Value Added Tax

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Value Added TaxAjay Babu BandiPractising Chartered Accountant

M.Com, FCMA,ACA,IFRS(Certified)

VAT BasicsValue Added Tax--- is a multi-point tax on value addition i.e., increase in valueWhich is collected at different stages of sale, andWith a provision for set-off for tax paid at the previous stage/tax paid on inputs against the tax collections on sales before remitting to the Governments account

Objectives of VATPrevents distortion in trade and economy through uniform tax rates Easy computation of tax Harmonization in the tax structure of various statesAvailing of credit on inputs leading to cost efficiency and rationalizationAvoids Double taxation through input creditEnsure equitable distribution of tax impact amongst dealers Easy compliance and procedures through transparency

Meaning of GoodsVAT is applicable only if there is a transfer of property in goods from one person to another for a consideration

Goods means all kinds of movable property

Constitutional provisions relating to State level VAT

Rates of VAT

Variants of VAT

Addition MethodSuitability : This method is mainly used with Income variant of VATComputation :Step1 : Aggregate all the Factor Payments including Profits to arrive at the Total Value AdditionStep2: Apply the Rate on Step 1 to calculate the tax

Invoice MethodSuitability : This method is followed under Central Excise LawComputation :Step1 : compute the tax to be imposed at each stage of sales on the entire sale valueStep2: Set-off the Tax paid at the earlier stage Step3: The differential Tax is paid

Subtraction MethodSuitability : This method is normally applied where the tax is not charged separately

Methods of determination of Value Added:Direct Subtraction MethodIntermediate Subtraction MethodIndirect Subtraction Method

Direct Subtraction MethodCompute Value Added =Total Value of Sales exclusive of Tax (less)Total value of Purchases exclusive of tax

Compute VAT amount =Value Added X Tax rate

Intermediate Subtraction MethodCompute Value Added =Total Value of Sales inclusive of Tax (less)Total value of Purchases inclusive of tax

Compute VAT amount =Value Added X Tax rate

Indirect Subtraction MethodCompute Value Added =VAT on Sales(less)VAT on Purchases

Note :This is same as Invoice Method

Understanding VAT

Utilization of ITC

Inputs Are goods meant for re-sale or use in manufacturing, processing of other goods or packing of goods manufactured

Input TaxMeans..Tax paid or payable under VAT lawBy a Registered Dealer to another Registered DealerOn the purchase of goods ,including Capital Goods in the course of Business

OutputMeans Sale of goods made by a Registered Dealer to another Registered DealerAnd Consumers in the course of his business

Output TaxIs tax collected on sale of goods from the Buyer.The output tax is calculated by applying the rate of tax on Taxable turnover of these goods

Dealer Means any person..Who carries on the business of buying,selling,supplying or distributing goods, directly or otherwise,Whether for Cash/Deferred payment/commission, Remuneration/ other valuable Consideration

Sales Means Every transfer of property in goods (other than by way of a mortgage , hypothecation ,charge or pledge)By one person to another, in the course of businessFor cash , deferred payment or other valuable consideration

Eligibility for Input Tax Credit Dealerrequired to be registered under the respective state Law Eligible Purchases- Tax paid on purchases which are meant for sale or for utilization in the process of production for such saleEligible Sales- Input Tax credit will be given to both manufacturers and traders for purchase of inputs/supplies meant for both sales within the state as well as to other states

Tax Payment

VAT liability of the Dealer is calculated by deducting VAT credit from Tax payable on Sales during the tax/ payment period

Carry forward of VAT Credit & RefundIf VAT credit exceeds the tax payable on sales in a month, the excess credit may be carried over to the future month(s) and the unadjusted VAT credit at the end of the specified period is eligible for REFUND

Eligible PurchasesParticularsExamples Sale or re-sale within the StateComputers purchased and sold in A.P.Sale to other parts of India in the course of inter-state trade or commerceComputers purchased in A.P. and sold in T.N.

