VALUE ADDED TAX

(VAT)
A
Presentation by
Sanjay Jagarwal

Introduction:

TAX: A fee charged ("levied") by

a government on a product, income,
or activity.
Types of taxes:
1.Direct Tax
2. Indirect Tax
Taxes are most often levied as a percentage,
called the tax rate.

Cont

The term direct tax generally means a tax paid

directly to the government by the persons on
whom it is imposed.
The indirect tax is a tax collected by an
intermediary (such as a retail store) from the
person who bears the ultimate economic
burden of the tax (such as the consumer).

Direct Taxes:

Banking Cash Transaction Tax

Corporate Tax
Capital Gains Tax
Double Tax Avoidance Treaty
Securities Transaction Tax
Personal Income Tax
Tax Incentives

Indirect Taxes:

Anti Dumping Duty

Custom Duty
Custom Duty
Sales Tax
Service Tax
Value Added Tax or V. A. T.
Goods and Services Tax (GST)

Value added tax

Value Added Tax (VAT) is a general

consumption tax assessed on the value added
to goods and services.
Over 130 countries worldwide have introduced
VAT over the past three decades and India is
amongst the last few to introduce it.
VAT has been introduced in Indian Taxation
System from April 1, 2005.

Cont

It is considered to be a multi-stage tax.

VAT is not applicable on following:
1. Food (with some exceptions)
2. Newspapers
3. Magazines
4. Childrens clothing
VAT is administered by HM Revenue &
Customs.
550 items covered (270 basic need items )

Cont

VAT was first suggested in Germany during

the post-World War I period.
It is not a charge on companies. It is charged
as a percentage of price.
A Person cannot make sale to himself.
It is collected fractionally.
Each state and union territory has
formulated its VAT legislation except for "
ANDAMAN & NICOBAR ".

The Three Type Of VAT:

Consumption Method

Net Income Method

Gross National Product Method of Valueadded Tax

The VAT is applied to imported products.

VAT Applicability

Below 5 Lakhs turnover No Tax & No. Regn

required.
5 40 Lakhs TOT will apply & VAT is
optional.
Above 40 Lakhs VAT will apply.

VAT AND SALES TAX:

Sales tax is imposed on the total retail price of

the item sold, while VAT tax is imposed on the
value added at each stage of production and
distribution.
value-added tax systems have more checks
against tax fraud because the tax is assessed at
more than one point in the distribution process.

VAT Terminology Input Tax

INPUT TAX
Input Tax is the Tax shown in our purchase
bills.
As per the norms, every trader need to show
Tax separately and it is considered as Input
Tax.
Apart from Trade Purchases, Tax on Capital
Goods purchases like A.C., Computers etc.. is
also considered for this Input Tax.

VAT Terminology Output Tax

OUTPUT TAX
Output Tax is the Tax charged on all the
Taxable sales of a Vat Dealer.
Output Tax is the Tax charged on all the Taxable sales of a Vat Dealer.

For Ex. Tax shown by us our Output Tax and

it becomes Input Tax for our customer.

VAT Rates

There are three main rates for Input and Output

Vat tax.
0% for Agriculture products.
1% for Jewellery
4% for Pharma, Computers, Soaps etc.
12.5% for FMCG, Automobile

Input Tax Amount Calculation

Month Purchases Gross Value X Rate of Tax

For ex.:
Input Tax = 10,00,000 * 0.04 = 40,000/Purchases, includes Trade purchases and
Capital Goods purchases as per the existing
VAT Rate.
E.g. Purchase price - Rs 100
Tax paid on purchase - Rs 10 (input tax)
Sale price - Rs 120
Tax payable on sale price - Rs 12 (output tax)
Input tax credit - Rs 10
VAT payable - Rs 2

Output Tax Amount Calculation

Month Sales X Rate of Tax

Output Tax = 20,00,000 * 0.04 = 80,000/-

On the invoice, we should show, Items

Amount, VAT Value and Total Value
In case of discounts, it should be given before
VAT.

Tax Credit

If Input Tax is greater than Output Tax, then

we should not pay Tax to Government.
This amount will be carried forward to the next
month. This is the Tax Credit Amount.
Input Tax 1,00,000/Output Tax 50,000/Tax Credit = Input Tax Output Tax =
1,00,000 50,000 = 50,000/-

Tax Amount Calculation

Output Tax (Input Tax + Tax Credit +

Opening Stock Vat Adjustment Amount)
VAT Equation
Sales Value Purchase Value = G.P X VAT
Rate.
Tax Paid Date
If not paid by 20th of the month then 5000/penalty

A Brief Discussion:
Seller

Buyer

Selling Tax Rate Invoice Tax

Tax
Price
value
Payable Credit
(Excludi
(Incl Tax)
ng Tax)

Net
TaxOutfl
ow

100

4% CST 104

4.00

114

12.5%
VAT

128.25

14.25

0*

14.25

124

12.5%
VAT

139.50

15.50

14.25

1.25

Consumer 134

12.5%
VAT

150.75

16.75

15.50

1.25

VAT/ CST

16.75
4.00

Total to Govt.

