SUDHIR SIR KEE VAT CLASS-4

CA SUDHIR HALAKHANDI: - Good Morning Students! This is my fourth class on VAT and as far as the subject is concerned this is my Last class on VAT. In my next class I will provide you the questions on whole the subject and thereafter we will start the class of Service Tax. Now in this class we first try to learn some more important terms and then Composition scheme and in the last we will take the procedural part of the VAT. OK, Are you ready for one more long class.

CA SUDHIR HALAKHANDI: - Now first of all we are taking white paper on VAT. Here note that the introduction of VAT in our country was not as smooth as it appeared after its successful implementation. An empowered committee of Fiannce Ministers of all the states was constituted under the chairmanship of Dr. Asim Das Gupta, the Finance Minister of West Bengal. First it was decided that the VAT would be introduced in 2003 i.e. from 1^st. April 2003 but due to political situation and scheduled elections in most of the states VAT was postponed though Haryana was the only state to adopt VAT in 2003 itself. 

 

The committee of state Finance Ministers was appointed under the Leadership of Dr. Asim Das Gupta, the Finance of West Bengal.

 

Later in 2005 the VAT was introduced in 20 states as stated in the schedule given above and before introduction of VAT a white paper was prepared by this Empowered committee of state Finance Ministers and released by the Finance Minister of the Country. In this White paper various modalities were set regarding procedural aspect of VAT alongwith the broad suggestive guidelines regarding this new concept of taxation in our country. The white paper also suggested a broad rate structure having minimum number of rates.

CA SUHDIR HALAKHANDI: - No it was only suggestive but there was a broad agreement between the states on its major contents.

Exports are Zero rated under VAT i.e. the input credit on the goods purchased for exports and goods used as raw material and packing material for exports will be available to the exporter and is refundable. All the states have made special provisions for early refund in this respect and White paper has set 3 Months time limit for making available the refunds to the dealers who are exporting the Goods.

CA SUDHIR HALAKHANDI:- Units Located in the SEZ (Special Economic Zone) and EOU (Export oriented units) under VAT are generally get the exemption from Tax on their purchases and if the provision is not made for exempted purchases for EOU and SEZ units then they will get the refund like normal exports.

CA SUDHIR HALAKHANDI:- A proper Tax invoice containing the required details is the basic requirement of claiming input tax credit.In general, the states have prescribed the details of invoice without prescribing the standard Performa of the same.

 

Generally the “Tax invoice” must contain the name of selling dealer, his TIN, amount of tax charged coupled with the general information about the goods sold. Further it should be serially numbered and to be made in duplicate to keep one copy of the same with the selling dealer. The word “TAX INVOICE” should be mentioned on it prominently to make it different from Non vatable bills.

CA SUDHIR HALAKHANDI:- Value added tax has an inbuilt mechanism to take care of loss on sales and this unique feature of VAT give an upper hand to the VAT over traditional sales tax system. Let us see this system of compensating the unfortunate dealers sustain genuine business losses.

 

Let us try to understand this situation with the help of an example: -

 

CA SUDHIR HALAKHANDI:- Yes, take an example of a dealer who purchased some goods after paying tax within the state but these goods are not sold by him and remained in the stock. The same dealer has sold some other taxable goods and collected tax on it. The dealer can adjust the Tax paid by him on the goods purchased by him but not sold and remained in stock against the output tax of the other goods sold by him.

 

Let us try to understand this with the help of an example. M/s Mohan and company has purchased goods “A” worth Rs. 100000.00 after paying tax of Rs. 12500.00 within the state. This commodity they purchased with an intention to hold in stock till next 6 months. During the same month they sold a commodity “B” purchased from agriculturist amounting to Rs. 200000.00 And collected tax of Rs. 8000.00

 

Now consider this situation in the pre- VAT era i.e. in old sales tax system M/s Mohan and company has to deposit a tax of Rs. 8000.00 to the govt. though it has stock of tax paid goods, which have suffered a tax of Rs. 12500.00.

 But if transaction is taking place in a VAT then there is a comfortable situation for M/s Mohan and company because due to its input credit of Rs. 12500.00 no tax will be required to be paid for their out put tax liability of Rs. 8000.00. The simple principal is there Tax paid on commodity “A” can be adjusted against the Tax due on commodity “B” and while final payment of tax whole the input tax credit is considered without differentiating between the goods sold and remained in stock.

