PUROHIT

WHICH COMPANIESVASU
AREVIBHAV
MAY 27, 2016
REQUIRED TO FILE VAT IN INDIA

ABSTRACT
Presently, VAT is followed in over 160 countries. The proposed Indian model of vat will be
different from vat, as it exists in most parts of the world. In India, vat has replaced the earlier
state sales tax system. This article focuses on tax levied on consumers given indirectly to
government via producer of concern product, which is known as VAT and its implementation
in India.

INTRODUCTION
Taxation refers to the process of an authority levying certain charges on goods, services and
transactions. It is one of the foremost powers held by the government of any country. Various
types of taxes are applicable at various stages of sale of goods and services; VAT is one such
tax. VAT is a kind of tax levied on sale of goods and services when these commodities are
ultimately sold to the consumer. VAT is an integral part of the GDP of any country.
While VAT is levied on sale of goods and services and paid by producers to the
government, the actual tax is levied from customers or end users who purchase these. Thus,
it is an indirect form of tax which is paid to the government by customers but via producers
of goods and services.
VAT is a multi-stage tax which is levied at each step of production of goods and services
which involves sale/purchase. Any person earning an annual turnover of more than Rs.5 lacs
by supplying goods and services is liable to register for VAT payment. Value added tax or
VAT is levied both on local as well as imported goods1.

FEATURES OF VALUE ADDED TAX IN INDIA

Similar goods and services are taxed equally. So a similar television from all brands
will be taxed the same.

VAT is levied at each stage of production and hence makes the taxation process easier
and more transparent.

VAT reduces chances of tax evasion and fosters compliance.

Encourages transparency in sale of goods and services at the tiniest level2.

REQUIREMENT OF VAT AND ITS UTILITY

India was one of the last few countries to introduce VAT as a form of tax. Taxation process in
India was believed to be exploited the most by businessmen and enterprises which had found
loopholes for evading taxes. VAT was introduced to minimize this evasion and render
transparency and uniformity to the tax payment process.
1 http://www.indiafilings.com/vat-registration.php
2 https://www.bankbazaar.com/tax/value-added-tax.html
1

Value Added Tax is levied in multiple stages of production of goods and services and comes
under the purview of various state governments. Hence, VAT in India might slightly differ
from one state to another.

No exemptions under the VAT system. Levying tax at each stage of the production
process ensures better compliance and less loopholes to be exploited

VAT, when enforced properly forms an important instrument for tax consolidation of
the country and as such helps towards solving the fiscal deficit issue to some extent

Since, VAT is a globally accepted taxation system, it will help India integrate better
into global trade practices

IMPLEMENTATION OF VAT IN INDIA

Since enforcement of VAT and collection of it comes under the purview of state governments,
different states have different VAT rules and implementation guidelines. Hence, the procedure
for tax implementation, rates of VAT, timelines for VAT payment and VAT return filing, all
differ from one state to another3.
Despite state-specific implementations, VAT in India can be divided into four main subheads.

NIL VAT Rate:

In a lot of states items that are very basic in nature are sold without levying any VAT on them.
These items are mostly those sold by the unorganized sector in their most basic or natural
form. Examples of this type of items are salt, khadi, condoms etc.

1% VAT Rate:

For items which tend to be highly expensive, the percentage of VAT applicable needs to be
kept low since otherwise the VAT levied could be too high an amount. For such items, VAT is
kept as low as 1%. Gold, silver and other precious stones as well as precious jewelry fall
under this category of goods. Most Indian states have fixed VAT for these items at 1% of the
amount.

4-5% VAT Rate:

A large number of daily consumption goods have been put by several state governments
under this category of VAT. So VAT charged on goods like oil, coffee, medicines etc. Is
around 4-5% for most states in India.

General VAT Rate:

General VAT rates apply to goods which cannot be segregated and put under any of the above
listed VAT categories. For goods like liquor, cigarettes etc. Many governments charge high
VAT rates of 12.5% or 14-15%. Also, many state governments follow a general rate of VAT
3 http://www.indiafilings.com/learn/category/vatcst/
2

for goods which cannot be categorized to suit the above classification. Such goods are taxed
at 12%, 13% or even 15% in different states.

