SIMPLIFYING

VAT

Here's all you wanted to know about VAT.

And didn't know whom to ask.

Issued in the general interest of

all Indian businesses by
Tally Solutions Private Limited
The Complete Accounting & Inventory Software
TallyMail: sales@tallysolutions.com TallyWeb: www.tallysolutions.com

Value Added Tally
for Value Added Tax
Just Rs. 4,950/- for Single-User Edition
Rs. 13,500/- for Multi-User Edition
Prices valid up to 31st March 2005
u It's new. It’s the latest Business
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Solutions u Tally 7.2 has complete VAT,
All licensed TDS, Accounting, Inventory and MIS
Tally 6.3 customers Reporting capabilities u Now, just
can download
a free upgrade of
ensure accurate data entry of your
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our website. At the press of a few buttons, generate
State specific VAT Statutory Returns,
VAT Documents, VAT Accounts… u
Want to know more? Log on to our website.
TallyWeb: www.tallysolutions.com
SIMPLIFYING
VATchand's
VAT
gyans
Foreword
Many have asked why we have embarked on the onerous task on
creating a comprehensive booklet on Value Added Tax (VAT) called
Simplifying VAT. Our answer has always been the same … “to
educate Indian businesses about the huge value and benefits of
embracing VAT”.
It is our passionate belief that VAT, the most remarkable tax reform
since independence is extremely progressive, transparent and will
help eliminate all the issues, concerns and problems faced by
businesses under the current Sales Tax regime. It will make
businesses more competitive both within India and internationally,
help reduce prices and make the system of taxation simpler and more
transparent. VAT will help propel India on its journey to become an
economic super power sooner than later. Over 130 countries around
the world have adopted VAT and are benefitting from it.
Simplifying VAT would not have been possible without the
dedicated contributions of numerous Chartered Accountants and
VAT experts both within Tally Solutions and from outside. Hundreds
of man-hours have gone into its creation. Every document on VAT,
from the White Paper, to each State specific Act, amendment and
notification have been examined to ensure accuracy and
comprehensiveness. We sincerely hope that this booklet brings you
as much enlightenment as it brought us joy in its creation.
Older versions
of Tally are not We believe that this VAT booklet is the first of its kind in the country.
VAT enabled.
Data migration And, we at Tally Solutions have undertaken the onus of its creation as
tools available to part of our endeavor in keeping pace with the requirements of Indian
all Tally users
of older businesses. This has been our mission since our inception in 1986.
versions.
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 VATchand's
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SIMPLIFYING VATchand's gyans

VAT
Discover how VAT heralds an era of transparency. 6 Discover how exports will become more competitive under
l Why is Sales Tax called a “hidden cost”? VAT. 18
l Why is VAT called a “transparent tax”? l Treatment of Exports (Section 2.5 of White Paper)

l Why should the end consumer pay all the tax? l What are the implications of VAT on exports?

l Do I need to disclose the profit margins on the invoice? l As an exporter, am I eligible for Input Credit on taxes paid within the

l Under VAT, how will the tax outlay reduce? State? Outside the State?
l Winning with VAT l What if I export goods bought from different sources at different
times?

Discover how VAT will change the way you maintain books of
accounts and file tax returns. 10 Discover the implication of VAT on Interstate Sales. 21
l How is VAT a self-assessment tax? l Why is a transaction chain formed?
l Why will VAT change the way I maintain my books of accounts? l When is Central Sales Tax (CST) charged?
l How do I maintain my Purchase Registers? l Can I claim input credit against CST paid?
l How do the Sales Registers need to be maintained? l Will I have to pay tax on interstate stock transfer?
l What are the VAT Documents I need to maintain? l Why should CST continue to be levied? Will it phased out or
l What are the VAT Records I need to maintain? replaced soon?
l How do I file State specific Statutory Returns?
l How is my VAT liability computed?
Discover being which type of VAT Dealer best suits your
l Winning with VAT
business. 24
l Who are the dealers who will have to Register under the VAT

Discover the impact of VAT on your Opening Stock. system? (Section 2.9 of the White Paper)
15
l Treatment of Opening Stock (Section 2.7 of the White Paper) l What is the turnover limit for each type of dealer?

l What are the implications of VAT on my Opening Stock? l What are the effects of remaining an Unregistered Dealer?

l How do I claim credit on Opening Stock? l How would Registered Dealers compete with Unregistered Dealers?

l What would be the behaviour of each participant in the VAT l Will I benefit by opting for the Composition Scheme (CS) or should I

transaction chain and how will prices get impacted? become a Registered Dealer?
l Conclusion l How would a Registered Dealer compete with a dealer who has
opted for the Composition Scheme?

