Pinnacle IPCC Value Added Tax

8/6/2019 Pinnacle IPCC Value Added Tax

1/44


2/44

BackgroundackgroundOn 1st April 2005, VATreplaced the single point sales

tax.Single point sales tax had a number of disadvantagprimarily that of double taxation.VAT is a modern and

progressive taxation system that avoids doubleaxa on . n a on o o er ng e poss y o a se -o otax paid on purchases, VAT has other advantages for b

.

2Pinnacle Education


3/44

Why VAT introduced?hy VAT introduced?hy VAT introduced?hy VAT introduced?

n e o sa es ax s ruc ure, ere were pro ems o ou taxation of commodities and multiplicity of taxes, resultia casca ng ax ur en, or ns ance, n e o s ruc ure

before a commodity is produced, inputs are first taxed,

en a er e commo y s pro ucew npu ax oa,output is taxed again.

This results in unfair double taxation with cascadingeffects..

3Pinnacle Education


4/44

What is cascading tax effect?hat is cascading tax effect?hat is cascading tax effect?hat is cascading tax effect?Particulars Price

withoutGross Tax Net Tax

payable bya es ax ea er o e

Government

Rs. Rs. Rs.

-P to X Ltd. (Sales Tax charged by P @ 12.5%)Q to X Ltd. (Sales Tax charged by Q @ 4%)

1,0006,000

125240

125240

Manufactured goods sold by-X Ltd. to Y Ltd. (Sales Tax charged by X Ltd. from Y Ltd. @ 12.5%)[Sales Tax paid to P and Q in their bill forms part of cost of X Ltd.]

10,000 1,250 1,250

Goods sold by wholesaler-

t . to reta er a es ax c arge y t . rom .[Sales Tax paid to X Ltd. in their bill forms part of cost of Y Ltd.] , , ,

Goods sold by retailer-Z to consumers Sales Tax char ed b Z from consumers @ 12.5% 22 000 2 750

Pinnacle Education 4

[Sales Tax paid to Y Ltd. in their bill forms part of cost of Z]


5/44

Government Revenue?overnment Revenue?Who will pay to the Government? Rs.PQX Ltd.

125240

1,250.

Z,

2,750Total VAT collected by the Government 6,490

More axEvasion

5Pinnacle Education


6/44

Needs for Introduction of VATeeds for Introduction of VATThe following points highlight the critical emergent need for introduction VAT-

VAT is more equitable way of taxing as all dealers share the tax burden. VAT is more transparent as easy procedures exist under it and only two rates.

Simpler- easy computation and easy compliance. Credit for in ut taxation leadin to cost efficienc . Prevents cascading effect by providing input rebate. Better compliance through self-policing. Avoid distortions in trade and economy due to uniform tax rates.

6Pinnacle Education


7/44

Scope of VATcope of VAT

State A

Sale State A State BSale

Dealer P Dealer Q

Dealer R

VAT is collected at each stage in the chainwhen value is added to goods.

It applies to all businesses, including importers,exporters, manufacturers, distributors, wholesalers,

retailers, works contractors and lessors.

7Pinnacle Education


8/44

Definition of Goods and Salesefinition of Goods and SalesGoodsmeans

every kind of moveable property including goods of incorporeal and intangible n

, , , ,securities and lottery tickets

The nature of the movable is such that its identity is not lost if it is moved from one location to another .

8Pinnacle EducationPinnacle Education 8


9/44

Definition of Goods and Salesefinition of Goods and Sales

A transaction of sale can be a:

sale of goods under hire-purchase system;

deemed sale of goods used / supplied in the course of execution ofworks contract;

deemed sale of goods given on lease.



10/44

No Tax on immovable Propertyo Tax on immovable Property yyNo tax on Immovable Property- Section 3(14) of General Clauses Act defin

that Immovable propertyincludes (a) land, (b) benefits arising out of land and thin(i) attached to the earth or (ii) permanently fastened to any thing that is attacheearth.

They are not goods, however, as per section 2 (7) of Sale of Goods Ac

includestanding crops, grass and things attached to and forming part of the land,which.

