
escapes tax.

Un-recovered taxation of some intermediate goods may lead to producers substituting

away from such inputs thus distorting the input choices of the said producers.

Exemptions may create incentives to self supply i.e. tax avoidance by vertical

integration.

Exemptions tend to feed on each other giving rise to a phenomenon called exemption

creep. This arises from the fact that each exemption gives rise to pressures on further

FEATURES OF VAT

1. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
a. 4% on declared goods or the goods commonly used.
b. 10-12% on goods called Revenue Neutral Rates (RNR). There would be no
fall in such remaining goods.
c. Two special rates will be imposed-- 1% on silver or gold and 20% on liquor.
Tax on petrol, diesel or aviation turbine fuel are proposed to be kept out from
the VAT system as they would be continued to be taxed, as presently
applicable by the CST Act.
2. Uniform Rates in the VAT system, certain commodities are exempted from tax. The
taxable commodities are listed in the respective schedule with the rates. VAT proposes
to keep these rates uniform in all the states so the goods sold or purchased across the
country would suffer the same tax rate. Discretion has been given to the states when it
comes to finalizing the RNR along with the restrictions. This rate must not be less
than 10%. This will ensure By doing this that there will be level playing fields to
avoid the trade diversion in connection with the different states, particularly in
neighboring states
3. No concession to new industries Tax Concessions to new industries is done away with
in the new VAT system. This was done as it creates discrepancy in investment
decision. Under the new VAT system, the tax would be fair and equitable to all.
4. Adjustment of the tax paid on the goods purchased from the tax payable on the goods
of sale All the tax, paid on the goods purchased within the state, would be adjusted
against the tax, payable on the sale, whether within the state or in the course of
interstate. In case of export, the tax, paid on purchase outside India, would be
refunded. In case of the branch transfer or consignment of sale outside the state, no
refund would be provided.
5. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the tax
on the full price of the goods sold and shows separately in the sell invoice issued by
him
6. VAT is not cascading or additive though the tax on the goods sold is collected at each
stage, it is not cascading or additive because the net effect would be as follows: - the

tax, previously paid on the sale of goods, would be fully adjusted. It will be like
levying tax on goods, sold in the last state or at retail stage.

WHATS THE BIGGEST ADVANTAGE?

The biggest benefit of VAT is that it could unite India into a large common market. This will
translate to better business policy. Companies can start optimizing purely on logistics of their
operations, and not on based on tax-minimization. Lorries need not wait at check-points for
days; they can zoom down the highways to their destinations. Reduced transit times and
lower inventory levels will boost corporate earnings. Following are the some more advantage
of VAT: 1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%,
10%, 12%, 20% and 25%. However, under the present VAT system, there would only
be 2 types of taxes 4% on declared goods and 10-12% on RNR. This will eliminate
any disputes that relate to rates of tax and classification of goods as this is the most
usual cause of litigation. It also helps to determine the relevant stage of the tax. This is
necessary as the CST Act stipulates that the tax levies at the first stage or the last stage
differ. Consequently, the question of which stage of tax it falls under becomes another
reason for litigation. Under the VAT system, tax would be levied at each stage of the
goods of sale or purchase.
2. Adjustment of tax paid on purchased goods Under the present system, the tax paid
on the manufactured goods would be adjusted against the tax payable on the
manufactured goods. Such adjustment is conditional as such goods must either be
manufactured or sold. VAT is free from such conditions.
3. Further such adjustment of the purchased goods would depend on the amount of tax
that is payable. VAT would not have such restrictions. CST would not have the
provisions on refund or carry over upon such goods except in case of export goods or
goods, manufactured out of the country or sale to registered dealer. Similarly, on
interstate sale on tax-paid goods, no refund would be admissible.

4. Transparency The tax that is levied at the first stage on the goods or sale or purchase
is not transparent. This is because the amount of tax, which the goods have suffered,
is not known at the subsequent stage. In the VAT system, the amount of tax would be
known at each and every stage of goods of sale or purchase.
5. Fair and Equitable VAT introduces the uniform tax rates across the state so that
unfair advantages cannot be taken while levying the tax.
6. Procedure of simplification Procedures, relating to filing of returns, payment of tax,
furnishing declaration and assessment are simplified under the VAT system so as to
minimize any interface between the tax payer and the tax collector.
7. Minimize the Discretion the VAT system proposes to minimize the discretion with
the assessing officer so that every person is treated alike. For example, there would be
no discretion involved in the imposition of penalty, late filing of returns, non-filing of
returns, late payment of tax or non payment of tax or in case of tax evasion. Such
system would be free from all these harassment
8. Computerization the VAT proposes computerization which would focus on the tax
evaders by generating Exception Report. In a large number of cases, no processing or
scrutiny of returns would be required as it would free the tax compliant dealers from
all the harassment which is so much a part of assessment. The management
information system, which would form a part of integral computerization, would
make the tax department more efficient and responsive.
VALUE ADDED TAX IN MAHARASHTRA

Quick Flash Back

Sales tax was first introduced in India in the then Bombay Province as early as March 1938
where a tax was imposed on sale of tobacco within certain urban and suburban areas. In the
year 1946, a general sales tax was introduced levying sales tax at the last stage of sale of
goods.

The Bombay Sales Tax Act, 1959 introduced in 1959 underwent many changes thereafter and
in July 1981, first point tax was introduced wherein goods were classified into three main
schedules, broadly covering tax free goods, intermediate products and finished goods. The
BST Act was repealed and Maharashtra Value Added Tax Act, 2002 came into force w.e.f. 1 st
April, 2005 to usher in the progressive value added tax system in place of the old sales tax
system.
VAT is a progressive and transparent system of taxation which eliminates the cascading
impact of multiple taxation through a multipoint taxation and set-off principle. It promotes
transparency, compliance and equity and therefore, is both dealer friendly and consumer
friendly.
VAT being a multi point tax, envisages an increase in the number of dealers and is based on
the concept of self-assessment and self-compliance. It is therefore, inevitable that the Sales
Tax Department transforms itself into a dealer friendly, focused and dynamic department to
cater to the ever increasing expectations of both the Government and the Trade & Industry.
Sales Tax Department has taken up the challenge to transform their selves and be available
for assisting the dealers in complying with the provisions of the law. They are in the process
of installing a state-wide networked IT system to computerise entire tax administration and
hope to provide online service to the dealers in due course. They are also realigning their
organisational structure to meet the challenges of the new system and stakeholders'
expectations.

Part1 - Introduction
Background
Maharashtra is one of the 21 States which have introduced the Value Added Tax (VAT)
system of taxation from 1st April 2005. With the introduction of VAT, the Sales Tax
Department has moved to a globally recognized sales taxation system that has been adopted
by more than 130 countries.

The design of Maharashtra State VAT is generally guided by the best international practices
with regard to legal framework, as well as operating procedures. Another key factor in
preparation of the design of State level VAT is the national consensus on certain issues. The
consensus has been arrived at through the discussions in the Empowered Committee of State
Finance Ministers on implementation of State level VAT.

On 1st April 2005, VAT replaced the single point sales tax. Single point sales tax had a
number of disadvantages, primarily that of double taxation. VAT is a modern and progressive
taxation system that avoids double taxation. In addition to offering the possibility of a set-off
of tax paid on purchases, VAT has other advantages for both business and government.

It eliminates cascading impact of double taxation and promotes economic efficiency.

It is primarily a self-policing, self-assessment system with more trust put on dealers.

It provides the potential for a stronger manufacturing base and more competitive
export pricing.