Simplifying VAT is a booklet created and published by Tally Solutions Private Limited. Articles and
Contributions included in this booklet may be reproduced or transmitted in any manner only with Learn VATinese in one day. 31
written permission from Tally Solutions Private Limited. However, no responsibility is accepted by
Tally Solutions Private Limited for any losses or other consequences resulting from use of the
information contained in this booklet .
Tally Solutions Private Limited recommends consultation with your Chartered Accountant/Tax
Consultant for further guidance on Value Added Tax.
4 5
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that goes into the government coffers. The government gets much
more. How?
SIMPLIFYING
VATchand's Let us take the example of a simple pencil. The manufacturer would
VAT
gyan...#1
have paid tax on each raw material used to produce it. The tax paid
goes to the government, and the manufacturer adds the taxes to his
cost. He then adds labour, processing charges and his profit that
Discover how VAT heralds make up the sales price. He then charges tax on the entire amount.
You as a consumer pay the tax. The government receives tax two
an era of transparency. times at least - once on the raw materials bought by the manufacturer
VAT will herald-in uniform tax rates across the country, simplify and next again fully on the final pencil. This means you have paid tax
procedures, help lower prices by eliminating the cascading effects of on the tax already paid - quite like compound interest. It has in effect
taxation, reduce total tax outlay and improve cash flows. It will also increased the cost of the goods and therefore the price the end
increase transparency in the way we do business. consumer pays for it. In the example below, you pay Rs.14.64 sales
tax on the bill, but the government receives Rs.26.64. You don't know
Transparency is the availability of all information with complete it but you have actually paid the government the whole of Rs.26.64.
confidence that nothing is hidden. All of us would like transparency
in our dealings. In taxation, the government seeks transparency of Table I: Tax outlay under Sales Tax
trade while at the same time, the consumer wants to know whether
Seller Buyer Selling Tax Tax Total
they are taxed correctly and what they pay as taxes are really received Price Rate Amount
and accounted for by the government. A
(Raw B
Lets look at the Government first. To begin with, it is not possible 100 12% 12.00 112.00
Material (Mfr)
under the present sales tax system to bring in transparency as regards
Supplier)
where tax is paid or the quantum of tax payable on goods. It is not
possible to trace the history of a transaction because where you B
wants
bought the goods is not relevant. Only your sales are relevant because Consumer 122 12% 14.64 134.40
profit of
you pay the full tax charged on it to the government. This encourages Rs 10 sells to
transactions 'without bill'. Consequently, it encourages the
Total Sales Tax collected by the Govt. 26.64
government to assume that traders are likely to cheat. This makes
them try to catch the trader, where possible, by imposing more taxes
and penalties.
Why is VAT called a “transparent tax”?
Why is Sales Tax called a “hidden cost”? In the VAT system, though tax is levied at every stage - from
In the Sales Tax regime, sales tax is levied on the full value of the manufacturer to the end consumer - it is levied only on the basic cost +
goods, at every stage of the manufacturing chain - from value add/margin and not on the VAT component, at every stage.
raw materials to finished goods. This means that sales tax Hence, VAT eventually helps lower prices and the complete
is levied on basic cost + value add/profit margin + sales transparency of the system will ensure that at any point in the
tax paid earlier. Every incidence of sales tax thus transaction chain, you will be able to determine how much VAT has
becomes a part of the cost of the product, leading to been paid for the goods.
multi-point taxation and cascading prices.
On the other hand, VAT solves the problem for both the government
As a consumer, you don't know how much sales tax and the consumer. Each trader is allowed to reduce the tax paid on
you have paid. The tax on the bill is not the amount their purchases from the tax collected on sales and to pay only the
6 7
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balance to the government. This means that the purchase and sales Do I need to disclose the profit margins on the invoice?
have to be correctly recorded. No you do not need to disclose the profit margins on the invoice and
similarly, you will never know the profit margins on any transaction
For the government, it is now easy to rely on the trader's statement as
along the transaction chain. The only
they have the information to match, in case it is needed. In the difference in raising a Tax Invoice under You do not need to
example below, you can see that the government receives a total of the VAT system is that the selling price and disclose the profit
Rs.13.75, which is on the invoice raised by the manufacturer on you. the VAT amount has to be reflected margins on the
Table II: Tax outlay under VAT separately, and then the total invoice invoice and
amount is to be shown. In the given similarly, you will
Seller Buyer Selling VAT Invoice Tax Net Tax example, only your selling price of Rs.110 is never know the
Price Tax
(Excluding Rate Value Payable Credit Received reflected (no break up of your cost price profit margins on
Tax) (Incl Tax) by Govt. and selling price needs to be disclosed) any transaction
A along with the VAT component of Rs. along the
13.75, with the total invoice value of transaction chain.
(Raw B
100 12.50% 112.50 12.50 0 12.50 Rs.123.75. Hence your profit margins will
Material (Mfr) never be disclosed on the invoice.
Supplier)
Under VAT, how will the tax outlay reduce?
B In the VAT system, it may seem that the 4 tax rates are higher (0%, 1%
wants profit 4% and 12.5% across all states) as against sales tax, which offers a
Consumer 110* 12.50% 123.75 13.75 12.50 1.25
of Rs 10 range (4% to 17% depending upon the state).
sells to **
Also, since there is total transparency of VAT paid and received, at
Total Sales Tax collected by the Govt. 13.75 each stage of a transaction, it may seem that the tax outlay across the
transaction chain has increased. But, in effect (see Tables I & II), the
* The selling price is reduced but the margin is the same as before, total tax outlay actually reduces in the VAT system due to input
which is Rs.10. credit. While the Government is being paid Rs.26.64 as tax in the Sales
** The tax paid by B to A is reduced and B will pay the Government Tax regime, for a similar transaction under VAT, the Government
only Rs.1.25. A has already collected Rs.12.50 which he will pay the will get only Rs.13.75 as tax!
government.
Winning with VAT
For the consumer, the tax on the invoice is the total amount that the It is clear that VAT encourages voluntary compliance and self-
government receives as tax. assessment. An environment of trust is created where the focus can
now be on trade rather than on compliance. Compliance with laws
Why should the end consumer pay all the tax?
will be automatic. Consequently, it is expected that a lot of
Under Sales Tax, it seems that the end consumer pays only that administrative overheads in the government would be reduced
portion of the tax on the value of the goods of his final purchase. In which could be used to promote trade activities.
reality the consumer pays the entire tax burden, although as a hidden
cost, as the seller considers tax paid by him as cost and computes his In addition, VAT is expected to eliminate disputes as regards tax
profit margin on this cost which is inclusive of tax paid by him at the liability of a transaction. VAT reduces the number of tax rates and tax
time of purchase. concessions on different goods. It eliminates allied levies like resale
tax, turnover tax, cess, additional tax and surcharge. VAT seeks to
VAT is a consumption tax, hence in this system the entire tax burden prevent the problem of under-valuing and inflation.
is reflected and actually paid by the consumer as a transparent cost.
Only now the Government gets paid a portion of the tax at every stage VAT is most certainly a more transparent and accurate system of
of the transaction, and the last dealer in the transaction chain charges taxation. The reasons why VAT should be implemented in India, as it
the entire amount to the end consumer. has been in 130 other countries around the world are really very clear.
The VAT regime will in the long run benefit everybody.
8 9
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gyan…#2
input credit, you will have to maintain your books of accounts as
prescribed under the State VAT laws.
SIMPLIFYING
VATchand's In the sales tax regime, all you need to do is to maintain up to date
VAT
gyan...#2
sales registers and sales invoices, while purchase registers are not
critical for payment of sales tax. However, under VAT, you will be
required to maintain up-to-date purchase registers and sales
Discover how VAT will change registers, in order to calculate your input credit.
the way you maintain books How do I maintain my Purchase Registers?
of accounts and file tax returns. In order to compute the VAT set-off accurately, you will need to
maintain a purchase register giving details of each purchase invoice
VAT is a self-assessment tax and transparency is crucial at every stage during the specified period showing separately Purchases from
of a transaction along with accurate documentation. This means that Unregistered Dealers and Registered Dealers. Information on the
the way books of accounts are maintained will need to change as also each of the following should be clearly shown:
the way tax returns are filed. l Gross invoice value - value of goods including VAT
l Purchase value - net of VAT
How is VAT a self-assessment tax?
l The VAT amount where VAT was paid
The very concept of self-assessment is that each dealer clearly records
every transaction - every purchase invoice and sale invoice - and pays The Purchase Register should be able to depict:
and collects tax accordingly and since every aspect is transparent, the l Goods used for consumption for which you cannot claim input
tax authorities need not get into detailed assessment and harass the credit (consumables such as waste cloth, spare parts, petroleum
dealer. Since there is a clear “transaction trail”, it is crucial that all products etc.)
transactions are recorded - carefully and on time - and the books of l Imports and purchases from other states
accounts are maintained as per the l Separate accounts on value of goods purchased at different VAT
prescribed State laws. Since there is a rates
clear “transaction
The basic simplification in VAT is that VAT trail”, it is crucial Additionally, you will need to retain all the original invoices received
liability will be self-assessed by the dealers that all transactions to claim input credit.
themselves in terms of submission of are recorded -
carefully and on A typical Purchase Register
returns upon setting-off the tax credit.
time - and the Purchase Register India Inc.
Return forms as well as other procedures 1-Apr-2005 to 30-Apr-2005
books of accounts List of All Purchase Vouchers

