PROJECT REPORT ON

“MVAT & GST”
MASTER OF COMMERCE
ACCOUNTANCY
SEMESTER IV
2016-2017

SUBMITTED BY
AASHISH GAUD
Roll No. : 37
UNDER THE GUIDANCE OF
ASST PROF. ANURADHA PARMAR.

NANJI BHAI KHIMJI BHAI THAKKAR THANE COLLEGE
AFFILIATED TO UNIVERSITY OF MUMBAI
SHETH J.T.T.COLLEGE OF ARTS, THANE (W)

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Sheth T.J. Education Society’s,
SHETH N.K.T.T. COLLEGE OF COMMERCE & SHETH J.T.T.
COLLEGE OF ARTS, THANE (W)
CERTIFICATE
OF
PROJECT WORK
This is to certify that,
Kumar. Aashish Gaud M.Com (Accountancy) Semester-IV Roll No:37 has undertaken &
completed the project titled “MVAT & GST” during the academic year 2016-17 under the
guidance of Asst Prof. ANURADHA PARMAR submitted on / / 2017 to this college in
fulfillment of the curriculum of

MASTER OF COMMERCE

UNIVERSITY OF MUMBAI.

This is a bonafide project work & the information presented is true & original to the best
of our knowledge & belief.

(ASST.PROF. ANURADHA PARMAR)

PROJECT GUIDE EXTERNAL EXAMINER

(DR.P.M.KARKHELE) (PROF.ANIL KHADSE)
PRINCIPAL COURSE COORDINATOR

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ACKNOWLEDGEMEMT

This project bears all those who directly or indirectly helped and extended their
kind support in completing this project.

At the time of making this report I express my sincere gratitude to ASST PROF.
ANURADHA PARMAR (internal project guide) for providing streamed guidelines since
inception till the completion of project.

I met during the course of this project, for their support and for providing valuable
information which help me to complete this project successfully.

At this moment I also almighty God for the blessing showed upon me, my parents
for their support and care and also my friends for their valuable Suggestions.

This project report is a collective effort of all and I sincerely remember and
acknowledge all of them for their excellent help and assistance throughout the project.

Course name: M.Com (Semester-IV)

College name: Sheth N.K.T.T. College of Commerce & Sheth J.T.T. College of Arts,
Thane.

University: Mumbai University

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ANURADHA PARMAR submitted in partial fulfillment of the Degree of M.Com(Accountancy) to Mumbai University is my original work. DECLARATION I. AASHISH GAUD hereby declare that the project report entitle “MVAT & GST” under guidance of ASST PROF. Signature: Date: / / 2017 Place: Thane INDEX OF CONTENT 4 | Page .

1. Title Page No. Section-2 Expecting Summary 36 11. Value added Tax 40 13. Goods & Services Tax model for 52 India 14. Explaining VAT 27 9. Calculating Tax Liability 33 10. No. Review of Literature 37 12. VAT effect on inflation 11 4. Sr. Difference between VAT&CST 08 3. What is VAT? 06 2. Vat in Maharashtra 18 7. Registration in under VAT 22 8. References 60 WHAT IS Value Added Tax? 5 | Page . Conclusion 58 15. Advantages 16 6. VAT effect on Economic Growth 14 5.

WHY VAT IS PREFERRED OVER SALES TAX? While theoretically the amount of revenue collected through VAT is equivalent to sales tax collections at a similar rate. while VAT is on sale and both work in the same manner. particular commodities may not yield any tax. which often occurs with sales tax.Value Added Tax is a broad-based commodity tax that is levied at multiple stages of production. It is usually intended to be a tax on consumption. The concept is akin to excise duty paid by the manufacturer who. At each intermediate stage credit will be given for taxes paid on purchases to set against taxes due on sales. in practice VAT is likely to generate more revenue for government than sales tax since it is administered on various stages on the production – distribution chain. Excise duty is on manufacture. hence the provision of a mechanism enabling producers to offset the tax they have paid on their inputs against that charged on their sales of goods and services. Lack of input credit facility in sales tax often results in tax on inputs becoming a 6 | Page . if final sales are not covered by the tax system e. The document was drawn up after all states. Under VAT revenue is collected throughout the production process without distorting any production decisions. Only at consumption stage where there are no further transactions will there be no tax credits. in turn. However. claims a credit on input taxes paid.g. even if final retailers evade the tax net. VAT is also a fairer tax than sales tax as it minimizes or eliminates the problem of tax cascading. were prepared to implement VAT from April. With sales tax. There is also in-built pressure for compliance and auditing under VAT since it will be in the interest of all who pay taxes to ensure that their eligibility for tax credits can be demonstrated. barring UP. with VAT some revenue would have been collected through taxation of earlier transactions. according to the white paper on VAT released by finance minister Chidambaram. These are facilitated by the fact that VAT operates through a credit system so that tax is only applied on value added at each stage in the production – distribution chain. due to difficulty of covering all the retailers.

VAT rates of 10-20 per cent are generally recommended. In addition. The equity impact of the relatively high rates have been a cause for concern as it is possible that the poor spend relatively high proportions of their incomes on goods subject to VAT. which makes it a neutral tax as it provides the least disturbance to patterns of production and the generation and use of income.rated to avoid anti-export bias. Sales tax is often applied again to the sales tax element of the cost. This is made possible by the fact that one person’s output is another’s input.cost to businesses which are often passed on to consumers. it is worth noting that VAT is a considerably complex tax to administer compared with sales tax. It may be difficult to apply to small companies due to difficulties of record keeping and its coverage in agriculture and the services sector may be limited. 7 | Page . the audit trail that exists under the VAT system makes it a more effective tax in administration terms than sales tax as it helps with the verification of VAT amounts declared as due. Notwithstanding the advantages mentioned above. thus there is a problem of tax on tax. To cover the high administration costs. As with sales tax imports are treated the same way as local goods while exports are zero. Thus the concept of zero VAT rate on some items has been introduced. This is not the case with VAT.

first. the retailers are not subject to tax except for the retail tax.150 and the tax on this is 18. Therefore.5% will be the net rate. At the last stage. 18. The tax that is to be paid at every point is 15%. This means that VAT is paid in the last point tax under the sale tax regime. The subsequent dealer pays tax on the portion of the value added upon such goods. the dealer pays tax on the sale or purchase of goods.75% would be the net VAT. 8 | Page . the tax burden would be shared by all the dealers from first to last.i. The tax on this is 12. the sale value is Rs.75%.e. At the third change of sale.5%.75%. Then.e. The VAT regime will do away with such concessions as it would provide the full credit on the tax that has been paid earlier. At the second change of sale. 2. Under VAT law. 3.75% -15% = 3. general and specific exemptions are granted on certain goods while VAT does not permit such exemptions. The Input Tax is 18.75%. concessional rates are provided on certain taxes. the burden of the full tax bond is borne by only one dealer. Thus.5%. Therefore. Therefore.75%. However. the value of goods is Rs.5%.120 and the tax thereon is 15%. 15% -12. the tax is collected at one stage of purchase or sale of goods. Under the CST Act. The input tax is 15%. either the first or the last dealer. the net VAT would be 12. Dealer’s get a credit for second change in sale? i. the tax is levied at a single point. The dealer will get a credit for first change in sale of 2.100. Under the CST law. such tax would be passed upon the final consumers. To illustrate the whole procedure of VAT. the tax burden is shared equally by the last dealer. under the VAT system. an example is as follows: At the first point of sale.DIFFERENCE BETWEEN VAT AND CST Under the CST Act. Under the VAT system.5%-. the sale value is Rs. the tax paid is 18. Under the CST Act. Therefore.

VAT will prevent cascading effect through input rebate and help avoid distortions in trade and economy by ensuring uniform tax rates. Moreover. It will also be simpler and offer easy computation and easy compliance. WHO PAYS? All dealers registered under VAT and all dealers with an annual turnover of more than Rs 5 lakh will have to register. 9 | Page . Dealers with turnovers less than Rs 5 lakh may register voluntarily. VAT would be a boon that reduces the cost of the product to the consumer and boosts competitiveness. VAT will replace the existing system of inspection by a system of built-in self-assessment by traders and manufacturers. For those who have been complying with taxes. This transparency and in-built incentive for compliance would increase revenues. and prices. VAT has in-built incentives for tax compliance — only by collecting taxes and remitting them to the government can a seller claim the offset that is due to him on his purchases. Industry and trade gain from transparency and reduced need to interact with the tax personnel. will fall. Everyone has an incentive to buy only from registered dealers — purchases from others will not provide the benefit of credit for the taxes paid at the time of purchase.WHO GAINS? State and Central governments gain in terms of revenue. WHAT’LL BE THE TAX BURDEN? The overall tax burden will be rationalized as it’ll be shared by all dealers. VAT would be major blow for tax evaders. in general. The tax structure will become simple and more transparent and tax compliance will improve significantly. both manufacturers who evade excise duty payments and traders who evade sales-tax.