It is invoice based, and as a result it offers a better financial system with less scope for
error.

It has an improved control, mechanism resulting in better compliance.

It widens the, tax base and promotes equity.

VAT in Maharashtra is levied under a legislation known as the Maharashtra Value Added Tax
Act (MVAT Act), supported by Maharashtra Value Added Tax Rules (MVAT Rules). VAT is
levied on sale of goods including intangible goods.
The meaning of goods for VAT purposes
Goods means every kind of moveable property including goods of incorporeal and
intangible nature but there are some exclusion, such as newspapers, actionable claims,
money, shares and securities and lottery tickets.
Businesses engaged in. the buying and selling of goods within the scope of the VAT law are
referred to as dealers.

The meaning of 'sale' for VAT purposes

A transaction of sale can be a:

normal sale of goods;

sale of goods under hire-purchase system;

deemed sale of goods used I supplied in the course of execution of works contract;

deemed sale of goods given on lease.

The rate of tax applicable to the goods sold under various classes of sales is uniform.
However, in respect of normal sales of goods and deemed sales of goods under works
contract and specified deemed sale of goods given on lease, the Act provides for an optional
method for discharging tax liability by way of composition. Being so, the tax liability has to
be determined with reference to the option exercised by the dealer for discharging tax
liability.
Businesses covered by VAT
The VAT system embraces all businesses in the production and supply chain, from
manufacture through to retail. VAT is collected at each stage in the chain when value is added
to goods. 1t applies to al1 businesses, including importers, exporters, manufacturers,
distributors, wholesalers, retailers, works contractors and lessors.

Part 2 - Registration under VAT

Rules for registration

If a dealers annual turnover exceeds the below mentioned threshold, then it must register
with the local office of the Sales Tax Department.
Category

Annual Turnover of

Turnover of sales or

Fees payable on

Sales

purchase of taxable

registration

goods not less than

Importer

1,00,000

10,000

100

Others

5,00,000

10,000

100

If the dealers turnover is less than the above threshold, then they are not liable to collect and
pay VAT. However, if a dealer wishes to avail the benefits of being a registered dealer, then
they may apply for voluntary registration by paying a fee of Rs.5,000/ -.

Benefits of being a registered dealer

As a registered dealer, they are entitled to:

collect VAT on the sales;

claim set-off of tax (input tax credit) paid on purchases;

Issue tax invoices and, be competitive.

Effective date of registration

The effective date of registration, that is, the date front which a dealer may charge VAT on
sales; will depend on the date they first become liable to pay VAT. This date will be
determined as follows:
a) New businesses:
If a dealer is not registered because their annual turnover is less than the threshold; their
liability to account for VAT starts from the date they cross the threshold.
b) Existing businesses:
If a dealer took over an existing business that is registered for VAT, then they will be liable to
pay tax on sales from the date they took over the business.
c) Voluntary registration:
If a dealer is registered on a voluntary basis, then he will be liable to account for VAT from
the date shown on the certificate of registration.
d) Late registration:
If a dealers turnover has exceeded the appropriate threshold but they have applied late for
registration, then he can charge VAT on his sales only after they are registered, i.e., from the
date shown on the certificate of registration.

Further, having crossed the threshold, it is an offence to be engaged in business as a dealer

without a certificate of registration

Certificate of registration
A dealer should prominently display the certificate and hologram, or a copy of the certificate
and hologram, at each place where they carry can on their business.

If a dealer has more than one place of business, then Sales Tax Office will provide them,
upon their request, one copy of the certificate of registration and hologram for each additional
place of business.

If a dealer loses his / her certificate of registration or hologram, or it is accidentally destroyed

or defaced, then they may obtain a duplicate copy of the certificate of hologram from their
sales tax office.

The certificate of registration and hologram is personal to the dealer to whom it is issued and
is non-transferable.
Changes to business circumstances
If, following dealer register, there are any amendments to the details they can be reported
while applying for registration, it must done within 60 days of the change, inform us in
writing.

Where the amendment involves a:

change in the name of the business;
change in the constitution of the business without dissolution of the firm;
change in the trustees of a Trust;
change in the guardianship of a ward;
change in the Karta of a Hindu Undivided Family;
conversion of Private limited Company to a Public limited Company;
change in the place of business;
addition of new place of business;
formation of a partnership with regard to the business,
an application made by a dealer for insolvency or liquidation of their business;
an application made against dealers business for insolvency or liquidation;
opening or closing of a bank account;

A dealer will not need to make a fresh application for registration. However, the
communication to the Registering Authority concerned should be made within sixty days of
the change or occurrence of the event.

Cancellation of registration

A dealer will be liable to pay VAT while their registration is effective. If however, their
turnover falls below the threshold, he may choose to apply for cancellation of his registration.
However, he should continue to collect and pay VAT in the normal way until his registration
is formally cancelled. Alternatively, they may be allowed the registration to continue.

If a dealer:

discontinue the business;

dispose of or sell or transfer the business;

A dealer must inform the Sales Tax Department within 30 days of the event. In case of
disposal or sale of business, their successor will need to apply for a fresh registration
certificate.

For cancellation of registration a dealer should submit form 103 which is available with the
local sales tax office. It can also be downloaded from the website

www.vat.maharashtra.gov.in

If the Sales Tax Department cancels the dealers registration, they must return the Certificate
of Registration

The cancellation of their certificate does not affect their liability to pay any tax, interest or
penalties in respect of any period prior to the date of cancellation of their registration.

The obligations of a registered dealer

Following are the registration, which dealers are obliged to:

display prominently their certificate of registration and hologram in their place of

business, and a copy of the certificate and hologram in each of the other places where
they carry on their business;
inform their sales tax office of any changes in the details previously reported to the
sales tax office;
collect VAT on all sales at appropriate rates;
calculate the tax due and submit correct, complete and self consistent returns and pay
the amount of tax due on or before the due dates;
issue tax invoice / bill or cash memorandum to all customers;
maintain adequate records and retain them for a period of five years from the end of
the tax year to which they relate;
extend co-operation to the officers of the Sales Tax Department at dealers business
premises and provide all assistance to them to discharge their duties.

Part 3 - Explaining VAT

How VAT works

When a dealer sell goods, the sale price is made up of two elements; the selling price of the
goods and the tax on the sale. The tax is payable to the State Government.

The tax payable on sales is to be calculated on the selling price. The tax paid on purchases
supported by a, valid tax invoice is generally available as set-off (input, tax credit) while
discharging the tax liability on sales.

Example
The following example shows how the VAT works through the chain from manufacturer to
retailer.

Company A buys iron ore and other consumables and manufactures stainless steel utensils;
Partnership firm B buys the utensils in bulk from Company A and polishes them;
shopkeeper C buys some of the utensils and purchases packing, material from vendor D,
packages them and sells the packed utensils for the public.

Particulars

Amount VAT
@
(Rs.)
4% (Rs.)

Company A
Cost of iron are and consumables

50,000

Sales of unpolished stainless steel utensils

1,50,000

Value added

1,00,000

Company A is liable to pay VAT on Rs.1,50,000/- @ 4%

6000

Less Set Off

(2000)

Net VAT amount to pay with the Return (Note: Tax invoice
issued by Company A will show sale price as Rs.1,50,000/- tax
as Rs.6,000/-. Therefore, the total invoice value will be
Rs.1,56,000/-)

2000

4000

Partnership B
Purchases unpolished stainless steel utensils.