Standing Trees- standing trees are not goods as they are sold along with

land and hence, not taxable. However, standing timber will be taxable under Vtimber is identified, (b) contract is unconditional and (c) timber is in deliverabIn such case, it is movable property and hence can be taxed.

1010

Pinnacle Education


11/44

Meaning of Dealereaning of DealerDealer means any personwho carries on (whether regularly or otherwise) the businebuying, selling, supplying or distributing goods, directly or indirectly, for cash or for de erred a ment, or or commission, remuneration or other valuable considera, and

includes: A local authority, a body corporate, a company, any co-operative society or ot

c u , rm, n u un v e am y or ot er assoc at on o persons w c carr es obusiness (Any Person);

A factor broker commission a ent del-credere a ent or an othermercantile agent, by whatever name called, and whether of the same descriptiherein before mentioned or not,who carries on the business of buying, selling, supply

, Anauctioneer who carries on the business of selling or auctioning goods belon

any principal,whether disclosed or not and whether the offer of the intending purc

11accepted by him or by the principal or a nominee of the principal.

Pinnacle Education11


12/44

Meaning of Dealereaning of Dealer Every person who acts as an agent, in any State, of a dealer residing outside that State and buys, sell

supplies, or distributes goods in the State or actson behalf of such dealer as- a mercantile agentas defined in the Sale of Goods Act, 1930 or anagent for handling of goods or

documents to title relating to goodsor anagent for the collectionor the payment of the sale price of goods or as a guarantor (del-credere) fo

collection or payment.

Every local branch or officerin a Stateof a firm registered outside that Stateor a company or otherbody corporate, the principal or headquarters whereof is outside that State, shall bedeemedto be a dealer for

the purposes of this Act. AGovernmentwhich, whether or not in the course of business, buys, sells, supplies or distributes

directly or otherwise, for cash or for deferred payment or for commission, remuneration or otconsideration, shall,except in relation to any sale, supply or distribution of surplus, unserviceable

,be deemedto be a dealer for the purpose of the Act. The above exception is made as all Godepartments have to make such sale of old goods. The exception is, however, applicable

12

.Government and are not eligible for the exception.

Pinnacle Education12


13/44

How VAT works?ow VAT works?

Illustration- X Ltd. is a manufacture company. it purchases raw material from P and Q. Manufactured goods ato a wholesaler Y Ltd. sells goods to retailer Z. Retailer Z sells goods to consumers.

withoutVAT

payable bydealer to theGovernment

s. s. s.Raw materials supplied by-P to X Ltd. (VAT charged by P @ 12.5%)Q to X Ltd. (VAT charged by Q @ 4%)

1,0006,000

125240

125240

Manufactured goods sold by-X Ltd. to Y Ltd. (VAT charged by X Ltd. from Y Ltd. @ 12.5%)Less: VAT credit available to X Ltd. (Rs. 125+ Rs. 240)

10,000 1,250365

885

Goods sold by wholesaler-

Y Ltd. to Z (retailer) (VAT charged by Y Ltd. from Z @ 12.5%)Less: VAT credit available to Y Ltd.

17,000 2,1251,250

875

Goods sold by retailer-Z to consumers VAT charged by Z from consumers @ 12.5% 22,000 2,750 625

13Pinnacle Education

Less: VAT credit available to Z 2,125


14/44

How VAT works?ow VAT works?Who will pay to the Government? Rs.P

QX Ltd.Y Ltd.

125

240885875

Z 625

Total VAT collected by the Government 2,750

Tax on value added- As commonly levied, the value added tax constitutes a mtaxing final consumer spending in the economyby installments or in stages. The

me o cons s s o evy ng aax on va ue a e o a pro uc or serv ce aeach stage of its production and distribution. For this purpose valued added istaken as the difference between the sales and purchases of intermediate produ

14Pinnacle Educationgoods for resale of business.


15/44

How VAT works?ow VAT works?Manufacturer X Ltd.

Wholesaler Y Ltd.