Credit will be given within the same month for entire VAT paid within the state on purchase of inputs and goods. prices and economic growth. the excess credit will be carried forward to the next month. About 270 items. OTHER CONSIDERATIONS It is imperative that policy makers in considering adoption of VAT should be interested in the economy wide impact of this tax. all agricultural and industrial inputs. This is particularly important because of the potential effects on consumption of certain commodities that have a direct or indirect effect on labour productivity. including drugs and medicines. of which 46 natural and unprocessed local products would be exempt from VAT. it was decided that states would have option to either levy 4% or totally exempt food grains from VAT but it would be reviewed after one year.HOW TO PAY? VAT will be paid along with monthly returns. If the tax credit exceeds the tax collected during a month on sale within the state. following opposition from some states. In fact. tobacco — under additional excise duties will not be under VAT regime for one year but existing arrangement would continue. over 550 items will be covered under the new tax regime. Three items — sugar. Credit thus accumulated over any month will be utilized to deduct from the tax collected by the dealer during that month. WHICH GOODS WILL BE TAXABLE UNDER VAT? All goods except those specifically exempt. Special emphasis is often placed on its effect on equity. capital goods and declared goods would attract 4% VAT. 10 | P a g e . textile. But.

A survey of OECD countries that introduced VAT indicated that VAT had little or no effect on prices. ♦ VAT exemptions may also be granted on goods and services that are consumed mostly by the poor. To guard against any unforeseen price effects the authorities may consider a tighter monetary policy stance at the introduction of VAT. This emanates from the fact that consumption as a share of income falls as income rises. following the premise that welfare is demonstrated by the level of consumption rather than income. This criticism is valid when VAT payments are expressed as a proportion of current income. DISTRIBUTION EFFECTS OF VAT Value added tax is widely criticized as being regressive with respect to income that is its burden falls heavily on the poor than on the rich. A proportional burden would also be demonstrated if lifetime income rather than current income is used. consumption is used as the denominator the impact of VAT would be proportional.VAT EFFECT ON INFLATION In considering the introduction of VAT. A lifetime income concept considers the fact that many income recipients are only temporarily at lower income brackets as their earnings increase. However if. Hence a uniform VAT rate falls heavily on the poor than the rich. In order to address the regressivity of VAT the following measures can be taken: ♦ The VAT itself can be used to differentiate taxation of consumer items that are consumed primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher than standard rate. countries are often concerned that it would cause an inflationary spiral. However there is no evidence to suggest that this is true. In cases where there was an effect it was a one time effect that simply shifted the trend line of the consumer price index (CPI). 11 | P a g e .

such as other tax and spending instruments of government. The use of multiple rates of VAT has however been widely discouraged for various reasons. This could be in the form of lower basic income tax rates on the poor or some pro-poor expenditures of government. This results in the use of presumptive methods of determining the tax liability. 12 | P a g e . food.♦ Equity concerns may also be addressed through other ways.g. The rationale behind exemptions is to reduce negative distributional effects of tax through the effect on incomes. The effects of exemption may be as follows: ♦ falling of revenues – exemptions break the VAT chain. Thus any concessions extended may tend to benefit the rich much more than the poor. If exemptions are granted at prior to the final sale. outside the VAT system. These include: ♦ The fact that sometimes it is almost impossible to differentiate between higher quality expensive products – e. The higher compliance cost resultant from differentiation of VAT rates may also be regressive with respect to income since smaller firms with lower income tend to bear proportionately more of the burden than do larger firms. ♦ Increased costs of VAT administration as a differentiated rate structure brings with it problems of delineating products and interpreting the rules on which rate to use. consumed by the rich and ordinary products consumed by the poor. ♦ significantly increased costs of tax compliance for small firms. Exemptions refer to situations where output is not taxed but taxes paid on inputs are not recoverable. it results in a loss of revenue since value added at the final stage escapes tax. which leads to more difficulties in monitoring the compliance. which are usually unable to keep separate records/accounts for sales of differently taxed items.

♦ Exemptions tend to feed on each other giving rise to a phenomenon called “exemption creep”. distribution effects are perhaps better addressed by other forms of tax and government expenditure policies which can often be better targeted at these aims.♦ Un-recovered taxation of some intermediate goods may lead to producers substituting away from such inputs thus distorting the input choices of the said producers. Based on the above. For example creating an exemption to reduce the tax burden on a particular commodity or goods may lead to increased pressure for exemption or zero rating of inputs used for the production of such a commodity.e. This arises from the fact that each exemption gives rise to pressures on further exemption. it is important that care is taken when introducing exemptions in order to avoid distortions in the production process as well as to minimize revenue loss resulting from such distortions. Given the fact that the primary purpose of VAT is to raise government revenue in an efficient manner and with as little distortions of economic activity as possible. ♦ Exemptions may create incentives to “self supply” i. tax avoidance by vertical integration. 13 | P a g e .

certain commodities are exempted from tax. Income tax reduces the net rate of return as both the amount saved as well as the return on that saving are subject to tax. c. Discretion has been given to the states when it comes to finalizing the RNR along with the restrictions. 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. 10-12% on goods called Revenue Neutral Rates (RNR). particularly in neighboring states 14 | P a g e . b. Two special rates will be imposed-. diesel or aviation turbine fuel are proposed to be kept out from the VAT system as they would be continued to be taxed. its effects on investment can be said to be neutral. 2. This rate must not be less than 10%.VAT EFFECT ON ECONOMIC GROWTH Economic growth can be facilitated through investment by both government and the private sector. There would be no fall in such remaining goods. Compared to other broadly based taxes such as income tax VAT is neutral with respect to choices on whether to consume now or save for future consumption. Uniform Rates in the VAT system. as presently applicable by the CST Act. FEATURES OF VAT 1. Since VAT does not influence investment decisions on firms. In this regard VAT may be said to be a superior tax in promoting economic growth than income tax. The taxable commodities are listed in the respective schedule with the rates. Savings by both parties are required in order to finance investment in a non-inflationary manner. 4% on declared goods or the goods commonly used. by increasing their costs.1% on silver or gold and 20% on liquor. This will ensure By doing this that there will be level playing fields to avoid the trade diversion in connection with the different states. Rate of Tax VAT proposes to impose two types of rate of tax mainly: a. Although VAT reduces the absolute return on saving it does not reduce the net rate of return on saving. Tax on petrol.

VAT is not cascading or additive though the tax on the goods sold is collected 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 6. 5. It will be like levying tax on goods.the tax. payable on the sale. This was done as it creates discrepancy in investment decision. previously paid on the sale of goods. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of sale All the tax. Collection of tax by seller/dealer at each stage. In case of export. would be fully adjusted. the tax. paid on the goods purchased within the state. it is not cascading or additive because the net effect would be as follows: . sold in the last state or at retail stage. whether within the state or in the course of interstate. would be refunded. In case of the branch transfer or consignment of sale outside the state. the tax would be fair and equitable to all. no refund would be provided. Under the new VAT system. 15 | P a g e . would be adjusted against the tax. 4. No concession to new industries Tax Concessions to new industries is done away with in the new VAT system. paid on purchase outside India. 3.

manufactured out of the country or sale to registered dealer. 4%. they can zoom down the highways to their destinations.WHAT’S THE BIGGEST ADVANTAGE? The biggest benefit of VAT is that it could unite India into a large common market. Consequently. 2%. no refund would be admissible. Similarly. 2. Lorries need not wait at check-points for days.1%. 8%. It also helps to determine the relevant stage of the tax. This will eliminate any disputes that relate to rates of tax and classification of goods as this is the most usual cause of litigation. there are 8 types of tax rates. CST would not have the provisions on refund or carry over upon such goods except in case of export goods or goods. Adjustment of tax paid on purchased goods Under the present system. 16 | P a g e . Reduced transit times and lower inventory levels will boost corporate earnings. Following are the some more advantage of VAT: - 1. 20% and 25%. the tax paid on the manufactured goods would be adjusted against the tax payable on the manufactured goods. and not on based on tax-minimization. Companies can start optimizing purely on logistics of their operations. Under the VAT system. Simplification Under the CST Act. 12%. This will translate to better business policy. VAT is free from such conditions. 3. tax would be levied at each stage of the goods of sale or purchase. the question of which stage of tax it falls under becomes another reason for litigation. Further such adjustment of the purchased goods would depend on the amount of tax that is payable. Such adjustment is conditional as such goods must either be manufactured or sold. under the present VAT system. However. VAT would not have such restrictions. 10%. on interstate sale on tax-paid goods. This is necessary as the CST Act stipulates that the tax levies at the first stage or the last stage differ. there would only be 2 types of taxes 4% on declared goods and 10-12% on RNR.