1,50,000

Sales polished stainless steel utensils

1,80,000

Value added

30,000

Partnership B is liable to pay V AT on Rs.1,80,000 at 4%

7,200

But can claim set off of tax paid on purchases

(6,000)

Net VAT amount to pay with the Return

1200

Shopkeeper C
Purchases polished stainless steel utensils

1,80,000

Packing material

5,000

Total Purchases

1,85,000

Sales

2,25,000

Value added

40,000

Shopkeeper C is liable to pay V AT on Rs.2,25,000 @ 4%

9,000

Set off of tax paid on purchases (Rs.7,200 + Rs.200 of packing 7,400

material)
Net VAT amount to pay with the Return

1,600

Vendor D
Tax paid costs

Nil

(The sale and purchase figures shown in the example are excluding tax)

The State Government received the tax in stages. The payments of tax were as follows:

Particulars

Amount (Rs.)

Suppliers of Company A

2,000

Company A

4,000

Partnership B

1,200

Shopkeeper C

1,600

Vendor D

200

Total

9,000

Thus, through a chain of tax on sale price and set off on purchase price, the cascading impact
of tax is totally eliminated.

Since set-off of tax on purchases is given only on purchases from registered dealers where tax
is collected separately, dealers purchases from unregistered dealers, imports, inter-state
purchases and purchases from registered dealers without separate tax collection are not
entitled to set-off.

In practice, the tax is finally borne by the ultimate consumer, who is not a registered dealer, in
this case, people who buy utensils from the shopkeeper C.

Tax free goods do not attract tax at any stage of sale or in any type of transaction, whereas,
exempted sales are certain types of transactions, viz., export sales which are exempt from tax.

Composition schemes

Certain dealers may find it difficult to keep detailed records for claiming set-off. For such
dealers, a simpler and optional method of accounting for VAT has been introduced. This
method is the composition scheme. It may be noted that composition scheme is not meant to
be a tax concession scheme but only a simplification of tax calculation and payment system.
Tax payable by dealers opting for composition in lieu of VAT
The following classes of dealers are eligible for option to pay tax under composition:

Resellers selling at retail, i.e., to consumers,

Restaurants, eating houses, hotel (excluding hotels having gradation of 'Four Star and
above), refreshment rooms, boarding establishments, clubs and caterers,
Bakers,
Dealers in second-hand passenger motor vehicles and
Works contractors
Dealers engaged in the business of providing mandap, pandal, shamiana.

Accordingly, if the dealer has opted for payment of tax liability under composition, the tax
liability has to be determined in terms of the guidelines given in the relevant Notification in
this regard. Apart from the terms and conditions governing each of the composition schemes,
the Notification explains the methodology for computation of turnover liable to tax and the
rate of composition payable.

A dealer can opt for the composition option at the beginning of the financial year and has to
continue to be a composition dealer at least till the end of that financial year. If dealer wishes
to switch, over to normal VAT, he can do so only at the beginning of the next financial year.
However, a new dealer can opt for composition at the time of registration.

In respect of works contract, the contractor can choose to discharge tax liability under
composition option. Moreover, such an option can be exercised by the contractor on contract
to contract basis.

Part 4 - Calculating tax liability

In, order to calculate how much tax a dealer has to pay, he must, first determine his turnover
of sales and turnover of purchases. The second stage is to ascertain the amount of tax due for
payment.

Calculating turnover of sales and purchases

The turnover of sales is the total of the amounts received or receivable (excluding VAT
charged separately) in respect, of the sale of goods, less the amount refunded to a purchaser
in respect of goods returned, within six months of the date of the sale.

Similarly, the turnover of purchases is the total of the amounts paid or payable (excluding
VAT charged separately) in respect of the purchase of goods less (the amounts repaid to
dealer in respect of goods they return, within six months of the date of purchase.

Credit notes and debit notes.

If the sale price, or the purchase price, of any goods is varied and either a credit note or a
debit note is issued, then the credit note or the debit note, as the case may be, should

show separately, the tax and the price.

be accounted for in the period in which the appropriate entries are made in their books of
accounts.

Special cases

Auctioneers
If dealer is an auctioneer, then they must include in their turnover, the price of the goods they
auction for their principal
Hotels
There are special rules for hotels and other establishments that provide boarding and lodging
for an inclusive amount.
The rules provide a formula to enable them to calculate their turnover of sales for meals (food
and beverages) which they provide.
The supply of food in a restaurant also includes an element of service. But the full amount
charged is the sale price for the purposes of calculating turnover and tax.
Works contracts

VAT applies only to the sale of goods. Supply of services is not liable to VAT. Works
contracts are deemed sales where both, goods and services are provided in a transaction and
cannot be separated.
A works contract may involve the creation of immoveable property, e.g. a house, a factory or
a bridge. Some other examples of works contracts are photography, repairs & maintenance
etc.
To calculate the amount a dealer should include it in their turnover of sales, so that they may
deduct it from the total contract price, the

costs of labour and service charges.

amount paid to sub-contractors.
charges for planning and designing, and any architect's fees.
hiring charges for machinery and tools.
cost of consumables, such as, water, gas and electricity.
Dealers administrative costs relating to labour and services and any other similar
expenses.
any profit element that relates to the supply of labour and services.

Alternatively, in lieu of the deductions as above, a dealer may choose to discharge the
liability arising on works contracts by referring to the table prescribed in the rules.
If the dealer finds that it is too complicated to calculate the deductions, then they may opt for
a composition scheme for any works contract.

Sales and purchases not liable to tax under VAT

The VAT law specifically excludes from value added tax all imports, exports and inter-state
transactions. These transactions are covered by the CST Act. Similarly, transactions that take
place outside Maharashtra are not within the scope of MVAT Act.

Point of levy in certain cases

Hire purchase
Where there is a hire purchase agreement or an agreement for sale by installments, the date of
the sale is deemed to be the date of the delivery of goods. This is despite the fact that legal
ownership of the goods only passes to the buyer after payment of the final installment.

If the hire-purchase agreement specifies the interest component then in calculating the sales
price, dealer should disregard the interest component included in the agreement.
Calculating the amount of VAT due on sales
Dealer should also make some adjustments to the total turnover of sales to arrive at the
amount on which tax is due.
From the total sales one should deduct
the total of exports and inter-State sales.
the total of sales of goods that are tax free, and
branch / consignment transfers to locations in Maharashtra as well as other States.
the tax collected.
To calculate the tax due, dealer should start allocating their turnover of sales in the return
period (net of the above deductions) to the rates of tax they have been charged. They should
also ensure that the correct tax rates are applied. The information should be readily available
from their records. This gives the total of sales tax due.
Calculating the turnover of purchases
Records will provide the total figure, but they may not have paid VAT on all their purchases.
They must now deduct the total value of
imports from out of India.
inter-State purchases.
purchases of tax free goods.
direct purchases from exempted units under the Package Scheme of Incentives.
consignment transfers, and
local purchased from unregistered dealers.
local purchases from registered dealers not supported by tax invoice.
The resulting figure represents purchases against tax invoices from registered dealers.

Calculating the amount of set off due (VAT paid on purchases)

This is the next stage of tax calculation. At this stage VAT is charged on total purchases.
Dealer must, however, make some adjustments to this amount for, in certain cases, the full set
off of the VAT paid on purchases is not available.

Adjustments to tax available for set off

If dealers purchases include goods, used

o as fuel, or
o for the manufacture of any tax-free goods, or
o as packaging for tax-free goods, this goods should be sold.

