VAT

Meaning:
Value Added Tax (VAT) is a general consumption tax assessed on the value
added to goods and services.

It is a general tax that applies, in principle, to all commercial activities involving

the production and distribution of goods and the provision of services. It is a
consumption tax because it is borne ultimately by the final consumer.

It is not a charge on companies. It is charged as a percentage of price, which

means that the actual tax burden is visible at each stage in the production and
distribution chain.

It is collected fractionally, via a system of deductions whereby taxable persons

can deduct from their VAT liability the amount of tax they have paid to other
taxable persons on purchases for their business activities. This mechanism
ensures that the tax is neutral regardless of how many transactions are involved.

In other words, it is a multi-stage tax, levied only on value added at each stage in
the chain of production of goods and services with the provision of a set-off for
the tax paid at earlier stages in the chain. The objective is to avoid 'cascading',
which can have a snowballing effect on prices. It is assumed that due to cross-
checking in a multi-staged tax, tax evasion will be checked, resulting in higher
revenues to the government.

Over 130 countries worldwide have introduced VAT over the past three decades
and India is amongst the last few to introduce it.

India already has a system of sales tax collection wherein the tax is collected at
one point (first/last) from the transactions involving the sale of goods. VAT would,
however, be collected in stages (installments) from one stage to another.

The mechanism of VAT is such that, for goods that are imported and consumed
in a particular state, the first seller pays the first point tax, and the next seller
pays tax only on the value-addition done - leading to a total tax burden exactly
equal to the last point tax.
 Necessity of VAT in India:

India, particularly the trading community, has believed in accepting and

adopting loopholes in any system administered by the state or the Centre. If a
well-administered system comes in, it will close avenues for traders and
businessmen to evade paying taxes. They will also be compelled to keep proper
records of their sales and purchases.

Many sections hold the view that the trading community has been amongst the
biggest offenders when it comes to evading taxes.

Under the VAT system, no exemptions will be given and a tax will be levied at
each stage of manufacture of a product. At each stage of value-addition, the tax
levied on the inputs can be claimed back from the tax authorities.

At a macro level, there are two issues, which make the introduction of VAT
critical for India.

Industry watchers say that the VAT system, if enforced properly, forms part of the
fiscal consolidation strategy for the country. It could, in fact, help address the
fiscal deficit problem and the revenues estimated to be collected could actually
mean lowering of the fiscal deficit burden for the government.

The International Monetary Fund (IMF), in its semi-annual World Economic

Outlook released on April 9, expressed its concern over India's large fiscal deficit
- at 10 per cent of the GDP.

Further any globally accepted tax administrative system, will only help India
integrate better in the World Trade Organization regime.

Advantages of VAT
 Since ages always a reform is made for the benefit in the process of
development. It was Chanakya who first wrote that a government should tax its
people like a shepherd shears his flock or a bee gets nectar from a flower. But
apparently that fiscal wisdom died with him. Let us not experience the same with
VAT in India. It has a baggage full of benefits. Few advantages of VAT in India
are mentioned below.

It will be a virtual crime not to look to the other side of the coin of the Indian VAT
system. Disadvantages will always give birth to amendments to the existing
policy so that traders can ride jerk free on it adding value to the existing Indian
taxation system. We have also discussed upon the friction of VAT below.

Advantages of VAT:

In the advantages part we will first look after the broad coverage of VAT in the
Indian market. Then we will consider the level of security the Indian VAT is
having on our revenues. Obviously the selection of items to be covered by VAT
in India will be given a bullet to think upon and at last we will check out the co-
ordination VAT in India will be having with our existing direct tax system.

1) Coverage
If the tax is carried through the retail level, it offers all the economic advantages
of a tax that includes the entire retail price within its scope, at the same time the
direct payment of the tax is spread out and over a large number of firms instead
of being concentrated on particular groups, such as wholesalers or retailers.

If retailers do evade, tax will be lost only on their margins because customers
that are registered firms gain nothing if their suppliers fail to collect tax, except
delay in payment; they will pay more to the government themselves. Under other
forms of sales tax, both seller and customer gain by evading tax. One particular
advantage is that of the widening of the tax base by bringing all transactions into
the tax net. Specifically, VAT gives the new government the opportunity to bring
back into the tax system all those persons and entities who were given tax
exemptions in one form or another by the previous regime.