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.

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VALUE ADDED TAX IN MAHARASHTRA

Quick Flash Back

Sales tax was first introduced in India in the then Bombay Province as early as March
1938 where a tax was imposed on sale of tobacco within certain urban and suburban
areas. In the year 1946, a general sales tax was introduced levying sales tax at the last
stage of sale of goods.
The Bombay Sales Tax Act, 1959 introduced in 1959 underwent many changes
thereafter and in July 1981, first point tax was introduced wherein goods were classified
into three main schedules, broadly covering tax free goods, intermediate products and
finished goods. The BST Act was repealed and Maharashtra Value Added Tax Act, 2002
came into force w.e.f. 1st April, 2005 to usher in the progressive value added tax system
in place of the old sales tax system.
VAT is a progressive and transparent system of taxation which eliminates the cascading
impact of multiple taxation through a multipoint taxation and set-off principle. It promotes
transparency, compliance and equity and therefore, is both dealer friendly and
consumer friendly.
VAT being a multi point tax, envisages an increase in the number of dealers and is
based on the concept of self-assessment and self-compliance. It is therefore, inevitable
that the Sales Tax Department transforms itself into a dealer friendly, focused and
dynamic department to cater to the ever increasing expectations of both the
Government and the Trade & Industry.
Sales Tax Department has taken up the challenge to transform their selves and be
available for assisting the dealers in complying with the provisions of the law. They are
in the process of installing a state-wide networked IT system to computerise entire tax
administration and hope to provide online service to the dealers in due course. They are
also realigning their organisational structure to meet the challenges of the new system
and stakeholders' expectations.

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Part1 - Introduction

Background

Maharashtra is one of the 21 States which have introduced the Value Added Tax (VAT)
system of taxation from 1st April 2005. With the introduction of VAT, the Sales Tax
Department has moved to a globally recognized sales taxation system that has been
adopted by more than 130 countries.

The design of Maharashtra State VAT is generally guided by the best international
practices with regard to legal framework, as well as operating procedures. Another key
factor in preparation of the design of State level VAT is the national consensus on
certain issues. The consensus has been arrived at through the discussions in the
Empowered Committee of State Finance Ministers on implementation of State level
VAT.

On 1st April 2005, VAT replaced the single point sales tax. Single point sales tax had a
number of disadvantages, primarily that of double taxation. VAT is a modern and
progressive taxation system that avoids double taxation. In addition to offering the
possibility of a set-off of tax paid on purchases, VAT has other advantages for both
business and government.

 It eliminates cascading impact of double taxation and promotes economic
efficiency.
 It is primarily a self-policing, self-assessment system with more trust put on
dealers.
 It provides the potential for a stronger manufacturing base and more competitive
export pricing.
 It is invoice based, and as a result it offers a better financial system with less
scope for error.
 It has an improved control, mechanism resulting in better compliance.

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the tax liability has to be determined with reference to the option exercised by the dealer for discharging tax liability. in respect of normal sales of goods and deemed sales of goods under works contract and specified deemed sale of goods given on lease.  It widens the. tax base and promotes equity. The meaning of “goods” for VAT purposes “Goods” means every kind of moveable property including goods of incorporeal and intangible nature but there are some exclusion. the buying and selling of goods within the scope of the VAT law are referred to as dealers.  deemed sale of goods used I supplied in the course of execution of works contract. actionable claims. shares and securities and lottery tickets. VAT is levied on sale of goods including intangible goods.  sale of goods under hire-purchase system. supported by Maharashtra Value Added Tax Rules (MVAT Rules). VAT in Maharashtra is levied under a legislation known as the Maharashtra Value Added Tax Act (MVAT Act). The rate of tax applicable to the goods sold under various classes of sales is uniform. The meaning of 'sale' for VAT purposes A transaction of sale can be a:  normal sale of goods. Businesses engaged in.  deemed sale of goods given on lease. the Act provides for an optional method for discharging tax liability by way of composition. money. Being so. 20 | P a g e . However. such as newspapers.

VAT is collected at each stage in the chain when value is added to goods. manufacturers. retailers. exporters. from manufacture through to retail.Businesses covered by VAT The VAT system embraces all businesses in the production and supply chain. 21 | P a g e . distributors. including importers. 1t applies to al1 businesses. wholesalers. works contractors and lessors.

Part 2 . All Figures in Rs. then they are not liable to collect and pay VAT. they are entitled to:  collect VAT on the sales.000 100 If the dealer’s turnover is less than the above threshold.000 10. Benefits of being a registered dealer As a registered dealer.5.  claim set-off of tax (input tax credit) paid on purchases. 22 | P a g e .000 100 Others 5. then they may apply for voluntary registration by paying a fee of Rs.00. be competitive. if a dealer wishes to avail the benefits of being a registered dealer.000 10.00. then it must register with the local office of the Sales Tax Department. However.  Issue tax invoices and.000/ -. Category Annual Turnover of Turnover of sales or Fees payable on Sales purchase of taxable registration goods not less than Importer 1.Registration under VAT Rules for registration If a dealer’s annual turnover exceeds the below mentioned threshold.

it is an offence to be engaged in business as a dealer without a certificate of registration Certificate of registration A dealer should prominently display the certificate and hologram. at each place where they carry can on their business. d) Late registration: If a dealer’s turnover has exceeded the appropriate threshold but they have applied late for registration. Further.. then he can charge VAT on his sales only after they are registered. then Sales Tax Office will provide them. having crossed the threshold. one copy of the certificate of registration and hologram for each additional place of business. will depend on the date they first become liable to pay VAT. that is. the date front which a dealer may charge VAT on sales. 23 | P a g e . c) Voluntary registration: If a dealer is registered on a voluntary basis. This date will be determined as follows: a) New businesses: If a dealer is not registered because their annual turnover is less than the threshold.Effective date of registration The effective date of registration. then they will be liable to pay tax on sales from the date they took over the business. If a dealer has more than one place of business.e. then he will be liable to account for VAT from the date shown on the certificate of registration. upon their request. b) Existing businesses: If a dealer took over an existing business that is registered for VAT. i. or a copy of the certificate and hologram. from the date shown on the certificate of registration. their liability to account for VAT starts from the date they cross the threshold.

Changes to business circumstances If.  Where the amendment involves a:  change in the name of the business.If a dealer loses his / her certificate of registration or hologram. it must done within 60 days of the change.  an application made by a dealer for insolvency or liquidation of their business.  change in the constitution of the business without dissolution of the firm. following dealer register.  change in the Karta of a Hindu Undivided Family. The certificate of registration and hologram is personal to the dealer to whom it is issued and is non-transferable.  change in the trustees of a Trust.  opening or closing of a bank account. 24 | P a g e . there are any amendments to the details they can be reported while applying for registration.  change in the guardianship of a ward. inform us in writing.  conversion of Private limited Company to a Public limited Company.  addition of new place of business.  formation of a partnership with regard to the business.  an application made against dealer’s business for insolvency or liquidation.  change in the place of business. or it is accidentally destroyed or defaced. then they may obtain a duplicate copy of the certificate of hologram from their sales tax office.

