What is VAT?

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What is VAT?

• Value added tax It is a modern progressive
  form of sales tax. It is a multi point tax
  system where tax is levied at each stage.

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Background of VAT

• A full-fledged Vat was initiated first in Brazil
  in mid 1960s and then in European countries in
  1970s and subsequently introduced in about 130
  countries, including several federal countries.
• In Asia it has been introduced by a large number
  of countries from China to Sri Lanka.
• In india, VAT is introduced from 1st April,2005.

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Background of VAT

• introduction of VAT, would help rationalize tax
  burden on Goods since other taxes like Sales tax
  would be abolished.
• The Central Sales Tax is also proposed to be
  phased out eventually

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What is there in the VAT?

• VAT is a form of indirect tax which includes sale
  of goods. Sale of services is covered under
  service tax.
• More than 550 commodities are covered under VAT.
• Tax structure is simple, it is 4,12.5,1
• In order to charge the VAT on final customer, VAT
  is required to be shown separately in the bill.

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Simple Classification

• Under VAT regime 5 different rate structures are
  provided
• Schedule A Goods which carry 0 Rates ScA
  contains Agricultural necessity products.
• Schedule B It covers precious metals it
  carries 1 rate.
• Schedule C Industrial IT products. Rate is 4
• Schedule D Liquor Petroleum products
• Schedule E It includes all the goods which are
  not covered from SCA to SCD(12.5)

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Why Vat was apposed

• High production and high consumption - are the
  two types of states we have -like Gujarat and
  Maharashtra. Producing State means those States
  who produce more than they consume i.e. goods
  sent outside the State will be more than goods
  brought into the State for consumption.
  Consuming States are those which consume more
  than they produce. Since VAT is a consumption
  based tax, theoretically, Consuming States will
  be benefited in the VAT tax regime while
  Producing States will suffer loss of revenue.

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Why Vat was apposed Continued

• Manufacturers, dealers, wholesalers, retailers,
  are required to show their margins separately in
  VAT return.
• Documentation is required at each stage without
  which setoff is not allowed.
• Customers feel that there is a tax burden on
  every consumption of goods whenever it is
  mentioned in tax invoice.
• Some of the states apposed VAT because VAT is
  revenue for central Govt.

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What are the commodities covered under VAT?

• VAT is 4for items consisting mainly raw material
  used in production process, IT products some of
  the products of common consumption (Tea, hawai
  chappalss, plastic footwear, embroidery jari
  items, computer parts)
• Drugs medicines would be charges at the rate of
  4 given in the 3rd schedule of VAT.

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Commodities not covered under VAT

• Pulses, milk, vegetables books
• Rice, wheat
• salt
• Bangles (of all types)
• Rakhi
• Matches
• Idols made by clay, clay lamps
• Poha, murmura
• Coconut in shell,

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Special rates under VAT

• 1 for Gold, Silver other precious semi
  precious stones their jewellery.
• 20 for liquor.
• All types of businesses are covered under VAT
  including Manufacturers, Distributors, Retailers,
  Works Contractors.

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VAT- how it is calculated?

• VAToutput tax- input tax
• Output tax is same as Tax collected from final
  consumers. Input tax is tax paid on the
  purchases.
• The difference between the two is required to be
  paid to the government.

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Example of VAT

• A Supplier, BManufacturer, CWholesaler,
  DRetailer
• A sells his produce at Rs.100 pays tax at the
  rate of 4. The sale price of Rs.100 would be the
  purchase price for B on which B is paying tax at
  the rate of 4.
• B is a manufacturer who would use wages,
  salaries other manufacturing expenses after
  adding profit, sale the same for Rs.200 to C on
  which C is paying tax at the rate of 4.

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Example of VAT Continue..

• C is a wholesaler selling the goods at Rs.300 on
  which tax is paid by D at the rate of 4
• D is a retailer who sells the goods for Rs.400 to
  final consumer on which tax is paid by final
  consumer at the rate of 4.
• The above illustration indicates that the VAT is
  collected at each stage of production
  distribution process.

