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Basic Concepts of VAT
Basic Concepts of VAT
C. B. THAKAR
B.Com.,LLB.,F.C.A.
ADVOCATE
1. Introduction
Value Added Tax (VAT) has been introduced on all India basis from 1.4.2005.
Now it is more than 5 years since introduction of VAT. The experience so far
cannot be sufficient to draw any conclusion. However looking to the principles
of VAT, the system should turn out to be acceptable to all of us, subject to that
the said system is implemented with good administration.
2. What is VAT ?
The tax on sale or purchase is levied by State Governments under the
Constitution Authority of entry 54 of the State list. The Central Sales Tax is
levied by Parliament as per entry 92 of Union list. In respect of State sales tax,
the State Governments have full liberty to govern their own system.
The States, like Maharashtra, have experienced all kinds of levy of Sales Tax
like, multiple levy of tax, last point tax and single point tax. The earlier (BST
Act) system was largely single point tax system, where the tax was levied at
first point of sale and subsequent sales were allowed as ‘resale’. No tax was
contemplated on these second sales/resale, except ‘Resale Tax’. Barring such
exceptional levies, normally it was single point tax.
Under VAT, the tax is levied at each point of sale. The tax paid on purchase
point is allowed to be set off, also referred to as input tax credit under VAT. A
following simple example can be considered for understanding the concept.
(i) A sells to B
(Rate of tax is assumed to be 10%)
Sales price + Tax = Total Tax Payment to Govt.
100 + 10 = 110
A will pay tax at Rs.10 Rs.10
(The input credit available to A is not
considered here for simplicity).
(ii) B sells to C
Sales price + Tax = Total
150 + 15 + 165
B will pay tax to Govt. as under:
Tax on sale 15
Less: Tax paid on Purchase (-) 10
Net Payable 05 Rs.5
(iii) C sells to D
Sales price + Tax = Total
200 + 20 = 220
C will pay tax to Govt. as under:
Tax on sale 20
Less: Tax paid on Purchase (-) 15
Net Payable 05 Rs.5
(iv) D sells to Consumer
Sales price + Tax = Total
250 + 25 = 275
D will pay tax to Govt. as under:
Tax on sale 25
Less: Tax paid on Purchase (-) 20
Net Payable 05 Rs.5
Total Payment Rs.25
Thus Government is getting Rs.25 as tax. However it can be noticed that the
tax is getting spread over number of dealers. The tax is actually realized on
highest price i.e. consumer price. It will also be noticed that there is no tax
burden on any dealer. The dealer is collecting tax and paying to the Govt. This
is the biggest advantage of VAT. The businessman has not to consider Sales
Tax as any burden on his business. Under single point tax, the tax rates were
high as well the dealer had to bear hidden burden of tax like, retention amount
in case of manufacturer, Turnover Tax, surcharge etc. This has cascading effect
which gets avoided under VAT System. In addition to above, there are several
other benefits of VAT compared to single point system, which can be noted as
under, in brief.
(i) There will not be any tax component in exports. In other words,
there will not be export of taxes in exported goods. The exports will
therefore be cheaper so as the exporter can compete in the world
market.
(ii) The system of concessional forms is given go bye. Therefore the
selling dealer will be saved from hassels of collecting number of
forms and in absence of same to bear higher burden with
interest/penalties.
(iii) The slab rates are bare minimum like, 0%, 4% (now 5% for non
declared goods from 1.4.2010 and 12.5% though there are rate of
1%/20% etc. for specific goods. There is more simplicity due to
above reduced rates.
(iv) The system is transparent, as tax is shown on the tax invoice. This
also brings simplicity in accounting and handling of Sales Tax
matters.
(v) The other big gain of VAT is avoiding cascading effect. As stated
above under earlier system there was cascading effect as certain
portion of tax was absorbed by the manufacturer/vendor. Under
VAT, 100% input credit will be given, avoiding cascading effect. The
input tax credit is restricted in relation to certain items, but
certainly more setoff is allowable under VAT, then what was
allowed earlier.
3. Comparison of VAT with BST era
Demerits of single point tax system under BST era
• No common rates
• Cascading effect
• Incentive to Evasion
Merits of VAT
• Common rates – India, a common market
• Larger Tax base - lower rates of taxes. Also minimum slab rates
• Transparent system
Demerits of VAT
• Every dealer becomes tax payer
• CST impediment
• Other taxes like Octroi, Excise duty, cess, luxury tax, entry tax to remain