Proposed VAT in The States

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PRESENTATION
ON
INTRODUCTION OF VAT
BY
RAMESH CHANDRA
Member Secretary
Empowered Committee of State Finance Ministers
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VALUE ADDED TAX IN INDIA
VAT IS BEING INTRODUCED PRIMARILY IN REPLACEMENT
OF THE EXISTING SALES TAX IN MOST OF THE STATES
OF INDIA WITH EFFECT FROM 1ST APRIL, 2005.
THE PROPOSED VAT STRUCTURE HAS BEEN EVOLVED ON
THE BASIS OF A CONSENSUS AMONG THE STATES. THE
BASIC FEATURES OF VAT WILL THEREFORE BE SAME
THROUGHOUT THE COUNTRY.
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WHY VAT ?
VAT STRUCTURE IS SUPERIOR TO THE PRESENT SALES
TAX SYSTEM BECAUSE OF THE FOLLOWING ADVANTAGES
1. IT ELIMINATES CASCADING EFFECT OF EXISTING
SALES TAX SYSTEM BY SETTING OFF THE TAX PAID
EARLIER AT EVERY STAGE OF SALE.
2. THE TAX STRUCTURE BECOMES SIMPLER, MORE
TRANSPARENT AND IT IMPROVES COMPLIANCE.
3. IN GENERAL, VAT REDUCES TAX BURDEN AND HELPS
REDUCE PRICES.
4. VAT HELPS EFFICIENCY, COMPETITION EXPORTS.
5. VAT, THUS, HELPS COMMON PEOPLE, TRADE,
INDUSTRY AND ALSO THE GOVERNMENT.
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INPUT TAX CREDIT
ESSENCE OF VAT LIES IN GIVING SET-OFF FOR THE TAX
PAID EARLIER, AND IS GIVEN EFFECT THROUGH INPUT
TAX CREDIT/ REBATE. THIS INPUT TAX CREDIT/ REBATE
IN RELATION TO ANY PERIOD MEANS THE SETTING OFF
THE AMOUNT OF INPUT TAX BY A REGISTERED DEALER,
AGAINST THE AMOUNT OF HIS OUTPUT TAX.
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CARRYING OVER OF TAX CREDIT
IF THE TAX CREDIT EXCEEDS THE TAX COLLECTED IN A
MONTH ON SALE WITHIN THE STATE, THE EXCESS CREDIT
WILL BE CARRIED OVER TO THE NEXT MONTH. TAX
CREDIT WILL BE CARRIED UP TO THE END OF NEXT
FINANCIAL YEAR. EXCESS UNADJUSTED VAT AT THE END
OF TWO CONSECUTIVE YEARS, IF ANY, WILL BE
ELIGIBLE FOR REFUND.
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TAX CREDIT ON CAPITAL GOODS
INPUT TAX CREDIT ON CAPITAL GOODS WILL BE
AVAILABLE FOR TRADERS AND MANUFACTURERS.
TAX PAID ON CAPITAL GOODS WILL BE ELIGIBLE FOR
TAX CREDIT. THE SAME WILL BE ADJUSTED OVER A MAX.
PERIOD OF 36 EQUAL MONTHLY INSTALMENTS. TAX
CREDIT IN THE SAME MONTH FOR PURCHASE OF CAPITAL
GOODS UPTO VALUE OF RS. 1 CRORE.
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TREATMENT OF EXPORTS
FOR ALL EXPORTS MADE OUT OF THE COUNTRY, TAX PAID
WITHIN THE STATE WILL BE REFUNDED IN FULL. THERE
WILL BE PROVISION FOR APPLICATION AFTER THE END
OF EACH QUARTER AND REFUND WILL BE MADE WITHIN
THREE MONTHS. IN CASE OF DELAY, INTEREST WILL BE
PAID FOR THE DELAYED PERIOD. .
INPUT TAX CREDIT, OF COURSE, MAY ALSO BE ADJUSTED
AGAINST LOCAL SALES.
STOCK TRANSFER OUT OF THE STATE
FOR STOCK TRANSFER OF THE OUTPUT, INPUT TAX PAID
IN EXCESS OF 4 WILL BE ELIGIBLE FOR TAX CREDIT.
SINCE INTER-STATE SALE CARRIES CST _at_ 4 AND THIS
IS NOT VATABLE IN THE IMPORTING STATE,
CORRESPONDING TAX INCIDENCE HAS TO BE KEPT FOR
INTER-STATE STOCK TRANSFERS.
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INPUTS PROCURED FROM OTHER STATES
TAX PAID ON INPUTS PROCURED FROM OTHER STATES
THROUGH STOCK TRANSFER OR INTER-STATE SALE WILL
NOT BE ELIGIBLE FOR CREDIT.
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OPENING STOCKS ON THE APPOINTED DAY

• ALL TAX-PAID GOODS PURCHASED ON OR AFTER 1-4-04
  STILL IN STOCK ON THE APPOINTED DAY WILL BE
  ELIGIBLE TO RECEIVE INPUT TAX CREDIT, SUBJECT TO
  SUBMISSION OF REQUISITE DETAILS.