In case of disposal or sale of business. For cancellation of registration a dealer should submit form 103 which is available with the local sales tax office. If however. the communication to the Registering Authority concerned should be made within sixty days of the change or occurrence of the event. their successor will need to apply for a fresh registration certificate. However. he may choose to apply for cancellation of his registration. their turnover falls below the threshold. It can also be downloaded from the website www. interest or penalties in respect of any period prior to the date of cancellation of their registration. Cancellation of registration A dealer will be liable to pay VAT while their registration is effective.maharashtra. 25 | P a g e .  dispose of or sell or transfer the business. he should continue to collect and pay VAT in the normal way until his registration is formally cancelled.vat. If a dealer:  discontinue the business. they may be allowed the registration to continue. Alternatively.in If the Sales Tax Department cancels the dealer’s registration. A dealer must inform the Sales Tax Department within 30 days of the event. they must return the Certificate of Registration The cancellation of their certificate does not affect their liability to pay any tax. However.gov.A dealer will not need to make a fresh application for registration.

 issue tax invoice / bill or cash memorandum to all customers.  collect VAT on all sales at appropriate rates. complete and self consistent returns and pay the amount of tax due on or before the due dates.  calculate the tax due and submit correct.  extend co-operation to the officers of the Sales Tax Department at dealer’s business premises and provide all assistance to them to discharge their duties. which dealer’s are obliged to:  display prominently their certificate of registration and hologram in their place of business. 26 | P a g e .  inform their sales tax office of any changes in the details previously reported to the sales tax office.  maintain adequate records and retain them for a period of five years from the end of the tax year to which they relate. and a copy of the certificate and hologram in each of the other places where they carry on their business.The obligations of a registered dealer Following are the registration.

27 | P a g e . tax credit) while discharging the tax liability on sales. valid tax invoice is generally available as set-off (input. shopkeeper C buys some of the utensils and purchases packing. The tax paid on purchases supported by a. material from vendor D. the selling price of the goods and the tax on the sale. Company A buys iron ore and other consumables and manufactures stainless steel utensils. the sale price is made up of two elements. Partnership firm B buys the utensils in bulk from Company A and polishes them. The tax is payable to the State Government.Explaining VAT How VAT works When a dealer sell goods. Example The following example shows how the VAT works through the chain from manufacturer to retailer. The tax payable on sales is to be calculated on the selling price.Part 3 . packages them and sells the packed utensils for the public.

000 @ 4% 9.000/-.) Company A Cost of iron are and consumables 50.@ 4% 6000 Less Set Off (2000) Net VAT amount to pay with the Return (Note: Tax 4000 invoice issued by Company A will show sale price as Rs.2.7.00 0 Value added 30.000/.200 + Rs.1.00 0 Sales 2.56. Therefore.1.1.) 4% (Rs. 1.85.00 0 Packing material 5.25.50.50.000) Net VAT amount to pay with the Return 1200 Shopkeeper C Purchases polished stainless steel utensils 1.000 at 4% 7.00 0 Value added 40. the total invoice value will be Rs.(The sale and purchase figures shown in the example are excluding tax) Particulars Amount VAT @ (Rs.000 Shopkeeper C is liable to pay V AT on Rs.80.000/.200 of 7.200 But can claim set off of tax paid on purchases (6.00 0 Sales polished stainless steel utensils 1.00 0 Company A is liable to pay VAT on Rs.50.tax as Rs.00 0 Value added 1.00.80.000 Set off of tax paid on purchases (Rs.6.000 Total Purchases 1.400 28 | P a g e .000/-) Partnership B Purchases unpolished stainless steel utensils.80.000 2000 Sales of unpolished stainless steel utensils 1.000 Partnership B is liable to pay V AT on Rs.25.1.50.

000 is : The State Government received the tax in stages.e. the cascading impact of tax is totally eliminated.600 Vendor D 200 Total 9.000 Vendor D is liable to pay VAT on Rs.200 Shopkeeper C 1.) Suppliers of Company A 2.000 Thus.000 Value Added 5.packing material) Net VAT amount to pay with the Return 1.000 Partnership B 1. i.000 Company A 4. through a chain of tax on sale price and set off on purchase price. The payments of tax were as follows: Particulars Amount (Rs.000 @ 4% 200 The VAT due on the value added through the chain. 29 | P a g e .2. 9.5..25.000 4% on Rs.600 Vendor D Tax paid costs Nil Sales 5.

notified information technology products and a few essential items D 20% and Liquor. petrol. eggs. people who buy utensils from the shopkeeper C. diesel etc above E 12. dealer’s purchases from unregistered dealers. the tax is finally borne by the ultimate consumer. imports. C & D. bread B 1% Precious metals and precious stones and their jewellery C 4% Raw materials. B. The goods are grouped into five schedules as under: Schedule Rate of tax Illustrative Items A 0% Vegetables. in this case. In practice. milk. (The list is illustrative and not exhaustive. notified industrial inputs. Please refer to the schedules for details) 30 | P a g e .5%. inter-state purchases and purchases from registered dealers without separate tax collection are not entitled to set-off. who is not a registered dealer.5% Other than items specified in schedules A. Rates of value added tax There are two main rates of VAT 4% and 12.Since set-off of tax on purchases is given only on purchases from registered dealers where tax is collected separately.

eating houses. i. pandal. hotel (excluding hotels having gradation of 'Four Star’ and above). It may be noted that composition scheme is not meant to be a tax concession scheme but only a simplification of tax calculation and payment system. whereas.e. to consumers. viz. For such dealers.  Dealers in second-hand passenger motor vehicles and  Works contractors  Dealers engaged in the business of providing mandap. refreshment rooms.  Restaurants.Difference between tax free goods and exempt sales It is sometimes confusing to have goods that are tax free and sales that are exempt. exempted sales are certain types of transactions.. boarding establishments. export sales which are exempt from tax. 31 | P a g e . a simpler and optional method of accounting for VAT has been introduced.. This method is the composition scheme. so what is the difference? Tax free goods do not attract tax at any stage of sale or in any type of transaction. Composition schemes Certain dealers may find it difficult to keep detailed records for claiming set-off. clubs and caterers. shamiana. Tax payable by dealers opting for composition in lieu of VAT The following classes of dealers are eligible for option to pay tax under composition:  Resellers selling at retail.  Bakers. Both result in no VAT being charged.

Moreover. However. If dealer wishes to switch.Accordingly. a new dealer can opt for composition at the time of registration. over to normal VAT. if the dealer has opted for payment of tax liability under composition. the contractor can choose to discharge tax liability under composition option. A dealer can opt for the composition option at the beginning of the financial year and has to continue to be a composition dealer at least till the end of that financial year. such an option can be exercised by the contractor on contract to contract basis. In respect of works contract. the tax liability has to be determined in terms of the guidelines given in the relevant Notification in this regard. the Notification explains the methodology for computation of turnover liable to tax and the rate of composition payable. 32 | P a g e . he can do so only at the beginning of the next financial year. Apart from the terms and conditions governing each of the composition schemes.

less the amount refunded to a purchaser in respect of goods returned. first determine his turnover of sales and turnover of purchases. the tax and the price. within six months of the date of the sale. the turnover of purchases is the total of the amounts paid or payable (excluding VAT charged separately) in respect of the purchase of goods less (the amounts repaid to dealer in respect of goods they return. should  show separately.  be accounted for in the period in which the appropriate entries are made in their books of accounts. Calculating turnover of sales and purchases The turnover of sales is the total of the amounts received or receivable (excluding VAT charged separately) in respect. or the purchase price. as the case may be. Similarly. If the sale price. within six months of the date of purchase. 33 | P a g e . Credit notes and debit notes. The second stage is to ascertain the amount of tax due for payment. he must.Calculating tax liability In. of the sale of goods. then the credit note or the debit note. order to calculate how much tax a dealer has to pay. of any goods is varied and either a credit note or a debit note is issued.Part 4 .

