VAT Helpline [BUSY]

VT A
(Value Added Tax)

1. What is VAT?
How is VAT different from Sales Tax?

2. Benefits of VAT 3. Background of VAT

About VAT
Input Tax Credit Output Tax Nett Tax Tax Invoice Tax Liability & Registration Tax Payers Identification Number (TIN) Return Filing Assessment Audit Declaration Forms Incentives Other Taxes Penal Provisions Coverage of Goods VAT Rates & Classifications

4. VAT implementation in BUSY

VAT Helpline [BUSY]

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 1960s, then in European countries in 1970s 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.

VAT Helpline [BUSY]

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

VAT Helpline [BUSY] 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. 2. 3. 4. Input purchased within the month Output sold in the month : Input tax paid Output tax payable : Rs. 1,00,000/Rs. 1,50,000/: Rs. 4,000/: Rs. 18,750/: Rs. 14,750/- (Rs. 18,750 4,000)

5. Nett VAT payable during the month 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 doesnt exceed Rs. 50 Lacs shall have the option of Composition Scheme. The nett tax in this case will be 1% of the dealers turnover. Dealers opting for this scheme will not be entitled to input tax credit. 5.6 Tax Payers Identification Number (TIN) All registered dealers will be issued a Tax Payers 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 is existing now. If no specific notice is issued for departmental

VAT Helpline [BUSY] 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.

VAT Helpline [BUSY] 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. Under 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.

6. VAT implementation in BUSY

BUSY is credited with being the first Fully VAT-Compliant Accounting Software in the country having implemented Haryana VAT - the only state to have implemented VAT so far in year 2004 itself. It provides: VAT Computation VAT Invoicing (Fully User-configurable) VAT Registers (State-specific)

VAT Registers for Delhi (DVAT-30, DVAT-31 and DVAT-35B) & Haryana (LS1 to LS7, LS9, LP1 to LP9, VAT A4 & C4) have already been incorporated in BUSY. VAT Registers for other states too will be incorporated as and when the details are available.
Created by : VAT Helpline [BUSY] Last Modified On : 21-03-2005

--------------------- X ---------------------