PROCESS OF REGISTRATION AND COLLECTION

VAT registration is mandatory for enterprises that make a turnover of more than Rs.5 lakh by
selling goods and services. All such enterprises are required to register in their respective
states of operation. Registering for VAT is necessary for enterprises in order to start paying
VAT. On registration, each trader is given a unique 11-didgit registration number which is
used to for all communication regarding VAT and its filing4.

Who should register for VAT?

Any firm making a turnover of more than Rs.5 lakh per annum is required to register for VAT
payment.

Documents required for VAT registration:

Following is the list of documents that needs to be submitted while registering for VAT.
o Copy of PAN card
o Address proof of business
o Proof of identity of promoters
o Additional security deposit or surety

How much time does it take to register for VAT?

Generally, state governments take around 15-20 days to complete the process of registration.
This time may differ from one state to another.
The process of collection of VAT can be safely categorized into two broad heads based on the
method of collection of value added tax.

Account-based collection of VAT

Under the account based method of collection, sale receipts are not used, instead tax is
calculated on the value added. Value added is calculated as the difference between revenues
and allowable purchases. Most countries do not use this method of computing and collecting
VAT, however, Japan still uses this way for tax collection.

Invoice-based collection of VAT

Under the invoice-based VAT collection, sale receipts or invoice is used to compute the
corresponding VAT. Traders when they sell their goods and services offer invoice containing
separate details of VAT collected. Most countries in the world today use the invoice-based
method of VAT collection.
4 http://dvat.gov.in/website/home.html#
3

Another way to categorize VAT collection is to classify it based on the timing of collection.

Accrual-based collection of VAT

Accrual based collection matches the revenue with the time period during which it is earned
and matches the cost of raw materials and expenses to the time period during which they
were made. This method is extremely complicated as compared to the cash-based collection
of VAT. However, it also throws substantial light on information about any business.

Cash-based collection of VAT

Cash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash
that is being handled instead of whether all the bills are paid. Whenever payment is received,
that date is recorded as date of receipt of funds.

COMPANIES WHICH ARE REQUIRED TO PAY VAT (RETURNS)?

VAT returns have to be filed by businesses that have an annual turnover that is Rs.5 lakhs or
higher. VAT is payable on all goods and services that are domestic or imported. VAT returns
can be filed traditionally by filling and submitting the requisite paperwork to the appropriate
authorities. It can also be filed online if registered under VAT Act 2003 using the provided
user id and password5.
ADDRESSING THE ISSUES
Under the VAT regime, due to multi-point levy on the price including value additions at each
and every resale, the margins of either the re-seller or the manufacturer would be reduced
unless the ultimate price is increased. VAT would not cause cascading, nor would it cause
vertical integration of firms. Also, it provides total transparency of the incidence of tax. This
is because, VAT is a multi-Stage sales tax levied as a proportion of the value added. It is
collected at each stage of the production and distribution process, and in principle, its burden
falls on the final consumer.
Another feature of VAT regime is discontinuation of the sales tax based incentives to new
industrial units. Until now, all the states were granting such incentives to new industries in
the form of exemption from tax on the purchase of inputs as well as on the sale of finished
goods, sales tax loans and/or tax deferral. However for the new industrial units to whom the
incentive by way of exemption/ or tax deferrals are already sanctioned under the Sales Tax
Act are continued in the form of refund.

5 http://ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf
4

SUPREME COURT OF INDIA LANDMARK JUDGEMENTS RELATING TO VAT6

1. Goods imported/ purchased inter-State used in Works contract, would be exempt from
VAT.
2. Levy of VAT on Display of Advertisement on Account.
3. Kerala VAT - Eligibility for VAT on works Contract at Compounded Rates.
1. Supreme Court of India in the case of Commissioner of Delhi Value Added Tax Vs. ABB
Ltd [2016 (4) TMI 534 - SUPREME COURT ] on the following issue:
Issue:
Whether the movement of goods in pursuance of Works contract constituted inter-State trade
as well as sale/ purchase in the course of import, covered by Section 3(a) and Section 5(2) of
the Central Sales Tax Act, 1956 (the CST Act) and thus, exempt under the Delhi Value
Added Tax Act, 2004 (the DVAT Act)?

