Background of Vat in India

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

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

Nokia 5800
Rs.14000

Cellular Telephone (Mobile Phone) - Reduced to 5% (By Notification G.o.Ms.No.45

dated 25.03.2015) in tamilnadu
 History in India

States Date No.

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

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

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

VAT being a multi stage levy, it allows registered dealers to take

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

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

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

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

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

This method is based on the identification of value-added , which can

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

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

It is used when invoice does not show VAT separately.
VAT liability at each stage= Rate of VAT/100+Rate of VAT X Taxable
Turnover.
Taxable Turnover means value added at each stage.
Value added= Sale price-Purchase Price.
 Types of subtraction method:

1. Direct subtraction method: Value Added= Aggregate value of

Sales(excluding tax)-Aggregate value of Purchases(excluding tax).

2. Intermediate subtraction method: Value Added= Sales-Aggregate

value of Purchases(including tax).

.
Disadvantages:

1. Not suitable in case of inputs with different rates of tax.

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

Under this method, VAT is imposed on the total sale value and credit
is allowed of the amount of VAT paid earlier.

The VAT amount is recovered from the buyer by charging it separately

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

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

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

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