. ,

Gross VAT @12.50% Rs. 1,250Less: VAT Credit Rs. 375Net VAT Rs. 885

. ,

Gross VAT @12.50% Rs. 2,125Less: VAT Credit Rs. 1,250Net VAT Rs. 875

Mr. P

Mr. Q

Retailer Z. . ,

Gross VAT @ 12.5% Rs. 125Less: VAT Credit Rs. NILNet VAT Rs. 125

. ,Gross VAT @ 4% Rs. 240Less: VAT Credit Rs. NILNet VAT Rs. 240

. ,Gross VAT @12.50% Rs. 2,750Less: VAT Credit Rs. 2,125Net VAT Rs. 625



16/44

Advantages of VATdvantages of VATa. Iteliminates cascading impact of double taxationand promotes economic

efficienc . results intorationalised tax burden.

b. It is primarily a self-policing,self-assessment systemwith more trust put ondealers.

c. It will increasetransparency.d. It provides the potential for a stronger manufacturing base andmore

.e. It is invoice based, and as a result it offers a better financial system withless

scope for error w.r.t. chargeability as well as compliance.

f. It has animproved control mechanism resulting in better compliance.g. Itwidens the tax base and promotes equity.h. It issimple for implementation.



17/44

Dee-merits of VATerits of VATa. It does not cover all goods as well as services.. ew exemp on un er e c u es o ca ons.

c. Floor Rate 12.5% and 4% generally - the States will have no discre

d. General rate of 12.5 % is too high-. , ,

and leaves wide room for doubts and disputes as to whether a particitem comes within the lower rate category or not.

f. The application of VAT on MRP at the first point, e. g., on drugs Bengal and once the MRP is taken as the base is a problematic.



18/44

Input Tax Creditnput Tax CreditThe value Added Tax (VAT) is based on the value addition to the goods, arelated VAT liabilit of dealer is calculated b deductin in ut tax credit fro

collected on sales during the payment period (say, a month).E.g.: X purchases input worth Rs. 15,00,000 and records sales of Rs. 22,00

e mon o anuary . npu ax ra e an ou pu ax ra e s . per cen Input tax credit/set-off shall be computed as follows-

Rs.o Input produced within the State in a month (a) 15,00,000o Output sold in the month (b) 22,00,000o Input tax paid @ 12.5% on (a) (c) 1,87,500o Tax collected 12.5% on (b) (d) 2,75,000

o paya e ur ng e mon - c e ,18Pinnacle Education


19/44

No Input Tax Credito Input Tax CreditHowever, generally no credit is available in respect of purchases gbelow-

Goods purchasedfrom unregistered dealers.Goods urchasedfrom other States countries.Purchase of goodsused in manufacture of exempted goods.

Purchase of ca ital oodsin some cases credit is available ininstalments). [Except Plant and Machinery items used fooperational activities]

Purchase of goodsused as fuel in power generation.Purchase of goods to bedispatched as branch transfers

19Pinnacle Educationoutside States.


20/44

No Input Tax Credito Input Tax CreditContd.

outside any State as branch transfer/consignments.

showing amounts of tax chargedseparately by the selling dealer.-

the law regulating VAT in a particular state).

(these schemes may be specified in the law regulating VAT particular state).



21/44

Carry forward of Tax Creditarry forward of Tax CreditIf the tax credit exceeds the tax payable on sales in a tax period, it

.input tax credit at the end of the financial year, it shall be eligiblrefund.Exception:

,be generally refunded in full within a stipulated period (generally months).Tax paid on inputs procured from other States through interState sale and stock transfer will not be eligible for credit.



22/44

Illustration on Carry forward of Tax Creditllustration on Carry forward of Tax Credit Rs.VAT paid on procurement of input/suppliers within State A January 2011 (a) 4

CST paid on procurement of input/suppliers from State B in January 2011 (b) 3

VAT paid on procurement of packing material within State A in January 2011 (c)

not eligible for tax credit) (d) 9,10,000

VAT collected in respect of sale within State A during January 2011 (e) 3,

CST collected in respect of inter-State sales to dealers in State B during January 2011 (f)

Input tax credit for January 2011 [i.e., (a) + (c)] (g) 4,60,000

. , , ,

CST and VAT payable by X Ltd. in state A for January 2011 after adjusting tax credit [(h)-(g),since it is negative no CST and VAT is payable in State A for January 2011] (i) Nil


- ,


23/44

Variants of VATariants of VATDifferent variants of VAT

Gross product variant Income variant Consumption variantTax is levied on all Tax is levied on all Tax is levied on all

for tax paid on inputsexcluding capital

inputs is allowed.