Facts & Background:

ABB Ltd. (the Respondent), a subsidiary of ABB Ltd., Zurich Switzerland (a market leader
in power and automation technologies having operational presence in over 100 countries),
was engaged in manufacturing and sale of engineering goods, including power distribution
system and SCADA system. The Delhi Metro Rail Corporation (the DMRC) awarded a
contract to the Respondent to provide transformers, switch gears, high voltage cables,
SCADA system and also complete electrical solution, including control room for operation of
metro trains on the concerned section, which were imported by the Respondent from Zurich
Switzerland. The Assessing Officer (the AO) asked the Respondent to pay VAT under the
DVAT Act on the deemed sale made to the DMRC. The lower authorities including Tribunal
upheld the order of AO.
Respondents contention: The Respondent denied its liability on the ground that it was
exempted from payment of VAT in respect of sale affected in the course of import and also in
respect of inter-State sale of goods, on account of provisions of Section 3(a) and Section
5(2) of the Central Sales Tax Act, 1956 .
Revenues contention: The AO as well as the Appellate Authority returned that there was no
link between the contract (DMRC) and the supplier of goods that were imported by the
Respondent and hence on account of lack of any privity of contract, the requirements
of Section 3(a) of the CST Act were not satisfied in respect of movement of goods from
outside Delhi to the required site of the DMRC in Delhi. Similar finding was returned in
respect of movement of the goods under import i.e., it cannot be held to have been
occasioned by the contract between the DMRC and the Respondent.

6 http://www.consultconstruction.com/blog/categories/listings/landmarkjudgements-vat.html?limitstart=0
5

Decision of the Honble High Court : The High Court held that the lower authorities and the
Tribunal had failed to consider relevant clauses & conditions of the contract, which
demonstrated & clarified that the importation of goods was strictly as per requirement and
specification set out by the DMRC in the contract and only to meet such requirement of
supply, the specified goods were imported. Hence, the event of import & supply was clearly
occasioned by the contract awarded to the Respondent by the DMRC. Thus, the transactions
were not covered by the DVAT Act but covered by the CST Act.
Being aggrieved, the Revenue preferred an appeal before the Honble Supreme Court of
India.
Held:
The Honble Supreme Court of India after detailed deliberation held as under:
Sale in course of inter-State sale:
The High Court found that terms of the contract envisaged inter-State movement of goods.
Such movement of goods was within the knowledge of the DMRC, because there was total
ban on setting up/working of heavy industries in Delhi and the DMRC had approved 18
places within the Country from where the equipment & goods had to be supplied. These
included the premises and factories of the Respondent also. On facts, therefore, it was rightly
held by the High Court that the inter-State movement of goods was within the contemplation
of the parties and it can be reasonably presumed that such movement was to fulfil the terms
of the contract and, therefore, the transaction was covered by Section 3(a) of the CST Act.
Sale in course of imports:
The Honble Supreme Court relied upon the judgement of the Constitution Bench of the
Supreme Court in the case of K.G. Khosla & Co. Vs. Dy. Commissioner of Commercial
Taxes [ 1966 (1) TMI 54 - SUPREME COURT OF INDIA ], wherein it was held that Section
5(2) of the CST Act does not prescribe any condition that before the sale could be said to
have occasioned import, it is necessary that the sale should precede the import. The sale is
only required to be incidental to the contract. In other words, the movement of goods from
another country to India should be in pursuance of the conditions of the contract.
Therefore, the Honble Supreme Court held that the salient features flowing out as conditions
in the contract and the entire conspectus of law on the issues as noticed earlier leaves one
with no option but to hold that the movement of goods by way of imports or by way of interState trade in instant case was in pursuance of the conditions and/or as an incident of the
contract between the Respondent and the DMRC. The goods were of specific quality and
description for being used in the Works contract awarded on turnkey basis to the Respondent
and there was no possibility of such goods being diverted by the Respondent for any other
purpose.