Works contracts VAT applies only to the sale of goods. water. a house. 34 | P a g e .Special cases Auctioneers If dealer is an auctioneer. a factory or a bridge. so that they may deduct it from the total contract price. and any architect's fees. such as.  Dealer’s administrative costs relating to labour and services and any other similar expenses. the  costs of labour and service charges. The rules provide a formula to enable them to calculate their turnover of sales for meals (food and beverages) which they provide.  cost of consumables. then they must include in their turnover.  any profit element that relates to the supply of labour and services. repairs & maintenance etc. Works contracts are deemed sales where both.g. To calculate the amount a dealer should include it in their turnover of sales. gas and electricity. goods and services are provided in a transaction and cannot be separated. Supply of services is not liable to VAT.  hiring charges for machinery and tools. A works contract may involve the creation of immoveable property.  charges for planning and designing. Some other examples of works contracts are photography. the price of the goods they auction for their principal Hotels There are special rules for hotels and other establishments that provide boarding and lodging for an inclusive amount. The supply of food in a restaurant also includes an element of service.  amount paid to sub-contractors. e. But the full amount charged is the sale price for the purposes of calculating turnover and tax.

in lieu of the deductions as above.Alternatively. If the dealer finds that it is too complicated to calculate the deductions. 35 | P a g e . then they may opt for a composition scheme for any works contract. a dealer may choose to discharge the liability arising on works contracts by referring to the table prescribed in the rules.

this suffocating system of taxation has spawned a black economy that is by many estimates half as big as the white counterpart.Section-2 Executive Summary Chanakya’s economic wisdom of granting states the right to tax its people just as a shepherd shears his flock or as a bee gets nectar from the flower we have died with him.e. 36 | P a g e . When we talk about contemporary about VAT immediately Goods & Services Tax regime comes to the picture which is now scheduled to be implemented in 2011. Value Added Tax. nothing much of the flower remains. This was the other objective. Over the years. The modern Indian state taxes its people just like the French use the flower for extracting perfume – in such a way that by the time they are through. to understand the concept of GST. Moreover the revenue collection system of the states was a totally corrupt one and many efforts since the economy actually liberalized itself have brought only limited results with lot more remaining to be done. A new system of taxation base on the principles of value addition took effect from April 2005. The basic objective of this project is to gain knowledge of the current indirect tax regime i. this report will help one to know what are the prerequisites for registering under the Vat regime & what are the benefits of VAT over the previous Sales Tax regime.

the main design of VAT. 20051.. This White Paper on State-level Value Added Tax (VAT) is presented in three parts. Review of Literature Dasgupta. International experience points towards self-assessment in the case of registered taxpayers and taxation in the jurisdiction of the supplier in other cases. National Institute of Public Finance and Policy New Delhi. with some revenue sharing among the member states..nipfp. 2 Rao. Some of the details need to be worked out before the tax on services can be implemented at the state level. A. K.what was the steps taken by the various states. Rao. 1) The justification of VAT and its background In Part 2. While doing so. A second concern relates to the need to integrate tax administration at the two levels in order to maximize on the efficiency of administration. One of the key issues that need to be resolved is the treatment of inter-state transactions in goods and services. http://www. it was recognized that this VAT was a State subject and therefore the States had freedom for appropriate variations consistent with the basic design as agreed upon at the Empowered Committee. has been elaborated. Finally. ”Goods and Services Tax for India”.”A White Paper On State-Level Value Added Tax”. The related issue concerns taxation of services which span more than one tax jurisdiction.in 37 | P a g e . 2008. 2005. 2008. . K. as evolved on the basis of a consensus among the States through repeated discussions in the Empowered Committee. 1 Dasgupta. in Part 3.org. A.2 This paper attempts to identify some of the potential contours of the tax.

The most significant point to note out of the Survey. The respondents were divided over extension of GST to products of conspicuous consumption which attract high tax rate or the manner of availability of tax credit on capital goods. apprehensions and concerns of the trade & industry and provide an insight to the policymakers to address the same for a successful implementation of the GST. is the view that the appropriate date for GST introduction is April 2011. efficient administration and increased tax collection are ranked in that order as critical success factors.2009. Deloitte Touche Tohmatsu India Private Limited. But the suitability of Dual GST which seems to be the only practical alternative in the short-term is not favored by a majority of the respondents.com/Deloitte-Pre%20GST%20Survey%202009. the possibility that a few states may not join the GST bandwagon presents as area of concern. The Survey results demonstrate an almost unanimous consensus that GST will be beneficial to the Indian economy. Easier compliance.amchamindia.2009. not entirely unexpected. Clearly there is a message to the Government where the implementation efforts should be aimed at. It is also interesting to note that.pdf 38 | P a g e . In addition. http://www. “The pre GST Survey”. The results of the Survey reveal the expectations.D T TI3. 3DTTI.

Scope & Objective of Study Need In the current scenario when our economy is to implement its new indirect tax regime Goods & Services Tax which is extension to VAT model. Scope The scope of study covers VAT the current regime & the new GST regime. Need. Objective  To Understand the concept of VAT  To Compare VAT with Sales tax regime  To know how to register under VAT  To Procedure for Declaration & Payment of VAT  To know Impact of VAT on Economy & Inflation  To know features of Goods & Services TAX 39 | P a g e . The study aims to compare the VAT with sales tax regime & then to have insight about registering under VAT.

http://www.performance-publique. it is the states that collect the taxes. although German industrialist Dr. The coverage of Modvat gradually increased and covered various other chapters. it is the most important source of state finance. in the then existing sales tax regime. Minister of the Economy. Let us have a glance on the history of vat up till April 2005 and reasons why it could not be implemented before. But the reason why the proposal of VAT took a long time is because VAT in its simplest form cannot be adopted in India where there are various authorities who can levy the taxes (e. Initially directed at large businesses. 4 ^ "Les recettes fiscales" (in french). accounting for 52% of state revenues. Moreover. VAT was introduced in India in the year 1976.g.html. that too at different rates. The importance & need of VAT in the sales tax structure of India was recognized by the taxation authorities. and was known as Modvat (modified value added tax). Industry and Employment (France).: State/ Central/ Municipality) There are various reasons why the implementation can take time. However. Le budget et les comptes de l’État. Joint Director of the French Tax Authority." Accessed from : http://en. Economic reforms were on a priority by the government since 1991. 1954. in respect of Central Excise. was first to introduce VAT on April 10. etc and all such details had to be worked upon.org/wiki/VAT#cite_note-0 40 | P a g e . Value Added Tax History4 Maurice Lauré.fr/le-budget-et-les-comptes-de- letat/approfondir/les-recettes/les-recettes-fiscales. It is the policies. "la TVA représente 130. changing from a multiple point tax to a single point tax. soit 52.wikipedia. the commodities. 23 February 2009. the taxation rate.gouv. In France. Wilhelm von Siemens proposed the concept in 1918. it was restricted only up to the Excise Duties.0 % des recettes fiscales nettes de l’État. But it is to be noted that. it was extended over time to include all business sectors. the framework. VAT in India Finally after 14 years vat was implemented.2 milliards d’euros.

VAT is intended to tax every stage of sale where some value is added to raw materials. with a provision to allow Input Tax Credit (ITC) on tax paid at an earlier stage. Under the VAT regime. VAT will be without the problem of double taxation as prevalent in the present tax laws. Presently VAT is followed in over 120 countries. which can be appropriated against the VAT liability on subsequent sale. One of the many reasons underlying the shift to VAT is to do away with the distortions in our existing tax structure that carve up the country into a large number of small markets rather than one big common market. the margins of either the reseller or the manufacturer would be reduced unless the ultimate price is increased. Thus. New Delhi. The states and union territories of India have decided to implement VAT in place of sales tax and a number of other state taxes. The Empowered Committee Of State Finance Ministers.(2009). In the present sales tax structure tax is not levied on all the stages of value addition or sales and distribution channel which means the margins of distributors/ dealers/ retailers et al are not subject to sales tax at present. Cascading effects of taxation Sales Tax 5 Dasgupta. Thus. the present pricing structure needs to factor only the single point levy component of sales tax and the margins of manufacturers and dealers/ retailers etc.pp 6-8 41 | P a g e . VAT is a multi-stage tax levied at each stage of the value addition chain.What is Value Added Tax (VAT)?5 VAT is a simple transparent tax collected on sales of goods. due to multi-point levy on the price including value additions at each and every resale. are worked out accordingly. A. but taxpayers will receive credit for tax already paid on procurement stages. “A White Paper On State-Level Value Added Tax”.