Then a dealer must calculate the value of those items and deduct tax @ 4% of the
corresponding purchase price from the amount otherwise available for set off. (Not applicable
to PSI dealers other than the New Package Scheme of Incentives for Tourism Projects, 1999
and also to manufacturers of tax-free sugar or fabrics covered by Entry A 45 and where such
goods are sold in the course of export falling under section 5 of the CST Act, 1956).

Similarly, if the goods are stock transferred by way of branch / consignment transfer to a
place outside the State, deduct tax @ 4% (1 % in respect of goods covered by Schedule B) of
the corresponding purchase price from the amount otherwise available for set off.

Dealer must also make further adjustments as follows:

If they have been used any goods (other than capital assets) as part of a works contract
for which they have been opted for payment composition @ 8% on the total contract
value, they must also deduct 36% of the amount from the set off otherwise available
(4% of purchase price in respect of construction contracts for which they have been
opted for payment of composition @ 5% on total contract value).
Where a dealers sales are less than 50 % of their gross receipts, then they can claim
set off only on those purchases of goods or packing materials effected in that year
where the corresponding goods are sold within six months of the date of purchase or
consigned within the said period to another State by way of stock transfers.
In respect of office equipment, furniture or fixtures which have been treated as capital
assets, a dealer should reduce set-off otherwise entitled by an amount equal to 4% of
the purchase price.
If a dealer is the retailer of liquor vendor and its actual sale prices are less than the
Maximum Retail Price, there is a special formula for calculating the amount of the

adjustment. Effectively this means that, if a dealer sells at 75% of the MRP then they
can claim set off only to the extent of 75% of the tax paid.
A dealer can not claim any set off for the tax paid on any purchases that remain unsold
on the date when business discontinues.

All this information should be available from their records, including tax invoices and bills or
cash memorandum they have issued, and the tax invoices they have received.
Part 5 - Filing a return and paying the tax

VAT is a self-assessment system and dealers are expected to make self assessment for a
given tax period and declare their VAT liability by filing returns. The returns have to be filed
in the prescribed form and by the specified dates. Further, they are also required to pay the
tax due as per the return filed.
In Maharashtra, return form is return-cum-chalan. As such, filing of returns along-with
payment of tax on or before the due date at the notified bank would be considered as
sufficient compliance. However, where any amount of tax including interest or penalty is due
as per a fresh or revised return, then they should first pay such amount in Government
Treasury and file the return in the local office of Sales Tax Department along with a self
attested copy of the chalan. If no payment is due or a refund is claimed as per the return, they
are also required to file the return in the local office of the Sales Tax Department.
Return forms
The return forms prescribed are as follows.
Form No. To Be Used By
221

All VAT dealers other than dealers executing works contract, dealers
engaged in leasing business, composition dealers (including dealers opting
for composition only for part of the activity of the business), PSI dealers and
notified Oil Companies.

222

All composition dealers whose entire turnover is under composition

(excluding works contractors opting for composition and dealers opting for
composition only for part of the activity of the business).

223

VA T dealers who are also in the business of executing works contracts,

leasing and dealers opting for composition only for part of the activity of the
business.

224

PSI dealers holding Entitlement Certificate (Transactions by PSI dealers

relating to the business of execution of works contracts, leasing, frading and
composition only for part of the activity of the business to be included in a

separate return in Form 223).

225

Notified Oil Companies (Transactions by OIL Companies relating to the

business of execution of works contracts, leasing and composition only for
part of the activity of the business to be included in a separate return in Form
223).

A dealer can refer to the instructions given in the form before filling the return.

Please ensure that the return for a tax period covers all the transactions of sales, purchases,
branch transfers received, branch transfers made etc. Further, they must ensure that all the
columns of the return are duly filled in and are clearly legible. If a particular column is not
relevant, please do not leave it blank but mention" not applicable". The return filed by them
must be correct, complete and self-consistent.

Time schedule for filing returns

Periodicity of filing returns is as follows:

Retailers who have opted for composition should file six-monthly returns.
Newly registered dealers should file quarterly returns until the end of the year in
which they first register.
All package scheme dealers should file quarterly returns.
All other dealers should file returns as given below :o Dealers whose tax liability in the previous year was less than Rs.1,OO,OOOj(Rs.1lakh) or whose entitlement for refund was less than Rs.10,OO,OOOj(Rs.10lakh) should file six-monthly returns.
o Dealers whose tax liability in the previous year was more. than Rs.10,00,000(Rs.10lakh) or whose entitlement for refund was more than Rs.l,00,00,000(Rs1crore) should file monthly returns.
o All other dealers should file quarterly returns.

Filing and payment dates for return-cum-chalan are as follows:

Return Frequency

Filing / Payment date

Monthly

21 days from the end of the return period

Quarterly

21 days from the end of the return period

Six Monthly

21 days from the end of the return period

Scrutiny of returns filed

The return filed by the dealer should be correct, complete, and self-consistent in every
respect. The Sales Tax Office will check the return to ensure that there are no obvious errors
in consistencies or contradictions in calculations. If this check reveals discrepancies, then the
dealers will be advised and invited to submit a fresh return. The department will issue this
defect notice within four months of receiving their return. Then they should file their fresh
return within 30 days of the notice. If they fail to do so, it will be deemed not to have filed the
return within the time allowed, and will so liable to a penalty charge.

At the same time, as the department issues the defect notice, dealers will be sent a 'show
cause' notice, explaining that a penalty may be imposed.

Central Value Added Tax.

In 1986 modified value added tax i.e. MODVAT introduced by the central government
which enabled the manufacturers to avail credit of excise duty paid on the input used in or in
relation to manufacture of end product. MODVAT scheme was renamed as central value
added tax scheme i.e. CENVAT scheme in the year 2000. Under this scheme duty paid on
input stage is offset against duty payable at the final stage. Scheme designed to reduce the
cascading effect of indirect taxes on final products.
Statutory Basis Of Cen vat.
Section 2A of The Central Excise Act ,1944 states that unless otherwise expressly
provided or unless context otherwise requires , references to the expressions duty duty of
excise and duties of excise shall be construed to include a reference to Central Value
Added Tax (CENVAT)
Section 37 (xvia xvic) of CEA gives power to the central govt. to make rules to
(a) provide for credit of duty paid or deemed to have been paid on goods used in or in relation
to manufacture of excisable goods .
(b)provide for giving sums of money with respect to raw materials used in manufacture of
excisable goods.
(c) provide for credit of service tax paid or payable on taxable services used in , or in relation
to , the manufacture of excisable goods.
In exercise of these powers , the central govt. made Cenvat Credit Rules , 2004 , which
governs the CENVAT scheme.

How Tax Credit System works.

VAT is based on Tax Credit System where the duty paid on input stage is offset against duty
payable at final stage. In conventional tax system , tax is calculated with reference to selling
price of the product .However, modern production technology requires variety of inputs and
multiple processing in manufacture of goods. Thus for manufacture of a product , output of
one manufacturer becomes input for other manufacturer, who carries out further processing
and sells it to third manufacturer. The process continues till final product is manufactured. In
multiple processing manufactures, a tax based on selling price of a product will result in
taxation at many stages, as raw material passes from one stage to another till the manufacture
of final product. As stages of production and sale continue, each subsequent purchaser has to
pay tax again and again on the inputs which has already been subjected to tax. This is called
cascading effect.VAT eliminates the cascading effect of tax by Tax Credit System. Under
TCS, credit is provided at each stage of tax paid at earlier stage. Assuming that rate of Tax is
10%.