2. Delhi Value Added Tax Act, 2004 Section 2(m) - Goods - Section 2(1)(zc) sale advertisement hoardings, panels, display boards and kiosks - Levy of VAT on the turnover
from display of advertisement on account of deemed sale resulting from transfer of the right
to use hoardings, panels, display boards, kiosks
6

Transfer of any right to use advertising sites - sale of space or time for advertisement
as defined under Section 65(105) of the Finance Act, 1994 Payment of service tax

HELD - The question whether a transaction would fall within the parameters of a
deemed sale or a service is essentially a question of fact and would have to be determined
in appropriate proceedings. The fact that the Assesse has filed its returns for service tax
and also paid service tax may not be determinative of the true nature of the transaction
and certainly, the authorities under the DVAT cannot be precluded from
independently examining the transactions in question

Clause (vi) of Section 2(1) of the DVAT Act is identically worded as clause (d)
of Article 366 (29-A) of the Constitution of India under the expanded scope of tax on
the sale or purchase of goods?, tax on transfer of the right to use goods has been included;
this is not the same as a tax on the use of goods and the two expressions cannot be
read synonymously. Therefore, for a transaction to fall within the meaning of Section 2(1)
(vi) of the DVAT Act, it is necessary that there should be a transfer of the right to use

It is not disputed that the sites in question are located in a restricted area and none of
the advertisers have an unmitigated access to those Sites; the Petitioner affirms that
possession of the Sites is retained by DIAL. Hence, it would be difficult to accept the
view that the transactions entered into by the Petitioner with the advertisers constituted
transfer of the right to use the Sites in question

The Tribunals decision in Upasana Finance Ltd, to the extent that it holds that
possession of the hoardings is not relevant, cannot be accepted in light of the unequivocal
view expressed by the Supreme Court in Bharat Sanchar Nigam Ltd - the Special
Commissioner to consider the objections filed by the Petitioner in light of the
observations made herein without insisting on pre-deposit appeal disposed.

3. CYRIL JACOB VELLAPPALLY JACOB VELLAPPALLY AND CO. Vs

COMMERCIAL TAX OFFICER (WC), KOTTAYAM
Kerala Value Added Tax Act - Section 8(a) - works contract - Eligibility to pay VAT on
works contract at compounded rates - requirements for cancellation of registration under the
CST Act - Effect of subsequent amendment.7

HELD - assessment year 2005-06 the amendment to Section 8(a)(i) having come into force
in the middle of the assessment year, and it being almost impossible on account of the
statutory provisions of Section 7(5) of the CST Act, to get a cancellation of the certificate of
registration in 2005-06 itself, it would be unfair on the part of the revenue to insist on the
higher rate of compounded tax under Section 8(a)(ii) of the Act on the works contracts
executed.

7 http://vat.com/
7

The orders of penalty imposed on this ground also cannot be legally sustained. - Demand of
differential tax and penalty set aside - Cancellation of the CST registration before the
commencement of the assessment year 2006-07.
HELD - petitioners had ample time during the assessment year 2005-06 itself to ensure that
they were duly qualified for exercising their option under Section 8(a)(i) - The petitioners
having not chosen to do so, and having opted for payment of tax at the lower rate of
compounded tax under Section 8 (a)(i), when they were not entitled for the same - the
Assessing officers finding that the petitioners are not entitled to the rate of tax under Section
8(a)(i) of the Act, cannot be said to be illegal - Assessee petition partly allowed.

CONCLUSION
There is no doubt that VAT has changed the scenario of the world of taxation, as it is
completely and way more different than the sales tax which is levied directly on consumers
but in case of VAT it works indirectly and involves producers as well.
VAT is collected and governed by the State Government, so each State Government in India
has distinct rules applicable for their State based on the type of good manufactured or sold.
Hence, it is important for any business involved in the manufacturing or trading of goods to
check the VAT rates applicable for the goods they sell in their state and comply with the
relevant regulation. VAT Registration is mandatory in most states for traders or manufacturers
having a turnover of more than Rs.5 lakhs per year (Rs.10 lakhs in some states). Therefore,
manufactures or traders must be aware of the relevant state VAT regulation and obtain
registration if required. When registered for VAT, the manufacturer or trader is allotted a
unique 11 digit number which will serve as the VAT Number / TIN Number / CST Number
for the business. VAT has become the necessity of government as well as consumers and it
also help the economy of the state to boost.

REFERENCES
http://vat.com/
https://www.bankbazaar.com/tax/value-added-tax.html
http://www.indiafilings.com/learn/category/vatcst/
http://ctax.kar.nic.in/what_vat/About%20vat%20nnew.pdf
http://www.consultconstruction.com/blog/categories/listings/landmark-judgements-vat.html?
limitstart=0
http://dvat.gov.in/website/home.html#