-tax paid on inputs andonly depreciation

on capital

for tax paid on allbusiness inputs

(including capital

Since the business gets setSince the business gets set- -off for the tax on inputs, off for the tax on inputs,it does not cause any cascading effect.it does not cause any cascading effect.



24/44

Variants of VAT (in Summary)ariants of VAT (in Summary)

Gross productvariant

Tax is levied on all output less input goods (excl.capital goods)

Income Variant Tax is levied on all sales less input purchases(excl. cap goods) less depreciation on capital goods

Consumption Tax is levied on all output sales less input

var ant purc ases ess nput cap ta goo s



25/44

Modes of calculating VATodes of calculating VAT

ales.

gDifferent modes of calculatingVAT

Addition Method Subtraction Method Tax Credit / Invoice MethodAggregatingall the Deducting tax on

and profit

Deducting aggregate

value of purchase exclusive

OutputsDeducting tax inclusive

value of purchases fromo ax rom e aggrega evalue of sales exclusive oftax.

e sa es an ax ngdifference between them(Backward calculation).

Tax Credit / Invoice Method has been adopted universally because of the inherent advantages in the cmethod of calculating tax liability. The other methods namely addition method and subtraction methonot workable in the case of a manufacturerwhen the rate of tax is different in respect of inputs


and outputs.


26/44

C t ti (i )t ti (i )omputation (in summary)omputation (in summary)Addition Method:

ax s to e compute on y on va ue a t ons ma e n

converting the raw materials into the finished goods.Subtraction Method:

= output tax% * [Aggregate Sales Value ( excl. tax ) Aggregate Purchase Value ( excl. tax )]

= Output tax rate/ ( 100 + output tax rate ) * [AggregateSales Value ( incl. tax ) Aggregate Purchase Value ( incl. tax )]

Invoice Method/ Tax credit method:

Tax can be computed by deducting tax on input purchasesfrom tax on output sales.

It should be noted that first consideration should be given tot should be noted that first consideration should be given to


It should be noted that first consideration should be given tot should be noted that first consideration should be given toVariants over the methods of computation.ariants over the methods of computation.


27/44

ExamplexampleParticulars Value Rate Tax Gross Amt.Output 1000000 4% 40000 1040000

InputGoods 100000 12.5% 12500 112500Ca ital Goods 200000 4% 8000 208000

Trading, Profit and Loss Account for the month ended _______.20xx

Particulars Amount Particulars AmountPurchases (incl. taxes) 112 00 Sales (incl. taxes) 1040000Depreciation (208000*10%) 20800Wages 230000Re airs and maintenance 9920

Other Factory Overheads 1280Net Profit ( bal Fig) 665500


Total 1040000 Total 1040000


28/44

Analysis on adoption of a particular variant with any of thenalysis on adoption of a particular variant with any of themethods:

Gross Product variant & Direct Consumption Method:

Since the ross roduct variant deals with output sales less input purchases(excl. cap goods) , information pertaining only to these two things shouldbe considered. Therefore by adopting direct consumption method the

computation of tax will be:

= 4% * (1000000-100000)= Rs. 36,000



29/44


Income Variant & Addition Method:

In this case, since the Income variant has been used depreciation oncapital goods has not been considered in application of Addition

method.

