VAT

VAT is based on the value addition to the goods,

and the related VAT liability of the dealer is

calculated by deducting input tax credit from tax
collected on sales during the payment period.
The essence of VAT is in providing set-off for the tax
paid earlier, and this is given effect through the
concept of input tax credit/rebate.
This in put tax credit in relation to any period means
setting off the amount of input tax by a registered
dealer against the amount of his output tax.
In the old sales tax structure in several states,
multiplicities of taxes (such as turnover tax,
surcharge on sales tax, additional surcharge etc.
were imposed. With introduction of VAT, these other
taxes will be abolished.

What are the benefits of VAT?

Set-off will be given for input tax as well as tax paid
on previous purchases;
Other taxes, such as turnover tax, surcharge,
additions surcharge, etc. will be abolished;
Overall tax burden will be rationalized;
Prices will in general fall;
There will be self-assessment by dealers;
Transparency will increase; and
There will be higher revenue growth
What is the need for introducing VAT?
VAT is more equitable way of taxing as all dealers
share the tax burden

VAT is more transparent as easy procedures

exist under it and only two rates are there.

Simpler-easy computation and easy compliance
Credit for input taxation leading to cost
efficiency
Better compliance through self-policing
Prevents cascading effect by providing input
rebate
Avoids distortions in trade and economy due to
uniform tax rates.
What are the merits of VAT?
Eliminates multiple tax
Certainty and easy understandability
Lowering of tax burden

Fairness
Tax evasion will be reduced
Tax transparency
Higher tax revenue
Uniformity
Simpler
Eliminates multiple rate regime
Neutral
Stable source of revenue
Economy in exports

Demerits It does not cover goods as well as services

Exemptions

Floor rate
General rate of 12.5 per cent is too high
Classification of capital goods
Inclusion of capital goods and industrial inputs

as concessional rate
Applicability of VAT on MRP
Distortions due to concessions
General structure of India
Increase in compliance cost
Increase in working capital
Preference for consumption over production
Tax evasion

Demerits in general:
For complying with the VAT provision accounting cost
increases. The burden of this increase cost may not be
commensurate with the benefit to traders and small
firms.
Since VAT is imposed or paid at various stages and not
on last stage, it results in increase in working capital
requirement. In this way it is considered to be non
beneficial as compared to the single stage last point
taxation system
VAT is a form of consumption tax. Proportion of income
spent on consumption is larger in the case of poor, as
compared to that of rich. Thus VAT tends to be
regressive.
VAT increases administration cost to the State, as
number of dealers to be administered will go up
significantly.

Illustration-1:

Total of tax element in respect of sales voucher:

A
Total of tax element in respect of purchase voucher:
B
VAT payable by dealer: A minus B
Illustration 2:
VAT is calculated by deducting tax credit from tax
collected during the payment period.
Purchase price Rs.100
Tax paid on purchase (i.e., input tax) at the rate
(assumed) of 10 per cent Rs. 10
Sale priceRs.180
Tax on sale price (i.e, output tax) at the rate
(assumed) of 12.5 per cent Rs.22.50
VAT payable (Rs.22.5 Rs.10) Rs.12.50

PROCEDURES
Provisions pertaining to compulsory issue of
tax invoice, cash memo or bill:
The entire design of VAT with input tax credit is
crucially based on documentation of tax invoice,
cash memo or bill.
Every registered dealer, having turnover of sales
above an amount specified, 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 counterfoil or duplicate
of such tax invoice duly signed and dated.

VAT invoice contains the following

information:
The words TAX Invoice should be printed in a
prominent place on the invoice.
Name, address and VAT registration number of
the seller
Date of issue of invoice
Mechanically printed Serial No. of the invoice.
Quantity and description of the goods sold
Unit price and the amount charged (excluding
VAT)
Rate and amount of VAT charged
Name, address and VAT registration no. of the
purchaser.

A dealer who is registered under VAT regulations

is known as registered dealer.

Registration of dealers with gross annual
turnover above a specified amount (say, Rs.5
Lakhs) is compulsory.
Failure to get registered shall result in attracting
default penalty (Penalties) and forfeiture of
eligibility to set off all input tax credit related to
the compulsory registration.
Cancellation of registration:
Discontinuance of business
Disposal of business;
Transfer of business to a new location; or
Annual turnover of a manufacturer or a trader
dealing in designated or services falling below

Composition Scheme: (This is optional )

Small dealers with annual gross turnover not
exceeding a specified amount (Rs.50 lakh) who
are otherwise liable to pay VAT, shall however
have the option for a composition scheme with
payment of tax at a small percentage of gross
turnover.
The dealers opting for this composition scheme
will not be entitled to input tax credit.
Features of Composition Scheme:
A very small tax is payable (the Empowered
Committee has permitted States to reduce the
rate of composition tax to as low as 0.25 per cent)
There will be a simple return Form to cover longer
return period.

