| Re: TAX Basics About VAT
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What is VAT
Value Added Tax is a multi point sales tax with set off for tax paid on purchases. It is basically a tax on the value addition on the product. The burden of tax is ultimately born by the consumer of goods. In many aspects it is equivalent to last point sales tax. It can also be called as a multi point sales tax levied as a proportion of Valued Added.
State Value Added Tax.
The discussion regarding the VAT and the implementation which is being planned is only confined to the State. There is no proposed Central VAT at present in the time frame of 1.4.2003. All the States are drafting their separate Value Added Tax Act and as per the present position, every States will have a separate VAT Act with different provision not corresponding with each other. It can be stated that the proposed VAT Act is the primary stage of VAT.
It is proposed that there would be Two tax rate slabs on which tax would be levied. The first one would be 4% and would covered all essential items. The second one is 10% and all luxury items would be covered. In addition special rate slabs are also proposed which are 1% for bullion and jewellery, 20% for Non Essential Goods and exemption to certain goods like agricultural produce etc. Petroleum products are not included in VAT rates. Separate rate would be notified for them.
Set off. ( Input Credit ): At present the set off would be available on the goods locally purchased within the State only. No set off would be available to the goods purchased in the course of inter state trade and commerce. It will be necessary to produce the tax invoice to claim set off. The tax should have been charged in the invoice.
Exempted Goods: Some goods would be declared as exempted by the State Government under the proposed VAT Act. However the present view as per guide lines issued by the State Government are that no set off would be allowed on the exempted goods. It means that the tax suffered on the raw material for manufacture of exempted goods would not be refunded
Manufacturer: The manufacturer would be required to purchase raw material after paying full tax on the rate applicable on such material. Unlike the present system wherein the manufacturer can purchase the goods at a concessional rate of tax against declaration form no declaration form will be required to be issued by the Manufacturer. The input tax suffered by him would be adjusted \ set off from the sale of the finished product. The tax adjustment of input credit of the goods purchased within the State would be available on the sales made within the State and also on the inter state sales subject to the tax payable. No adjustment would be available of the input credit in case of branch transfer, consignment sale.
Trader: The trader would be required to collect tax on the sales made by him and the tax liability would be set off \ adjusted from the purchase \ input tax credit of the goods locally purchased in that State.
Issue of Invoice: Under the proposed Value Added Tax Act issue of invoice would be mandatory. No set off \ input credit would be allowed unless the original tax invoice is produced wherein tax is clearly charged separately in the invoice.
Declaration Form: Use of declaration form of purchase of goods on concessional rate of tax or NIL rate of tax under the State Act would be completely finished. There would be no requirement of declaration form under the proposed Value Added Tax. However the Road Permits like ST 18 A and ST 18 C declaration forms would continue. Declarations forms of CST Act would also continue
Accounting: The basic account books required for the purpose of VAT Act are Purchase and Sale Register. Both the registers would be the basis on which the calculation of payment of tax would be made. The normal practice of entering the gross value of Purchase bill would be changed. The assessee would be required to enter the value of goods in the goods A\c and the amount of tax in the Tax A\c separately.
Stocks: Stock statement are required to be furnished as prescribed for the quarter ending and then monthly from January to March . Set off of tax paid stocks would be given. Tax paid stocks as on march ending would be the basis for claiming set of under the new VAT Act. However, no set off would be available for the tax paid stock purchased prior to 1.4.2005.
Capital Goods: Set off would also be available on the tax paid goods at the time of purchase of capital goods under the VAT Act. Basis of set off is yet to be declared. However, it is presumed that set off would be available within a span of 3 years from the date of commercial production.
Export: Export would be zero rated. Tax paid on raw material used in manufacture of goods for export would be refunded by the State Government in cash \ adjustment. The exports would became more competitive in the world market as there would be no tax henceforth on raw material used for manufacture of goods for export.
Registration: All Importers, Manufacturers, Exporters and Dealers having CST registration would be required to seek mandatory registration under the new VAT Act. The existing registered dealers are required to fill a FACT SHEET as notified by the department within a stipulated time which is at present 15.02.2006 and then they would not be required to seek fresh registration. There would be two types of registration. The first is VAT dealers registration and the second is composition scheme dealer registration. The dealers opting under composition scheme would not be able to charge tax in the invoice and he would pay lump sum fee as composition amount. It is apparently for retail traders and the expected limit of turn over for option under composition scheme is maximum Rs. 15 lacs.