2) Revenue security
VAT represents an important instrument against tax evasion and is superior to a
business tax or a sales tax from the point of view of revenue security for three
reasons.

In the first place, under VAT it is only buyers at the final stage who have an
interest in undervaluing their purchases, since the deduction system ensures that
buyers at earlier stages will be refunded the taxes on their purchases. Therefore,
tax losses due to undervaluation should be limited to the value added at the last
stage. Under a retail sales tax, on the other hand, retailer and consumer have a
mutual interest in under declaring the actual purchase price.

Secondly, under VAT, if payment of tax is successfully avoided at one stage

nothing will be lost if it is picked up at a later stage; and even if it is not picked up
subsequently, the government will at least have collected the VAT paid at stages
previous to that at which the tax was avoided; while if evasion takes place at the
final stage the state will lose only the tax on the value added at that point.

If evasion takes place under a sales tax, on the other hand, all the taxes due on
the product are lost to the government.

A significant advantage of the value added form in any country is the cross-audit
feature. Tax charged by one firm is reported as a deduction by the firms buying
from it. Only on the final sale to the consumer is there no possibility of cross
audit.

Cross audit is possible with any form of sales tax, but the tax-credit feature
emphasis’s and simplifies it and is likely to make firms more careful not to evade
because they know of the possibility of cross check.

3) Selectivity
VAT may be selectively applied to specific goods or business entities. We have
already addressed essential goods and small business. In addition the VAT does
not burden capital goods because the consumption-type VAT provides a full
credit for the tax included in purchases of capital goods. The credit does not
subsidize the purchase of capital goods; it simply eliminates the tax that has
been imposed on them.

4) Co-ordination of VAT with direct taxation

Most taxpayers cheat on their sales not to evade VAT but to evade personal and
corporate income taxes. The operation of a VAT resembles that of the income
tax more than that of other taxes, and an effective VAT greatly aids income tax
administration and revenue collection. It is interesting to note that when Trinidad
and Tobago set out to introduce VAT it chose one of its top income tax
administrators as the VAT Commissioner.

It must be stressed once again that if properly implemented VAT can ultimately
lead to a reduction in overall rates of tax.

Revenues will not be sacrificed but would in fact be enhanced as a consequence

of the broadened tax base. This does not seem to be a bad idea at all.
Disadvantages of VAT
The main disadvantages which have been identified in connection with the
Value Added Tax are:

1) VAT is regressive :
It is claimed that the tax is regressive, ie its burden falls disproportionately on the
poor since the poor are likely to spend more of their income than the relatively
rich person. There is merit in this argument, particularly if it attempts to replace
direct or indirect taxes with steep, progressive rates. However, observation from
around the world and even Guyana has shown that steep tax rates lead to
evasion, and in the case of income tax act as a disincentive to effort.

Further, there is now a tendency in most countries to reduce this progressivity of

taxes as has been done in Guyana where a flat rate of income tax has been
introduced. In any case VAT recognizes and makes room for progressively by
applying no or low rates of tax on essential items such as food, clothes and
medicine. In addition it allows for steep rates of tax on luxury items, although this
can create problems for administration and open opportunities for evasion by
way of deliberate misclassification, a problem incidentally not peculiar to VAT,
and which takes place extensively in the area of customs duties.

2) VAT is too difficult to operate from the position of both the

administration and business.

(a) The administration

It is often argued that VAT places a special burden on tax administration.
However, it is worth noting that wherever VAT was introduced one of its effects
was the rationalization and simplification of the previous indirect tax system and
its administration. Each of the previous indirect taxes such as customs duties,
purchase tax and excise duties replaced by VAT had its own rate structure as
well as a different tax base and separate administrative procedure. The
consolidation and incorporation of numerous indirect taxes into the VAT would
simplify the rate structure, tax base, and administration of the indirect tax system,
thereby eliminating the overlapping auditing practices that had plagued those
systems.

