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Value Added Tax (VAT)Value Added Tax (VAT)

By

NITISH KHURANA

Project On

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IntroductiontoIntroductionto

VatVat MeaningMeaning

ValueValue AddedAdded TaxTax isis aa multimulti pointpoint salessales taxtax withwith setset offoff forfor taxtax paidpaidonon purchasespurchases.. ItIt isis basicallybasically aa taxtax onon thethe valuevalue additionaddition onon thetheproductproduct.. TheThe burdenburden ofof taxtax isis ultimatelyultimately borneborne byby thethe consumerconsumer ofofgoodsgoods.. InIn manymany aspectsaspects itit isis equivalentequivalent toto lastlast pointpoint salessales taxtax.. ItIt

cancan alsoalso bebe calledcalled asas aa multimulti pointpoint salessales taxtax leviedlevied asas aa proportionproportionofof ValuedValued AddedAdded..

ItIt isis aa generalgeneral taxtax thatthat applies,applies, inin principle,principle, toto allall commercialcommercialactivitiesactivities involvinginvolving thethe productionproduction andand distributiondistribution ofof goodsgoods andandthethe provisionprovision ofof servicesservices..

ItIt isis notnot aa chargecharge onon companiescompanies.. ItIt isis chargedcharged asas aa percentagepercentage ofofpriceprice..

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Characteristicsof

VAT The difference between retail sales tax and VAT is that while

retail sales tax is collected at one stage, VAT is collected ininstallments at successive stages of production anddistribution. It is a multi - state tax rather than a single stageone like the retail sales tax, and in its deal form, is to belevied on all the states of production & distribution.

It is principle, comprehensive unlike selective excises.

It is collected in bits at each stage of production anddistribution which, when added, equal a tax on the retail saleof the final product at the same rate as the VAT.

It falls on each input entering into the final products once andonly once.

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HistoryofVATHistoryofVAT TheThe veryvery systemsystem ofof ValueValue AddedAdded TaxesTaxes oror VATVAT waswas introducedintroduced forfor

thethe firstfirst timetime inin thethe marketmarket byby thethe modernmodern FrenchFrench economisteconomist inin19541954.. MauriceMaurice LaurLaur whowho waswas thethe jointjoint directordirector ofof thethe FrenchFrench taxtaxauthorityauthority andand thethe directordirector generalgeneral ofof thethe departmentdepartment ofof import,import, waswasthethe firstfirst personperson toto introduceintroduce VATVAT oror thethe valuevalue AddedAdded TaxTax withwith effecteffectfromfrom 1010thth ofof AprilApril inin thethe yearyear 19541954 inin thethe casescases ofof largelarge businesses,businesses,andand whichwhich areare extendedextended overover timetime toto allall businessbusiness sectorssectors.. InIn France,France,

VATVAT becamebecame soso importantimportant thatthat itit hashas becamebecame oneone ofof thethe mostmostimportantimportant sourcessources ofof thethe statestate financefinance andand itit isis accountingaccounting forforalmostalmost 4545%% ofof statestate revenuesrevenues..

LikeLike allall thethe otherother directdirect taxestaxes inin thethe market,market, thethe VATVAT isis quitequitedifferentdifferent.. ThisThis isis actuallyactually anan indirectindirect taxtax becausebecause inin thisthis sortsort ofof taxtaxitit isis collectedcollected fromfrom someonesomeone otherother thanthan thethe individualindividual whowho actuallyactually

bearsbears thethe costcost ofof thethe taxtax whowho isis knownknown asas thethe sellerseller ratherrather thanthan thetheconsumerconsumer.. TheThe implementersimplementers ofof thisthis taxtax alsoalso havehave takentaken certaincertaininitiativesinitiatives whichwhich helphelp themthem inin avoidingavoiding doubledouble taxationtaxation onon finalfinalconsumptionconsumption..