will be simple in all States. There will no are maintained as Date Particulars
Voucher
No.
Quantity Rate Gross Total Purchase VAT 12.5% Purchase
12.5% - Input 4%
VAT 4%
- Input
longer be compulsory assessment at the per the prescribed 1-Apr-2005 Pragati Solutions 15,000.00/no
1 2 nos 33,750.00 30.000.00 3,750.00
end of each year as exists now. If no specific State laws. 2-Apr-2005 Pragati Solutions 2 10 nos 15,000.00/no 1,68,750.00 1,50,000.00 18,750.00

notice is issued proposing departmental 5-Apr-2005

10-Apr-2005
Shankar & Co.,
Neoware
3
4
5 nos
15 nos
2,000.00/no
16,000.00/no
10,400.00
2,70,000.00 2,40,000.00 30,000.00
10,000.00 400.00

audit of the books of accounts of the dealer, 15-Apr-2005 Neoware 5 10 nos 16,000.00/no 1,80,000.00 1,60,000.00 20,000.00
25-Apr-2005 Shankar & Co., 6 10 nos 2,000.00/no 20,800.00 20,000.00 800.00
within the time limit specified in the Act, the dealer will be deemed to
have been self-assessed on the basis of returns submitted by him.
Why will VAT change the way I maintain my books of accounts?
The greatest advantage VAT offers is the facility of claiming input Grand Total 52 nos 6,83,700.00 5,80,000.00 72,500.00 30,000.00 1,200.00

credit on all VAT (input tax) paid, at the time of purchase, against all
VAT (output tax) collected at the time of sale. In order to claim the
10 11
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How do the Sales Registers need to be maintained? q Product - if exempt or vatable

The sales need to be recorded in a sales register giving details of each q Tax Identification Number (TIN) - registration details along with
sale invoice. Information on the each of the following should be sellers' name and address
clearly shown: q Tax Point - date of sale
l Gross invoice value - value of goods including VAT q Full Item List - with VAT break-up including
l Sale value - net of VAT VAT totals
l The VAT amount where VAT was collected Updated Purchase
& Sales Registers, 2. Credit and Debit Notes
The Sales Register should be able to depict: VAT Documents Similar to the Tax Invoice, Credit Notes and
l Exports and sales made to other states and VAT Records Debit Notes need to be serially numbered,
l Separate accounts on value of goods sold at need to be
maintained to file display the TIN number and contact details of
different VAT rates the person raising the document, Tax Point and full details of the
State specific
Additionally, you will need to retain a copy of Statutory Returns. adjustment. Credit and Debit Notes are documents for
all invoices issued to claim input credit. acknowledging adjustments to sales and purchases and will have an
impact on input credit. Hence, they typically contain updated details
What are the VAT Documents I need to maintain? of goods returned, price adjustments and damaged goods.
1. Tax Invoice
What are the VAT Records I need to maintain?
INVOICE 1. Stock Records
Invoice No. Dated
India Inc.
99, 4th T Block 1 5-Apr-2005
Complete records of purchases and sales will have to be maintained
Jayanagar
Bangalore - 560 011
Delivery Note

5
Terms of Payment
15 days
for each stock item.
Supplier’s Ref. Other Reference(s)
2. Manufacturing Accounts
Consignee Buyer’s Order No. Dated
Ravi Associates 21 5-Apr-2005 Complete records of raw materials and inputs purchased along with
No. 54, Despatch Document No. Dated
J.P Nagar 212121 5-Apr-2005 goods manufactured.
Bangalore - 560 078 Despatched through Destination
Local Carrier Domestic 3. VAT Accounts
Terms of Delivery
Immediate As per State specified formats, the VAT Accounts will have to be
accurately maintained. The VAT Account is a summary of all input
Description of Goods Quantity Rate Per Amount tax paid on purchases and all output tax collected at the time of sale,
CPU 5 nos 20,000.00 no 1,00,000.00 to compute the Net VAT Payable or Input Credit that is carried
forward.
VAT 12.5% - Output 12.50 % 12,500.00

How do I file State specific Statutory Returns?

Total 5 nos 1,12,500.00
Amount Chargeable (in words) E. & O. E.
State specific Statutory Returns will need to be filed in a continuous
Rs. One Lakh Twelve Thousand Five Hundred Only
form, either monthly or quarterly and then annually (a summary of
Company’s VAT TIN No. : VAT123456 the entire year's reports).
Buyer’s VAT TIN No. : VAT999999

Declaration
We declare that this invoice shows the actual price of the goods
for India Inc.
Since these are continuous reports, the Carry Forward Credit of the
described and that all particulars are true and correct.
Authorised Signatory current report has to match that of the previous report. Furthermore,
once the Returns are filed, changes cannot be made in the subsequent
month/s without submitting detailed documentation.
A VAT compliant invoice, called Tax Invoice, will need to be serially
numbered and will have the following details (as shown above):