Inputs used as raw materials, consumable stores, containers or packing materials intended to be sold in the state or inter state Carton boxes & other packing materialsFor the use in works contractsCement and steel purchased by construction company within the state of A.P.To be used as Capital GoodsPlant & Machinery installed in factory

ParticularsExamples Inputs used as raw materials, consumable stores, containers or packing materials intended to be sold in the course of exportGoods manufactured in A.P. exported to SingaporeFor making zero rated sales other than those referred to in the point above

Non availability of Input Tax CreditPurchases from Unregistered DealersPurchases from other states/countriesPurchase of goods used in manufacture of exempted goodsPurchase of Capital Goods (credit is available in installments)Purchase of goods used as a fuel in power generation Purchase of goods to be dispatched as branch transfers outside states/consignment

Non availability of Input Tax CreditPurchase of goods where the purchase invoice is not availablePurchase of goods where the Dealer does not have Invoices showing amounts of tax charged separately by the selling DealerPurchase of non-creditable goodsPurchase from a Dealer who has opted for composition SchemeGoods in Stock , which have suffered tax under an earlier Act, but exempted under VATPurchase of Goods for personal use

Zero Rated SaleExport Deemed Export /Penultimate SaleZero rated SaleRefund to exporters (within 3 months)

Sale to Dealers in Special Economic Zone (SEZ)Sale should be made to a Registered Dealer in SEZPurchase for Manufacture at SEZAUTHORISED by central GovernmentExemption to SEZ and EOU or refund of Input Tax paid within 3 months

VAT on Capital GoodsDefinitionas understood under CENVAT CREDIT RULES, 2004State Governments can provide to give set-off on a staggering basis , at the most in 36 installmentsCapital Goods mentioned in Negative List would NOT be eligible for Input Tax CreditIf prior permission is required, the same should be duly obtained

VAT on Stock TransferTransfer from one state to another stateTransfer other wise than by a saleBranch transferTransfer to Agent or Principal

Burden of proof on the Dealer

VAT credit for Stock TransferVAT credit is given to a Dealer for purchase of inputs/supplies in a state meant for sales within the state as well as in other states

Even for stock transfer/consignment sale of goods out of the state, Input tax paid in excess of 2% is eligible for VAT credit

Composition Scheme for Small Dealers

ELIGIBILITY

NOT Eligible

VAT and Sales tax incentives

Works ContractsDealers have 2 options

Works ContractsOption 1Pay tax on the value of the goods at the time of incorporation of such goods in the works executed, at the rates applicable to the Goods.or

Works ContractsOption 2Pay tax by way of composition at applicable rates on a certain percentage of the Total consideration received as may be prescribedNo VAT Credit or only partial VAT Credit

Deemed Sale

Hire Purchase is a deemed sale

Lease transactionsliable to TAX

Registration

is the process of obtaining Certificate of Registration (RC) from VAT authorities under the respective State ActA Dealer registered under the state VAT law is called a Registered DealerPersons liableDealers whose turnover exceeds the prescribed limitCasual traders , agent of Non-resident dealer, dealers in jewellery (irrespective of quantum)

Registration-Cancellation

Discontinuance of businessDisposal of businessTransfer of business to a new locationAnnual turnover falling below the specified amount

Taxpayers Identification Number (TIN)is the registration number of the Dealer11 digit numerals (first 2 digits state code)

Maintenance of BooksVAT invoice is a document listing goods sold with price, tax and other detailsContents of VAT invoiceTax invoiceName & Address of the selling DealerRegistration number of the selling DealerName & Address of the purchasing DealerRegistration number of the purchasing Dealer

Contents of VAT invoicePre printed serial numberDate of issueDescription, quantity and value of Goods soldRate and amount of tax chargedSignature of the selling dealer

Importance of VAT invoiceHelps in determining the input tax creditPrevents cascading effect of taxesFacilitates multi point taxation on value additionAssists in audit and investigationChecks evasion of tax

Records to be maintained Sales RecordsPurchase RecordsVAT AccountGoods DetailsPenalty failure to maintain records No concessional Sales

Assessment ProcedureFiling of Returnmonthly , quarterly /annually according to the state lawsAssessment no compulsory assessment..dealer can assess himself Cross Checking computerized system between tax authorities of state and central Governments

VAT AuditBasically a self assessment tax TypesDepartmental audit or Audit by CAs

Role of CA in VATRecord keepingTax planningNegotiations with suppliersHandling departmental audit

Merits of VATProper Accounting SystemsDeterrent to Tax EvasionNeutralityCertaintyTransparency

Merits of VATBetter Revenue Collection and StabilityEffect on Retail PriceSelf AssessmentOther taxes get abolishedFairnessEncourages Small Scale Industry

Demerits of VATDifferential Rates of TaxDisintegrationAccounting CostsIncreasing Working Capital RequirementsInequality of TaxationIncrease in Administration CostsNon-coverage of both goods and ServicesHigher Base Rate

Demerits of VATFloor RateTreatment of Exempted goodsHuge list of ExemptionsExtensive Definitions Arbitrary Classification of GoodsConcessional rates based on End StageRevenue loss due to concessional Rate