Under Tax Credit System

Assuming rate of Tax is 10%. If the cost price a product manufactured by A is Rs. 100 and
that product is purchased by manufacturer B as input for further processing. Then along with
tax, purchase price of B will be Rs. 110.However B will get a credit of duty already paid ices.
10 , he will not consider this amount in his cost .B does a value addition Rs. 40 on that
input , then selling price of that product will be Rs. 154. (Rs. 100+40=140 + 10%
Tax(Rs.14)= 154).Though B will mark the invoice price as Rs. 154 , he will pay a tax of only
Rs. 4 (14-10) as B has got a credit of Rs. 10 on account of 10% tax already paid on that
product by earlier manufacturer C purchases the product from B as input for further
processing , does a value addition of Rs. 60, then the selling price of that product will be Rs.
206( 140+60=200+10% Tax= 220-14=206). Here C will not consider Rs. 14 as his cost as he
is getting a credit of Rs. 14 , which is the amount of tax paid by the earlier manufacturers
will only pay Rs. 6 as tax i.e. 10% of value addition of Rs. 60 done by him. If C sells his
product to D for further processing, Then purchase price of D will be Rs. 220.However D
will get a credit of duty already paid i.e. Rs. 20 , so he will not consider this amount in his
cost .If D does a value addition of Rs. 50 on that input the selling price of D will be Rs.
275( 200+ 50=250 + 10% Tax= 275). However D will pay only Rs. 5 as duty (10% of Rs. 50)
as he has got a credit of Rs. 20 i.e. amount of tax paid by earlier manufacturer.
Advantages of Tax Credit System.
Under TCS and VAT , exports can be made tax free which allows goods manufactured in
India to compete with goods manufactured in other countries on price front. As the exporters
are allowed CENVAT credit , inputs for manufacture of export products comes totally duty
free which helps in keeping the prices low and competitive. Taxation can be target specific as
VAT allows differential taxation of goods and services. It is a self regulating system where
value chain is unbroken and each user of input has a interest in keeping the system working.
Tax enforcement is strengthened as TCS provides audit trail through different stages of
production and trade. It acts as a self policing mechanism as every stakeholder has a
monetary interest involved i.e. getting the tax credit. If someone wants to evade tax, he will
not get the benefit of tax credit and there is no incentive for evading taxes. Moreover his
products will also not find market as users of inputs will not buy something which does not
give them tax credit.

VALUATION IN CUSTOMS
Definitions:

Import with its grammatical variations and cognate expressions, means bringing into
India from a place outside India - 2(23)
imported goods means any goods brought into India from a place outside India but does
not include goods which have been cleared for home consumption 2(25)
Indian Customs Waters means the waters extending into the sea up to the limit of
contiguous zone of India under section 5 of the Territorial Waters Continental Shelf,
Exclusive Economic Zone and other Maritime Zones Act, 1976 and includes any bay,
gulf, harbor, creek or tidal river 2(28) jurisdiction of the Act
Goods includes- (a) vessels, aircrafts and vehicles; (b) stores; (c) baggage; (d)
currency and negotiable instruments; and (e) any other kind of movable property 2(22)
Section 12. Dutiable goods- (1) Except as otherwise provided in this Act, or any law for
the time being in force, duties of customs shall be levied at such rates as may be specified
under the Customs Tariff Act, 1975 or any other law for the time being in force, on goods
imported into, or exported from, India

CUSTOMS VALUATION (DETERMINATION OF PRICE OF IMPORTED GOODS)

RULES, 1988
Definitions.

"identical goods" means imported goodso 1.which are same in all respects, including physical characteristics, quality and
reputation as the goods being valued except for minor differences in appearance
that do not affect the value of the goods;
o 2.produced in the country in which the goods being valued were produced; and
o 3.produced by the same person who produced the goods, or where no such goods
are available, goods produced by a different person, but shall not include imported
goods where engineering, development work, art work, design work, plan or
sketch undertaken in India were completed directly or indirectly by the buyer on
these imported goods free of charge or at a reduced cost for use in connection with
the production and sale for export of these imported goods;
"similar goods" means imported goods
o 1.which although not alike in all respects, have like characteristics and like
component materials which enable them to perform the same functions and to be
commercially interchangeable with the goods being valued having regard to the
quality, reputation and the existence of trade mark;
o 2.produced in the country in which the goods being valued were produced; and

o 3.produced by the same person who produced the goods being valued, or where
no such goods are available, goods produced by a different person, but shall not
include imported goods where engineering, development work, art work, design
work, plan or sketch undertaken in India were completed directly or indirectly by
the buyer on these imported goods free of charge or at a reduced cost for use in
connection with the production and sale for export of these imported goods;
"related persons " meanso 1. they are officers or directors of one another's businesses;
o 2. they are legally recognised partners in business;
o 3.they are employer and employee;
o 4.any person directly or indirectly owns, controls or holds 5 per cent or more of
the outstanding voting stock or shares of both of them;
o 5.one of them directly or indirectly controls the other;
o 6.both of them are directly or indirectly controlled by a third person;
o 7.together they directly or indirectly control a third person; or
o 8.they are members of the same family.

India is presently following the provisions of the WTO Agreement on Customs Valuation
(ACV) for determination of value on imported goods where Customs duty is levied with
reference to value (ad-valorem rates). However, this does not apply to cases where tariff
values have been fixed .
India is a founding Member of the GATT (presently WTO) and was actively involved in the
GATT negotiations (Tokyo Round, 1973-79), which developed the Agreement on Customs
Valuation (ACV). India implemented the ACV in August 1988.

Legal provisions
Section 2(41) of the Customs Act, 1962 defines Value in relation to any goods to mean the
value thereof determined in accordance with Section 14 (1).
Section 14 (1) in turn, states that when a duty of customs is chargeable on any goods by
reference to their value, the value of such goods shall be deemed to be:-"The price at which
such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of
importation or exportation, as the case may be, in the course of international trade, where the
seller and the buyer have no interest in the business of each other and the price is the sole
consideration for the sale or offer for sale".The provisions Section 14 (1) apply for the
valuation of both imported goods and export goods.
However, a common valuation law at international level applies only to imported goods and
its basic principles are laid down in Article VII of General Agreement on Tariffs and Trade
(GATT), 1948, currently administered by the World Trade organization, WTO. The Indian
valuation law under Section 14(1) of the Indian Customs Act is based on the principles of
Article VII of the GATT. The Agreement on Customs Valuation (ACV), which came into
force on 1st January 1981, lays down well defined methods of valuation to be strictly

followed so as to ensure uniformity and certainty in valuation approach and to avoid

