VALUE ADDED TAX

Submitted to Submitted by
Dr. Praerna sharma Nirbhay singh
DEFINITION
 The value added tax (VAT) as its name implies is a tax in
the value added to a commodity or service

 A value added tax(VAT) is a tax not on the total value of

the commodity being sold, but on the value added to it
by last trader
CHARACTERISTICS OF VAT
 Its special characteristics being that it falls on the value
added at each stage from the stage of production to retail
stage.
 It is a multiple stage tax collection.
VAT TERMINOLOGY
Output VAT: Amount received by a seller as a
percentage of the gross sale price of goods or
services
Input VAT: Amount paid by a buyer as a percentage
of the gross purchase price for goods or services
used in production
 MEANING OF ‘VALUE ADDED’ – the ‘value’ of
inputs is Rs 110, while ‘value’ of output is Rs 150. Thus,
the manufacturer has made ‘value addition’ of Rs 40 to
the product. Simply put, ‘value added’ is the difference
between selling price and the purchase price.
POINTS IN FAVOR OF VALUE ADDED
TAX
 Neutral form
 Simple form of taxation

 Less scope for tax evasion

 Easy method of investigation

 Promotion of exports

 Based on gross auditing

 Less burdensome

 It encourages investment

 Burden of tax is shared by all factors

POINTS AGAINST VALUE ADDED TAX
 Not easy to adopt
 Shortage of efficient management

 Inflationary in nature

 More expensive

 Not neutral tax

 Not conductive to efficiency

 Not economical

 Possibility of tax evasion

 Lack of public co-operation

 Difficult to adopt in under-developed countries

VALUE ADDED TAX IN INDIA
 India has been making its best efforts since long to
modify the prevailing tax structure.
 Many renowned economists as well as expert
committees have look into VAT
 It has some attractions as the tax structure of commodity
tax is complicated
 Study group appointed by FICCI has strongly favoured
to adopt VAT in place of excise duties, sales tax ,octroi.
 In this regard L.K. Jha Committee suggested there ought
to be lowering excise duty on one hand and restrictions
should be levied on the powers of state governments to
impose sales tax
PROBLEMS OF VAT IN INDIA
 Constitutional problem
 Administrative problems

 Revenue considerations

 Experience of developing countries

SOME OF THE REASONS FOR
OPPOSITION OF VAT
 Presence of a large number of tax deferral and holiday
schemes, which resulted in a narrow base. It may again
be noted that under VAT, which is multi-point, the tax
rates have to be reasonably low, and lower tax rates
presupposes that the tax base is wide
 Low level of awareness among traders, and even
administrators, giving rise to fears and apprehensions.
Owing to this, there was considerable consternation
among the trade, which gave rise to open revolt against
the system.
 Partial implementation of the ideal VAT with the existing system coexisting
even under this regime.

 Increased burden on retailers of Bookkeeping and compliance.

 Multiplicity of rates of tax under the VAT regime.

 Drop in revenue for the State Government, though there are no studies
attributing such reduction to the system of taxation.
CENTRAL VALUE ADDED TAX(CENVAT)
 Till march 2000, MODVAT was in practice, and that was
modified into CENVAT.
 These provisions used in central excise to implement the
concept of VAT at the manufacturing stage by giving the
credit of the duty paid on inputs
 The CENVAT scheme is principally based on the system
of granting credit on duty paid on inputs.
 Under CENVAT, a manufacturer has to pay duty as per
nominal procedure on the basis of ‘assessable
value’(which is mainly based on selling price)
of a final product.
Credit will be available for duty paid on
 Raw materials

 Material used in relation to manufacture

 Packaging material

 Paints

 CENVAT credit is available only on inputs used in or in

relation to the manufactur
VAT CALCULATION
 VAT taxpayers RELATE total OUTPUT VAT
(amounts received from buyers in sales) to their
total INPUT VAT (amounts paid to sellers in
purchases).

 When total Output VAT exceeds total Input VAT

the difference is paid to the taxing jurisdiction.
When total Input VAT exceeds total Output VAT
the taxpayer is entitled to a refund.
 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
THANK YOU