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Value Added Tax in India

Dr Sarbesh Mishra
Finance Area
CST – A perspective
o The Central Sales Tax (CST) Act that comes
under the direction of Central Government
takes into consideration all the interstate
sales of commodities.
o Sales tax can be levied either by the central
or state government, Central Sales tax
department. A 4 per cent tax was generally
levied on all inter-State sales. State sales
taxes, that apply on sales made within State,
had rates that range from 4 to 15 per cent.

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Constitutional Framework
The states are empowered to impose sale tax
on the goods that are subject to purchase or
sale by enacting laws. The Parliament has
enacted the CST Act and the states are in
the process of enacting laws. The sale of
goods or purchase includes:
1. the sale of goods, defined under the Sale of
Goods Act.
2. transfer of goods used as otherwise in
pursuance of the contract.

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3. transfer of goods used otherwise in Works
4. delivery of goods in pursuance to
Hire Purchase Agreement or on installment.
5. transfer of right to use to goods on lease or
6. supply of food by the club or body to its
7. supply of food articles or drinks for

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VAT Replaces Sales Tax
Most of the states in India, from April 01,
2005, have supplemented the sales tax with
the new Value Added Tax (VAT). VAT in
India is classified under the following tax
1. 0% for the essential commodities
2. 1% on gold ingots as well as expensive stones
3. 4% on capital merchandise, industrial inputs,
and commodities of mass consumption

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4. 12.5% on all other items
5. Variable rates (depending on state) are
applicable for tobacco, liquor, petroleum
products, etc.
Note - A Central Sales Tax which is at the rate
of 4% is also levied on inter-State sales
but would be eliminated gradually.

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Miscellaneous Taxes
1. Municipal/Local Taxes
2. Stamp duty on the transfer of assets
3. Property/building tax that is levied by local
4. Agriculture income tax levied by the State
Governments on the income from
5. Luxury tax that is levied by certain State
Government on specified goods

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Meaning - VAT
o A general consumption tax that is
assessed on the value added to goods &
o It is the indirect tax on the consumption
of the goods, paid by its original
producers upon the change in goods or
upon the transfer of the goods to its
ultimate consumers.
o It is based on the value of the goods,
added by the transferor.
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VAT – Contd…
o It means every seller of goods and service
providers charges the tax after availing the
input tax credit. It is the form of collecting
sales tax under which tax is collected in
each stage on the value added of the goods.
o VAT is a multi-stage tax, levied only on
value that is added at each stage in the
cycle of production of goods and
services with the provision of a set-off
for the tax paid at earlier stages in the
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o 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.
o VAT - 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.
o 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.

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Importance of VAT in India
o 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
o 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
inputs can be claimed from tax authorities.
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Advantages of VAT
o 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.

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o Revenue Security - 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.
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o 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.

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o 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
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Disadvantages of VAT
1. VAT is regressive (Decreasing
proportionately as the amount taxed
increases )
2. VAT is difficult to operate from position
of both administration and business
3. VAT is inflationary
4. VAT favors capital intensive firms

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Items covered under VAT
o All business transactions that are carried on
within a State by individuals / partnerships/
companies etc. will be covered under VAT.
o 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
o 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.
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o The remaining items would attract
12.5 % VAT. Precious metals such as
gold and bullion will be taxed at 1%.
o Petrol and diesel are kept out of the
VAT regime in India. (Continue to
follow CST).

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Levies of TAX under the VAT
1. Sale Tax or Output Tax including
Deemed Sale within the state. It covers
all kinds of transfer of goods, under the
Sale of Goods Act including deemed
sale that is transfer of goods by way of
Works Contract delivery of goods on the
basis of a hire purchase agreement or
installment, etc.

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o Purchase Tax, including deemed
Purchase within the state. The tax paid
on purchase of goods in certain
o Composition tax, that is in lieu of tax by
way of lump sum tax. This means the
amount paid by the dealers like retailers
whose turnover is below the specified limit
of the taxable turnover that is allowed to
pay the amount at his option.

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