12 13
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A Statutory Return, depending upon each State, could have as much
as 30 fields on the form. For each of the fields to be filled, one would
need to do accurate calculations based on all the transactions of the
given period.
In some States, the Statutory Returns form could be a single-page and
in other states there could be multiple pages, which would need the
support of purchase, sales and other related annexures.
How is my VAT liability computed?
In the VAT system, calculation of your Net VAT Payable or Carry
Forward Credit is really very simple. Since VAT offers set-off of all
taxes paid at the time of purchase (input tax) against all taxes
collected at the time of sale (output tax), all you need to do is record
each and every purchase and sale made, since the same has an impact
on your input credit. No records - no credit! Remember, keeping
proper records is a fundamental business need.
Winning with VAT
For the very first time since independence, the Government is
offering a set-off (input credit) on all taxes paid and collected. The
VAT system will not only help lower prices without affecting your
profit margins, but also reduce your tax outlay. To win with VAT all
you would need to do is maintain the books of accounts in the
prescribed formats, and reap the benefits.
14
SIMPLIFYING
VATchand's
VAT
gyan...#3
Discover the impact of VAT
on your Opening Stock.
Under the Sales Tax regime, all incidences of tax are added to the cost
of the goods. This means that over and above the cost of the goods,
every transaction is affected by the cascading effect of 'tax on tax'. So,
your closing stock valuation is not “true value” as the tax component
is added to it. However, under VAT, stock valuation is much truer -
that is your stock is valued at “actuals” minus the tax component.
Treatment of Opening Stock (Section 2.7 of the White Paper)
All tax-paid goods purchased on or after April 1, 2004 and still in
stock as on April 1, 2005 will be eligible to receive input tax credit,
subject to submission of requisite documents within a specified
period, usually a month. Resellers holding tax-paid goods on April 1,
2005 will also be eligible. VAT will be levied on the goods when sold
on and after April 1, 2005 and input tax credit will be given for the
sales tax already paid in the previous year. This tax credit will be
available over a period of 6 months after an interval of 3 months
needed for verification.
What are the implications of VAT on my Opening Stock?
An example would explain the scenario:
Table III: Closing Stock on 31-3-2005
Stock as on the 31-3-2005 worth Rs 20,00,000 comprises of
Rs.5,00,000
Interstate purchase - Item A
(Tax suffered 4% - 20,000/-)
Purchases from the Rs.5,00,000
First dealer in the state - Item B (Tax suffered @ 12.5% - 62,500/-)
Purchases from the Rs.5,00,000
First dealer in the state - Item C (Tax suffered @ 4% - 20,000/-)
Purchases from the Second Rs.5,00,000
dealer in the state - Item D (RST Tax suffered @ 1.5% - 7,500/-)
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The amount of relief for the example in Table III would be as under
Table IV: Relief under the VAT System
Commodity
Interstate purchase - Item A
Purchases from the First dealer
in the state Rs.5,00,000 - Item B
(Tax suffered @ 12.5% - 62,500/-)
Purchases from the First dealer
in the state Rs.5,00,000 - Item C
(Tax suffered @ 4% - 20000/-)
Purchases from the Second
dealer in the state Rs.5,00,000 - Item D
(Tax suffered @ 1.5% - 7,500/-)
Total amount of Tax Credit
under VAT
six months from the end of three months after the commencement of
the Act.
Relief under the VAT What would be the behaviour of each participant in the VAT
transaction chain and how will prices get impacted?
Rs 0/- 1) A lot depends on the behaviour of the participants high up in the
VAT transaction chain, particularly the first in the chain, viz., the
Rs.62,500/- manufacturer. The VAT chain could comprise of Manufacturer,
Interstate dealer, First local dealer, Second local dealer and lastly
the consumer. Each participant's behaviour is analysed and the
brief conclusion is that it all depends on the actions of the
Rs.20,000/- manufacturer. We must remember that the stocks will be those
containing pre-printed maximum MRP and that does not
encourage reduction in prices.
Rs.56,250/-
(90% of 2) In the very short term, at least till the stocks last (goods that have
Rs.5,00,000 at 12.5%) suffered sales tax), consumer prices may well rise and a
correction might take place when new stocks (goods on which
VAT is levied) are produced. In the medium to long term though,
Rs.1,38,750/-
prices would fall.