In addition, the abolition of a number of alternative indirect taxes releases

experienced personnel to focus on a single tax. It also means reduction in the
number of forms used, legislation to be applied and returns and accounts with
which the business person has to contend.

(b) Business
It is true that the VAT is collected from a larger number of firms than under any
form of income tax or single state sales tax; to the typical smaller firms the
complexities of the tax and the need for more extensive records (for example, to
justify deductions) are likely to prove serious.
However, it is often overlooked that businesses already function with
considerable administrative responsibility for a number of laws including the
National Insurance Act and the Income Tax Act.

Under the Income Tax (Accounts and Records) Regulations of 1980 every
person, without exception is required to maintain detailed and extensive records
of all its transactions. Compliance with this will certainly ensure compliance with
VAT regulations, and since there is an actual benefit to be derived from
accounting for VAT paid on input there is an incentive for proper record-keeping.

As we have noted before, VAT also allows for the exemption of small businesses
from the system.

Under any form of sales taxation, small businesses have to be granted special
treatment because of their inability to cope with the requirements of keeping
adequate records which larger enterprises can handle at a reasonable cost. The
intent of the special treatment is to reduce the administrative burden on small
enterprises, but not the taxes that normally would be charged on the goods and
services they supply. The revenue loss at the final link in the commercial cycle is
limited only to the value added at that stage ,whereas in the case of income tax
or sales tax the entire tax is lost. To recover the loss from exemptions, a flat tax
on turnover may be applied.

In the larger businesses with proper staff and computers, the task is really one of
double entry book-keeping and any additional work is hardly ever noticed.

3. VAT is inflationary
Some businessmen seize almost any opportunity to raise prices, and the
introduction of VAT certainly offers such an opportunity. However, temporary
price controls, a careful setting of the rate of VAT and the significance of the
taxes they replace should generally ensure that there is no increase if any in the
cost of living. To the extent that they lead to a reduction in income tax, any price
increases may be offset by increases in take-home pay.

In any case, any price consequence is one time only and prices should stabilise
thereafter.

4. VAT favors the capital intensive firm

It is also argued that VAT places a heavy direct impact of tax on the labour-
intensive firm compared to the capital- intensive competitor, since the ratio of
value added to selling price is greater for the former. This is a real problem for
labour-intensive economies and industries.

Items Covered in Indian VAT

 550 items covered 270 items of basic Rests 12.5% VAT.
needs, like medicine, Gold & silver
drugs, agro & industrial
inputs, capital &
jewelers - 1%
declared goods 4% VAT
Tea-producing states Petrol, diesel, liquor, Sugar, textile &
options either lottery not included * tobacco excluded
percentage VAT
for one year
Traders with turnover of less than 500,000 rupees are exempt from the new
tax.

Note : * Some states like Delhi have imposed VAT on diesel at 20%, which is
higher than the 12% sales tax charged earlier. Similarly, Delhi imposed VAT on
LPG at 12.5%, which is also higher than the previous sales tax rate of 8 percent.

All business transactions carried on within a State by individuals, partnerships,

companies etc. will be covered by VAT.

"More than 550 items would be covered under the new Indian VAT regime of
which 46 natural and unprocessed local products would be exempt from VAT", a
PTI report quoted West Bengal Finance Minister and VAT panel chairman
Asim Dasgupta as saying.

About 270 items including drugs and medicines, all agricultural and industrial
inputs, capital goods and declared goods would attract four per cent VAT in
India.

The remaining items would attract 12.5 per cent VAT. Precious metals like gold
and bullion would be taxed at one per cent.

Considering the difficulties faced by the tea industry, it was decided that tea-
producing states would be given an option to levy 12.5 per cent or four per cent
subject to review in 2006.

Petrol and diesel would be kept out of VAT regime in India, which covers only
marketable items.
Das gupta was quoted as saying that the panel was yet to take a view on CNG.

Following opposition from some of the states, it was decided that states would
have option to either levy four per cent or totally exempt food grains but it would
be reviewed after one year.

Three items - sugar, textile and tobacco - covered under Additional Excise
Duties, will not be under VAT regime for one year but the existing arrangement
would continue.
The Indian VAT panel relaxed the threshold limit for traders coming under VAT
regime from Rs 5-50 lakh of turnover from the previous stance of Rs 5-40 lakh.