=4% * (230000+9920+1280+665500)= Rs. 36,268



30/44


Income variant & Invoice method:Tax on output sales- tax on input purchases (excl. cap goods) - tax ondepreciation

= 40000-12500-10%(800)

=Rs. 27,420



31/44


Income variant & Direct Subtraction method:Output Tax Rate (Output sales- Input purchases (excl. cap goods) depreciation on Capital Goods Net Value)

= 4% (1000000-100000-20000)

=Rs. 35,200



32/44


Income variant & Indirect Subtraction method:Output Tax Rate/(100+Output rate) (Output sales(incl. tax) - Inputpurchases (excl. cap goods)(incl. tax) depreciation on Capital Goodsinclusive tax Value)

= 4% / 104% (1040000-112500-20800)= s. ,



33/44


Consumption variant & Direct Subtraction method:Output Tax Rate X (Output sales(excl. tax) - Input purchases (excl.cap goods)(excl. tax) Input Capital Goods exclusive tax Value)

= 4% x (1000000-100000-200000)

=Rs. 28,000



34/44


Consumption variant & Indirect Subtraction method:Output Tax Rate/(100+Output rate) (Output sales(incl. tax) - Inputpurchases (excl. cap goods)(incl. tax) Input Capital Goods inclusivetax Value)

= 4% / 104% (1040000-112500-208000)= s. ,



35/44


Consumption variant & Invoice method:Tax on output sales- tax on input purchases - tax on Capital Goods(subject to state laws)

= 40000-12500-8000

=Rs. 19,500



36/44

Points to be remembered :

Likewise, we can get number of combinationsof variants & methods which are to be consideredor computat on o .

Addition Method cannot work together becauseconsum tion variant does not distin uishbetween capital & current expenditure.



37/44

Rules for Compulsory Registrationules for Compulsory Registrationules for Compulsory Registrationules for Compulsory Registration

If for a dealer, his annual turnover exceeds the below mentioned threshold, one mwith the local office of the Sales Tax Department.

Category Annual turnover of sales Turnover of sales or

purchase of taxable goodsnot less than

Importer Rs.1.00,000 Rs.10,000

Others Rs.5,00,000 Rs.10,000

37Pinnacle Education 37


38/44

R l f l t R i t til f l t R i t tiules for voluntary Registrationules for voluntary Registration

If your turnover is less than the above,

pay VAT. However, if one wish to avail the

benefits of being a registered dealer, hemay apply forvoluntary registrationby paying a prescribed fee (In Maharashtra,

c arges or vo untary reg strat on sRs.25,000/-.

Pinnacle Education 38Pinnacle Education 38


39/44

Entitlement of Registered Dealerntitlement of Registered Dealer

As a registered dealer you are entitled to:

Collect VAT on the sales;

Claim set-off of tax (input tax credit) paid on purchases;

.

39Pinnacle Education 39Pinnacle Education


40/44

Certificate of Registrationertificate of Registration

hologram , or a copy of the certificate and hologram,at each placewhere hecarries on your business.

If he has more than one place of business, the Department will provupon request, one copy of the certificate of registration and hologrforeach additional placeof business.

The certificate of registration and hologram is personal to the dealer it is issued and isnon-transferable



41/44

Rates of VAT in Maharashtraates of VAT in MaharashtraThere are two main rates of VAT; 4% and 12.5%. The goods are grouped into five schedules as unde

A 0 % Vegetables, milk, eggs, bread

B 1 % Precious metals and precious stones and their jewellery

C 4% Raw materials, notified industrial inputs, notified informationtechnology products and a few essential items

an a ove quor, pe ro , ese e c



42/44

Relevant Dates of filing VATelevant Dates of filing VATReturnseturnsFiling and payment dates for return-cum-chalan are as follows:

Return frequency Filing / payment date

Monthly 21 days from the end of the return period

Quarterly 21 days from the end of the return period

Six monthl 21 da s from the end of the return eriod



43/44

Contents of Tax Invoiceontents of Tax Invoiceontents of Tax Invoiceontents of Tax InvoiceThe tax invoice must contain

t e wor s ax nvo ce , pr nte n o etters at t e top or at a prom nent p a

registered dealers name, address and registration number ( TIN) the name, address and the registration number of the purchaser; serial number of the invoice; date of issue; , rate and the amount of the tax charged and indicated separately; prescribed declaration regarding validity of the registration and payment o

and it must be signed either by dealer or by someone authorised by him / her /it.



44/44

Thank you

Pinnacle Education 44

Date post:	07-Apr-2018
Category:	Documents
Upload:	sneh-shah
View:	221 times
Download:	0 times

Pinnacle IPCC Value Added Tax

Documents