The basic principle of VAT The Value Added Tax system has its origin in the West European countries. incentives. Thus. 3) The then existing structure created a poor economic impact. This process continues till the final product emerges. with dubious results. steel ingots are made in a steel mill. Tax rates. It required numerous complex forms that take an enormous amount of time and money to complete. the incidence of tax goes on increasing as the raw material and final product pass from one stage to another. The tax code was often altered to provide economic stimulus for various business segments. which are then rolled into plates in a rerolling unit and after this a third manufacturer will make furniture from these plates. who carries out further processing and supplies it to the third manufacturer. It also led to difficulty in enforcement and collection. For instance. Thus. and created hundreds of loopholes that are used to reduce or evade taxes. Today raw material passes through a number of stages and processes until it reaches the ultimate stage. The product then goes to the wholesaler who in turn will sell it to the retailer and he will finally turn it to the consumer. There was ongoing political pressure to alter tax laws to benefit or exclude special interest groups. Generally. 42 | P a g e . An ideal system would tax spending to create a positive incentive to earn more. and save and invest more. output of the first manufacturer becomes the input of the second manufacturer. if tax is levied on the selling price of a product. 2) It was too easily exploited for political reasons. and exemptions were altered continuously for political reasons. taxes are levied on the selling price of the product. It often discourages economic growth by creating a negative incentive to work and to earn more. 1) The then existing system was too complex. That tax code has evolved over many years creating thousands of conflicting definitions and exemptions. as shown in the table below Why a New Tax System? There are seven significant reasons to reform the tax system. It neglected the overall health of the economy.

5) It requires a large number of professionals in the private sector. who is registered for VAT. like tax accountants. lawyers. 7) It is inefficient. It is the person. If we are ever going to reduce the national deficit without breaking the back of the tax payer. For example. These educated and talented people could contribute greatly in productive jobs in the private sector. to advise. estimated at over $600 billion annually. a company decides not to build a new assembly plant because of negative capital investment tax policies. 6) It forces business managers to make decisions based on tax implications rather than good business. It just costs too much to collect taxes this way. 4) It was a bureaucratic control. This was non- productive labour that does not contribute directly to the economy. NOT the enterprise.000 employees to manage this huge bureaucracy. The Income tax Revenue Survey requires a huge operating budget and over 114. this is the first place to reduce waste. works or services and have an annual sales turnover exceeding the threshold limit should register as taxpayer. This process wastes valuable resources on non-productive labour that could otherwise be used to build businesses and strengthen the economy. Who have to register as a Taxpayer? All legal and natural persons who provide goods. All importers are required to register irrespective of their annual turnover. and even entire corporate departments. The person is only registered once for all enterprises/branches/divisions carried on unless permission is granted to register them separately. Totally exempt businesses will not however be registered as taxpayers but still be subjected to later visits by VAT officials to confirm their exempt status. In fact. If the dealer supplies only exempt goods and services he must still notify the local VAT office if his turnover exceeds the threshold limit. interpret and prepare tax returns. and thereby deprives a community from new jobs and the company from growth. it is a measurable drain on the economy both in direct and indirect costs. 43 | P a g e .

electricity bill. d.  He would make a field inspection of your premises.  The Office of Commercial Tax Officer would send you the VAT CERTIFICATE  Once registered. rent receipt. Proof of identification of the authorized signatory e.g. Copy of the constitution document e.  On submission. e.  Fill the Application in duplicate and affix photograph. Proof of principal place of business e. FORM 2. the Commercial Tax Officer would verify if the submission is complete and desirable. lease agreement. driving license. FORM 1. (Procedure)  Download or buy forms. b. Memorandum and Articles of Association for a company. You will also have to submit VAT returns monthly to the Commercial Taxes Department and keep proper books of accounts.  Attach the following documents to the application a.g. Type of registration: 44 | P a g e . Board Resolution authorizing the signatory to sign the application in case of company. FORM 3. passport.The person to be registered  Sole proprietor (individual)  Incorporated/unincorporated body of persons  Corporation / company  Association not for gain  Welfare organization / trust  Local authority and certain public authorities Registration for VAT:. Submit the forms to the jurisdictional Central Excise Office  Submit the above in the nearest Commercial Tax Office. you will have to account for output tax that is attributable to your taxable sales. c. Partnership deed for partnership firm.g. voter identity card.

If you calculate that you owe tax to the VAT office it should be paid at the same time as you submit your declaration form. If you are 45 | P a g e . they cannot issue a VAT invoice and cannot show sales tax separately in their invoice. Naturally. by just paying 1 % which is now 0. This option is available only for the businesses like Brick Kilens & Dhabas (that does not include restaurants).VAT (Obligatory): All those businesses having  Annual turnover equal to or more than 5 lacks  Carries out Inter State transactions (Irrespective to annual sales) VAT (Voluntary) Any one not fulfilling the above conditions may register himself under VAT voluntarily keeping future in consideration. can be eligible to the composition scheme.25% of their turnover as composition tax. The difference between the two figures is either the amount of tax due to be paid to the VAT office or the amount of credit to be carried forward to the next month’s declaration. The empowered committee has agreed that dealers with turnover up to Rs.a. TOT Turnover Tax also called Composition scheme or Lump Sum Payment Schemes. Credit for purchases can only be claimed if you are in possession of an official tax invoice which shows the amount of VAT you have paid on the transaction. In such case. On the form you will show the amount of VAT you have paid to your suppliers and the amount you have charged your customers. they will pay tax at flat rate based on their turnover. Declaration & Payment of Tax One must complete a VAT declaration form monthly as per directions of the VAT office for instance on the 16th day of each month. 40 lakhs p. Small retailers may not be in a position to maintain detail record of tax paid on inputs and tax payable on final products.

owed tax it will be carried forward and you will deduct it from the tax you owe the following month. 24 as annexure Comparison of VAT and Sales tax Under Sales Tax Under VAT Tax levied at the stage of the first sale (only for Tax levied and collected at every point of sale. 24 o FORM 23 & 24 includes the Total Purchases. burden on raw materials will be avoided. 23. 19. leather and natural gas at the final stage). Dealers reselling goods on which tax has already Dealers reselling tax-paid goods will have to been paid do not collect any tax on resale and file collect VAT and file returns and pay VAT at every nil returns stage of sale (value addition). Tax only on goods. 19. 46 | P a g e . At the most a few forms required. Six taxation rates. 23. It is transparent and easier. Tax levied and collected at every point of sale Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase Successive sales (resale) of goods on which tax is of goods will be deducted from the amount of tax already paid do not attract tax. Tax on goods and services both. Computation of tax liability is complex. Huge number of forms required in procedure. Total Sales & input taxes In case of Annual turnover less than 1 crore  Filing of Quarterly return using FORM 15 with FORM 18. You will also need to show other information on your declaration. Self-assessments by dealers. Only two rates. cotton. input tax. paid at the next sale. In case of Annual turnover more than 1 crore  Monthly declaration & payment of Output tax using FORM 16 o This is annexure less return  On the end of every quarter through FORM 15 o Annexures FORM 18. Thus duplication of tax materials for manufacture. The manufacturer will pay VAT on the goods On 19 goods used as raw materials there is no purchased as raw materials but the VAT paid on input tax credit on the tax paid on such goods and raw materials will be deducted on the sale of 2% tax is levied on other goods used as raw goods manufactured. Assessment done by the department.

The simple excises or the turnover taxes results in the unintended effect of (i) taxing an output (together with its input content) more than once. i.Advantages of application of VAT In its purest form. and an account based audit system that is regarded as superior to the system of physical verification. The latter already having fallen into disrepute for causing distress to tax filer’s needs to be eventually abandoned as its positive impact on revenue yield remains questionable. An account- based audit should not only tighten the tax net but raise revenues through a wider acceptability of a tax administration in the public eye.e. However. But the total collected from the VAT should be exactly the same as if collected only from the retailers of the commodity concerned. Therefore. 47 | P a g e . Arresting cascading could be considered important to a regime of VAT. the institution of VAT in fact should be conceived also as an instrument of tax administration – an administration that checks evasion through a self monitoring feature. The VAT. instead. But the retail sales tax is difficult to collect because there are too many retailers of various sizes. the VAT must give credit for raw materials and capital goods. The VAT. as well as (ii) applying a tax on the earlier paid input tax leading to cascading. in general. (i) Eliminates cascading effects :- The VAT is preferred because the VAT minimizes distortions. (ii) Eases administration:- Although there are feasible options limiting the impact of cascading. it is a tax on the sum total of value added. for this benefit to occur. VAT is a tax that is levied on the value added along different stages of production and distribution of a commodity or service. should reflect the demands from consumers. the utility of multipoint VAT goes much beyond that. it should be equivalent to a retail sales tax that is collected only at the retail stage. avoid the distortion as represented by misallocation or redirection of resources from one economic activity to another. Therefore. It causes producers to move their capital or resources away from the production of one output to another one which does not suffer from cascading. it does not alter producers’ decisions to produce particular commodities which. equal to the value of a commodity or service. because it gives credit for input tax earlier paid. Nevertheless. can be collected at earlier stages of production in fragments and can end at the retail stage.. In this sense.