Traders within this limit can pay a composite VAT rate of one per cent but would
not be entitled to input tax credit.

The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation.
The existing sales tax structure allows for double taxation thereby cascading the
tax burden. For example, before a commodity is produced, inputs are first taxed,
the produced commodity is then taxed and finally at the time of sale, the entire
commodity is taxed once again. By taxing the commodity multiple times, it has in
effect increased the cost of the goods and therefore the price the end consumer
will pay for it.

The transaction chain under VAT assuming that a profit of Rs 10 is retained

during each sale.

SALE 'A' OF CHENNAI 'B' OF SALE 'C' OF

@ Rs. 100/- BANGALORE @ Rs. 114/- BANGALORE
»» »» »» »»

SALE 'D' OF SALE CONSUMER

@ Rs. 124/- BANGALORE @ Rs. 134/- IN
»» »» »» BANGALORE

Tax implication under Value Added Tax Act

Seller Buyer Selling Price Tax Invoice value Tax Tax Net
(Excluding Tax) Rate (Incl Tax) Payable Credit TaxOutflow

A B 100 4% CST 104 4 0 4.00

B C 114 12.5% 128.25 14.25 0* 14.25

VAT

C D 124 12.5% 139.50 15.50 14.25 1.25

VAT

D Consume 134 12.5% 150.75 16.75 15.50 1.25

r VAT

Total to Govt. VAT 16.75

CST 4.00

*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the
same though it could to be reduced to 2% when VAT is introduced and
eventually phased out.

VAT can be considered as a multi-point sales tax with set-off for tax paid on
purchases (inputs) and capital goods. What this means is that dealers can
actually deduct the amount of tax paid by him for purchase from the tax collected
on sales, thereby paying just the balance amount to the Government.
States Welcoming VAT in India:

Except the following 8 states (among them 5 BJP ruled states), all the 21 states
have given a welcome hug to VAT in India. Ramesh Chandra, secretary of the
federal panel overseeing Indian VAT implementation said that other states will
join within a month-and-a-half.

• Uttar Pradesh
• Tamil Nadu (to join from July 1st,2008)
• Uttaranchal

BJP ruled states

• Madhya Pradesh
• Rajasthan
• Jharkhand
• Gujarat
• Chattisgarh
 FAQs for VAT in India

• What is the difference between Sales Tax and VAT?

• What is input tax?
• What is input tax credit?
• What are the `sales' not liable to tax under the VAT Act?
• Who is a retail dealer?
• In the VAT regime, will stock transfer be more beneficial than inter-State
sale?

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 reduces tax
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.
 Quotes & Unquotes for VAT in India

India, always a land of 'YES' and 'NO'. The introduction of VAT in India
also reciprocated with different views for different people. Each and everyone
carried their own say. Few quoted VAT in India as something very wonderful and
needful for the existing tax system. Others quoted the opposite. Many were
neutral and waited the system to speak the truth. Let me bring for you few of the
Indian VAT quotations.

Chidambaram to state governments:

"On behalf of the Centre, I promise to fully cooperate with you, compensate you
and help in building a computer network system and resolve all problems."

Ramesh Chandra, secretary of the federal panel:

"VAT will be launched tomorrow (April 1) and there is absolutely no question of
deferring it."

Praveen Khandelwal, secretary-general of the Confederation of All India

Traders.
"We will step up our protest come what may. It is a do or die situation for us."

Former finance minister Yashwant Sinha:

"The central government must also spell out a clear roadmap on how and when it
intends to phase out central excise."

Onkar S Kanwar, president, FICCI:

"We urge the BJP to reconsider their decision and work with their states
governments on internal mechanisms aggressively while coordinating with the
Centre to iron out the genuine difficulties."

Bengal finance minister Asim Dasgupta, Kajaria:

"The FM is sacrificing the interest of all sections for the gain of none."

World Bank country director Michael Carter:

"A comprehensive VAT widens tax net, as it makes tax evasion difficult. Going by
the experience of other countries, VAT has proved beneficial and leads to
revenue buoyancy."