arbitrariness.
Section 14 - (1) For the purposes of the Customs Tariff Act, 1975 , or any other law for the
time being in force, the value of the imported goods and export goods shall be the transaction
value of such goods, that is to say, the price actually paid or payable for the goods when sold
for export to India for delivery at the time and place of importation or as the case may be , for
export from India for delivery at the time and place of exportation, where the buyer and seller
of goods are not related and price is the sole consideration for the sale subject to conditions
as may be specified in the rules made in this behalf
Provided that such transaction value shall include, in addition to the price, any amount paid
or payable for costs and services, including commissions and brokerage, engineering, design
work, royalties and license fees, costs of transportation to the place of importation, insurance,
loading, unloading and handling charges to the extent and in the manner specified in the rules
in this behalf Provided further that the rules in this behalf may provide for:
The circumstances in which the buyer and seller are deemed to be related The manner of
determination of value when there is no sale or the buyer and seller are related or price is not
the sole consideration for sale or in any other case, the manner and acceptance or rejection of
value declared by the importer or exporter, where the proper officer has reason to doubt the
truth and accuracy of such value, and determination of value for the purpose of this section.
Provided also that such price shall be calculated with reference to the rate of exchanges as in
force on the date on which a bill of entry is presented under section 46, or a shipping bill or
bill of export, as the case may be, is presented under section 50;
Explanation - For the purposes of this section-(a) "rate of exchange" means the rate of
exchange-(i) determined by the Board , or(ii) ascertained in such manner as the Board may
direct, for the conversion of Indian currency into foreign currency of foreign currency into
Indian currency;(b) foreign currency" and "Indian currency" have the meanings respectively
assigned to them in the Foreign Exchange Management Act, 1999 .
The Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 lays down
the methods of valuation based on the ACV. Transaction value, which is the price paid or
payable for the imported goods, is the primary basis for valuation. If the transaction value
method is not applicable in a specific case, the other methods of valuation prescribed in the
Rules (based on ACV) have to be followed in a hierarchical order, subject to certain
exceptions . Under the Customs Act, 1962, the Central Government has also been empowered
to fix Tariff Values under provisions of Section 14(2) for any product. If Tariff Value is fixed
for any goods, then ad-valorem duties are to be calculated with reference to such Tariff Value.
The tariff values may be fixed for any class of imported or export goods having regard to the
trend of value of such or like goods and the same has to be notified in the official gazette.

This measure is resorted to only in rare cases where the price fluctuations in the market are
rampant having significant economic impact.
The Customs Valuation Rules, 1988, lays down methods for the valuation of imported goods.
The primary basis for valuation is the "Transaction Value". In certain situations, the Customs
authorities could reject the declared value (transaction value method), if the truth or accuracy
of the declaration is reasonably suspected. In all such cases where the transaction value
method is not applied, goods shall be valued by applying the subsequent methods in a strictly
hierarchical. In order to enable the Customs to determine the value by application of the
most appropriate method, the importer is required to truthfully declare the full particulars
concerning the goods under import. These include full description and specifications of the
goods, basis of valuation applied, relationship with the supplier, conditions and restrictions if
any attached with the sale, elements of cost not included in the invoice price, royalty and
license fee payable in relation to the imported goods, etc. These details are to be declared in
a special Valuation Declaration Format designed for the purpose.
Transaction Value method:
Rule 3(i) of the Customs Valuation Rules, 1988 states that the value of imported goods shall
be the transaction value.
Rule 4(i) thereof defines transaction value as the price actually paid or payable for the
goods when sold for export to India. The price actually paid or payable should be adjusted to
include all the costs and services (dutiable valuation factors) specified in Rule 9 (1).
In short, the transaction value should be determined by suitably adjusting the declared value
so as to include all payments made as a condition of sale of the imported goods by the buyer
to the seller or by the buyer to a third party to satisfy an obligation of the seller. Since the
assessment is on CIF basis, the invoice value should be suitably adjusted to include the
freight, insurance and handling charges as applicable under Rule 9 (2).
Valuation factors:
Valuation Factors are the various elements (dutiable factors), which should be added while
determining the Customs value. The factors should be added to the extent they are not already
included in the price actually paid or payable (invoice value).These dutiable factors are:

Commissions and brokerage, except buying commissions;

The cost of containers which are treated as being one for Customs purposes with the
goods in question;
The cost of packing whether for labor or materials;

The value of the following goods and services where supplied directly or indirectly by
the buyer free of charge or at reduced cost for use in connection with the production and
sale for export of the imported goods, to the extent that such value has not been included
in the price actually paid or payable:- material, components, parts and similar items
incorporated in the imported goods; tools, dies, moulds and similar items used in the
production of the imported goods; materials consumed in the imported goods;
engineering, developing, artwork, design work, and plans and sketches undertaken
elsewhere than in the importing country and necessary for the production of imported

goods;
Royalties and license fees related to goods being valued that the buyer must pay either
directly or indirectly, as a condition of sale of the goods being valued, to the extent that
such royalties and fees are not included in the price actually paid or payable;
Advance payments;
Freight charges up to the place of importation;
Loading, unloading and handling charges associated with transporting the goods;
Insurance.

Non-dutiable Factors:
The following charges are not to be added for the purposes of determining the Customs value
provided they are clearly distinguishable and separately declared in the commercial invoice:

Buying commission:
Interest charges for deferred payment;
Post-importation charges (e.g. inland transportation charges, installation or erection
charges, etc.);
Duties and taxes payable in India.

Conditions required to be satisfied for application of Transaction Value method .

The sale is in the ordinary course of trade under fully competitive conditions;
The sale does not involve any abnormal discount or reduction from the ordinary
competitive price;
The sale does not involve special discounts limited to exclusive agents;
There are no restrictions concerning the disposition or use of the goods by the buyer .
The sale or price is not subject to some condition or consideration;
No part of the proceeds of the goods (by resale, disposal or use) after importation accrues
to the seller;
Buyer and seller are not related, and if related, the relationship should not have influenced
the price.

Non applicability of TV method.

Transaction value method does not apply in following situations .

If there is no sale for export to India in respect of any importation, such as gifts.
Where valuation fraud (under valuation, wrong description, miss declaration of quantity,
grade, specifications, etc) are shown to have taken place.

Related Party transactions

The transaction value method cannot be applied in cases where the buyer and seller are
related and the relationship has influenced the price.
In such cases the burden of proof shifts to the importer, who should satisfy the Customs
that the declared price closely approximates to the test values.
If the importer fails to discharge this responsibility, the declared value could be rejected
and valuation done under any of the subsequent methods applied in hierarchical order.

Other valuation methods:

(1) Transaction Value of Identical goods.
This is based on the previously determined transaction value of identical goods, imported at
or about the same time;
(2)Transaction Value of Similar goods.
Appendix 1
List of important forms referred to in the Guide

Sr.

Form

No.

Number

Subject

101

Application for Registration under the MV AT Act, 2002.

103

Application for cancellation of Registration Certificate.

210

Chalan in respect of payment made otherwise than with return by a

dealer under the MVAT Act, 2002

221

Return-cum-chalan for all VAT dealers other than dealers executing

works contract, dealers engaged in leasing business, composition
dealers (including dealers opting for composition only for part of the
activity of the business), PSI dealers and notified Oil Companies.

222

Return-cum-chalan for all composition dealers whose entire turnover

is under composition (excluding works contractors opting for

composition and dealers opting for composition only for part of the
activity of the business).
6

223

Return-cum-chalan for VAT dealers who are also in the business of

executing works contracts, leasing and dealers opting for composition
only for part of the activity of the business.

224

Return-cum-chalan for PSI dealers holding Entitlement Certificate.

(Transactions by PSI dealers relating to the business of execution of
works contracts, leasing, trading and composition only for part of the
activity of the business to be included in a separate return in Form
223).

225

Return-cum-chalan for Notified Oil Companies. (Transactions by

OIL Companies relating to the business of execution of works
contracts, leasing and composition only for part of the activity of the
business, to be inc1uded in a separate return in Form 223).

304

Application for cancellation of assessment order under section (1) of

section 23 of the Maharashtra Value Added Tax Act, 2002.

10

310

Appeal against an order of assessment, interest, penalty or fine.

11

311

Application for grant of stay against order of assessment, penalty,

interest or fine

12

414

Application for tax clearance certificate.

13

501

Application for refund under sub-section (1) of section 51 of the

Maharashtra Value Added Tax Act, 2002.