Note 1: In the above table it is assumed that the product is taxable at Conclusion
12.5% on the first sale under Sales Tax and the VAT rate is at 12.5% The over-riding issue that concerns us is that dealers might seek to
Note 2: In the above table it is assumed that VAT is to be implemented leverage and speculate the market in an effort to minimise stock
w.e.f. 1st April, 2005. levels by 31-3-2005 because they think that prices are going to fall for
their stocks or conversely seek to maximise their stocks to take
How do I claim credit on Opening Stock?
advantage of rise in prices. It is a risk either way.
The procedure suggested under the current VAT rules are as follows,
that might change by the time of implementation.
Every Registered Dealer claiming relief shall
make an application in the prescribed form
Relief may be
to the Local VAT officer within the adjusted in the
stipulated period, usually thirty days, of manner prescribed
the commencement of the Act. The in the rules in
application would contain details of the equal monthly
stock in hand with clear disclosure of installments over a
purchases and of tax applicable on the period of six
stock. months from the
end of three
The Local VAT officer will review the months after the
application and issue a certificate commencement of
mentioning the amount to which the dealer the Act.
is entitled as relief.
Such relief may be adjusted in the manner
prescribed in the rules in equal monthly installments over a period of
16 17
 VATchand's
gyan…#4
This tax refund along with all other export benefits that were
available earlier will continue. Moreover, because each supplier in
SIMPLIFYING the chain is able to obtain credit, exports under VAT will become
VATchand's
cheaper.
VAT
gyan...#4
As an exporter, am I eligible for Input Credit on taxes paid within
the State? Outside the State?
Discover how exports will become We have to stress that while VAT paid within the state will be
refunded, exemptions and refunds under other tax acts should not be
more competitive under VAT. withdrawn. Hence, CST should not be charged or should be refunded
against Form H or other form of proof of export. VAT paid would
VAT too offers many benefits to exporters. Under VAT, exporters are anyway be claimed back. Hence the position of the exporter would
eligible for Input Credit on all purchases. This, in addition to the remain the same as in the current sales tax scenario. However, the
elimination of all hidden incidences of Sales Tax, will result in better refund period of 3 months is too long. The refund should be made
pricing and enhanced competitiveness in global markets. within one month of submitting the return. Three months cause
unnecessary financial strain and costs in the highly competitive
Hitherto, and as far back as 20 years ago, all taxes and charges
including excise duty and sales tax, incurred on exported goods were foreign markets.
either refunded by the government or, as was usual, not charged. A simple export transaction under VAT will appear as follows,
Excise Duty was exempted on production of Form 'AR4' and Central assuming at each level the profit margin is Rs.10:
Sales Tax was not charged on production of Form 'H'. Local Sales
Taxes too were not charged on production of requisite forms. Hence, Table V: Export transaction under the VAT system
it is evident that the intention of the government has always been that
Sales Tax Invoice Tax Tax Net
of not charging taxes on exports. Of course, proof of export has to be Seller Buyer
price Rate Value payable credit Tax
submitted together with the Forms and a lot of formalities
Q 4%
undertaken to obtain exemption. It is to be noted that the refunds P 100 104 4 0 4.00
CST*
were usually available to the exporter or to the immediate supplier to
the exporter. However, the immediate supplier would normally not Q R 12.5% 14.25
114 128.25 14.25 0
receive any refund of taxes paid to their VAT
supplier. Furthermore, taxes on inputs for For all exports Exporter
12.5%
R 124 139.50 15.50 14.25 1.25
manufacture would still be paid and rarely made out of the VAT
re-claimed which would increase costs. country, tax paid Expo- Foreign 0%
134 134 0.00 15.50 -15.50
within the State rter Buyer VAT
Treatment of Exports (Section 2.5 of White
will be refunded in
Paper) full, and this CST
Total Tax to Exempt
For all exports made out of the country, tax refund will be 4.00
Govt against
paid within the State will be refunded in full, made within three
Form H
and this refund will be made within three months.
months. Units located in SEZ and EOU will *If the current system continues, this CST too would be exempted on
be granted either exemption from payment of production of Form H if the intent to export was already known or be
input tax or refund of the input tax paid within three months. refundable against production of relevant forms. Please note that by
What are the implications of VAT on exports? obtaining input credit on the last invoice, the entire VAT paid in the
The implication of this clause is that VAT and other taxes paid within chain has effectively been refunded by the government.
the state relating to goods that are exported will be refunded.
18 19
 VATchand's
gyan…#4
What if I export goods bought from different sources at different
times?
SIMPLIFYING
An export transaction may not be as simple as
VAT
that shown in Table V. Quite often the exporter
may export goods that are in stock, i.e., goods
that have been bought at different times from
different sources when it was not known
where they would be sold. The situation
becomes complicated when the sources could
be both within the state and outside the state.
The law has not clarified the method to be
CST would be adopted in such cases for obtaining refund
exempted on and it is suggested that an input-output
production of Form
H if the intent to norm be used for this purpose or the goods
export was already for export be identified on FIFO basis.
known or be
However, all said and done, exports should
refundable against
production of be encouraged as usual and clarifications
relevant forms. should be issued to clear the little confusion
that still remains.
20
VATchand's
gyan...#5
Discover the implication of VAT on
Interstate Sales.
Under VAT, interstate sales are not eligible for Input Credit.
Additionally, Central Sales Tax will be levied on all such transactions.
Moreover, there are multiple implications, while dealing with
Composite and Unregistered Dealers too.
Interstate trade in India is mostly in the form of manufacturers or
large national distributors selling goods to wholesalers in different
states. The wholesalers then sell the goods to small dealers in
different towns who would sell to retailers. Retailers of course sell to
consumers. The whole process can be viewed as a transaction chain.
Why is a transaction chain formed?
The chain is established for two reasons
i. To make goods easily available locally through local means. If the
manufacturer were to reach consumers in small towns across the
country, it would either have to establish its own distribution and
retail outlets or rely on local businesses. The former would mean
incurring huge fixed costs whereas the latter would give flexibility at
variable costs.
ii. To ease cash flow at each level of the
chain. If the manufacturer began to supply Input credit on
small quantities directly to the consumer, stocks transferred
the manufacturers would receive small outside the state is
sums of money over an extended period, allowed, provided
which would not match the money to be however that up to
paid out for their huge costs. Large 4% of the credit will
be disallowed. This
consumers or even industrial consumers is intended to make
would by-pass some participants in the interstate trade and
chain to obtain lower prices. Similarly, stock transfers
any participant up or down the chain can broadly on the same
by-pass another to obtain price or cost competitive level.
advantage. 21
 VATchand's VATchand's
gyan…#5 gyan…#5
When is Central Sales Tax (CST) charged? Table VI on the previous page shows how CST is a cost and not
In interstate trade, the manufacturer or any other source of supply refundable, while VAT paid by the dealer who then sells interstate is
charges their customer in another state sales tax on the sales value of available as input credit. The same Rs.4/- if available as a refund to B,
the goods. This tax, called Central Sales Tax (CST), they collect on would reduce the cost of B, and everyone else along the transaction
chain and also for the consumer. However in the entire chain, CST
behalf of their state government and pay it with their sales tax return.
only adds to costs but does not break the transaction chain.
CST is a tax levied by the state on sales made outside the state. Hence,
the revenue accrues to the government in which the goods are Unfortunately, VAT is a state-level tax and CST will continue to be
produced and is paid by the dealer in the consuming state. A dealer levied on interstate trade till an interstate VAT replaces it. Interstate
who is Registered under the CST Act gets to pay a lower tax (e.g. 4%) VAT would have allowed the purchasing dealer to adjust the VAT
if they follow the regulations associated with it. This involves paid to the supplier across the state borders against the VAT collected
submission of 'C' Form, which is an unnecessary procedure in the from their customer (by claiming it as input credit).
absence of computerization of interstate goods movement records. Will I have to pay tax on interstate stock transfer?
An Unregistered dealer pays the normal rate (e.g.10%). While CST is a cost, most states do not levy any tax on stock
transferred to own branches outside the state. Therefore, many
Moreover if goods bought interstate are exported, CST incurred on organizations had established branches across states to save CST. To
them is not charged on production of Form 'H'. Of course, proof of counter this, many states levied purchase tax on goods transferred
export has to be submitted together with the Forms and a lot of into their state from outside. Other taxes like Entry Tax, Octroi, other
formalities undertaken to obtain exemption or refund. cess and levies serve to raise barriers on free movement of goods,
particularly interstate trade. When deliberating on VAT, states
Can I claim input credit against CST paid? disallowed any input credit if stock was transferred to own branches
The CST paid is a cost to the dealer as the government neither refunds from the state.
it nor is it allowed to be adjusted against any liability. The dealer, of
course, passes on the cost down the chain to their customer. The White Paper on VAT issued in January 2005, has relaxed the
However, Value Added Tax (VAT), which is also a tax that is provision and has allowed input credit on stocks transferred outside
the state, provided however that up to 4% of the credit will be
collected on sales, is allowed to be adjusted against VAT paid on
disallowed. This is intended to make interstate trade and stock
purchases. Therefore, only the difference between VAT collected on transfers broadly on the same competitive level.
sales and VAT paid on purchases is a cost to the dealer. This would
reduce the price that the dealer needs to charge their customer. Why should CST continue to be levied? Will it phased out or
replaced soon?
Table VI: Interstate and State transactions The presence of CST in a VAT regime certainly will not make the new
Selling Invoice Net system unviable, but it does acts as a nuisance value. Look closer -
Price Tax Tax CST is inevitable in the absence of an inter-state VATable tax. If one
Tax Rate Value
Seller Buyer (Excluding Payable Credit Tax abolishes CST altogether without an interstate tax then, the
Tax) (Incl Tax)
Outflow producing states suffer losses and the consuming states gain. This
A will affect manufacturing and trade. It should not be forgotten that
Interstate B 100 4% CST 104 4 0 4.00 CST is a key revenue source to the state exchequer which if abolished
Sale increases the losses faced by the states.
12.5%
B C 114 128.25 14.25 0* 14.25
VAT That the centre is moving away from a CST regime and closer to a
VATable interstate tax is clear from the reasonable progress being
12.5% made on a massive computerized system. This system will track the
C D 124 139.50 15.50 14.25 1.25
VAT movement of goods from state to state and will help in the creation of
Cons- 12.5% a fair inter-state tax system.
D 134 150.75 16.75 15.50 1.25
umer VAT It is a temporary problem till the interstate tax information system is
VAT 16.75 ready. The faster the system is implemented, the earlier would CST be
Total to Govt. CST
phased out. Businesses should treat this as such and not panic into
4.00
22 revamping their supply chain. 23

