SALIENT FEATURES

VALUE ADDED TAX IN INDIA

VAT IS PROPOSED TO BE INTRODUCED PRIMARILY IN REPLACEMENT OF THE EXISTING SALES TAX IN MANY STATES OF INDIA WITH EFFECT FROM 1.4.2005. 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 AND IT IMPROVES COMPLIANCE.

3. COMPETITIVE EXPORTS.
4. TRANSPARENCY.
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THE BASIC FEATURES OF PROPOSED VAT

1) BASIS OF VAT CALCULATION :
VAT HAS TO BE PAID BY A REGISTERED DEALER ON THE VALUE ADDITION OF THE GOODS WHEN SOLD BY HIM. VAT LIABILITY WILL BE CALCULATED BY DEDUCTING INPUT TAX CREDIT FROM TAX COLLECTED BY THE DEALER DURING THE PAYMENT PERIOD.
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2) TAX CREDIT :
CREDIT WILL BE GIVEN WITHIN THE SAME MONTH FOR ENTIRE VAT PAID WITHIN THE STATE ON PURCHASE OF INPUTS / SUPPLIES MEANT FOR BOTH INTRA-STATE AND INTER-STATE SALE, IRRESPECTIVE OF WHEN THOSE WILL BE UTILISED / SOLD. THIS ALSO REDUCES IMMEDIATE TAX LIABILITY.

3) METHOD OF SET-OFF :
THE CREDIT WHICH THUS ACCUMULATES OVER ANY MONTH WILL BE UTILISED TO DEDUCT FROM THE TAX COLLECTED BY THE DEALER IN THAT MONTH UNDER THE VAT ACT.
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EXAMPLE OF TAX CREDIT AND SET-OFF

(under VAT, assuming tax-rate of 10%)
a) INPUT PROCURED WITHIN THE STATE IN A MONTH b) OUTPUT SOLD IN THE MONTH Rs. 1,00,000/Rs. 2,00,000/-

c) INPUT TAX PAID @4% ON (a)

d) TAX COLLECTED @10% ON (b) e) VAT PAYABLE DURING THE MONTH [(d) - (c)] : (Rs.20,000 - Rs.4,000)

Rs.

4,000/-

Rs. 20,000/Rs. 16,000/-

4) 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 UPTO THE END OF NEXT FINANCIAL YEAR. EXCESS UNADJUSTED VAT AT THE END OF TWO CONSECUTIVE YEARS, IF ANY, WILL BE ELIGIBLE FOR REFUND.

5) TAX CREDIT ON CAPITAL GOODS:

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.
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5(A). EXAMPLE OF SET-OFF ON CAPITAL GOODS

(UNDER POST-VAT SCENARIO)

a) INPUTS PROCURED WITHIN THE STATE IN A MONTH

b) CAPITAL GOODS PROCURED WITHIN THE STATE IN THE MONTH

Rs. 1,00,000/Rs. 90,00,000/-

c) OUTPUT SOLD IN THE MONTH d) INPUT TAX PAID @ 4% ON (a) e) TAX PAID ON CAPITAL GOODS PROCURED @ 4%

Rs. 1,30,000/Rs. 4,000/Rs. 3,60,000/-

f) TAX CREDIT AVILABLE ON CAPITAL GOODS i.e. (e)/36

g) TOTAL TAX CREDIT AVAILABLE IN THE MONTH i.e. [(d) + (f)] h) TAX @10% ON SALES OF Rs. 1,30,000/- DURING THE MONTH i) VAT PAYABLE DURING THE MONTH [(g) > (h)] j) CARRYING OVER OF TAX CREDIT FOR CREDIT DURING THE NEXT MONTH [(g) - (h)] :

Rs. 10,000/Rs. 14,000/Rs. 13,000/NIL Rs. 1,000/9

6) TREATMENT OF EXPORTS:
FOR ALL EXPORTS MADE OUT OF THE COUNTRY, TAX PAID WITHIN THE STATE WILL BE REFUNDED IN FULL IMMEDIATELY AFTER THE END OF FINANCIAL YEAR.

7) 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 @ 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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8) INPUTS PROCURED FROM OTHER STATES :

TAX PAID ON INPUTS PROCURED FROM OTHER

STATES THROUGH STOCK TRANSFER OR INTERSTATE SALE WILL NOT BE ELIGIBLE FOR CREDIT.

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9) OPENING STOCKS ON 01-04-2003

ALL TAX-PAID GOODS PURCHASED ON OR AFTER 1-4-02 & STILL IN STOCK WILL BE ELIGIBLE TO RECEIVE INPUT TAX CREDIT, SUBJECT TO SUBMISSION OF REQUISITE DETAILS. PROOF OF PAYMENT OF TAX WILL BE NEEDED. RESELLERS HOLDING TAX-PAID GOODS ON 1-4-03 WILL ALSO BE ELIGIBLE. INPUT TAX CREDIT TO BE AVAILABLE OVER A PERIOD OF 6 MONTHS AFTER AN INTERVAL OF 3 MONTHS, TO BE USED FOR VERIFICATION.
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11) 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.
HENCE,

NO DECLARATION FORM WILL BE NEEDED.

DECLARATION FORMS WILL BECOME

REDUNDANT, EXCEPT IN CASE OF SALE IN THE COURSE OF EXPORT.

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12) 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. EXISTING DEALERS WILL BE AUTOMATICALLY

REGISTERED UNDER THE VAT ACT.