• RESELLERS HOLDING TAX-PAID GOODS ON THE APPOINTED
  DAY WILL ALSO BE ELIGIBLE.

• THE CLAIM OF INPUT TAX CREDIT SHOULD BE SUPPORTED
  WITH THE PRODUCTION OF ORIGINAL TAX INVOICE.

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OPENING STOCKS -(Contd.)

• INPUT TAX CREDIT TO BE AVAILABLE OVER A PERIOD OF
  6 MONTHS AFTER AN INTERVAL OF 3 MONTHS, TO BE
  USED FOR VERIFICATION.

• THE DEALERS CLAIMING INPUT TAX CREDIT SHOULD BE
  CAREFUL IN PRESERVING CASH MEMOS/ TAX INVOICES.

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REGISTRATION
REGISTRATION WILL BE COMPULSORY FOR DEALERS
HAVING TURNOVER ABOVE A THRESHHOLD TO BE DECIDED
BY EACH STATE. THERE WILL BE PROVISION FOR
VOLUNTARY REGISTRATION. THE MINIMUM GROSS
TURNOVER FOR VOLUNTARY REGISTRATION WILL BE
NOTIFIED BY THE GOVERNMENT. EXISTING DEALERS WILL
BE AUTOMATICALLY REGISTERED UNDER THE VAT ACT. A
DEALER SHALL BE ALLOWED 30 DAYS TIME FROM THE
DATE OF LIABILITY TO GET HIM-SELF REGISTERED.
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SMALL DEALERS
EXEMPTION FROM VAT

• SMALL DEALERS WITH GROSS TURNOVER NOT EXCEEDING
  RS. 5 LAKH PER ANUM WILL NOT BE LIABLE TO VAT.

• STATES WILL BE AT LIBERTY TO FIX THRESHOLD
  LIMIT WITHIN RS. 5 LAKH.

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SMALL DEALERS (CONTD.)
COMPOSITION SCHEME

• SMALL DEALERS WITH ANNUAL GROSS TURNOVER NOT
  EXCEEDING Rs. 40 LAKH, WHO ARE OTHERWISE
  LIABLE TO VAT, SHALL, HOWEVER, HAVE OPTION FOR A
  COMPOSITION SCHEME WHERE HE PAYS TAX AT A SMALL
  PERCENTAGE OF GROSS TURNOVER.

• STATES AT LIBERTY TO FIX UPPER CEILING WITHIN
  RS. 40 LAKH FOR COMPOSITION SCHEME.

• SUCH DEALERS WILL NOT BE ELIGIBLE TO ISSUE TAX
  INVOICE.

• CERTAIN CATEGORY OF DEALERS, SUCH AS
  MANUFACTURERS, IMPORTERS WILL NOT BE ELIGIBLE FOR
  COMPOSITION SCHEME.

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PROPOSED TAXPAYERS IDENTIFICATION NUMBER
1. THE TAXPAYERS IDENTIFICATION NUMBER (TIN)
WILL CONSIST OF 11 DIGIT NUMERALS THROUGHOUT
INDIA, AS PER CONSENSUS.
2. FIRST TWO CHARACTERS WILL REPRESENT THE STATE
CODE AS USED BY THE MINISTRY OF HOME AFFAIRS,
GOVERNMENT OF INDIA (CENSUS CODE).
3. THE SET-UP OF THE NEXT NINE CHARACTERS,
HOWEVER, MAY BE DIFFERENT. THIS WILL INCLUDE 2
CHECK DIGITS
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STRUCTURE OF PROPOSED 11 DIGIT REGISTRATION
NUMBER
1
9
4
8
2
0
1
7
0
6
4
Number Proper
State Code
Act Identification Code
Check Digits
Charge Code
VAT0
SST1
CST2
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RETURN

• SIMPLIFIED FORM OF RETURNS WILL BE NOTIFIED

• RETURNS ARE TO BE FILED MONTHLY/ QUARTERLY AS IN
  THE EXISTING SYSTEM

• RETURNS SHALL BE ACCOMPANIED WITH PAYMENT
  CHALLANS.