14

704

Audit report under section 61 of the Maharashtra Value Added Tax

Act, 2002.

DIFFERANCE BETWEEN M-VAT AND CENVAT

QUICK FLASH BACK
M-VAT
Sales tax was first introduced in India in the then Bombay Province as early as March 1938
where a tax was imposed on sale of tobacco within certain urban and suburban areas. In the

year 1946, a general sales tax was introduced levying sales tax at the last stage of sale of
goods.
The Bombay Sales Tax Act, 1959 introduced in 1959 underwent many changes thereafter and
in July 1981, first point tax was introduced wherein goods were classified into three main
schedules, broadly covering tax free goods, intermediate products and finished goods. The
BST Act was repealed and Maharashtra Value Added Tax Act, 2002 came into force. 1st
April, 2005 to usher in the progressive value added tax system in place of the old sales tax
system. VAT in Maharashtra is levied under a legislation known as the Maharashtra Value
Added Tax Act (MVAT Act), supported by Maharashtra Value Added Tax Rules (MVAT
Rules). VAT is levied on sale of goods including intangible goods.
The meaning of goods for VAT purposes
Goods means every kind of moveable property including goods of incorporeal and
intangible nature but there are some exclusion, such as newspapers, actionable claims,
money, shares and securities and lottery tickets.
Businesses engaged in. the buying and selling of goods within the scope of the VAT law are
referred to as dealers.

The meaning of 'sale' for VAT purposes

A transaction of sale can be a:

normal sale of goods;

sale of goods under hire-purchase system;

deemed sale of goods used I supplied in the course of execution of works contract;

deemed sale of goods given on lease.

The rate of tax applicable to the goods sold under various classes of sales is uniform.
However, in respect of normal sales of goods and deemed sales of goods under works
contract and specified deemed sale of goods given on lease, the Act provides for an optional
method for discharging tax liability by way of composition. Being so, the tax liability has to

be determined with reference to the option exercised by the dealer for discharging tax
liability.
Businesses covered by VAT
The VAT system embraces all businesses in the production and supply chain, from
manufacture through to retail. VAT is collected at each stage in the chain when value is added
to goods. 1t applies to al1 businesses, including importers, exporters, manufacturers,
distributors, wholesalers, retailers, works contractors and lessors.

CENTRA VAUE ADDED TAX.

In 1986 modified value added tax i.e. MODVAT

introduced by the central government

which enabled the manufacturers to avail credit of excise duty paid on the input used in or in
relation to manufacture of end product. MODVAT scheme was renamed as central value
added tax scheme i.e. CENVAT scheme in the year 2000. Under this scheme duty paid on
input stage is offset against duty payable at the final stage. Scheme designed to reduce the
cascading effect of indirect taxes on final products.
STATUTORY BASIS OF CENVAT
Section 2A of The Central Excise Act ,1944

states that unless otherwise expressly

provided or unless context otherwise requires , references to the expressions duty duty of
excise and duties of excise shall be construed to include a reference to Central Value
Added Tax (CENVAT)
Section 37 (xvia xvic) of CEA gives power to the central govt. to make rules to
(a) Provide for credit of duty paid or deemed to have been paid on goods used in or in
relation to manufacture of excisable goods .
(b) Provide for giving sums of money with respect to raw materials used in manufacture of
excisable goods.
(c) Provide for credit of service tax paid or payable on taxable services used in , or in relation
to , the manufacture of excisable goods.

In exercise of these powers, the central govt. made Cenvat Credit Rules , 2004 , which
governs the CENVAT scheme.
LEAGLE PROVISIONS

M-VAT
Registration under VAT
Rules for registration

If a dealers annual turnover exceeds the below mentioned threshold, then it must register
with the local office of the Sales Tax Department.
Category

Annual Turnover of

Turnover of sales or

Fees payable on

Sales

purchase of taxable

registration

goods not less than

Importer

1,00,000

10,000

100

Others

5,00,000

10,000

100

If the dealers turnover is less than the above threshold, then they are not liable to collect and
pay VAT. However, if a dealer wishes to avail the benefits of being a registered dealer, then
they may apply for voluntary registration by paying a fee of Rs.5,000/ -.

Benefits of being a registered dealer

As a registered dealer, they are entitled to:

collect VAT on the sales;

claim set-off of tax (input tax credit) paid on purchases;

Issue tax invoices and, be competitive.

Effective date of registration

The effective date of registration, that is, the date front which a dealer may charge VAT on
sales; will depend on the date they first become liable to pay VAT. This date will be
determined as follows:
a) New businesses:
If a dealer is not registered because their annual turnover is less than the threshold; their
liability to account for VAT starts from the date they cross the threshold.
b) Existing businesses:
If a dealer took over an existing business that is registered for VAT, then they will be liable to
pay tax on sales from the date they took over the business.
c) Voluntary registration:
If a dealer is registered on a voluntary basis, then he will be liable to account for VAT from
the date shown on the certificate of registration.
d) Late registration:
If a dealers turnover has exceeded the appropriate threshold but they have applied late for
registration, then he can charge VAT on his sales only after they are registered, i.e., from the
date shown on the certificate of registration.

Further, having crossed the threshold, it is an offence to be engaged in business as a dealer

without a certificate of registration

Certificate of registration
A dealer should prominently display the certificate and hologram, or a copy of the certificate
and hologram, at each place where they carry can on their business.

If a dealer has more than one place of business, then Sales Tax Office will provide them,
upon their request, one copy of the certificate of registration and hologram for each additional
place of business.

If a dealer loses his / her certificate of registration or hologram, or it is accidentally destroyed

or defaced, then they may obtain a duplicate copy of the certificate of hologram from their
sales tax office.

The certificate of registration and hologram is personal to the dealer to whom it is issued and
is non-transferable.
Changes to business circumstances
If, following dealer register, there are any amendments to the details they can be reported
while applying for registration, it must done within 60 days of the change, inform us in
writing.

Where the amendment involves a:

change in the name of the business;
change in the constitution of the business without dissolution of the firm;
change in the trustees of a Trust;
change in the guardianship of a ward;
change in the Karta of a Hindu Undivided Family;
conversion of Private limited Company to a Public limited Company;
change in the place of business;
addition of new place of business;
formation of a partnership with regard to the business,
an application made by a dealer for insolvency or liquidation of their business;
an application made against dealers business for insolvency or liquidation;
opening or closing of a bank account;

A dealer will not need to make a fresh application for registration. However, the
communication to the Registering Authority concerned should be made within sixty days of
the change or occurrence of the event.
Cancellation of registration
A dealer will be liable to pay VAT while their registration is effective. If however, their
turnover falls below the threshold, he may choose to apply for cancellation of his registration.
However, he should continue to collect and pay VAT in the normal way until his registration
is formally cancelled. Alternatively, they may be allowed the registration to continue.

If a dealer:

discontinue the business;

dispose of or sell or transfer the business;

A dealer must inform the Sales Tax Department within 30 days of the event. In case of
disposal or sale of business, their successor will need to apply for a fresh registration
certificate.

For cancellation of registration a dealer should submit form 103 which is available with the
local sales tax office. It can also be downloaded from the website

www.vat.maharashtra.gov.in

If the Sales Tax Department cancels the dealers registration, they must return the Certificate
of Registration

The cancellation of their certificate does not affect their liability to pay any tax, interest or
penalties in respect of any period prior to the date of cancellation of their registration.