Ramesh Chand, a protestor:

"Traders want to give tax but they want it through a system which makes it easier
and fair for them and not VAT. All the traders are protesting against it. We want
the government to revoke VAT."
Raja Chelliah, the architect of the VAT system:
"India can be globally competitive as a fully integrated market if all states adopt
the Value Added Tax regime."

Sushil Kumar Gupta, a shopkeeper in the up market Defense Colony

shopping complex in south Delhi:
"We are totally against VAT."

Vijay Goel, president of the Confederation of All India Traders and a

member of the BJP:
"We are from the very beginning against this tax which will co-exist with central
sales tax and several others. We demand that the extra taxes be abolished
before VAT is implemented."

Taxation - Useful and Important Definitions

Assessee

Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any
tax or any other sum of money is payable under this Act, and includes -

• Every person in respect of whom any proceeding under this Act has been
taken for the assessment of his income or of the income of any other
person in respect of which he is assessable, or of the loss sustained by
him or by such other person, or the amount of refund due to him or to such
other person;
 • Every person who is deemed to be an assessee under any provision of
this Act;
• Every person who is deemed to be an assessee in default under any
provision of this Act;

Assessment year

Assessment year means the period of twelve months commencing on 1st April
every year and ending on 31st March of the next year. Income of previous year
of an assessee is taxed during the following assessment year at the rates
prescribed by the relevant Finance Act.

Company

Section 2(17) of the act defines company. The term company includes:

1. any Indian company

2. any corporate incorporated by or under the laws of country outside India
3. any institution, association or body which is or was assessable or was
assessed as a company for any assessment year under the 1922 Act or
under the 1961 act any institution, association or body, whether
incorporated or not and whether Indian or non Indian, which is declared by
general or special order of the board to be a company only for such
assessment year or assessment years

Convertible Foreign exchange

This mean foreign exchange which is for the time being treated by the Reserve
Bank of India as convertible foreign exchange for the purposes of the Foreign
Exchange Regulation Act, 1973 and any rules made there under.

Foreign Exchange Asset

This mean any specified asset which the assessee has acquired, purchased with
or subscribed to, in convertible foreign exchange.

Gross Total Incom

Under the scheme of computation of total income under the Income Tax Act, the
income falling under each head is to be computed as per the relevant provisions
of the Act relating to computation of income under that head. The aggregate of
income under each head is known as 'Gross Total Income'

Income
There is no specific definition of income but for statutory purposes there are
certain items which are listed under the head income. These items include those
heads also which normally will not be termed as income but for taxation we
consider them as income. These items are included under section 2(24) of the
income tax act, 1961. As per the definition in section 2(24), the term income
means and includes:

• profits and gains

• dividends
• voluntary contributions received by a trust created wholly or partly for
charitable or religious purposes or by an institution established wholly or
partly for such purposes
• the value of any perquisite or profit in lieu of salary taxable under clause
(2) and (3) of section 17 of the act
• any special allowance or benefit, other than those included above
• any allowance granted to the assessee either to meet his personal
expenses at the place where the duties of his office or employment of
profits are ordinarily performed by him or at a place where he ordinarily
resides or to compensate him for the increased cost of living
• capital gains
• any sum chargeable to income tax under section 28 of the income tax act
• any winnings from lotteries, crossword puzzles, races, including horse
races, card games and games of any sort or from gambling or betting of
any form or nature whatsoever
• any received as contribution to the assessee's provident fund or
superannuation fund or any fund for the welfare of employees or any other
fund set up under the provisions of the emplyees state insurance act
• profits on sale of a licence granted under the imports (control) order, 1955
made under the imports and exports (control) act, 1947

Indian company

Indian company means a company formed and registered under the companies
act, 1956. Any company formed and registered under any law relating to
companies formerly in force in any part of India, other than Jammu and Kashmir
and the union territories as specified or a corporation established by or under a
central, state or provincial act or any institution, association or a body which is
declared by the board to be company under section 2 (17) are referred as Indian
company. In the case of state of Jammu and Kashmir, a company formed and
registered under any law for the time being in force in the state. Similarly in case
of union territories.

Investment Income
This mean any income other than dividends derived from a foreign exchange
asset.