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PROCEDURE OF ASSESSMENT OF VAT LIABILITY

• SIMPLIFICATION IN VAT IS THAT VAT LIABILITY WILL
  BE SELF-ASSESSED BY THE DEALER IN TERMS OF
  SUBMISSION OF RETURNS UPON SETTING OFF THE TAX
  CREDIT HIMSELF. RETURN FORMS AS WELL AS OTHER
  PROCEDURES WIL BE SIMPLE AND SIMILAR IN ALL
  STATES.

• THERE WILL NO LONGER BE COMPULSORY ASSESSMENT AT
  THE END OF EACH YEAR AS IS EXISTING NOW.

• DEEMED ASSESSMENT, IF NO NOTICE IS ISSUED
  PROPOSING ASSESSMENT.

• ASSESSMENTS ARE TO COMPLETED WITHIN TWO YEARS
  FROM THE END OF JUNE OF THE YEAR.

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AUDIT

• CORRECTNESS OF SELF ASSESSMENT WILL BE CHECKED
  THROUGH A SYSTEM OF DEPARTMENTAL AUDIT.

• A CERTAIN PERCENTAGE OF THE DEALERS WILL BE TAKEN
  UP FOR AUDIT EVERY YEAR ON A SCIENTIFIC BASIS.

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DECLARATION FORM
THERE WILL BE NO NEED FOR ANY PROVISION FOR
CONCESSIONAL SALE UNDER THE VAT ACT SINCE THE
PROVISION FOR SET-OFF MAKES THE INPUT ZERO-RATED.
NO DECLARATION FORM WILL BE NEEDED. HENCE,
DECLARATION FORMS WILL BECOME REDUNDANT, EXCEPT
IN CASE OF INTER-STATE SALE OR SALE IN THE
COURSE OF EXPORT.
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INCENTIVES

• THE EXISTING INCENTIVE SCHEME WILL BE CONTINUED
  AFTER ENSURING THAT THE VAT CHAIN IS NOT
  AFFECTED.
• IN CASE OF DEFERMENT, THE CHAIN CONTINUES IN THE
  SAME MANNER. IN CASE OF EXEMPTION / REMISSIONS,
  EITHER DEDUCTION METHOD WILL BE USED OR TAX WILL
  BE SHOWN IN THE INVOICE AND THEN REMITTED. THUS,
  VAT CHAIN WILL CONTINUE.

• THE SCHEME OF INCENTIVE WILL BE NOTIFIED
  SEPARATELY.