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VATVAT ieie.. thethe ValueValue addedadded taxtax isis relativelyrelatively aa newnew conceptconcept inin ourour countrycountry andand itit

waswas practicallypractically introducedintroduced inin thethe yearyear 20052005 inin largelarge nono ofofstatesstates ofof thethe countrycountrythoughthough initiallyinitially itit waswas introducedintroduced butbut takentaken backback inin midmid 9090ss inin thethe statestate of ofMaharashtraMaharashtra.. FurtherFurther HaryanaHaryana waswas thethe firstfirst statestate toto introduceintroduce itit successfullysuccessfully inin

20032003.. TheThe VATVAT introductionintroduction scheduleschedule inin IndiaIndia cancan bebe seenseen asas underunder;;

No StatesDate of Imposition of

VAT

Number of

States

1 Haryana 01-Apr-03 1

2 Andhra Pradesh, West Bengal,

Kerala, Karnataka, Orissa, NCT

Delhi, Tripura, Bihar, Arunachal

Pradesh, Sikkim, Punjab , Goa,

Mizoram, Nagaland, J & K,

Manipur, Maharashtra, Himachal

Pradesh, Assam and Meghalaya

01-Apr-05 20

3 Uttaranchal 01-Oct-05 1

4 Rajasthan, Gujarat, MP,

Chattisgarh and Jharkhand

01-Apr-06 5

5 Uttar Pradesh and Tamil Nadu Still not decided 2

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VATTerminology

Output VAT : Amount received by a seller as a percentageof the gross sale price of goods or services

Input VAT : Amount paid by a buyer as a percentage of thegross purchase price for goods or services

used in production.

Zero Rated : Transactions in which the seller collects nooutput tax and the corresponding input tax isfully refundable. Exports are zero rated

Exempt : Transactions in which the seller collects nooutput tax but the corresponding input tax isnon-refundable and absorbed by the seller.Financial services are commonly exempt.

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How VAT (Value Added Tax)How VAT (Value Added Tax)

WorksWorks AA tradertrader registeredregistered forfor VATVAT effectivelyeffectively payspays VATVAT onlyonly atat oneone stagestage

whenwhen hehe sellssells hishis goodsgoods..

ThisThis taxtax isis thethe onlyonly amount,amount, whichwhich hashas anan effecteffect onon hishis sellingselling

priceprice whichwhich includesincludes VATVAT..

TheThe VATVAT thatthat hehe hashas paidpaid asas aa partpart ofof hishis purchasepurchase priceprice isis chargedchargedonon himhim byby hishis supplierssuppliers..

ThisThis isis notnot aa costcost toto himhim becausebecause hehe getsgets itit backback byby deductingdeducting itit

fromfrom taxtax onon hishis salessales (Output(Output Tax)Tax)..

Therefore,Therefore, VATVAT shouldshould havehave aa minimumminimum impactimpact onon hishis sellingsellingpricesprices..

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Letstake an exampleLetstake an example

ManufacturerManufacturer

TheThe ManufacturingManufacturing companycompany PerfectPerfect ShoemakerShoemaker PvtPvt.. LtdLtd hashas

purchasedpurchased rawraw materialmaterial worthworth RsRs.. 5050,,000000//-- afterafter payingpaying statestate taxtax

ofof RsRs.. 22,,000000//-- @@ 44%%.. TheThe LabourLabour contentscontents areare RsRs.. 4040,,000000//-- andand thethe

marginmargin towardstowards administrativeadministrative andand sellingselling expensesexpenses andand profitprofit areare

RsRs..1000010000 hencehence thethe totaltotal salesale priceprice 100000100000//-- ..SupposeSuppose thethe taxtax isis

raterate 1212..55%% hehe willwill chargecharge RsRs 1250012500 asas taxtax fromfrom thethe WholesalerWholesaler..

SinceSince hehe hashas alreadyalready paidpaid RsRs 20002000//-- onon thethe rawraw materialsmaterials hencehence hishis

netnet taxtax liabilityliability RsRs 1050010500//-- afterafter gettinggetting aa creditcredit ofof RsRs 20002000//-- taxtax

paidpaid byby himhim onon rawraw MaterialMaterial.. ThisThis isis VATVAT forfor manufacturermanufacturer

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WholesalerWholesalerTheThe wholesalerwholesaler toughtough shoeshoe sellerseller hashas purchasedpurchased goodsgoods worthworth

RsRs 11,,0000,,000000//-- afterafter payingpaying taxtax ofof RsRs.. 1212,,500500//-- asas mentionedmentioned

aboveabove.. LetLet usus assumeassume hishis marginmargin forfor profitprofit andand expensesexpenses isis RsRs..

77,,000000//-- thenthen hehe willwill thethe goodsgoods forfor RsRs.. 11,,0707,,000000//-- toto thethe

retailerretailer andand alsoalso chargecharge taxtax ofof RsRs.. 1313,,375375//-- fromfrom thethe retailerretailer..

