Value Added Tax (VAT), 2010  

(India)
  In one the most large scale reforms of the country's public finances in over past 50 years,
India has finally agreed the launch of its much-delayed Value Added Tax (VAT) from 1st
April 2005. At a rate of 12.5%, VAT will come in on April 1, 2005. The tax, agreed after state
finance ministers met in New Delhi, is designed to make accounting more transparent, cut
trade barriers and boost tax revenues.

The system had been postponed many times, mainly

because of opposition from the powerful trading lobby. March 24, 2005: The state finance
Ashim Dasgupta, who heads a panel overseeing the ministers in consultation with
implementation of VAT, said: "We are very happy to Finance minister P. Chidambaran
announce that a broad consensus among states was decided to scale down the
arrived at the meeting to introduce VAT on April 1, composite tax to 0.25 per cent
2005."  The  Congress-led  new left-leaning United from the earlier one percent over
Progressive Alliance (UPA) government has made sales Turnover. This levy will be
implementing VAT one of its key priorities. applicable to traders out of the
According to analysts VAT is essential in tackling the VAT ambit and having a sales
problem of tax evasion. In India, all the state turnover between Rs. 5 lakh-Rs.
governments collect over Rs 85,000 crore (Rs 850 50 lakh per year.
billion) by way of sales tax and further over 20,000 crore The Next major decision by the
(Rs 200 billion) by way of Central Sales Tax. This is state finance ministers is to phase
what officially comes mostly from petroleum, liquor, iron out central sales Tax (CST) during
and steel and cement companies. Rough estimates next three years. While the 4
suggest that these industries account for over 50 per percent CST stays during 2005-
cent sales tax for the states and the Centre. Majority of 06, it will be slashed to 2 percent
the officials in sales tax departments believe that what in 2006-07. CST will not be levied
they actually collect is less than 50 per cent of the from April 1, 2007.
revenue that should otherwise accrue to them if all
transactions are accounted for by the businessmen.   
  India has a large un-organised market, especially agro-based industries and here a large
number of transactions go unrecorded. The menace of stock transfers adds to the problem
of tax evasion. In India, introduction of VAT will only change the collection methods for sales
tax rather than reform the indirect tax system.
   VAT is nothing but sales tax at source. Instead of collecting it after five months or so, the
state governments would collect the same in advance and then allow set-offs to the
businessmen. All tax paid on inputs, subject to rules made, shall be allowed to set-off
against the tax on output. There would be exceptions like CST not allowed to be set off if
sales are made locally in some other state; octroi not to be set off against output tax, etc.
What about Central Sales Tax Act, 1956?  Well, this will remain and might be the biggest
stumbling block for successful introduction of VAT in India. Double taxation under the
Central Sales Tax Act, even for declared goods under Section 14, has been permitted. But
the biggest problem is that the central sales tax paid by the businessmen will not be allowed
to be set off against local output tax payable. A city like Delhi will suffer the most.
State governments have agreed not to start new incentive schemes giving sales tax
exemptions. 'C' forms have been made mandatory even when the local sales tax is less than
4 per cent. 'C' forms are required even when sales are made from sales tax free zones.
Therefore, the power given to the state government under Section 8(5) of the Central Sales
Tax Act is now virtually redundant as even if the sales tax is reduced to zero, the 'C' forms
would still be required.  It would be a difficult scenario for local VAT and CST to co-exist.
Single VAT, which should be a combination of sales tax, service tax and excise duty is what
we should have aimed for. 
Necessity of Value Added Tax: The General perception of the existing single point sales tax
system is that it is highly complex with multiplicity of rates, plethora of explanation, many
rates in some group of item, extensive use of statutory forms, high and unrealistic quota of
assessment, loss of revenue on value additions, Tax rate war between States , etc. The
consensus was that a new system is needed and Value Added Tax has emerged as a
principal instrument of taxing domestic consumption world wide during last four decades. It is
now in operation in more than 100 Countries. The basic advantages of Value Added Tax can
be stated as its neutrality, transparency, certainty and self policing mechanism. 
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.  America which has similar federal and state laws \
Constitution has not implemented VAT. It needs study as to why a develop and advance
economy like America has not adopted VAT. 

Frequently asked questions (FAQ) on VAT 

 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.

What is the difference between Sales Tax and VAT?

VAT is levied on all goods & services while sales tax is only levied on goods. Thus, a lower tax rate is
needed to collect the same amount as sales tax. VAT has no cascading effect. The VAT mechanism of
auto-control reducestax evasion, therefore enhancing income tax collection. VAT is levied at import. 

What is input tax? 

Input generally mean goods purchased by a dealer in the course of his business for re-sale or for use in
the manufacture, processing, packing/storing of other goods or any other business use. The tax paid on
inputs is known as Input Tax. It has been defined in Section 2(xvii) of the Model VAT Bill, 2003 thus:
"Input tax means the tax paid or payable under this Act by a registered dealer to another registered dealer
on the purchase of goods in the course of business for resale or for manufacture of taxable goods or for
use as containers or packing material or for the execution of works contract." 

What is input tax credit? 

It is the credit for tax paid on inputs. Every dealer has to pay output tax on the taxable sale effected by
him. The basic formula of VAT is that every dealer pays tax only on the value addition in his hands. In
simple words input tax credit is the mechanism by which the dealer is enabled to set off against his output
tax, the input tax. Dealers are not eligible for input tax credit on all inputs. There are certain restrictions
and conditions on the eligibility of input tax credit as it is stipulated in the respective State legislation. 

What are the `sales' not liable to tax under the VAT Act? 
Since the VAT Act applies only to sales within a State, the following sales shall not be governed by the
VAT Act: 

a) sale in the course of inter-State trade or commerce which shall continue to be liable to tax under the
Central Sales Tax Act, 1956; 
b) sale which takes place outside the State; and 
c) sales in the course of export or import. 

Who is a retail dealer? 

Retail dealer is not specifically defined in most of the draft VAT legislation of States. To some extent, a
dealer will be considered to be engaged in the business of selling at retail if 9/10ths of his turnover of
sales consists of sales made to persons who are not dealers and if any question arises as to whether any
particular dealer is a retailer, then the officer in charge shall be refered for. 

In the VAT regime, will stock transfer be more beneficial than inter-State sale? 

In so far as a decision as to whether goods should be stock transferred and then sold to customers by the
branch or should direct inter-State sales be effected, there can be no generalisation. The decision has to
be taken on a VAT impact analysis of each individual business. 

The tax implications to be considered are: 

In the case of inter-State sale, the buying dealer has to pay a non-VATable CST while the selling dealer
will get the benefit of input tax credit. 

 In the case of stock transfer, though there is no tax on the inter-State movement, the input tax
credit will be restricted to the tax paid on inputs in excess of 4 per cent.