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Example of VAT Continue
Particulars A B C D
Purchase price 100 200 300
Sale price inclusive VAT 100 200 300 400
Tax collected _at_4 4 8 12 16
Tax Paid on purchases (Input Tax) 4 8 12
Set off Tax collected on sales (-) tax paid on purchases --- 4 (8-4) 4 (12-8) 4 (16-12)
Tax deposited in treasury of Govt. 4 4 4 4
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VAT vs. Sales Tax

• In earlier tax structure, the tax was levied on
  the final selling price which was paid by the
  consumer. It means tax on commodity of Rs.400 is
  Rs. 16 by applying tax rate of say 4.
• Under the new tax system tax paid by the final
  consumer is same i.e Rs.16 which consist of Rs. 4
  at each stage.( Rs.4 by Supplier, Rs.4 by
  Manufacturer, Rs.4 by wholesaler, Rs.4 by
  Retailer.)

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Whether the VAT will result in decrease in prices?

• Consider the following example
• ACo manufactures certain item which form the
  raw material for B Co .B uses that for making
  the product which is sold to CCo. C will sell
  the same to the final consumer, Suppose As cost
  of prodRs.90,Ex. Duty paid 10,final price is
  Rs.110.It means profit added by
• A110-99Rs.11

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Whether the VAT will result in decrease in
prices? Continued..

• Purchase price for BRs.110manuf. Exp.Rs.50160,
  Duty is 10, It means cost is Rs.16016176 if
  the good is sold to C for Rs.200, profit is added
  is Rs.24
• Purchase price of C200manu cost Rs.40240
  duty charge10i.e 24 if the same product s sold
  in the market for Rs.300 so profit added by C is
  Rs 36/-.
• Under the earlier system Duty paid is 9162449
  which will be collected from final consumer in
  the form of sales tax.
• However under VAT, duty paid by B will not
  Rs.16,but it will be equal to10 on Rs.2450 i.e
  7.4 It means S.P.11024507.4191.4(forB)

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Whether the VAT will result in decrease in
prices? Continued..

• Now the purchase price of C191.4
• Its cost of prod.Rs.40, profit Rs.36, It means
  value addition is 76 on which VAT is Rs.7.6,
  Therefore the final price of the product is
  Rs.191.440367.6Rs.275.
• It means the price of the final product is Rs.300
  under sales tax it is Rs.275 under VAT.

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Benefits of VAT

• It is simple, transparent progressive.
• Business friendly system of taxation.
• Reduction in the number of tax rates to only two
  main rates-4 12.5
• Reduction in the effective tax rate for many
  goods
• Elimination of Tax on Tax existing in sales tax
  system
• Simplification of tax forms procedures.

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• Benefits of VAT Continued
• VAT system is based on self assessment
• Dealers , manufacturers , has to maintain the
  records of purchases sales. Thus the
  documentation is minimum as far as VAT is
  concerned.
• Dealers are required to be registered under VAT
  with sales tax department. (Form 101)

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Benefits of VAT Continued

• Benefit to Manufactures.
• Manufactures will be benefited as they will be
  reimbursed fully for the tax paid on their
  purchases.
• Benefit to Traders / retailersThe distributors
  will have to pay tax on their profit margin,
  instead of resale tax- which is direct cost- as
  no input tax credit is allowed against resale Tax
  paid. However, under VAT every body will have tax
  credit and so over all tax burden will be
  minimized

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Benefits of VAT Contiued

• Benefit to Consumers
• There are no hidden taxes due to transparency. In
  view of standardization of VAT rates it is
  possible that price of maximum commodities will
  go down.

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Composite scheme of VAT

• There is no VAT for the dealers whose turnover is
  less than Rs.5,00,000
• If the turnover is between Rs.5,00,000 to
  Rs.50,00,000 the dealers can go for composite
  schemes.
• This consolidated scheme is available to dealers
  only when there is no input credit VAT is
  directly shown on sale price.

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When the VAT return is filled?

• If the tax liability is Rs.1,00,000 or more
  monthly tax return is required to be filed.
• If tax liability is more than Rs.12000 but less
  than Rs.1,00,000 quarterly return is required to
  be filed
• If tax liability is less than Rs.12,000 the
  return is required to be filed after every six
  months.

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