Advantages of CS:
It saves a lot of labor and effort in keeping records.
It simplifies calculation of tax liability of a dealer.
Tax rate is very low. Normally, it is 4% or less.
Not required to maintain any statutory records.
Disadvantages:
The dealer is not eligible to avail input tax credit.
Moreover, he/it cannot issue tax invoices in order to
pass on tax credit to the purchasers.
Who is eligible for composition scheme?
He is a registered dealer under VAT regulation of the
State;
He purchases and sells goods only within the State
His sales turnover for the immediately preceding
financial year does not exceed Rs. 50,00,000;

He is liable to pay tax under the respective State VAT Act

only
Who is not eligible?
A manufacturer or a dealer who sells goods in course of
inter-State trade or commerce;
A dealer who sells the goods in course of import into or
export out of territory of India;
A dealer transferring goods outside the State otherwise
than by way of sale or for execution of works contract;
Exercise of option:
At the time of the exercise of option, the dealer should
not have any stock of goods brought from other States
After exercise of option, he should not use any goods
brought from other States.
He should not claim any input tax credit on inventory
from the date on which he opts for Composition Scheme.

Tax payers Identification Number (TIN):

The TIN No. consists of 11 digit numerals
throughout the country.
First two characters will represent the State Code
as used by the Union Ministry of Home Affairs,
GoI (Census Code)
The set-up of the next 9
characters may,
however, be different in different States.This will
include 2 check digits)
Provisions regarding Return:
Returns are to be filed monthly/quarterly as
specified in the State Acts / Rules, and will be
accompanied with payment challans.
The dealer has the option of filing revised return
within a stipulated time period under VAT

What is self-assessment of VAT liability?

Voluntary return will be submitted after setting off the
tax credit.
If no specific notice is issued proposing departmental
audit of the books of account of the dealer within a
stipulated time, the dealer will be deemed to have been
self-assessed on the basis of returns submitted by him.
Significance of audit:
Correctness of self-assessment will be checked through
a system of departmental audit.
The Audit Wing will remain de-linked from tax collection
wing to remove any bias.
A cross-checking, computerized system is being worked
out on the basis of coordination between the tax
authorities of the State Govt. and the authorities of
Central Excise and

and income tax to compare constantly the tax

returns and set-of documents of VAT system of the
States and those of Central excise and income tax.
Penal provisions:
Not more stringent than in the sales tax system.
How many goods are covered under VAT?
In general, all the goods, including declared goods
will be covered under VAT and will get the benefit of
input tax credit.
Generally, exempted category includes 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.

Classification of Commodities:
Under the VAT system covering about 550
goods, there will be only two basic VAT rates of 4
per cent and 12.5 %
There is a specific category of tax exempted
goods (like natural and unprocessed products in
unorganized sector, items which are legally
barred from taxation and items which have
social implications list of goods finalized by the
Empowered Committee formed for the purpose
of introduction of VAT)
Besides, a special VAT rate of 1 % is applicable
only for gold and silver ornaments etc.
Records to be maintained:
(a) Purchase account; (b) Sales Record; (c) VAT

VAT and Works contract:

In terms of Article 366 (29A) of the Constitution of
India, transfer of property in goods involved in
execution of works contract is deemed to be a sale of
such goods.
Portion pertaining to sale of goods is taxable under VAT.
(remaining service tax)
Works contract: means a contract for carrying out any
work which, includes assembling, construction,
building,
altering,
manufacturing,
processing,
fabricating,
erection,
installation,
fitting
out,
improvement, repair or commissioning of any movable
or immovable property.
Salient features:
Sale and service
Goods
Transfer of property in goods

Consumables not liable for VAT

Taxable turnover for works contract:
Value of goods transferred in execution of works contract
(i.e., cost of such goods + normal margin of profit
prevalent in the trade)

Expenses on transfer of such property in goods (i.e., expenses

incurred on transfer of property in goods till the stage the
property gets transferred)

Expenses incurred on conversion if property in goods is

transferred in some other form

VAT value
andfor
lease
Taxable
VAT transactions

A+B+
C

Value of goods transferred in execution of

works contract