Long term Capital Gains

This mean income chargeable under the head "capital gains relating to a capiatl
asset being a foreign exchange asset which is not a short term capital asset.

Manufacture

To "manufacture" is to produce new out of the existing materials.It further implies

transformation in to new and different articles having a distinct name,character or
use.Section2(f) of the Central Excises and Salt Act,1944 gives statutory definition
for "manufacture".

Non Resident Indian (NRI)

NRI means an individual being a citizen of India or a person of Indian origin who
is not a resident. A person shall be deemed to be of Indian origin if he or either of
his parents or any of his grand parents was born in undivided India.

Person

The income tax is charged in respect of the total income of the previous year of
every 'person'. Here the person means--

1. an individual : a natural human being i.e male, female minor or a person of

sound or unsound mind
2. a Hindu undivided family (HUF)
3. a company :
o any Indian company
o any body corporate incorporated by under the laws of a country
outside India
o any institution, association or body whether Indian or non Indian,
which is declared by general or special order of the board to be a
company
o any institution, association or body which is or was assessable or
was assessed as a company for any assessment year under the
Indian Income tax Act, 1922 or which is or was assessable or was
assesses under this act as a company for any assessment year
commencing on or before the 1st day of April. 1970
4. a firm i.e a partnership firm
5. an association of persons or a body of individuals whether incorporated or
not
6. a local authority-- means a municipal committee, district board, body of
port commissioners, or other authority legally entitled to or entrusted by
 the government with the control and management of a municipal or local
fund.
7. every artificial, juridical person, not falling within any of the above
categories.

Previous year

The Financial Year in which the income is earned is known as the previous year.
Any financial year begins from 1st of April and ends on subsequent 31st March.
The financial year beginning on 1st of April 2003 and ending on 31st March 2004
is the previous year for the assessment year 2004-2005.

Principal Officer

Any public body or association of persons or any body of individuals or a

company or a local authority is referred as the principle officer. They include the
secretary, treasurer, manager or agent of the authority, company, association or
body. Also any person connected with the management or administration of the
local authority, company, association or body upon which the assessing officer
has served a notice of his intention of treating him as the principal officer.

Specified Asset

This includes any of the following assets-

1. Shares in an Indian company

2. debentures issued by an Indian company which is not a private company
as defined in the companies act, 1956
3. deposits with an Indian company which is not a private company
4. any security of the central government
5. units of the unit trust of India
6. Such other assets as the central government may specify in this behalf by
notification in the official gazette

The Andhra Pradesh experience with VAT:

1. In the Indian state of Andhra Pradesh, the Andhra Pradesh Value Added
Tax Act, 2005 came into force on 1 April 2005 and contains six schedules.
Schedule I contains goods generally exempted from tax. Schedule II deals
with zero rated transactions like exports and Schedule III contains goods
taxable at 1%, namely jewellery made from bullion and precious stones.
Goods taxable at 4% are listed under Schedule IV. The majority of
foodgrains and goods of national importance, like iron and steel, are listed
under this head. Schedule V deals with Standard Rate Goods, taxable at
 12.5%. All goods that are not listed elsewhere in the Act fall under this
head. The VI Schedule contains goods taxed at special rates, such as
some liquor and petroleum products.

The Act prescribes threshold limits for VAT registration - dealers with a taxable
turnover of over Rs.40.00 lacs, in a tax period of 12 months, are mandatorily
registered as VAT dealers. Dealers with a taxable turnover, in a tax period of 12
months, between Rs.5.00 to 40.00 lacs are registered as Turnover Tax (TOT)
dealers. While the former category of dealers are eligible for input tax credit, the
latter category of dealers are not. A VAT dealer pays tax at the rate specifed in
the Schedules. The sales of a TOT dealer are all taxable at 1%. A VAT dealer
has to file a monthly return disclosing purchases and sales. A TOT dealer has to
file a quarterly return disclosing only sale turnovers. While a VAT dealer can buy
goods for business from anywhere in the country, a TOT dealer is barred from
buying outside the State of A.P.