 

Imagine if the amount involved is bigger the results will be far much amazing because of interest cost on money involved.

 

This particular benefit is the result of inbuilt system of VAT. Manufacturers stocking the raw material will be the biggest beneficiaries of this provision.

 

Certain industries have to stock raw material in a certain period for the whole year because of seasonal availability or because of favorable price. Suppose M/s XZY Mfg. And trading company has purchased raw material worth Rs.50 Lakh after paying of Rs. 2 Lakh. In traditional sales tax system it had to pay regular sales tax on the sale of finished goods but under VAT during the first some months it’s tax liability will be very low or Zero due to the adjustment of Tax paid on it’s purchases.

 

CA SUDHIR HALAKANDI:- The rates under VAT are minimum in numbers as suggested by the White paper as mentioned above and these rates are: -

 

1. Exempt or Tax Free.

2. 1 Percent.

3. 4 Percent.

4. 12.5 Percent.

 

All these four rates i.e. from Exempt to 12.5% were suggested by the White paper but most of the states have invented a new rate i.e. 20% to tax some of commodities to balance their revenue and local needs.

CA SUDHIR HALAKHANDI: - TIN is the unique Tax identification Number issued to every dealer registered under the VAT and it is 11 digits number in which first 2 digits represents the state in which the dealer is registered and rest of 9 digits set as per the local situations of the state. A dealer is recognised by his TIN.

CA SUDHIR HALAKHANDI: - Now students I have replied your all the questions on different terms of Vat and we are coming to one more important aspect of VAT i.e. Composition scheme for small dealers. Now should I start?

For dealers dealing directly with the consumers the, composition scheme of paying composition amount in lieu of the tax, ranging from 0.25% to 1% is introduced by almost all the VAT states. The general upper limit for the Composition dealers is Rs. 50 Lakhs.

The dealers opting for this scheme are not able to claim or pass on any input credit hence practically they can sell goods to consumers only and re-sellers or non-consumers are not purchasing goods from them. Before opting for the composition scheme a cost benefit analysis is must to ascertain it’s feasibility.

The maximum rate of composition in lieu of tax is 1% but some of the states have introduced a much lower rate but in any case cost benefit analysis is necessary for opting for composition scheme.

Further the dealers under Composition scheme are not eligible for CST purchase i.e. they cannot purchase goods from other states and CST sales i.e. cannot sale goods to other states.

 

The procedure for composition dealer is very simple and they have to file very simple return.

This is purely an optional scheme.

CA SUDHIR HALAKHANDI:- Yes following dealers are not eligible for VAT composition scheme :-

1.      Manufacturers.

2.      Importers of Goods from outside the state.

3.      Importers of Goods from out side India.

4.      Dealers who are selling the goods in interstate trader or commerce.

5.      Dealers who are purchasing the goods from unregistered dealers of the state.

Further it should be noted the purchases of Compositon dealers should be from the VAT registered dealers of the State.

CA SUDHIR HALAKHAND: - Yes, you have described all the basic of the composition schemes but what is your question?

CA SUDHIR HALAKHANDI: - A Good question and it shows that you understood the subject very well. Now I have explained that :-

1.      The Composition dealers can not take the credit of tax paid by them.

2.      The composition amount can not be charged in the bill.

3.      The purchasers can not claim the credit of tax on purchases from composition dealers.

Since the composition dealers can not take the credit of the tax paid and further the composition dealers can not charge the composition amount in their bill in that case it is a charge against their profit. Hence before going for the composition scheme they have to do cost benefit analysis.

Further the purchaser can not claim the credit of tax with reference to the purchases from composition dealers. This is the biggest drawback. See composition dealers purchases goods within the state by paying state Vat and if they can not pass the credit to their purchasers then the chain of VAT dealers is broken and the goods become taxable at full rate again. So no dealer or manufacturer purchases goods from the composition dealers and they can only sale the goods to the final consumers who do not need the input credit.

CA SUDHIR HALAKHANDI: - One more point. There is a threshold limit also i.e. the limit up to which no tax is required to be paid by the dealers and further they do not required the registration also. The white paper has fixed the limit at Rs.5 lakhs and also give states the power to increase the limit up to Rs. 10 Lakhs.