Value Added Tax in India

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Value Added Tax in India

Dr Sarbesh Mishra

Finance Area


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CST A perspectiveo The Central Sales Tax (CST) Act that comes

under the direction of Central Governmenttakes into consideration all the interstate

sales of commodities.

o Sales tax can be levied either by the centralor state government, Central Sales taxdepartment. A 4 per cent tax was generally

levied on all inter-State sales. State salestaxes, that apply on sales made within State,had rates that range from 4 to 15 per cent.


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Constitutional FrameworkThe states are empowered to impose sale taxon the goods that are subject to purchase orsale by enacting laws. The Parliament has

enacted the CST Act and the states are inthe process of enacting laws. The sale ofgoods or purchase includes:

1. the sale of goods, defined under the Sale of

Goods Act.2. transfer of goods used as otherwise in

pursuance of the contract.


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Contd.3. transfer of goods used otherwise in Works

Contracts.

4. delivery of goods in pursuance to

Hire Purchase Agreement or on installment.

5. transfer of right to use to goods on lease orotherwise.

6. supply of food by the club or body to its

members.7. supply of food articles or drinks for

consumption.


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VAT Replaces Sales TaxMost of the states in India, from April 01,2005, have supplemented the sales tax withthe new Value Added Tax (VAT). VAT in

India is classified under the following taxslabs:

1. 0% for the essential commodities

2. 1% on gold ingots as well as expensive stones

3. 4% on capital merchandise, industrial inputs,and commodities of mass consumption


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Contd.4. 12.5% on all other items

5. Variable rates (depending on state) areapplicable for tobacco, liquor, petroleumproducts, etc.

Note - A Central Sales Tax which is at the rateof 4% is also levied on inter-State sales

but would be eliminated gradually.


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Miscellaneous Taxes1. Municipal/Local Taxes

2. Stamp duty on the transfer of assets

3. Property/building tax that is levied by localbodies

4. Agriculture income tax levied by the StateGovernments on the income fromplantations

5. Luxury tax that is levied by certain StateGovernment on specified goods


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Meaning - VATo A general consumption tax that is

assessed on the value added to goods &services.

o It is the indirect tax on the consumptionof the goods, paid by its originalproducers upon the change in goods orupon the transfer of the goods to its

ultimate consumers.

o It is based on the value of the goods,added by the transferor.


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VAT Contdo It means every seller of goods and service

providers charges the tax after availing theinput tax credit. It is the form of collecting

sales tax under which tax is collected ineach stage on the value added of the goods.

o VAT is a multi-stage tax, levied only onvalue that is added at each stage in the

cycle of production of goods andservices with the provision of a set-offfor the tax paid at earlier stages in thecycle/chain.


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CST Vs. VATo 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.o VAT - Under the VAT system, the tax burden

would be shared by all the dealers from first tolast. Then, such tax would be passed upon thefinal consumers.

o Under the CST Act, the tax is levied at a singlepoint. Under the VAT system, the retailers are notsubject to tax except for the retail tax.


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Importance of VAT in Indiao A well-administered system comes in, it will

not only close options for traders andbusinessmen to evade paying their taxes,

but also make sure that they'll be compelledto keep proper records of sales andpurchases.

o Under the VAT system, no exemptions are

given and a tax will be levied at every stageof manufacture of a product. At every stageof value-addition, the tax that is levied oninputs can be claimed from tax authorities.


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Advantages of VATo Coverage If the tax is considered on

a retail level, it offers all the economicadvantages of a tax of the entire retailprice within its scope. The directpayment of tax spreads out over alarge number of firms instead of beingconcentrated only on particular groups,such as wholesalers & retailers.


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Contd.o Revenue Security - under VAT, if the

payment of tax is avoided at one stagenothing will be lost if it is picked up at

later stage. Even if it is not picked uplater, the government will at least havecollected the VAT paid at previousstages. Where as if evasion takes place

at the final/last stage the state will loseonly tax on the value added at thatparticular point.


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Contd.o Selectivity - VAT is selectively applied

to specific goods & business entities. Inaddition, VAT does not burden capitalgoods because of the consumption-type. VAT gives full credit for taxincluded on purchases of capital goods.


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Contd.o Co-ordination of VAT with direct

taxation - Most taxpayers cheat on

sales not to evade VAT but to evadetheir personal and corporate incometaxes. Operation of VAT resemblesthat of the income tax and an

effective VAT greatly helps in incometax administration and revenuecollection


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Disadvantages of VAT1. VAT is regressive (Decreasing

proportionately as the amount taxedincreases )

2. VAT is difficult to operate from positionof both administration and business

3. VAT is inflationary

4. VAT favors capital intensive firms


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Items covered under VATo All business transactions that are carried on

within a State by individuals / partnerships/companies etc. will be covered under VAT.

o More than 550 items are covered under thenew Indian VAT regime out of which 46natural & unprocessed local products will beexempt from VAT

o Nearly 270 items including drugs andmedicines, all industrial and agriculturalinputs, capital goods as well as declaredgoods would attract 4 % VAT in India.


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Contd.o The remaining items would attract

12.5 % VAT. Precious metals such as

gold and bullion will be taxed at 1%.o Petrol and diesel are kept out of the

VAT regime in India. (Continue tofollow CST).


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Levies of TAX under the VAT1. Sale Tax or Output Tax including

Deemed Sale within the state. It coversall kinds of transfer of goods, under theSale of Goods Act including deemedsale that is transfer of goods by way ofWorks Contract delivery of goods on thebasis of a hire purchase agreement or

installment, etc.


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Contd.o Purchase Tax, including deemed

Purchase within the state. The tax paidon purchase of goods in certain

circumstances.

o Composition tax, that is in lieu of tax byway of lump sum tax. This means theamount paid by the dealers like retailers

whose turnover is below the specified limitof the taxable turnover that is allowed topay the amount at his option.

Value Added Tax in India

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