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OTHER EXISTING TAXES SUCH AS TURNOVER TAX,
SURCHARGE, ADDITIONAL SURCHARGE ETC. WILL BE
ABOLISHED.
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COVERAGE
GOODS OUTSIDE VAT
LIQUOR, PETROL, DIESEL, AVIATION TURBINE FUEL AND
OTHER MOTOR SPIRIT WILL REMAIN OUTSIDE VAT.
THOSE WILL CONTINUE TO BE TAXED UNDER THE SALES
TAX ACT.
OTHER GOODS
ALL OTHER GOODS INCLUDING DECLARED GOODS WILL BE
SUBJECTED TO VAT AND WILL GET THE BENEFIT OF
INPUT TAX CREDIT.
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RATES OF VAT
A FEW ITEMS WHICH ARE NOT TAXED AT PRESENT,
WILL ALSO REMAIN EXEMPTED FROM VAT
THERE WILL BE ONLY TWO BASIC RATES OF VAT.
SOME OF THE ESSENTIAL COMMODITIES, DECLARED
GOODS AND BASIC INPUTS WILL BE TAXED _at_ 4
FOR ALL OTHER GOODS THERE WILL BE A GENERAL VAT
RATE OF 12.5 AS PER CONSENSUS AMONG THE STATES.
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THERE WILL BE TWO EXCEPTIONS
a) GOLD SILVER-ORNAMENTS AND ARTICLES THEREOF,
PRECIOUS AND SEMI-PRECIOUS STONES WILL HAVE A
VAT RATE OF 1 .
b) TEA SOLD UNDER THE AUSPICES OF ANY TEA AUCTION
CENTRE IN WEST BENGAL DULY AUTHORISED BY THE
INDIAN TEA BOARD, WILL BE TAX _at_1.
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PROPOSED EXEMPTED GOODS
1. Natural and Unprocessed products - which are
in un-organised sector . 2. Items which are
legally barred from taxation on sale . 3. Items
which have social implications . 4. AED goods,
namely Sugar, Textile and Tobacco. (until
further notification).
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GOODS PROPOSED TO BE TAXED _at_ 4
1. Goods of basic necessities. 2. Industrial
Agricultural inputs. 3. Declared goods. 4.
Capital Goods. 5. Drug Medicine.
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CENTRAL SALES TAX
CST TO CONTINUE FOR THE YEAR 2005-06.
POSITION TO BE REVIEWED BY EMPOWERED COMMITTEE
IN ABOUT OCTOBER 2005 FOR ADVISING MINISTRY OF
FINANCE. SIMILARLY SYSTEM OF AED ON SUGAR,
TEXTILE AND TOBACCO WOULD CONTINUE FOR 2005-06.
AED ON THESE ITEMS LIKELY TO BE REPLACED BY VAT
W.E.F. 1.4.2006
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LEGISLATION
26 STATES HAVE ALREADY DRAFTED THEIR VAT
LEGISLATION. OUT OF THESE 9 STATES ARE LIKELY TO
RECEIVE PRESIDENTIAL ASSENT WITHIN THE NEXT ONE
WEEK. 7 STATES HAVE INDICATED THAT THEY WOULD
PROMULGATE VAT LEGISLATION THROUGH ORDINANCE
ROUTE. HARYANA HAS ALREADY INTRODUCED VAT. AS
MANY AS 10 ASSEMBLIES ARE SCHEDULED TO MEET THIS
MONTH AND TAKE UP VAT LEGISLATION.
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LEGISLATION (Contd.)
ALMOST ALL 26 STATES HAVE REPORTED THAT THEIR
DRAFT RULES ARE READY AND CAN BE NOTIFIED AFTER
THE ACT HAS RECEIVED PRESIDENTIAL ASSENT. THE
TARGET FOR NOTIFICATION OF RULES, SCHEDULES AND
FORMS IS 31ST OF DECEMBER, 2004.
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TINXSYS
IN ORDER TO TRACK INTER-STATE TRANSACTIONS A
COMPUTERISED TAX INFORMATION EXCHANGE SYSTEM IS
BEING INSTALLED. THE PILOT PROJECT LIKELY TO BE
READY BY 1ST APRIL, 2005 WILL COVER 10
STATES. IT IS EXPECTED THAT THE ENTIRE COUNTRY
WOULD BE COVERED BY THE END OF 2005. ALL STATE
GOVERNMENTS HAVE BEEN ADVISED TO COMPUTERISE
THEIR DEPARTMENTS FULLY BY 30TH JUNE 2005.
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PUBLICITY
A NATION WIDE PUBLICITY CAMPAIGN ABOUT VAT WOULD
BE LAUNCHED IN THE PRINT AND ELECTRONIC MEDIA
AFTER DIWALI. THE STATE GOVERNMENTS HAVE AGREED
TO LAUNCH THIS PROGRAMME IN THE LOCAL
LANGUAGES. THERE WILL BE REGIONAL MEETINGS FOR
EXPLAINING THE CONCEPT OF VAT TO TRADE AND
INDUSTRY.
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CENTRAL ASSISTANCE
THE CENTRAL GOVERNMENT IS FULLY COMMITED TO THE
INTRODUCTION OF VAT AND ASSISTING THE STATE
GOVERNMENTS. CENTRE WOULD MEET 100 OF THE
LOSS TO THE STATES ON ACCOUNT OF INTRODUCTION OF
VAT DURING 2005-06. THIS PERCENTAGE WOULD BE
75 FOR 2006-07 AND 50 DURING 2007-08. GOI HAS
AGREED TO MEET A SUBSTANTIAL PERCENTAGE OF THE
COST OF INSTALLING TINXSYS. GOI HAS ALSO MADE
PROVISIONS FOR THE NATION WIDE PUBLICITY
CAMPAIGN. GOI HAS AGREED TO ALLOT A PIECE OF
LAND TO EC FOR ITS OFFICE IN DELHI.
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EC
EMPOWERED COMMITTEE OF STATE FINANCE MINISTERS
TO CONTINUE IN ITS PRESENT FORM. IT WOULD ALSO
CONTINUE TO AID, ADVISE AND ASSIT THE CENTRAL AND
STATE GOVERNMENTS IN THE SMOOTH IMPLEMENTATION OF
VAT.

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THANK YOU