are fully aware of the tax liability. Governments seek sources that are income elastic and not sensitive to changes in prices of particular goods or income sources. Both producers and consumers. (iii) Improves International competitiveness:- Since VAT has the potential for eliminating cascading. wholesaler or retailer. which includes taxes already paid at earlier stages. As export competitiveness can be adversely influenced by then tax factor. the process is cumbersome and the effect is not fully realised. Consequently. the potential for raising resources efficiently is generally higher. who ultimately bear the tax burden. which commodity taxes usually lack. it is possible to design the VAT in a manner that will ensure that exports are free from any tax burden (zero-rating). Further. It is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at earlier stages of production and distribution get taxed again and again at subsequent points. (iv) Imparts Transparency:- Another positive aspect of the VAT is its simplicity and transparency. Even though exports are generally exempt from sales tax and the burden of input tax embedded in the exports is sought to be eliminated through the duty drawback mechanism. tax is paid on an inflated value. As a result the competitiveness of exports in international markets is enhanced. The VAT tends to collect the quantum of tax payable at every stage of transaction. (vi) Goodbye to Tax on Tax: VAT is the only tax that offers positive alternatives to the negative impact of indirect taxation. governments have been turning to tax reform as a way to raise revenues. Since the VAT permits a relatively larger coverage in as much as it is possible to extend it to value addition at all stages in the production-distribution chain. where the manufacturer himself 48 | P a g e . such adjustments under the VAT structure are also WTO consistent. which is not as easily ascertainable in other forms of commodity taxation. the capacity to zero rate easily and accurately is an important aspect of the VAT. Such anomalies escalate prices and encourage vertical integration. nevertheless. (v) Buoyant Source of Revenue:- When faced with chronic budget deficits and growing expenditures. instead of paying taxes on the value addition by a manufacturer.

A lifetime income concept considers the fact that many income recipients are only temporarily at lower income brackets as their earnings increase. In cases where there was an effect it was a one time effect that simply shifted the trend line of the consumer price index (CPI). This emanates from the fact that consumption as a share of income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than the rich. 49 | P a g e . This criticism is valid when VAT payments are expressed as a proportion of current income. Effects of VAT on Distribution Value added tax is widely criticized as being regressive with respect to income that is its burden falls heavily on the poor than on the rich. However there is no evidence to suggest that this is true. In order to address the regressivety of VAT the following measures can be taken:  The VAT itself can be used to differentiate taxation of consumer items that are consumed primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a higher than standard rate. A proportional burden would also be demonstrated if lifetime income rather than current income is used. To guard against any unforeseen price effects the authorities may consider a tighter monetary policy stance at the introduction of VAT.  VAT exemptions may also be granted on goods and services that are consumed mostly by the poor. VAT has an inbuilt device for reducing the cascading effect by restricting the levy to actual value addition. However if. It encourages growth by confining tax burden to the net economic contribution of the taxpayer. since the Capital Investment also gets tax relief. VAT Effect on Inflation In considering the introduction of VAT. countries are often concerned that it would cause an inflationary spiral. Moreover. A survey of OECD countries that introduced VAT indicated that VAT had little or no effect on prices. Vertical integration has been responsible for recession and unemployment particularly in developing countries.tries to wholesale and retail the goods. following the premise that welfare is demonstrated by the level of consumption rather than income. VAT can accelerate economic growth by encouraging modernization and replacement. consumption is used as the denominator the impact of VAT would be proportional.

outside the VAT system. which leads to more difficulties in monitoring the compliance. If exemptions are granted at prior to the final sale. o Significantly increased costs of tax compliance for small firms. Exemptions refer to situations where output is not taxed but taxes paid on inputs are not recoverable. This results in the use of presumptive methods of determining the tax liability. The rationale behind exemptions is to reduce negative distributional effects of tax through the effect on incomes.e. These include: o The fact that sometimes it is almost impossible to differentiate between higher quality expensive products – e.g.  Equity concerns may also be addressed through other ways. o Increased costs of VAT administration as a differentiated rate structure brings with it problems of delineating products and interpreting the rules on which rate to use. Thus any concessions extended may tend to benefit the rich much more than the poor. tax avoidance by vertical integration. consumed by the rich and ordinary products consumed by the poor.  Exemptions may create incentives to “self supply” i. it results in a loss of revenue since value added at the final stage escapes tax. The use of multiple rates of VAT has however been widely discouraged for various reasons. The effects of exemption may be as follows:  Falling of revenues – exemptions break the VAT chain. The higher compliance cost resultant from differentiation of VAT rates may also be regressive with respect to income since smaller firms with lower income tend to bear proportionately more of the burden than do larger firms.  Un-recovered taxation of some intermediate goods may lead to producers substituting away from such inputs thus distorting the input choices of the said producers. This arises from the fact that each exemption gives rise to pressures on further 50 | P a g e . food.  Exemptions tend to feed on each other giving rise to a phenomenon called “exemption creep”. This could be in the form of lower basic income tax rates on the poor or some pro-poor expenditures of government. such as other tax and spending instruments of government. which are usually unable to keep separate records/accounts for sales of differently taxed items.

51 | P a g e . Based on the above. Since VAT does not influence investment decisions on firms. Given the fact that the primary purpose of VAT is to raise government revenue in an efficient manner and with as little distortions of economic activity as possible. by increasing their costs. exemption. distribution effects are perhaps better addressed by other forms of tax and government expenditure policies which can often be better targeted at these aims. it is important that care is taken when introducing exemptions in order to avoid distortions in the production process as well as to minimize revenue loss resulting from such distortions. For example creating an exemption to reduce the tax burden on a particular commodity or goods may lead to increased pressure for exemption or zero rating of inputs used for the production of such a commodity. Compared to other broadly based taxes such as income tax VAT is neutral with respect to choices on whether to consume now or save for future consumption. Although VAT reduces the absolute return on saving it does not reduce the net rate of return on saving. Savings by both parties are required in order to finance investment in a non-inflationary manner. Income tax reduces the net rate of return as both the amount saved as well as the return on that saving are subject to tax. VAT Effect on Economic Growth Economic growth can be facilitated through investment by both government and the private sector. its effects on investment can be said to be neutral. In this regard VAT may be said to be a superior tax in promoting economic growth than income tax.

therefore.. Chidambram Why GST? In the existing State-level VAT structure there are also certain shortcomings as follows. (2009). There are. both the cascading effects of CENVAT and service tax are removed with set-off. several taxes which are in the nature of indirect tax on goods and services. and this is why GST is not simply VAT plus service tax but an improvement over the previous system of VAT and disjointed service tax. Moreover. 52 | P a g e . However. entertainment tax. for this GST to be introduced at the State level. it is essential that the States should be given the power of levy of taxation of all services.. This is the essence of GST. etc. such as luxury tax. pp i. In the GST. justified for (a) Additional power of levy of taxation of services for the States. (c) Subsuming of several taxes in the GST and 6 Chidambram.”6 By P. including set-off for cascading burden of CENVAT and service taxes. The Empowered Committee Of State Finance Ministers. This power of levy of service taxes has so long been only with the Centre. then the Goods and Services Tax (GST) will be a further significant breakthrough – the next logical step - towards a comprehensive indirect tax reform in the country. P. “First Discussion Paper On Goods and Services Tax In India”. A Constitutional Amendment will be made for giving this power also to the States. for instance. Goods & Services Tax Model for India GST: The way ahead “If the Value Added Tax (VAT) is considered to be a major improvement over the pre-existing Central excise duty at the national level and the sales tax system at the State level. even now. burden of Central Sales Tax (CST) will also be removed. New Delhi. with the introduction of GST. The GST at the State-level is. (b) System of comprehensive set-off relief. and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level is established which reduces the burden of all cascading effects. and yet not subsumed in the VAT.