Security Amount: Security amount for seeking registration is likely to be increased many fold in VAT Act. The security for registration under the present Act is Rs.10,000.00 which is likely to be increased to Rs. 25,000.00 for small scale industry, Rs. 1,00,000.00 for medium scale industry and Rs. 5,00,000.00 for large scale industry. Apart from it, the assessing authority would have a right to seek additional security equal to 25% of the tax liability.
Audit of Account: Every dealer having a turn over of over Rs. 40.00 lacs would be required to get his account audited by a Chartered Accountant and submit the audit report within the stipulated time. Failure to do so would attract penalty proceedings.
Penalties: Penalties had been increased many folds in the new VAT Act. As per discussion draft on VAT Act circulated, there is more emphasis on penalties.
Works Contract and Leasing: No clarification, provision or guide lines had been issued by the department till date on works contract and leasing transaction. The continuation of existing composition scheme or by what method they would be taxed in future has not been informed.
Concluding: VAT would change the nature of trade in the coming years, but the medium level of trade that is C&F agents, distributors, stockiest etc. would face problems as the companies would reduced the tier of marketing. Similarly small retail dealers would be required to maintained more accounts or pay composition money which cannot be collected from the customers. The present provision of CST and VAT can not go together. After the abolition of CST the direct marketing concept may gain ground and the necessity of having warehouse, godowns etc. in all states may decrease or finish. It would adversely affect the trade and employment of the states.
I hope this also will give you more idea about VAT
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Q. What is VAT?
A. Each commodity passes through different stages of production and distribution before finally it reaches the Consumer. Some value is added at each stage of the production and distribution chain. Value Added Tax (VAT) is tax on value addition at each stage. Under VAT system, a dealer collects tax on his sales, retains the tax paid on his purchase and pays balance to the Govt. Treasury. It is a consumption tax because it is borne ultimately by the final Consumer. The tax paid by the dealer is passed on to the buyer. It is not a charge on the dealer. Hence, VAT is a multipoint tax system with provision for set off of tax paid on purchases at each point of sale.
Q. How is VAT computed?
A. The dealer pays VAT by deducting the tax paid on purchases (input tax) from his tax collected on sales (output tax). Hence, VAT = Output Tax – Input Tax.
For example: A dealer pays Rs.10.00 @ 10% on his purchase price of goods valued Rs.100.00. He sells the goods at Rs.150.00 and collects tax amounting to Rs.15.00 (@ 10%). He will pay Rs.5.00 (Rs.15.00- Rs.10.00) as he has already paid Rs.10.00 to his seller while purchasing those goods.
Q. How is VAT different from Sales Tax?
A. VAT will have only four rates instead of large number of rats of Sales Tax, with off setting of tax on inputs against that on output; VAT does away with tax on tax. Claiming input tax credit under VAT ensures proper invoicing. Overall, these features of VAT encourage disclosure of complete information on business turnover.
Q. Who is to be covered by VAT?
A. All business transactions carried on within a State by individuals, partnerships, Companies, etc. will be covered by VAT.
Q. Who will not be covered by VAT?
A. VAT will not cover small business with a turnover below a certain limit. In Orissa, a general trader having annual turnover of Rs.2, 00,000/- or more will be covered under VAT. The dealer, who purchases goods from outside the State for resale inside the State, or sells to outside the State, is liable to pay tax on his first transaction. The taxable limit for works contractor is Rs.50, 000/- and for manufacturer is Rs.1,00,000/-.
Q. What are the tax rates under VAT?
A. There are just four rates under VAT- the zero rate (exempted goods), 1%, 4% and a general rate of 12.5%. These rates will be uniform in all States across the country. The same set of goods will be charged at the same rates in all the States. Most essential commodities are exempt from VAT or fall in the category of 4%.
Q: Will VAT increase the cost of compliance?
A No. The cost of compliance will come down due to self-assessment as dealers will not have to approach the department for statutory forms or for assessment.