Cont
Note: The transaction chain under VAT assuming
that a profit of Rs 10 is retained during each sale.
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.

New Terms

CENVAT ( Central Value Added Tax)

MODVAT (Modified Value Added Tax)
The light diesel oil, high-speed diesel oil or motor
spirit, commonly known as petrol, shall not be treated
as an input for any purpose whatsoever.
Input service means any service used by a provider of
taxable service for providing an output service.

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:

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;
sale which takes place outside the State; and
sales in the course of export or import

Ultimate Objective Of VAT

Calculation Easy and Simple

Transparency
Increased Tax Base
Competitive Price
Uniform Tax Structure
More Revenue
NO Revenue Leakage
Avoids Double Taxation
Co-ordination of VAT with direct taxation

Advantages of VAT:

Coverage If the tax is considered on a retail level,

it offers all the economic advantages of a tax of the
entire retail price within its scope. The direct payment
of tax spreads out over a large number of firms
instead of being concentrated only on particular
groups, such as wholesalers & retailers
Revenue Security - Under VAT only buyers at the
final stage have an interest in undervaluing their
purchases, as the deduction system ensures that
buyers at earlier stages are refunded the taxes on their
purchases. Therefore, tax losses due to
undervaluation will be limited to the value added at
the last stage

Cont

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

stage nothing will be lost if it is picked up at later stage. Even
if it is not picked up later, the government will at least have
collected the VAT paid at previous stages. Where as if evasion
takes place at the final/last stage the state will lose only tax on
the value added at that particular point.

Selectivity - VAT is selectively applied to

specific goods & business entities. In addition,
VAT does not burden capital goods because of
the consumption-type. VAT gives full credit
for tax included on purchases of capital goods.

Cont

Co-ordination of VAT with direct taxation - Most

taxpayers cheat on sales not to evade VAT but to
evade their personal and corporate income taxes.
Operation of VAT resembles that of the income tax
and an effective VAT greatly helps in income tax
administration and revenue collection.
Simplification Under the CST Act, there are 8 types
of tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and
25%. However, under the present VAT system, there
would only be 2 types of taxes 4% on declared goods
and 10-12% on RNR. This will eliminate any
disputes that relate to rates.

Cont

Adjustment of tax paid on purchased goods Under

the present system, the tax paid on the manufactured
goods would be adjusted against the tax payable on
the manufactured goods. Such adjustment is
conditional as such goods must either be
manufactured or sold. VAT is free from such
conditions.
Transparency The tax that is levied at the first stage
on the goods or sale or purchase is not transparent.
This is because the amount of tax, which the goods
have suffered, is not known at the subsequent stage.
In the VAT system, the amount of tax would be
known at each and every stage of goods of sale or

Cont

Fair and Equitable VAT introduces the uniform tax

rates across the state so that unfair advantages cannot
be taken while levying the tax
Procedure of simplification Procedures, relating to
filing of returns, payment of tax, furnishing
declaration and assessment are simplified under the
VAT system so as to minimize any interface between
the tax payer and the tax collector
Minimize the Discretion the VAT system proposes
to minimize the discretion with the assessing officer
so that every person is treated alike.

Cont

For example, there would be no discretion involved in

the imposition of penalty, late filing of returns, nonfiling of returns, late payment of tax or non payment of
tax or in case of tax evasion. Such system would be free
from all these harassmen.
Computerization the VAT proposes computerization
which would focus on the tax evaders by generating
Exception Report. In a large number of cases, no
processing or scrutiny of returns would be required as
it would free the tax compliant.

Disadvantages of VAT:

VAT is regressive.

VAT is difficult to operate from position of

both administration and business.

VAT is inflationary.

VAT favors capital intensive firms.

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 recognises and makes
room for progressivity 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.

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.

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 rationalisation 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

Cont
(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.

Cont

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.
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.

VAT favors capital intensive firms

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

India needs to take following steps:

Application of information technology

Wide spread computerization
Bringing all registered dealers into tax net
Avoiding exemptions and incentives
Granting rebate on already paid tax
Phasing out of Central Sales Tax

Procedural Issues:
Different rate of VAT on Petroleum products
Delhi 20%, M.P. 29%, Gujarat 24% ~ 38%

List of goods eligible to VAT @4% not uniform for all the
States for example Ornaments made of rolled gold and
imitation gold are eligible to VAT @4% in M.P. whereas
in Delhi chargeable to VAT @12.5%
Applicability of VAT on Deemed Exports
No specific exemption, methodology of payment of
tax and refund.

VAT A Roadmap to GST

Phase - I
Single point tax with multiple rate of taxes without any
provision of set off
Phase - II
Multipoint taxation with provision of set off known as
VAT
Proposed
Levy of service tax on specified services by the States
Uniformity of rates
Abolishing CST in a phased manner
Arriving at a consensus rate of Goods & services
Implementation of GST ( Goods and Service Tax) by 1
April 2010