The obligations of a registered dealer

Following are the registration, which dealers are obliged to:

display prominently their certificate of registration and hologram in their place of

business, and a copy of the certificate and hologram in each of the other places where
they carry on their business;
inform their sales tax office of any changes in the details previously reported to the
sales tax office;
collect VAT on all sales at appropriate rates;
calculate the tax due and submit correct, complete and self consistent returns and pay
the amount of tax due on or before the due dates;
issue tax invoice / bill or cash memorandum to all customers;
maintain adequate records and retain them for a period of five years from the end of
the tax year to which they relate;

extend co-operation to the officers of the Sales Tax Department at dealers business
premises and provide all assistance to them to discharge their duties.

CENVAT
Legal provisions
Section 2(41) of the Customs Act, 1962 defines Value in relation to any goods to mean the
value thereof determined in accordance with Section 14 (1).
Section 14 (1) in turn, states that when a duty of customs is chargeable on any goods by
reference to their value, the value of such goods shall be deemed to be:-"The price at which
such or like goods are ordinarily sold, or offered for sale, for delivery at the time and place of
importation or exportation, as the case may be, in the course of international trade, where the
seller and the buyer have no interest in the business of each other and the price is the sole
consideration for the sale or offer for sale".The provisions Section 14 (1) apply for the
valuation of both imported goods and export goods.
However, a common valuation law at international level applies only to imported goods and
its basic principles are laid down in Article VII of General Agreement on Tariffs and Trade
(GATT), 1948, currently administered by the World Trade organization, WTO. The Indian
valuation law under Section 14(1) of the Indian Customs Act is based on the principles of
Article VII of the GATT. The Agreement on Customs Valuation (ACV), which came into
force on 1st January 1981, lays down well defined methods of valuation to be strictly
followed so as to ensure uniformity and certainty in valuation approach and to avoid
arbitrariness.
Section 14 - (1) For the purposes of the Customs Tariff Act, 1975 , or any other law for the
time being in force, the value of the imported goods and export goods shall be the transaction
value of such goods, that is to say, the price actually paid or payable for the goods when sold
for export to India for delivery at the time and place of importation or as the case may be , for
export from India for delivery at the time and place of exportation, where the buyer and seller
of goods are not related and price is the sole consideration for the sale subject to conditions
as may be specified in the rules made in this behalf
Provided that such transaction value shall include, in addition to the price, any amount paid
or payable for costs and services, including commissions and brokerage, engineering, design
work, royalties and license fees, costs of transportation to the place of importation, insurance,
loading, unloading and handling charges to the extent and in the manner specified in the rules
in this behalf Provided further that the rules in this behalf may provide for:
The circumstances in which the buyer and seller are deemed to be related The manner of
determination of value when there is no sale or the buyer and seller are related or price is not
the sole consideration for sale or in any other case, the manner and acceptance or rejection of

value declared by the importer or exporter, where the proper officer has reason to doubt the
truth and accuracy of such value, and determination of value for the purpose of this section.
Provided also that such price shall be calculated with reference to the rate of exchanges as in
force on the date on which a bill of entry is presented under section 46, or a shipping bill or
bill of export, as the case may be, is presented under section 50;
Explanation - For the purposes of this section-(a) "rate of exchange" means the rate of
exchange-(i) determined by the Board , or(ii) ascertained in such manner as the Board may
direct, for the conversion of Indian currency into foreign currency of foreign currency into
Indian currency;(b) foreign currency" and "Indian currency" have the meanings respectively
assigned to them in the Foreign Exchange Management Act, 1999 .
The Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 lays down
the methods of valuation based on the ACV. Transaction value, which is the price paid or
payable for the imported goods, is the primary basis for valuation. If the transaction value
method is not applicable in a specific case, the other methods of valuation prescribed in the
Rules (based on ACV) have to be followed in a hierarchical order, subject to certain
exceptions . Under the Customs Act, 1962, the Central Government has also been empowered
to fix Tariff Values under provisions of Section 14(2) for any product. If Tariff Value is fixed
for any goods, then ad-valorem duties are to be calculated with reference to such Tariff Value.
The tariff values may be fixed for any class of imported or export goods having regard to the
trend of value of such or like goods and the same has to be notified in the official gazette.
This measure is resorted to only in rare cases where the price fluctuations in the market are
rampant having significant economic impact.
The Customs Valuation Rules, 1988, lays down methods for the valuation of imported goods.
The primary basis for valuation is the "Transaction Value". In certain situations, the Customs
authorities could reject the declared value (transaction value method), if the truth or accuracy
of the declaration is reasonably suspected. In all such cases where the transaction value
method is not applied, goods shall be valued by applying the subsequent methods in a strictly
hierarchical. In order to enable the Customs to determine the value by application of the
most appropriate method, the importer is required to truthfully declare the full particulars
concerning the goods under import. These include full description and specifications of the
goods, basis of valuation applied, relationship with the supplier, conditions and restrictions if
any attached with the sale, elements of cost not included in the invoice price, royalty and
license fee payable in relation to the imported goods, etc. These details are to be declared in
a special Valuation Declaration Format designed for the purpose.

Transaction Value method:

Rule 3(i) of the Customs Valuation Rules, 1988 states that the value of imported goods shall
be the transaction value.
Rule 4(i) thereof defines transaction value as the price actually paid or payable for the
goods when sold for export to India. The price actually paid or payable should be adjusted to
include all the costs and services (dutiable valuation factors) specified in Rule 9 (1).
In short, the transaction value should be determined by suitably adjusting the declared value
so as to include all payments made as a condition of sale of the imported goods by the buyer
to the seller or by the buyer to a third party to satisfy an obligation of the seller. Since the
assessment is on CIF basis, the invoice value should be suitably adjusted to include the
freight, insurance and handling charges as applicable under Rule 9 (2).
Valuation factors:
Valuation Factors are the various elements (dutiable factors), which should be added while
determining the Customs value. The factors should be added to the extent they are not already
included in the price actually paid or payable (invoice value).These dutiable factors are:

Commissions and brokerage, except buying commissions;

The cost of containers which are treated as being one for Customs purposes with the
goods in question;
The cost of packing whether for labor or materials;

Conclusion
When a dealer sell goods, the sale price is made up of two elements; the selling price of the
goods and the tax on the sale. The tax is payable to the State Government.

The tax payable on sales is to be calculated on the selling price. The tax paid on purchases
supported by a, valid tax invoice is generally available as set-off (input, tax credit) while
discharging the tax liability on sales.
Example
The following example shows how the VAT works through the chain from manufacturer to
retailer.

Company A buys iron ore and other consumables and manufactures stainless steel utensils;
Partnership firm B buys the utensils in bulk from Company A and polishes them;
shopkeeper C buys some of the utensils and purchases packing, material from vendor D,
packages them and sells the packed utensils for the public.
central value added tax scheme i.e. CENVAT scheme in the year 2000. Under this scheme
duty paid on input stage is offset against duty payable at the final stage. Scheme designed to
reduce the cascading effect of indirect taxes on final products.
The Act provides for the scope and machinery for levy and collection of service tax in India.
It is supported by central govt and Maharashtra govt, 2000,2004 and several other
subordinate rules and regulations. Besides, circulars and notifications are issued by the
Central Board of indirect tax Taxes (CBIT) and sometimes by the Ministry of Finance,
Government of India dealing with various aspects of the excise duty of service tax. Unless
otherwise stated, references to the sections will be the reference to the sections of the m vat of
Maharashtra and cenvat of India

Bibliography

1. Value Added Tax By Sales Tax Department.

2. www.google.com

3. www.tax4india.cenvat.com

4. www.vat.maharashtra.gov.in