Q. Will the cost of doing business go up as dealers will have to pay tax on their purchases?
A: No. If we assume that the average time required for settling amounts receivable and payable is the same as the time for remitting tax and processing any refund, no additional cost is imposed on trade or industry.
Q. Will prices go up due to VAT and will the consumer suffer?
A: No. As against three slabs of 4, 8 and 12 per cent in the present regime VAT will have only two major slabs of 4 and 12.5 per cent; some commodities falling in the 8 per cent slab will come down to the 4 per cent slab, bringing the prices down. Further, input tax credit and credit allowed for purchase of capital goods should reduce the effective selling price.
Q. Will input tax credit be available on capital goods used in the execution of works contract?
A. Yes. Input tax credit will be available on capital goods purchased after April 1, 2005 for execution of works contracts in NCT of Delhi subject to conditions. However, in case a dealer, after availing tax credit, transfers the assets/capital goods, on which he had availed tax credit, out of NCT of Delhi for executing other works not liable to be taxed in Delhi, the credits so allowed shall be reversed and tax will have to be paid on such transfer of capital goods/assets. The tax so payable shall be equivalent to the unutilized portion of tax credit allowed by the department less tax payable at usual rates on such transfer or sale.
Q. What is zero rating under VAT? How does it differ from exempt goods?
A. Zero rate is applicable to goods for certain transactions under VAT and input tax credit is available on those transaction. Under VAT, the goods exported outside India, sold to an EOU and to a dealer having business under a Special Economic Zone (SEZ), Software Technology Park (STP), Electronic Hardware Technology Park (EHTP) are zero rated. In these transactions the tax rate will be zero and input tax credit will be available. The propose is that the goods exported or sold to outside the State will be free of any load of tax in it, which will increase competitiveness and encourage exports.
Exempt goods are those goods whose tax rate is zero, but input tax credit will not be available. Essential items such as agricultural implements manually operated or animal driven, books, periodicals, journals, fresh milk, etc. are in the exempted category.
Q. Why are sales to SEZ, STP, and EHTP & EOU zero rated?
A. SET, STP etc. are being set up to promote industry and create industrial base. Sales to a unit under SEZ, STP, etc. are treated on a par with export. Hence, the goods sold to SEZ, STP are zero rated to encourage export.
Levy of tax
Q. Is it possible to avail credit for taxes paid on inputs if the goods are sold in another State or are exported?
A. Purchases intended for inter-State sale as well as exports are eligible for tax credit in excess of 4 per cent CST.
Q. If the input is used partly for making taxable goods and partly for exempted goods, will input tax credit be available?
A. Where inputs are partly used for making taxable goods (or inter-State sales) and partly for making exempt goods, the tax credit shall be reduced proportionately. To illustrate, X purchased machinery for Rs. 1 lakh and paid a tax of Rs. 12,500 on it and used it in the manufacture of taxable as well as exempted goods. At that time, he estimated that the share of taxable goods made by the machinery would be 80 per cent. In this case, his input tax credit will be restricted only to 80 per cent of Rs. 12,500 or Rs. 10,000.
Q. How is input tax credit to be claimed? Is there any requirement of a `one to one' correlation between input tax and output tax?
A. There is no need for a `one to one' correlation between input tax credit and output tax. Quite a number of small businesses are under the misconception that input tax has to be adjusted against output tax on a bill to bill basis.
The operation of the input tax mechanism is simple. The dealer will be eligible to take credit for the eligible input tax in a tax period as specified on the entire purchases. He will charge VAT at the prescribed rate as is done in the present system for levy of sales tax. The VAT or output tax payable is compiled on a monthly basis as is done now. The dealer can adjust the input tax eligible on the entire purchase in the tax period against the output tax payable irrespective of whether the entire goods purchased are sold or not. For example, if the input tax credit in a particular month is Rs. 1,000 and the output tax payable is Rs. 500, the excess input tax of Rs. 500 can be carried forward to the next tax period.
Assuming no further input tax credit in the following month and that the output tax payable is Rs. 700 the dealer will pay Rs. 200 along with the monthly return.
Q. What is the applicable rate of tax on packing materials as outputs?
A. Packing material or containers are always sold with some goods packed or contained in it. No separate rate of tax is applicable on sale of such packing material/container. The rate of tax applicable to the goods packed in such packing material will be the rate of tax applicable on this packing material. Where such goods are exempted from tax, the packing material/container will also be exempt from tax.