SIMPLIFYING
VATchand's
VAT
gyan...#6
Discover being which type of VAT
Dealer best suits your business.
VAT is a consumption tax and a destination tax. Under VAT, the end
consumer pays all the tax. All intervening tax components in a
transaction trail are eligible for set off. This removes the cascading
effect of taxation. Since the last dealer in the transaction chain charges
VAT, it is important to know where you stand in the chain. And,
based on this, chose the type of registration that best suits your
business.
Who are the dealers who will have to Register under the VAT
system? (Section 2.9 of the White Paper)
Registration of dealers with gross annual turnover above Rs.5 lakhs
will be compulsory. There will be provision for voluntary
registration. All existing dealers will be automatically Registered
under the VAT Act. A new dealer will be allowed 30 days time from
the date of liability to get Registered. Small dealers with gross annual
turnover not exceeding Rs.5 lakhs will not be liable to pay VAT. States
will have flexibility to fix threshold limit within Rs.5 lakhs. Small
dealers with annual gross turnover not exceeding Rs.50 lakhs who
are otherwise liable to pay VAT, shall however have the option for a
composition scheme with payment of tax at a small percentage of
gross turnover. The dealers opting for this composition scheme will
not be entitled to input tax credit.
What is the turnover limit for each type of dealer?
l Small dealers with turnover of less than Rs. 5 lakhs (currently
being reconsidered to increase this limit to Rs.10 lakhs) need not
register.
l Composition Scheme (optional) gross annual turnover between
Rs. 5 lakhs and Rs.50 lakhs
l Registered Dealers (compulsory) gross annual turnover over
Rs.50 lakhs
24
VATchand's
gyan…#6
What are the effects of remaining an Unregistered Dealer?
The effect of remaining Unregistered is that the dealer is treated much
like a consumer. They have to pay VAT on their purchases from a
Registered Dealer, as there is no other way for the tax to be collected
from the consumer. The Unregistered Dealer cannot charge VAT on
their invoices to their customers. Consequently, while their
customers cannot claim input credit the dealer has to necessarily raise
prices to compensate for VAT paid. The Unregistered Dealer is hence
assumed to be very small who sells directly to the consumer.
Let's take an example transaction of an Unregistered Dealer:
Table VII: Transaction of an Unregistered Dealer to a consumer
Purchase:
Basic Cost Rs.1000.00
VAT @ 12.5% Rs.125.00
Total Purchase Value
(effectively, Cost of Materials) Rs.1125.00
Sale:
Profit Margin (for example) Rs.150.00
Sale Invoice (to a consumer)*
(effectively, inclusive of VAT) Rs.1275.00
*It should be noted that Unregistered Dealers are NOT expected to
sell to non-consumers (i.e. industry or other dealers) since the
recipient does not get any VAT credit
From a revenue viewpoint, the goal would have been to collect 12.5%
on Rs.1000.00 (Basic Cost) + Rs.150.00 ('Value addition by dealer')
which is Rs.143.75, instead of Rs.125.00 (which it actually gets).
On an average turnover of, say Rs.3 lakhs for a Small Dealer, with an
average margin of, say 15%, the Government stands to 'lose'
Rs.5,625.00 per dealer per annum. This level has been considered
acceptable by the Committee, and is being stated here
only to put things into perspective.
How would Registered Dealers compete with
Unregistered Dealers?
The first assumption is, that ALL Registered
Dealers, irrespective of their size, have to follow
the State VAT law.
25
 VATchand's VATchand's
gyan…#6 gyan…#6

A Registered Dealer may sell to both consumers and non-consumers.
Let us look at both examples:
Table VIII: Transaction of a Registered Dealer to a consumer
Sale to a Non-consumer (another Dealer OR Industry):
While the basic transaction is the same, it is useful to understand it in
context of the consequent transaction in the chain.
Table IX: Transaction of a Registered Dealer to a non-consumer

