VAT

VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or
importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in
simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax -
that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a
manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer
purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the
goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be
only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus,
the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands.

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

Importance of VAT in India

India, particularly being a trading community, has always believed in accepting and adopting loopholes in
any system administered by State or Centre. If a well-administered system comes in, it will not only close
options for traders and businessmen to evade paying their taxes, but also make sure that they'll be
compelled to keep proper records of sales and purchases.

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

Advantages of VAT

1. 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.
2. 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.

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.

3. 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.
4. 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.

To know more about advantages of VAT click here: Advantages of VAT

Disadvantages of VAT

1. VAT is regressive
2. VAT is difficult to operate from position of both administration and business
3. VAT is inflationary
4. VAT favors capital intensive firms
Items covered under VAT

 All business transactions that are carried on within a State by individuals/partnerships/ companies
etc. will be covered under VAT.
 More than 550 items are covered under the new Indian VAT regime out of which 46 natural &
unprocessed local products will be exempt from VAT
 Nearly 270 items including drugs and medicines, all industrial and agricultural inputs, capital
goods as well as declared goods would attract 4 % VAT in India.
 The remaining items would attract 12.5 % VAT. Precious metals such as gold and bullion will be
taxed at 1%.
 Petrol and diesel are kept out of the VAT regime in India.
 Tax implication under Value Added Tax Act

Selling Price Invoice

Tax Tax Tax Net Tax
Seller Buyer (Excluding value ( Incl
Rate Payable Credit Outflow
Tax) Tax)

4%
A B 100 104 4 0 4.00
CST

12.5%
B C 114 128.25 14.25 0* 14.25
VAT

12.5%
C D 124 139.50 15.50 14.25 1.25
VAT

12.5%
D Consumer 134 150.75 16.75 15.50 1.25
VAT

VAT
Total to Govt. 16.75 4.00
CST

Silent Features Of VAT

a. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
o 4% on declared goods or the goods commonly used.
o 10-12% on goods called Revenue Neutral Rates (RNR). There would be no fall in such
remaining goods.
o Two special rates will be imposed-- 1% on silver or gold and 20% on liquor. Tax on
petrol, diesel or aviation turbine fuel are proposed to be kept out from the VAT system as
they would be continued to be taxed, as presently applicable by the CST Act.
b. Uniform Rates in the VAT system, certain commodities are exempted from tax. The taxable
commodities are listed in the respective schedule with the rates. VAT proposes to keep these
rates uniform in all the states so the goods sold or purchased across the country would suffer the
same tax rate. Discretion has been given to the states when it comes to finalizing the RNR along
with the restrictions. This rate must not be less than 10%. This will ensure By doing this that there
will be level playing fields to avoid the trade diversion in connection with the different states,
particularly in neighboring states
c. No concession to new industries Tax Concessions to new industries is done away with in the new
VAT system. This was done as it creates discrepancy in investment decision. Under the new VAT
system, the tax would be fair and equitable to all.
d. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of sale All
the tax, paid on the goods purchased within the state, would be adjusted against the tax, payable
on the sale, whether within the state or in the course of interstate. In case of export, the tax, paid
on purchase outside India, would be refunded. In case of the branch transfer or consignment of
sale outside the state, no refund would be provided.
e. Collection of tax by seller/dealer at each stage. The seller/dealer would collect the tax on the full
price of the goods sold and shows separately in the sell invoice issued by him
f. VAT is not cascading or additive though the tax on the goods sold is collected at each stage, it is
not cascading or additive because the net effect would be as follows: - the tax, previously paid on
 the sale of goods, would be fully adjusted. It will be like levying tax on goods, sold in the last state
or at retail stage.

Advantages Of VAT

1. 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 of tax
and classification of goods as this is the most usual cause of litigation. It also helps to determine
the relevant stage of the tax. This is necessary as the CST Act stipulates that the tax levies at the
first stage or the last stage differ. Consequently, the question of which stage of tax it falls under
becomes another reason for litigation. Under the VAT system, tax would be levied at each stage
of the goods of sale or purchase.
2. 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.
3. Further such adjustment of the purchased goods would depend on the amount of tax that is
payable. VAT would not have such restrictions. CST would not have the provisions on refund or
carry over upon such goods except in case of export goods or goods, manufactured out of the
country or sale to registered dealer. Similarly, on interstate sale on tax-paid goods, no refund
would be admissible.
4. 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 purchase.
5. Fair and Equitable VAT introduces the uniform tax rates across the state so that unfair
advantages cannot be taken while levying the tax.
6. 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.
7. Minimize the Discretion the VAT system proposes to minimize the discretion with the assessing
officer so that every person is treated alike. For example, there would be no discretion involved in
the imposition of penalty, late filing of returns, non-filing 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 harassment
8. 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 dealers from all the harassment which is so
much a part of assessment. The management information system, which would form a part of
integral computerization, would make the tax department more efficient and responsive.