SinceSince hehe hashas alreadyalready paidpaid thethe taxtax ofof RsRs.. 1212,,500500//-- onon hishis

purchasespurchases hencehence hishis netnet taxtax liabilityliability willwill bebe RsRs.. 1313,,375375//-- ((--))

1212,,500500//-- == RsRs.. 875875//-- WeWe cancan VerifyVerify itit asas 1212..55%% ofof 70007000 SinceSince

thethe valuevalue addedadded byby thethe WholesalerWholesaler isis 70007000..

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RetailerRetailer

TheThe retailerretailer M/sM/s.. BrightBright shoeshoe pointpoint hashas purchasedpurchased

goodsgoods forfor RsRs.. 11,,0707,,000000//-- afterafter payingpaying taxtax ofof RsRs..

1313,,375375//--.. SupposeSuppose hishis marginmargin forfor profitprofit andand expensesexpenses isisRsRs.. 1010,,000000//-- thusthus hehe willwill sellsell thethe goodsgoods toto thethe

customercustomer atat RsRs.. 11,,1717,,000000//-- andand willwill chargecharge taxtax ofof RsRs..

1414,,625625//--.. HisHis netnet taxtax liabilityliability willwill bebe RsRs.. 1414,,625625//-- ((--))

RsRs.. 1313,,375375 == RsRs.. 11,,250250//-- wewe cancan verifyverify itit asas 1212..55%% ofof

1010,,000000//-- sincesince thethe valuevalue addedadded byby thethe retailerretailer isis RsRs..

1010,,000000//--

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InIn thisthis studystudy itit isis foundfound thatthat therethere areare numbernumber ofof

problemsproblems toto introduceintroduce valuevalue addedadded taxtax onon commoditiescommoditiesinin differentdifferent statesstates inin India,India, butbut inin thisthis paperpaper onlyonly majormajorproblemsproblems havehave beenbeen takentaken whichwhich areare facingfacing bybydifferentdifferent statesstates forfor imposingimposing ofof VAT,VAT, asas followsfollows

Problemsin Implementation of

ValueAddedTaxin India

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BillingBilling

LackofuniformityLackofuniformity

Concessionfor New IndustryConcessionfor New Industry

NumberofTaxesimposeby theNumberofTaxesimposeby theGovernmentGovernment

LackofinfrastructurefacilitiesLackofinfrastructurefacilities

DealinginVariety of GoodsDealinginVariety of Goods

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VATVAT ReturnsReturns

VATVAT ReturnsReturns areare filedfiled everyevery monthmonth oror everyevery quarterquarter dependingdependingonon thethe amountamount ofof VATVAT youyou paypay.. TheThe normalnormal rulerule isis thatthat ifif youyoupaypay lessless thanthan RsRs 1515,,000000 forfor VATVAT everyevery month,month, aa VATVAT ReturnReturn isis totobebe filedfiled everyevery quarterquarter.. ItIt isis allall atat thethe discretiondiscretion ofof thethe VATVATofficerofficer.. AtAt monthlymonthly oror quarterlyquarterly intervalsintervals onon youryour VATVAT Return,Return,

youyou shouldshould subtractsubtract youryour InputInput TaxTax (attributable(attributable toto taxabletaxablesuppliessupplies only)only) fromfrom youryour OutputOutput TaxTax andand paypay thethe differencedifference totothethe VATVAT CommissionerCommissioner..

IfIf youryour InputInput TaxTax isis greatergreater thanthan youryour OutputOutput TaxTax youyou cancan carrycarryoverover thethe differencedifference asas aa creditcredit toto youryour nextnext VATVAT ReturnReturn.. InIn

certaincertain circumstances,circumstances, thethe CommissionerCommissioner maymay paypay youyou anyanyexcessexcess ifif hehe isis satisfiedsatisfied thatthat suchsuch anan excessexcess isis aa regularregular featurefeatureofof youryour businessbusiness