Q. Can input credit on packing material be availed on use of petroleum products?
A. The eligibility for input tax credit on packing material also depends on the item packed therein. In case items packed therein are not eligible for input tax credit under certain circumstances, such credit will not be available on the packing material as well.
Q. Is there any restriction for availing input tax credit depending on the manner of disposal of goods, say, as free gifts or on stock transfer?
A. Yes. Input tax credit will be available on output tax payable on sales within the State and on inter-State sale. Restricted input tax credit is available on stock transfer/consignment dispatches outside the State.
Q. How can a dealer adjust the input tax against output tax when he makes taxable and exempt supplies? Will the input tax credit relating to exempt supplies lapse?
A. If the purchases are used partly for making taxable supplies, input tax credit shall be allowed proportionate to the extent they are used for that purpose. However, no input tax credit is allowed on the portion used for making exempt goods.
Q. Is there any tax liability on scrapping a capital asset on which input tax credit has been availed? What will be the tax implication on sale of such scrapped machines?
A. Tax will be levied on the sale of scrapped machines. However, the tax liability is subject to set off against any credit that may be available in the assassin's account.
Q. What amount will be available as input tax credit in case machinery is used for manufacture of taxable goods as well as exempted goods?
A. The input tax credit will be available on a proportionate basis.
Q. What should be done by a purchasing dealer to return rejected goods to the seller? What happens in case such a dealer is not registered under the State VAT Act?
A. In case the buying dealer is registered under the VAT Act, he shall, on returning the goods, issue to the selling dealer a duly signed delivery cum debit note (DDN). In case the buying dealer rejecting the goods is not a registered dealer under some other State and did not issue the DDN in respect of goods returned by him, the selling dealer may issue a credit note in respect of goods so returned to him and deduct the value of such goods from his gross turnover.
The selling dealer, in this case, may be asked by the authority to furnish evidence of the receipt of goods back by him, credit of the amount of such rejection of goods to the account of the purchaser of goods and payment thereof to him.
Q. Is input tax credit available on goods stock transferred? If ineligible, will the input tax credit relating to such goods lapse?
A. VAT Act provides for no input tax credit on goods dispatched on stock transfer. However, if the goods have been purchased locally on payment of tax and subsequently stock transferred after taking input tax credit, the input tax credit shall have to be reversed to the extent of 4 per cent.
Special regime
Q. Can input tax credit be claimed on stock of goods on the date of implementation of VAT?
A. All taxed stock purchased between April 1, 2004 and March 31, 2005 will be eligible for input tax credit.
Q. Will input tax credit be available on purchase of second hand machinery?
A. Yes. The requirement of law in respect of purchase of second hand machinery is the same as for new machinery. If the purchase of second hand machinery otherwise satisfies all other requirement of availability of input tax credit, the credit will be available.
Q. What is the composition scheme? What are the benefits for small dealers?
A. If the taxable quantum of a dealer does not exceed Rs. 25 lakhs in a year, and the dealer does not import or export goods or makes inter-State sales or purchases goods from an unregistered dealer, the dealer can opt for the composition scheme. Under this scheme, he needs to pay only 1 per cent of the taxable turnover and he need not maintain detailed accounts.
Q. What is fair market value and how is it calculated?
A. If sales or purchases are under or over invoiced, the department can subject the same to a fair market value assessment of the consideration to account for or for computing the input or output tax liability. It shall be recomputed on an arm's length principle.
Payments and refunds
Q. Can a dealer whose input tax credit exceeds the output tax payable in a tax period or in a year claim refund of the excess credit?
A. Yes. The dealer can claim the excess. Since the rate of tax on input and sales is the same in the case of a dealer, there will only be value addition and there may not be a situation where the input tax credit exceeds the output tax payable.
Q. What are the circumstances in which refund of input tax credit is permissible?
A. Refund of input tax credit is normally permissible in the case of a zero rated sale. Exports are zero rated sales. The input tax credit liable to the export sales will be eligible for refund. Refund may also arise in case input tax credit exceeds tax liability.
Last edited by paran1976; 10-10-2008 at 05:02 AM..
Reason: Automerged Doublepost
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