18 August 2009
VAT - in India VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands.
Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2
VAT levy will be administered by the Value Added Tax Act and the rules made there-under.
VAT can be computed by using either of the three methods detailed below • The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. • The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). • Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales. India opted for tax credit method, which is similar to CENVAT.
Note: Also look for MODVAT
States such as Andhrapradesh, Kerala, Maharashtra, Madhyapradesh, Delhi and Haryana have experimented with VAT albeit in a limited manner, covering only limited goods. The experiments never had the full-fledged features of VAT and were only concoctions. These states have even called off their experiments owing to different reasons. If one analyses why VAT or its variant failed in Maharashtra, which was the only state to come closer to a true VAT regime, the following reasons emerge:
1. Dual methodologies of computation of VAT credit Error! Hyperlink reference not valid. , one for the Manufacturing stage and the other for the trading stage, thus breaking the audit trail. It may be noted that one of the advantages of VAT system, as we would be dealing later on, is the audit trail that is created in the VAT chain.
2. Presence of a large number of tax deferral and holiday schemes, which resulted in a narrow base. It may again be noted that under VAT, which is multi-point, the tax rates have to be reasonably low, and lower tax rates presupposes that the tax base is wide. These two features were not present in the Maharashtra tax regime.
3. Low level of awareness among traders, and even administrators, giving rise to fears and apprehensions. Owing to this, there was considerable consternation among the trade, which gave rise to open revolt against the system.
4. Partial implementation of the ideal VAT with the existing system coexisting even under this regime.
5. Increased burden on retailers of Bookkeeping and compliance.
6. Multiplicity of rates of tax under the VAT regime.
7. Drop in revenue for the State Government, though there are no studies attributing such reduction to the system of taxation.
Thus States had indeed tried some variations of VAT, but eventually gave up due to a variety of reasons.
What is the difference between Sales Tax and VAT? VAT is levied on all goods & services while sales tax is only levied on goods. Thus, a lower tax rate is needed to collect the same amount as sales tax. VAT has no cascading effect. The VAT mechanism of auto-control reduces tax evasion, therefore enhancing income tax collection. VAT is levied at import.
What is input tax? Input generally mean goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture, processing, packing/storing of other goods or any other business use. The tax paid on inputs is known as Input Tax. It has been defined in Section 2(xvii) of the Model VAT Bill, 2003 thus: "Input tax means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods in the course of business for resale or for manufacture of taxable goods or for use as containers or packing material or for the execution of works contract."
What is input tax credit? It is the credit for tax paid on inputs. Every dealer has to pay output tax on the taxable sale effected by him. The basic formula of VAT is that every dealer pays tax only on the value addition in his hands. In simple words input tax credit is the mechanism by which the dealer is enabled to set off against his output tax, the input tax. Dealers are not eligible for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as it is stipulated in the respective State legislation.
What are the `sales' not liable to tax under the VAT Act? Since the VAT Act applies only to sales within a State, the following sales shall not be governed by the VAT Act:
a) sale in the course of inter-State trade or commerce which shall continue to be liable to tax under the Central Sales Tax Act, 1956; b) sale which takes place outside the State; and c) sales in the course of export or import.
Who is a retail dealer? Retail dealer is not specifically defined in most of the draft VAT legislation of States. To some extent, a dealer will be considered to be engaged in the business of selling at retail if 9/10ths of his turnover of sales consists of sales made to persons who are not dealers and if any question arises as to whether any particular dealer is a retailer, then the officer in charge shall be refered for.
In the VAT regime, will stock transfer be more beneficial than inter-State sale? In so far as a decision as to whether goods should be stock transferred and then sold to customers by the branch or should direct inter-State sales be effected, there can be no generalisation. The decision has to be taken on a VAT impact analysis of each individual business.
The tax implications to be considered are: In the case of inter-State sale, the buying dealer has to pay a non-VATable CST while the selling dealer will get the benefit of input tax credit. • In the case of stock transfer, though there is no tax on the inter-State movement, the input tax credit will be restricted to the tax paid on inputs in excess of 4 per cent.
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