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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
State Code

4 8 2 0 1 7 0
Charge Code

6 4
Check Digits CST=2
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Number Proper
Act Identification Code

VAT=0

SST=1

13) COMMODITY COVERAGE

a. NON-APPLICABILITY OF VAT :

A FEW ITEMS LIKE PETROL, DIESEL AND AVIATION TURBINE FUEL WILL BE TAXED UNDER VAT BUT NOT ELIGIBLE FOR INPUT TAX CREDIT. OTHER COMMODITIES USED AS FUEL WILL HOWEVER BE ELIGIBLE FOR TAX CREDIT. PETROLEUM DEALERS WILL BE LIABLE FOR VAT. HENCE THOSE DEALERS ONLY WILL BE ELIGIBLE FOR TAX CREDIT.
b. GOODS OTHER THAN ABOVE : ALL OTHER GOODS INCLUDING DECLARED GOODS WILL BE SUBJECTED TO VAT AND WILL GET THE BENEFIT OF INPUT TAX CREDIT.
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14) INCENTIVES UNDER THE OLD SCHEME :

STATES MAY DEVELOP THEIR OWN MECHANISM TO CONTINUE INCENTIVES IN THE MANNER DEEMED FIT, KEEPING THE SAME COMPATIBLE WITH VAT. NO NEW INCENTIVES WILL BE GIVEN.

VARIATIONS IN THE DESIGN OF THE EXISTING STATE INCENTIVE SCHEMES ARE RECOGNISED.
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15) PROCEDURE OF ASSESSMENT OF VAT LIABILITY :

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.
DEEMED ASSESSMENT, IF NO NOTICE IS ISSUED. THERE WILL NO LONGER BE COMPULSORY ASSESSMENT AT THE END OF EACH YEAR AS IS EXISTING NOW.
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16) AUDIT :
CORRECTNESS AUDIT. OF SELF ASSESSMENT WILL BE

CHECKED THROUGH A SYSTEM OF DEPARTMENTAL A CERTAIN PERCENTAGE OF THE DEALERS WILL BE

TAKEN UP FOR AUDIT EVERY YEAR ON A SCIENTIFIC BASIS. MORE COMPLYING DEALERS WILL BE AUDITED LESS FREQUENTLY.
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 ALL DEALERS ARE EXPECTED TO BE AUDITED AT LEAST ONCE IN FIVE YEARS.

IF EVASION IS DETECTED ON AUDIT, THE DEALER MAY BE ASSESSED FOR ALL THE PREVIOUS PERIODS UP TO LAST FIVE YEARS.

THE AUDIT WING WILL REMAIN DELINKED FROM THE TAX COLLECTION AND MONITORING WING TO REMOVE ANY BIAS.

THERE WILL BE SIMULTANEOUS RESTRUCTURING AND COMPUTERISATION IN THE SALES TAX DIRECTORATES.
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17) 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. 25 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. 25 LAKH FOR COMPOSITION SCHEME.

SUCH DEALERS WILL NOT BE ELIGIBLE TO ISSUE TAX INVOICE.

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

18) 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 @ 4% FOR ALL OTHER GOODS THERE WILL BE A GENERAL VAT RATE, WHICH WILL HAVE A FLOOR OF 10%. ACTUAL RATE WILL BE FIXED BY THE RESPECTIVE STATE DEPENDING ON THE REVENUE NEUTRAL RATE (RNR) OF THAT PARTICULAR STATE, WHICH WILL NOT EXCEED UPPER CEILING FIXED AT 12.5% AS PER CONSENSUS AMONG THE STATES.
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* *

THERE WILL BE TWO EXCEPTIONS:

a) GOLD, SILVER, PRECIOUS AND SEMI-PRECIOUS
STONES WILL HAVE A VAT RATE OF 1% .

b) LIQUOR WILL HAVE A HIGHER VAT RATE WITH A FLOOR OF 20%.

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PROPOSED EXEMPTED GOODS

1.

Natural and Unprocessed products - which are in un-organised sector. Items which are legally barred from taxation on sale. Items which have social implications .

2.

3.

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GOODS PROPOSED TO BE TAXED @ 4%

1. 2. Goods of basic necessities . Industrial & Agricultural inputs .

3. Declared goods . 4. Capital Goods.

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GENERAL RATE
ALL OTHER GOODS WILL BE TAXED AT A GENERAL RATE TO BE DECIDED BY THE STATE.

THE GENERAL RATE WILL HAVE A FLOOR

OF 10% AND UPPER CEILING OF 12.5%.

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CHANGES INTRODUCED RECENTLY TO BRING ABOUT COMMONALITY IN THE BASIC FEATURES OF STATE VAT ACTS
VAT LEGISLATION WILL BY AND LARGE BE SIMILAR. THERE WILL ALSO BE COMMONALITY IN THE FOLLOWING BASIC FEATURES :-

1. COMMON DEFINITION OF CAPITAL GOODS. 2. INPUT TAX CREDIT FOR OPENING STOCK OF GOODS AS ON 1.4.2003 - SUBJECT TO PURCHASES ON OR AFTER 1.4.2002. 3. INPUT TAX CREDIT ALLOWED ON INTER-STATE STOCK TRANSFERS TO THE EXTENT OF INPUT TAXES PAID IN EXCESS OF 4%. 4. CREDIT ALLOWED ON PURCHASE OF CAPITAL GOODS. 5. REFUND OF EXCESS OF INPUT TAX CREDIT NOT ADJUSTED UPTO THE END OF THE NEXT FINANCIAL YEAR. 6. COMMON THRESHOLD LIMIT G.T.O. UPTO RS. 5 LAKHS P.A. 7. PROVISION FOR COMPOSITION OF TAX - UPPER LIMIT OF G.T.O. OF RS. 25 LAKHS P.A.
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THANK YOU