Value of VAT Total

Invoice
Goods @12.5% Value
Purchase:
Purchase Invoice 1000.00 125.00 1125.00
Cost of Materials 1000.00
Sale:
Profit Margin (for example) 150.00
Sale Invoice (to next VAT Dealer) 1150.00 143.75 1293.75
While the hypothetical example above, shows that the Sale Price of VAT Paid to Government 18.75
the same product (with the same margin) by a Registered Dealer is Transaction Chain of ‘next’ Dealer
Rs.18.75 higher than that of an Unregistered Dealer it is expected Purchase by ‘next’ VAT Dealer 1150.00 143.75 1293.75
that, in real-life situations, the larger scale of operations will either Cost of Material 1150.00
lower purchase costs, or lower expectations of Profit Margin. Sale:
Therefore, the small difference in Sale Price (approx. 1.5%) will get Profit Margin (for example) 150.00
levelled out.
Sale Invoice (to Consumer or non-
It is even more important to break-up the final invoice amount (paid consumer) 1300.00 162.50 1462.50
by the consumer) and understand its components: VAT Paid to Government 18.75
Basic Cost of Material: Rs.1000.00
In both the above contexts, and in contrast to the example for the
Profit Margin (Value added) by Dealer: Unregistered Dealer, the 'COST OF MATERIALS' does NOT include
Rs.150.00 the VAT Paid.
Total TAX on Goods (1150*12.5%): Rs.143.75 Will I benefit by opting for the Composition Scheme (CS) or should
I become a Registered Dealer?
This Rs.143.75 has been received by the Two factors will help you determine if you should opt for the
Government as: Composition Scheme - one, if you are a dealer supplying directly to
Rs.125.00 paid by First Dealer (who sold to our the end consumers and two, the current
example dealer) profit margins you make. Two factors will
help you determine
Rs.18.75 paid by our example Dealer If your profit margins are in the range 11% if you should opt for
and above, and your State Government the Composition
In effect, even though the amounts have been paid by two different levies a 1% VAT rate on gross annual Scheme:
Dealers, the total amount of tax paid is ONLY ON THE BASIC COSTS turnover then it makes sense to opt for the 1. If you are a dealer
+ VALUE ADDED AT EACH STAGE. This is being stated here for CS (since your total tax outlay will be less supplying directly to
clarity. The importance of this statement will be reflected when we the end consumers
than that of the Registered Dealer, any
reach our interpretation of Composition Dealer. 2. The current profit
profit margin below will increase your margins you make.
26 outlay comparatively and higher than 27
 VATchand's VATchand's
gyan…#6 gyan…#6

11% will decrease your outlay comparatively). Similarly, if your State Table X: Transaction with a Composition Scheme Dealer
Government levies a 2% VAT rate on gross annual turnover, then Value of VAT Total
your profit margins should be in the range 25% and above for it to Goods @12.5% Invoice
make business sense to opt for this scheme. Value
Purchase:
How would a Registered Dealer compete
Purchase Invoice 1000.00 125.00 1125.00
with a dealer who has opted for the
Composition Scheme? Cost of Materials (Since ‘Input
The present VAT Rules state that Credit not available’) 1125.00
Registered Dealers, who have OPTED for Sale:
the Composition Scheme CANNOT Profit Margin (150.00+VAT to be
charge VAT on their invoices! Paid on Turnover approx. Rs. 12.50) 162.50
Sale Invoice (to next VAT Dealer) 1287.50 1287.50
This, effectively, means that a VAT Paid to Government. (1% of
Composition Scheme Dealer is the same as Turnover) 12.88
an Unregistered Dealer and worse, will Transaction Chain of ‘next’ Dealer
ADDITIONALLY have to pay a percentage of Turnover (similar or Purchase by ‘next’ VAT Dealer 1287.50 1287.50
effectively equivalent to Turnover Tax). A simple understanding of Cost of Materials 1287.50
the impact is, that even at 1%, the Composition Scheme Dealer is
Sale:
sacrificing almost 10% of the profit margin!!
Profit Margin (for example) 150.00
While this could have been true for Dealers who are 'end of the chain' Sale Invoice (to Consumer or non-
(where, even then, an unnecessary burden would have been consumer) 1437.50 179.69 1617.19
imposed) it should be taken for granted, that a majority of these VAT Paid to Government 179.69
dealers would NOT be 'end of the chain'. They would be completely
out of business if dealing with non-consumers. Total VAT received by the Government:
To illustrate this we shall apply it to two suppliers to an industry. Rs.125.00 up to the point purchased by Dealer C
One who is a Composition Scheme Dealer (Dealer C), and one who is
Rs.12.88 paid by Dealer C
a Regular Dealer (Dealer R).
Rs.179.69 paid by 'next Dealer' in Chain
Total: Rs.317.57, even though the amount paid by the consumer is
Rs.179.69.

28 29
 VATchand's
gyan…#6
Table XI: Transaction with a Registered Dealer

Value of VAT Total

SIMPLIFYING
Goods @12.5%
Invoice VATchand's
Value
VAT
glossary
Purchase:
Purchase Invoice 1000.00 125.00 1125.00
Cost of Materials 1000.00
Sale: Learn VATinese in one day
Profit Margin (for example) 150.00
Sale Invoice (to next VAT Dealer) 1150.00 143.75 1293.75
Value Added Tax (VAT):
VAT Paid to Government 18.75
VAT is a system of indirect taxation and is meant to be in lieu of other
Transaction Chain of ‘next’ Dealer
indirect taxes such as excise duty, customs duty, sales tax, etc..
Purchase by ‘next’ VAT Dealer 1150.00 143.75 1293.75
Cost of Material 1150.00 Under VAT, the tax is not levied on the entire selling price of the
Sale: product but only on the value addition made at each stage of
Profit Margin (for example) 150.00 manufacturing up to the retail stage.
Sale Invoice (to Consumer or non- The VAT is levied on the value addition at different stages of
consumer) 1300.00 162.50 1462.50 manufacturing and distribution of goods. It is a transaction tax levied
VAT Paid to Government 18.75 at multi-points with a benefit of set-off at each stage.
Consumption type VAT:
This type of VAT allows for tax credit for all business purchases
Total VAT received by the Government:
including capital assets. The economic base of this tax is, therefore,
Rs.125.00 up to the point purchased by Dealer R equivalent to total private consumption. Simply put the final VAT
amount is entirely paid by the end consumer of the product.
Rs.18.75 paid by Dealer R
State VAT:
Rs.18.75 paid by 'next Dealer' in Chain
Under the State VAT system, central government has to retreat from
Total: Rs.162.50, equal to the amount paid by the consumer! the domestic trade tax arena. Each state has to convert its present sales
tax into VAT, which in turn is levied and administered by the states
Conclusion
within a band of rates (e.g. practiced by EU). This system will
VAT cascading happens with Dealer C! There is simply no way that promote fiscal responsibility and discipline on the part of the States.
Dealer C can remain in business since he will neither be able to compete
Input Tax Credit:
with the prices offered by a Registered Dealer, nor will a Registered
The essence of VAT is in providing set-off for the tax paid earlier, and
Dealer purchase anything from Dealer C since input credit cannot be
this is given via input tax credit. The Registered Dealer can set off the
claimed by the Registered Dealer on purchases made from the Composite
amount of input tax paid by him at the time of his purchase, against
Dealer.
the amount of output tax charged by him at the time of sale.
Hence the Composition Scheme would be most effective only for dealers
Carrying Over of Tax Credit
at the end of the transaction chain, supplying directly to end consumers, If the tax credit exceeds the tax payable on sales in a month, the excess
with minimum profit margins of 11%+. credit will be carried over to the end of next financial year, at the end