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AccordingAccording toto VATVAT law,law, youyou cannotcannot sellsell anyany goodsgoods withoutwithout aa salessalesdocumentdocument.. ThisThis documentdocument cancan bebe aa smallsmall cashcash memomemo oror aa cashcash salesaleoror aa billbill forfor cashcash transactionstransactions issuedissued at,at, oror before,before, thethe timetime whenwhenthethe cashcash isis receivedreceived.. TheThe pricesprices mentionedmentioned onon thesethese salesale documentsdocumentsshouldshould includeinclude VATVAT andand thethe wordswords 'Price'Price includesincludes VAT'VAT' mustmust bebeprintedprinted onon themthem.. TheseThese documentsdocuments areare suitablesuitable forfor retailersretailers suchsuch asas

grocersgrocers andand chemistschemists.. YouYou mustmust givegive thethe originaloriginal toto thethe customercustomerandand keepkeep aa duplicateduplicate.. AtAt thethe endend ofof eacheach businessbusiness day,day, youyou cancan totaltotalthethe cashcash salessales andand enterenter itit inin youryour SalesSales LedgerLedger..ForFor sellingselling onon credit,credit, youyou areare requiredrequired toto provideprovide thethe purchaserpurchaser withwithaa taxtax invoiceinvoice atat thethe timetime ofof supplysupply inin respectrespect ofof thatthat supplysupply.. WhenWhenyouyou receivereceive aa depositdeposit asas advanceadvance paymentpayment forfor aa booking,booking, aa taxtax

invoiceinvoice shouldshould bebe issuedissued atat thethe timetime suchsuch depositdeposit isis receivedreceived.. AllAll taxtaxinvoicesinvoices shouldshould bebe seriallyserially numberednumbered andand issuedissued inin serialserial numbernumberorderorder.. TheyThey mustmust includeinclude thethe followingfollowing informationinformation::

Issuing Tax Billsand InvoicesIssuing Tax Billsand Invoices

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MERITS OF VAT

It ensures that input is taxed only once.

It combines the advantage of being of general tax, withoutthe disadvantages of extended input taxation.

It is free of other economic demerits of cascade type

turnover or sales tax. It does not change the relative prices of inputs and give

wrong signals to producers regarding factor combinations.

It does not raise costs through input taxation.

In developing countries, a mild bias could be built into thesystem against capital intensive methods.

Economy in the use of scarce inputs could be promotedthrough an additional non refundable duty.

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VATVAT -- BENEFITSBENEFITS

Set off willbe given forinput taxas wellSet off willbe given forinput taxas well

as tax paid on previous purchaseas tax paid on previous purchase

Other taxes willbe eliminatedOther taxes willbe eliminated

Overall taxburden willbe rationalizedOverall taxburden willbe rationalized

There willbe selfassessment bydealersThere willbe selfassessment bydealers

Transparency willincreaseTransparency willincrease

There willbe higher revenue growthThere willbe higher revenue growth

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DEMERITS OF VAT

VAT wasto be applied in all states butitfailed to doso.

Inflationrate has beenincreased due to VAT.

VAT has complicated bothtariffin customs and excise and

Overburdend with more exemptions

VAT isregressive :- Its burdenfalls disproportionatelyonPoorpeople since the poorare likelyto

spend more oftheirincomes

VAT istoo difficulttooperate from the positionofboththe

Administration and business

Monthly Return: The manufacturer is r equired to payCenVAT on a fortnightly basis and submit a monthly return

(ER1) to the Superintendent ofCentral Excise by the 10th of

the month

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VAT RATES AND CLASSIFICATION OF COMMODITIES

Fordifferent commodities VAT rates are calculated as1%, 4%,12.5% and a

specific categoryis exempted from VAT

GOODS EXEMPTED FROM VAT

Agricultural implements manually operated or animal driven

notified by the state government.

Aquatic feed, Cattle feed, Poultry feed, Animal feed suppleme

Books including almanacs, panchangs, timetables for passeng

transport services.

Cereals & Pulses (during period from 01/04/05 to 31/03/06) in w

grain

Chalk stick, Charcoal & Badami Charcoal, Charkha implemen

in production of handspun yarn.

Firewood, Fishnet fabrics, Contraceptives of all types.

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Sales TaxV/sVATSales TaxV/sVAT

Sales Tax VAT

Sales Tax is a narrow concept VATis a wi er concept

Sales tax, as compared to VATis t e

percentage of revenue imposed on t e

retail sale ofgoods.

T e value added tax system, unli e t e

conventional sales tax system, efficiently

addresses t e problems of cascading and

inputtax creditt at causes an automatic

hi e in the consumer price level. The

incidence of cascadingis avoided in VAT.

Sales tax is often considered a burden ifthepercentage charged goes beyond 10% and is

subjected to evasion by the consumers who

engage in buying products through the

internet and other activities such as buying

at wholesale or through an employer.

Although tax evasion is not possible in VAT,

itis subjected to other fraudulent practices

such as carousel fraud. This is one ofthe

prominent practices oftheft ofthe value

added tax.

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Thank YouThank You