VAT- Value Addition Tax

The sales tax structure has become simple & transparent after implementation of VAT system in India, also helping in avoiding cascading effect of tax. Summarized provisions are provided in attached PPT..

1. Value Addition Tax [ VAT ] - Rajesh Jain , CA [email protected]

2. VAT Back Ground In the existing Sales Tax structure, there were problems of double taxation & multiplicity of taxes ( Single Point, Multiple Point or Last Point taxation ), resulting in a cascading tax burden. Also, several States used to levy multiplicity of taxes, such as Turnover tax, surcharge on sales Tax, Additional Surcharge etc. With introduction of VAT, these other taxes have been abolished. As a result, overall tax burden is rationalised and prices in general will fall.

3. VAT Back Ground …... The Tax structure has become simple which has improved tax compliance and also enhanced revenue growth of State. The VAT is therefore, helping common people, traders, industrialist and also the Government. It is indeed move towards more efficiency, equal competition and fairness in taxation regime.

4. VAT What is VAT ? It is nothing but multipoint Sales Tax. It is collected only on value addition at each stage. Tax paid by the dealer on its purchase of goods & capital goods are eligible for set off against payment of VAT. [ Input Tax Credit ] [ Remember, A dealer can not claim the input tax credit if the purchase of goods and capital goods are not meant for the business. ]

5. VAT CST & VAT Central Sales Tax ( CST ) is charged by seller of goods when there is inter-State sale. ( i.e. Sales made to dealer/consumer in other states.) In this case goods moves from one State to another State. On the other hand, VAT is charged by the seller of the goods, when he makes sales within the state. [ Remember : No input tax credit is available when CST is paid. In other words, inter-State purchase of goods are not vatable. ]

6. Purchases Made Within State Paid VAT Tax Money remains in the State of buyer & Seller. Therefore, Input Credit is available to Buyer Input Tax Credit On Purchases Purchases Made from outside State Paid CST Tax Money goes in the Seller’s State Therefore, Input Credit is NOT available to Buyer

7. VAT Summary The principles of VAT are common for the whole country. Tax is levied at the point of sale. VAT system are intra-State sale { within the State } while CST system are inter-State sale { outside State }. Union Territories are also treated as states. VAT is implemented by giving set-off of the tax suffered by the Purchases. {Input Tax Credit } Under VAT system buyer and seller are within the State. VAT money remains in same state hence buyer can take input tax credit.

8. VAT Variants of VAT ( Various Approaches for Input Credits ) A] Gross Product Variants : Tax is levied at the point of sale. Input Credit is available only for purchases of raw materials. No input credit for capital goods used for manufacturing. VAT Calculation =[ VAT collected from Sales - VAT paid on Purchase of R.M.]

9. VAT Variants of VAT ( Various Approaches for Input Credits ) B] Income Variants : Tax is levied at the point of sale. Input Credit is available for purchases of raw materials as well as depreciation on capital goods. Credit can be availed on a pro-rata basis as & when depreciation is charged on capital goods. VAT Calculation =[ VAT collected from Sales - VAT paid on Purchase of R.M & Depreciation on Capital Goods.]

10. VAT Variants of VAT ( Various Approaches for Input Credits ) C] Consumption Variants : Tax is levied at the point of sale. Input Credit is available both for purchases of raw materials as well as on capital goods. No need to examine whether the goods are capital goods or not. VAT Calculation =[ VAT collected from Sales - VAT paid on Purchase of R.M & on Capital Goods.]

11. VAT Methods for Computation of Value Addition There are several methods to calculate value addition for levy of tax. The three commonly used methods are as under : Addition Method : Value addition is arrived at by aggregating all factory payments plus profits. ( like Rent, Electricity, hire charges, interest, wages, depreciation etc.) No Scope for matching of sales invoice with purchase invoice.

12. VAT Methods for Computation of Value Addition... B. Invoice Method : The tax is levied on full sale price & credit is given for the tax paid on purchases made. Effectively tax is levied on value addition only. Without proper purchase invoice the dealer can not avail input credit so dealer will take due care to collect all invoice. It’s easy & simple method of computation of value addition.

13. VAT Methods for Computation of Value Addition... C . Subtraction Method : Under this method, the purchase price is deducted from selling price and tax is paid on the net amount only i.e.value added. (i) Direct Subtraction Method : Tax is levied on difference between aggregate value of sales excluding tax & aggregate value of purchase excluding tax . (ii) Indirect Subtraction Method : Tax is levied on difference between aggregate value of sales including tax & aggregate value of purchase including tax . This method is unpopular & cumbersome. It is sometime practically impossible to when various inputs are used in manufacture of numerous output. It is also not preferred by dealers as their margin gets disclosed.

14. VAT Advantages of VAT : Easy to administer & transparent. Less litigation Tax Credit on Purchase of Capital Goods as well. No Cascading effect. Self Assessment. Stringent against tax avoidance. Abolition of various forms. Effective Audit & enforcement strategies.

15. VAT Limitations of VAT : Detailed Record maintenance. Increase in manpower & investment No credit for tax paid on inter-State purchases. Break in chain in composition scheme. Audit under VAT. Delay in refund of taxes.

16. VAT Ineligible purchase of Input Credit : Ex empted Goods. Imported Goods Inter-state purchases. Goods received as Free Samples & not for sale. Purchases which is utilised to manufacture exempted goods. Purchases where Tax is not shown separately. Purchase invoice not available. Purchases from Unregistered Dealer/ Under composition Scheme. Goods Purchased but are destroyed by fire/stolen/lost. Goods received on Consignment sales or stock transfer from other state. Goods purchased & returned within the specified period.

17. THANK YOU