Value Added Tax

VAT useful for CA CMA CS ICWA exams November/December 2015

1. Value Added Tax Ajay Babu Bandi Practising Chartered Accountant M.Com , FCMA,ACA,IFRS(Certified)

2. VAT Basics Value Added Tax - -- is a multi-point tax on value addition i.e., increase in value Which is collected at different stages of sale, and With 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 Government’s account

3. Objectives of VAT Prevents distortion – in trade and economy through uniform tax rates Easy computation of tax Harmonization in the tax structure of various states Availing of credit on inputs leading to cost efficiency and rationalization Avoids Double taxation through input credit Ensure equitable distribution of tax impact amongst dealers Easy compliance and procedures through transparency

4. Meaning of Goods VAT 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

5. Constitutional provisions relating to State level VAT

6. Rates of VAT

7. Variants of VAT

8. Addition Method Suitability : This method is mainly used with Income variant of VAT Computation : Step1 : Aggregate all the Factor Payments including Profits to arrive at the Total Value Addition Step2 : Apply the Rate on Step 1 to calculate the tax

9. Invoice Method Suitability : This method is followed under Central Excise Law Computation : Step1 : compute the tax to be imposed at each stage of sales on the entire sale value Step2 : Set-off the Tax paid at the earlier stage Step3 : The differential Tax is paid

10. Subtraction Method Suitability : This method is normally applied where the tax is not charged separately Methods of determination of Value Added: Direct Subtraction Method Intermediate Subtraction Method Indirect Subtraction Method

11. Direct Subtraction Method Compute 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

12. Intermediate Subtraction Method Compute 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

13. Indirect Subtraction Method Compute Value Added =VAT on Sales (less) VAT on Purchases Note : This is same as Invoice Method

14. Understanding VAT …

15. Utilization of ITC

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

17. Input Tax Means.. Tax paid or payable under VAT law By a Registered Dealer to another Registered Dealer On the purchase of goods ,including Capital Goods in the course of Business

18. Output Means … Sale of goods made by a Registered Dealer to another Registered Dealer And Consumers in the course of his business

19. Output Tax Is 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

20. 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

21. 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 business For cash , deferred payment or other valuable consideration

22. Eligibility for Input Tax Credit Dealer —required 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 sale Eligible 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

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

24. Carry forward of VAT Credit & Refund If 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

25. Eligible Purchases Particulars Examples Sale or re-sale within the State Computers purchased and sold in A.P. Sale to other parts of India in the course of inter-state trade or commerce Computers purchased in A.P. and sold in T.N.

26. 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 materials For the use in works contracts Cement and steel purchased by construction company within the state of A.P. To be used as Capital Goods Plant & Machinery installed in factory

27. Particulars Examples Inputs used as raw materials, consumable stores, containers or packing materials intended to be sold in the course of export Goods manufactured in A.P. exported to Singapore For making zero rated sales other than those referred to in the point above

28. Non availability of Input Tax Credit Purchases from Unregistered Dealers Purchases from other states/countries Purchase of goods used in manufacture of exempted goods Purchase 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

29. Non availability of Input Tax Credit Purchase of goods where the purchase invoice is not available Purchase of goods where the Dealer does not have Invoices showing amounts of tax charged separately by the selling Dealer Purchase of non-creditable goods Purchase from a Dealer who has opted for composition Scheme Goods in Stock , which have suffered tax under an earlier Act, but exempted under VAT Purchase of Goods for personal use

30. Zero Rated Sale Export Deemed Export /Penultimate Sale Zero rated Sale Refund to exporters (within 3 months)

31. Sale to Dealers in Special Economic Zone (SEZ) Sale should be made to a Registered Dealer in SEZ Purchase for Manufacture at SEZ AUTHORISED by central Government Exemption to SEZ and EOU or refund of Input Tax paid within 3 months

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

33. VAT on Stock Transfer Transfer from one state to another state Transfer other wise than by a sale Branch transfer Transfer to Agent or Principal Burden of proof on the Dealer

34. VAT credit for Stock Transfer VAT 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

35. Composition Scheme for Small Dealers

36. ELIGIBILITY …

37. NOT Eligible

38. VAT and Sales tax incentives

39. Works Contracts Dealers have 2 options …

40. Works Contracts Option 1 … Pay 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

41. Works Contracts Option 2 Pay tax by way of composition at applicable rates on a certain percentage of the Total consideration received as may be prescribed No VAT Credit or only partial VAT Credit

42. Deemed Sale

43. Hire Purchase is a deemed sale

44. Lease transactions…liable to TAX

45. Registration is the process of obtaining Certificate of Registration (RC) from VAT authorities under the respective State Act A Dealer registered under the state VAT law is called a Registered Dealer Persons liable… Dealers whose turnover exceeds the prescribed limit Casual traders , agent of Non-resident dealer, dealers in jewellery (irrespective of quantum)

46. Registration-Cancellation Discontinuance of business Disposal of business Transfer of business to a new location Annual turnover falling below the specified amount

47. Taxpayer’s Identification Number (TIN) is the registration number of the Dealer 11 digit numerals (first 2 digits state code)

48. Maintenance of Books VAT invoice is a document listing goods sold with price, tax and other details Contents of VAT invoice Tax invoice Name & Address of the selling Dealer Registration number of the selling Dealer Name & Address of the purchasing Dealer Registration number of the purchasing Dealer

49. Contents of VAT invoice Pre printed serial number Date of issue Description, quantity and value of Goods sold Rate and amount of tax charged Signature of the selling dealer

50. Importance of VAT invoice Helps in determining the input tax credit Prevents cascading effect of taxes Facilitates multi point taxation on value addition Assists in audit and investigation Checks evasion of tax

51. Records to be maintained Sales Records Purchase Records VAT Account Goods Details Penalty –failure to maintain records No concessional Sales

52. Assessment Procedure Filing of Return—monthly , quarterly /annually according to the state laws Assessment – no compulsory assessment..dealer can assess himself Cross Checking computerized system between tax authorities of state and central Governments

53. VAT Audit Basically a self assessment tax Types— Departmental audit or Audit by CAs Role of CA in VAT Record keeping Tax planning Negotiations with suppliers Handling departmental audit

54. Merits of VAT Proper Accounting Systems Deterrent to Tax Evasion Neutrality Certainty Transparency

55. Merits of VAT Better Revenue Collection and Stability Effect on Retail Price Self Assessment Other taxes get abolished Fairness Encourages Small Scale Industry

56. Demerits of VAT Differential Rates of Tax Disintegration Accounting Costs Increasing Working Capital Requirements Inequality of Taxation Increase in Administration Costs Non-coverage of both goods and Services Higher Base Rate

57. Demerits of VAT Floor Rate Treatment of Exempted goods Huge list of Exemptions Extensive Definitions Arbitrary Classification of Goods Concessional rates based on End Stage Revenue loss due to concessional Rate