The Act appears to be the most liberal VAT law in India. It has simplified the
registration procedures and provides for across the board input tax credit (with a
few exceptions) for business transactions.[verification needed] A unique feature of
registration in Andhra Pradesh is the facility of voluntary VAT registration and
input tax credit for start-ups.

The Act also provides for transitional relief (TR) for goods on hand as of 1 April
2005. However, these goods ought to have been purchased from registered
dealers between 1 April 2005 to 31 March 2006. This is a bold step compared to
the 3 months TR provided by several developed countries.

The Act not only provides for tax refunds for exporters (refund of tax paid on
inputs used in the manufacture of goods exported), it also provides for refund of
tax in cases where the inputs are taxed at 12.5% and outputs are taxed at 4%.

The VAT Act in Andhra Pradesh is administered by the Commercial Taxes

Department (department to collect VAT and other taxes) using a networked
software package called VATIS. The personnel were trained prior to the Act
coming into force. VATIS is used to process documents and forms received and
to generate registration certificates and tax demand notices.

VAT, to be successful, relies on voluntary tax compliance. Since VAT believes in

self assessments, dealers are required to maintain proper records, issue tax
invoices, file correct tax returns etc. The opposite seems to be happening in
India. Businesses are still run on traditional lines. Cash transactions are order of
the day. The unorganised sector dominates the market. The hope of higher tax
compliance and lesser evasion is still a far cry in Andhra Pradesh. This is
reflected in the high percentage of return defaulters (14%), credit returns (35%)
and nil returns (20%). That is, roughly 70% of VAT dealers are presently not
paying any tax. Filing of credit returns is rampant among FMCG, Consumer
Durables, Drugs and Medicines and Fertilizers. The margins are low in this
sector (ranging between 2 to 5%). The value addition is not enough to yield
revenue as of now. Credits offered by manufacturers compounds the problem.
The question is, in a typical purchases and sales scenario, can there be more
output tax than input tax? When purchases consistently exceed sales, can output
tax exceed input tax? If a VAT dealer can balance his/her purchases and sales,
can there be a net tax to the State? Is there a mathematical model or paradigm
which can give value added tax and which can reduce the percentage of credit
returns? There are no ready answers for these queries. The only remedy seems
to be the restriction of input tax to the corresponding purchase value of goods put
to sales. In fact a two tier system can be adopted to counter the credit returns -
allow full input tax to manufacturers and restrict input tax to the purchase value of
goods put to sale to traders. Restricting input tax to 4% in the case of inter state
sales and in the case of products taxable at 12.5% seems to be another solution.

Limitations to example and VAT

In the above example, we assumed that the same number of widgets were made
and sold both before and after the introduction of the tax. This is not true in real
life.
The fundamentals of supply and demand suggest that any tax raises the cost of
transaction for someone, whether it is the seller or purchaser. In raising the cost,
either the demand curve shifts leftward, or the supply curve shifts upward. The
two are functionally equivalent. Consequently, the quantity of a good purchased,
and/or the price for which it is sold, decrease.

This shift in supply and demand is not incorporated into the above example, for
simplicity and because these effects are different for every type of good. The
above example assumes the tax is non-distortionary.

A VAT, like most taxes, distorts what would have happened without it. Because
the price for someone rises, the quantity of goods traded decreases.
Correspondingly, some people are worse off by more than the government is
made better off by tax income . That is, more is lost due to supply and demand
shifts than is gained in tax. This is known as a deadweight loss. The income lost
by the economy is greater than the government's income; the tax is inefficient.
The entire amount of the government's income (the tax revenue) may not be a
deadweight drag, if the tax revenue is used for productive spending or has
positive externalities - in other words, governments may do more than simply
consume the tax income. While distortions occur, consumption taxes like VAT
are often considered superior because they distort incentives to invest, save and
work less than most other types of taxation - in other words, a VAT discourages
consumption rather than production. However they are still considered inferior to
taxes like land value tax which neither cause deadweight losses nor distort
incentives.

A Supply-Demand Analysis of a Taxed Market

In the above diagram,

Deadweight loss: the area of the triangle formed by the tax income box, the
original supply curve, and the demand curve

Government's tax income: the grey area

Total consumer surplus after the shift: the green area

Total producer surplus after the shift: the yellow area