Methods Of Collecting And Charging The VAT

Generally, there are 2 methods that are followed while charging and collecting the VAT:

1. Invoice or tax credit method The tax is collected and charged separately on the basis of the tax
that is paid on the purchase and the tax that is payable on the sale, shown separately in the
invoice. Therefore, the difference between the tax paid on purchase and the tax payable on sale
as per the invoice is the VAT.
2. Subtraction Method Under this method, the tax is collected and charged on the aggregate value
of the tax payable on sale and purchase by applying the rate of tax, applicable to the goods.
Therefore, the difference between the sale price and purchase price would be VAT. It means VAT
is the tax which consumers ultimately face. It is collected at each stage. The tax earlier paid can
be allowed as set off or credit. Therefore, it is called as Last Point Tax

VAT in Various States of India

VAT or value added tax has replaced the sales tax in India. Earlier across the India there is a sales tax
applicable on all the manufacturing goods however later on VAT or value added tax came into existence.
This tax (VAT) helps the government to generate the revenue in a systematic way. The basic principle of
the value added tax is to collect the tax at the inception of the goods that is going to be manufactured. For
e.g. if the trader is purchasing goods at Rs 100 then he needs to pay the value added tax of 10% similar
kind of tax will be paid by the manufacturer while purchasing the raw material.
Let’s have a look on the simplest way of calculation of VAT.
Purchase price paid by the dealer 1 from broker
Rs 100 + 10% tax= Rs 110 (here tax is Rs 10)
If the dealer 1 sells the good to other dealer 2
Rs 120+10% tax = Rs 132 (here after including profit of Rs 10 by dealer1 tax is Rs 12)
This will reduce the tax of dealer1 and added the excess amount while selling the goods to dealer2.

VAT has been imposed on various states such as Andhra Pradesh, Maharashtra, Madhya Pradesh,
Orissa, Kerala, Tamil Nadu and Rajasthan. The present VAT structure provided by the government is not
turned out to be a foolproof formula hence central government keeps on removing it sometimes due to the
agitation of the manufacturer and dealer. VAT is not a standard denomination in all the states it is varied
in different part of the country. On an average there are two average tax slabs the first one is 4% that
covers all the essential items where as the second slab consist of 10% that covers all the luxury items.
There are two sub slabs also that is 1% for jewellery and 20% for non-essential goods.

This should be noted that there are two ways to collect VAT:

1. In the very first method tax is charged both on the basis of the tax that is paid by the customer on
its purchase this tax is simply applicable on sales. In a simple language the difference between
the tax paid on purchase and tax paid on sales.
2. In other method tax is collected on the cumulative value of tax paid on sales and tax paid on
purchase.

The key benefit that is given on the basis of Value added tax (VAT):

A. Reduces tax evasion.

B. Multiple taxes such as turnover tax, surcharge on sales tax, additional surcharge etc have been
put an end to.
C. Advocated an internal system of self assessment for VAT liability.
D. Tax structure becomes easier and more visible.
E. Enhances tax compliance and results in higher revenue growth.
F. Encourages competitiveness of exports.

Relevant Components of Calculating VAT

 Sale or purchase price of the goods

 Turnover of sale or purchase including the taxable turnover
 Output Tax
 Input Tax
 Input Tax paid on purchase on which the credit or set off claim
 Net tax payable

Difference between VAT And CST

Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore, the burden
of the full tax bond is borne by only one dealer, either the first or the last dealer. However, under the VAT
system, the tax burden would be shared by all the dealers from first to last. Then, such tax would be
passed upon the final consumers.

Under the CST Act, the tax is levied at a single point. Under the VAT system, the retailers are not subject
to tax except for the retail tax.

Under the CST Act, general and specific exemptions are granted on certain goods while VAT does not
permit such exemptions. Under the CST law, concessional rates are provided on certain taxes. The VAT
regime will do away with such concessions as it would provide the full credit on the tax that has been paid
earlier.

Under VAT law, first, the dealer pays tax on the sale or purchase of goods. The subsequent dealer pays
tax on the portion of the value added upon such goods. Thus, the tax burden is shared equally by the last
dealer. To illustrate the whole procedure of VAT, we give you an example as follows:

At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%. Therefore, the net VAT
would be 12.5%. At the second change of sale, the sale value is Rs.120 and the tax thereon is 15%. The
tax that is to be paid at every point is 15%. The input tax is 15%. You will get a credit for first change in
sale of 2.5%-- i.e. 15% -12.5%. Therefore, 2.5% will be the net rate. At the third change of sale, the sale
value is Rs.150 and the tax on this is 18.75%. At the last stage, the tax paid is 18.75%. The Input Tax is
18.75%. You get a credit for second change in sale?i.e. 18.75% -15% = 3.75%. Therefore, 3.75% would
be the net VAT. This means that VAT is paid in the last point tax under the sale tax regime.