30 31
 VATchand's VATchand's
glossary glossary
of the second year if the excess still remains then it becomes eligible the return you may need to attach detailed purchase and sale
for refund. annexures and payment challans.
Similarly on capital goods, the input tax credit can be adjusted over a Composition Scheme Registration
maximum of 36 equal monthly installments (depending on each
Small dealers with annual gross turnover between Rs.5 and 50 lakhs,
state).
will have an option to be registered for a composition scheme with
Inter-State Sales payment of tax at a small percentage (1% or 2%) of gross turnover.
Tax paid on inputs procured from other States either on sale or stock The dealers in this scheme will not be entitled to input tax credit.
transfer will not be eligible for input credit.
VAT Rates by Classification of Commodities
Tax Invoice
The VAT system covers 550 goods where there are 4 VAT categories
A VAT compliant invoice will need to be raised based on the
applicable VAT rate by classification, and should have the following u 4% mostly for all raw material, about 270 items in this category
details
u 12.5% for all finished goods, about 234 items in this category
u product if exempt or vatable
u special category of 1% on gold and silver
u seller if registered or unregistered; if from state outside state
u Tax Identification Number - registration details of both seller u exempt category, about 46 items primarily comprising of natural
and buyer and unprocessed products
u Tax point - date of sale
Zero-Rated Sales
u Full item list with VAT breakup including VAT totals
Zero-rated sales are normally exports and agricultural produce.
Credit and Debit Notes:
Input credit can be claimed for the input tax paid at the time of
Year around updated details of all returns, adjustments and damaged
purchase, even though output tax is not levied at the time of sale.
goods will have to be maintained, since this will affect the input tax
credit . Exempt Sales
Stock Records/Manufacturing Accounts Exempt category has about 46 items, and on the sale of these items,
Year .around updated details of sales and purchase of each stock item output tax is not levied. Input credit cannot be claimed for the input
will have to be maintained by dealers. Since each transaction is tax paid on the purchases relating to the production/transaction of
recorded by both the purchaser and seller, the transaction trail exists the exempt goods.
which serves as a self audit record and aids in cross verification.
Similarly the manufacturers will need to maintain a Manufacturing
Account of all inputs/raw-material consumed and goods produced
VAT Accounts
A summary of all output tax paid at time of purchase and all input tax
charged at time of sale will have to be maintained to compute Net Tax
Payable or Carry Forward Credit (Input Tax Credit)
Statutory Returns
Statutory Returns will have to be filed in a continuous form, either
monthly or quarterly and then a 12-month summary at the year-end.
The objective of the Statutory Return is simply to determine the total
tax payable or carry forward category. Depending on the State, with
32 33
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2476327 Erode: Chinnamuthu Street • Alternative Systems-2266636 E.V.N. Road
• GENESIS - VBSE Private Ltd.-2260997 Hosur: Sipcot Post • MSK Infotech Private
Limited-278573 Madurai: Naicker New Street • J.L. Infomatrix Limited-2629845 North
Veli Street • CSC Computer Education (P) Ltd-2330346 Simmakkal • YENNES Infotec
(P) Limited-2624413 Nagercoil: Court Road • Blue-Chip Institute of Information
Technology-228549 Salem: Fair Lands • SYSTECH-2440660 Five Road • CSC Computer
Education (P) Ltd-2332187 L.I.C. Colony Road • Asia Software-5504089
Thiruvannamalai: Krishnan Street • Sri Krishna Computers-254167 Tirupur:
Vallipalayam • SYSTECH-2243189 Trichy: Chattiram Bus Stand • CSC Computer
Education (P) Ltd-2710260 Valayalkara Street • Vijay Solutions & Links -2721920
Tuticorin: Palay Road • Victory Computer Consultancy-2328515 Pondicherry: Mission
Street • CSC Computer Education (P) Ltd-2341766 Pavazha Nagar • Channel Media-
2204734
South Central: Karnataka: Bangalore: Jayanagar • Academy for Corporate
Excellence-26348350 Mathikere • Institute of Accounting Software-51278054 Rama
Murthy Nagar • Base Enterprise Solutions-25660368 Richmond Road • J L Infomatrix
Limited-22293054 Belgaum: Tilakwadi • Infobase Software Solutions-3090011 Bellary:
Gandhinagar • Chetan Institute for Business Solutions-254970 Davangere: Chetana
Road • Genius Computers-259195 Gadag: • Account Pro Solutions-230853 Hubli:
Madhura Market • Parish Systems & Software-5253369 Mangalore: Baikampady • Soft-
Link-2400321 Mysore: Hunsur Road • B. B. Enterprises-2414677 Shimoga: • Anfotech
Systems-225457 Tumkur: B.H. Road • Multimedia Advertising & Marketing-2255882
Kerala: Alappuzha: Near YMCA Junction • Manvish Infotech Solutions-3090788
Calicut: Bank Road • Manvish Infotech Solutions-93884 68146 West Hill • Indmerc
Solutions Pvt. Ltd.-2384229 Ernakulam: Aluva • Manvish Infotech Solutions-1600 444
888 Ravipuram • Indmerc Solutions Pvt. Ltd.-2356434 Kannur: Bank Road • Spectrum
Computers-2768832 Kollam: Kaikulangara • Vinay Systems-2796659 Kottayam: Good
Shepherd Street • K. K. Associates-2580460 Palakkad: Kalmandapam • Infomatic
Solutions-2547256 Trivandrum: Pattom Palace P.O. • Indmerc Solutions Pvt. Ltd.-
2791218