basis of classification etc.  The Central GST and State GST are to be paid to the accounts of the Centre and the States separately. It would have to be ensured that account-heads for all services and goods would have indication whether it relates to Central GST or State GST (with identification of the State to whom the tax is to be credited).pp 37-38 53 | P a g e . would be uniform across these statutes as far as practicable.(2009). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However. fall.  The Central GST and the State GST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services. New Delhi. a dual GST structure with defined functions and responsibilities of the Centre and the States is recommended. 7Dasgupta. Salient features of the GST model7 Keeping in view the report of the Joint Working Group on Goods and Services Tax. if necessary with a collectively agreed Constitutional Amendment. definition of taxable event and taxable person. (d) Removal of burden of CST. Salient features of the proposed model are as follows:  The GST shall have two components: one levied by the Centre (hereinafter referred to as Central GST). The Empowered Committee Of State Finance Ministers. goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. measure of levy including valuation provisions. the burden of tax under GST on goods will. and the other levied by the States (hereinafter referred to as State GST). the views received from the States and Government of India. Rates for Central GST and State GST would be prescribed appropriately. A. in general. the basic features of law such as chargeability. reflecting revenue considerations and acceptability. “First Discussion Paper On Goods and Services Tax In India”. An appropriate mechanism that will be binding on both the Centre and the States would be worked out whereby the harmonious rate structure along with the need for further modification could be upheld. Because of the removal of cascading effect.

functions such as assessment. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. scrutiny and audit would be undertaken by the authority which is collecting the tax.  Cross utilization of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services under the IGST model which is explained later. A taxpayer or exporter would have to maintain separate details in books of account for utilization or refund of credit. enforcement. uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.  The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities. taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST.  Since the Central GST and State GST are to be treated separately. The exact design would be worked out in consultation with the Income- Tax Department.  To the extent feasible.  Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits.  Since the Central GST and State GST are to be treated separately.  Keeping in mind the need of tax payers convenience. The same principle will be applicable for the State GST. in general. Further. with information sharing between the Centre and the States. The same principle will be applicable for the State GST. taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST.  The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.  The administration of the Central GST would be with the Centre and for State GST with the States. 54 | P a g e . the rules for taking and utilization of credit for the Central GST and the State GST would be aligned.

 Taxes or levies to be subsumed should be part of the transaction chain which commences with import/manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other. The Empowered Committee Of State Finance Ministers. subsumed under the Goods and Services Tax:  Central Excise Duty  Additional Excise Duties  The Excise Duty levied under the Medicinal and Toiletries Preparation Act  Service Tax  Additional Customs Duty.Taxes subsumed by GST8 The various Central.  The taxes. the following Central Taxes would be. and  Cesses. On application of the above principles. commonly known as Countervailing Duty (CVD)  Special Additional Duty of Customs . to begin with.pp 19 55 | P a g e . either on the supply of goods or on the supply of services. Following State taxes and levies would be. to begin with. the following principles were kept in mind:  Taxes or levies to be subsumed should be primarily in the nature of indirect taxes. State and Local levies were examined to identify their possibility of being subsumed under GST.  Revenue fairness for both the Union and the States individually would need to be attempted. New Delhi. 8 Dasgupta. “First Discussion Paper On Goods and Services Tax In India”. levies and fees that are not specifically related to supply of goods & services should not be subsumed under GST.(2009). subsumed under GST:  VAT / Sales tax  Entertainment tax (unless it is levied by the local bodies).  The subjugation should result in free flow of tax credit in intra and inter-State levels.4% (SAD)  Surcharges. While identifying. A.

10. The same illustration will hold in the case of final service provider as well. after setting-off of Input Tax Credit of Rs. 2+Re. the manufacturer.15 from his gross GST of Rs. 20. 3+Rs. 3 after setting-off Rs. The manufacturer will then pay net GST of Rs. in terms of a hypothetical example with a manufacturer.1. one wholesaler and one retailer. 2. 6 (= Rs. with the manufacturer making value addition of Rs. The overall burden of GST on the goods is thus much less. 16 paid to wholesaler. Thus.100 of input of goods and services used in the manufacturing process. Let us suppose that GST rate is 10%. betting and gambling. after setting- off GST paid at the earlier stages. The illustration shown below indicates.  Luxury tax  Taxes on lottery.  State Cesses and Surcharges in so far as they relate to supply of goods and services. wholesaler and retailer have to pay only Rs.  Entry tax not in lieu of Octroi. how GST will work. he pays net GST of only Rs. This is shown in the table below. when a retailer sells the same goods after a value addition of (say) Rs. Similarly. 10 as GST paid on his inputs (i. Input Tax Credit) from gross GST of Rs. after setting-off Rs. he pays net GST of only Re. 1) as GST on the value addition along the entire value chain from the producer to the retailer. 13.e. The manufacturer sells the goods to the wholesaler. 56 | P a g e .30 on his purchases worth Rs. 13 from the gross GST of Rs. 15 to the manufacturer. Rs. When the wholesaler sells the same goods after making value addition of (say).

the States in North-Eastern Region and Special Category States) where lower threshold had prevailed in the VAT regime. the States considered that the threshold for Central GST for goods may be kept at Rs. the Empowered Committee has recommended that a threshold of gross annual turnover of Rs. This raising of threshold will protect the interest of small traders. therefore. A uniform State GST threshold across States is desirable and. 57 | P a g e .1. Keeping in view the interest of small traders and small scale industries and to avoid dual control. 5 lakhs for a majority of bigger States and a lower threshold for North Eastern States and Special Category States.5 crore and the threshold for services should also be appropriately high. The existing threshold of goods under State VAT is Rs. 10 lakh both for goods and services for all the States and Union Territories may be adopted with adequate compensation for the States (particularly.GST’s benefit to the small entrepreneurs and small traders The present threshold prescribed in different State VAT Acts below which VAT is not applicable varies from State to State.

Nasik (Division). Thane (Division). Wardha. Out which some of them are in: Mumbai (Head Quarters). Amaravati (Division). Pune (Division). Bandra. Aurangabad (Division). and many more… 58 | P a g e . Kalyan. Akola. Sangli. Nagpur (Division). Ratnagiri. Kolhapur (Division). Satara. Solapur. Raigad (Division). Palghar. Ahmednagar. Conclusion List of Sales Tax Offices in the State of Maharashtra There are total 40 Sales Tax Office located all over the Maharashtra. Nalasopara.

there has to be a robust and integrated MIS dedicated to the task of tracking flow of goods and services across the country and rendering accurate accounting of levies associated with such flow of goods and service. and 3. though this may go a long way in harmonizing levies. Even if all Union-level levies are integrated into a single levy and all state level levies culminate in a single State level levy. 1950 demarcates taxing powers in a two-tier structure wherein levies on production and international imports are with the Union and post. Apart from all these. The Constitution of India. integrated and fully fledged GST calls for the following: 1.production levies rest with the states. this may still have two levies and the resultant cascading and administrative burdens may nevertheless remain to an extent. The states levy VAT on goods sold or entering in the state under various entries of the state list. 2. A harmonized. 59 | P a g e . Implementation of GST calls for effecting widespread amendments in the Constitution and the various constitutional entries relating to taxation. Services have to be appropriately integrated in the tax network.Bringing about an integration of all taxes levied on goods and services in a federal polity with sharp distribution of legislative powers is a Herculean task to say the least. The Centre levies duties of excise on manufactures and import/countervailing duties on international imports apart from levying a tax on services under various taxing and the residuary entry in the Union List.

K.in 60 | P a g e . 2008. “A White Paper On State-Level Value Added Tax”. New Delhi. A.pdf 2 Rao.finmin.pp 6-8 Available at: www. References 1.pp 19 7 Dasgupta. New Delhi.(2009). The Empowered Committee Of State Finance Ministers. The Empowered Committee Of State Finance Ministers.in/downloads/reports/whitepapervat. The Empowered Committee Of State Finance Ministers.com 4.nipfp.pp 19 3 DTTI.org. National Institute of Public Finance and Policy New Delhi.2009. “First Discussion Paper On Goods and Services Tax In India”.com/Deloitte-Pre%20GST%20Survey%202009.(2009).google.gov. A.amchamindia. New Delhi. http://www. The Empowered Committee Of State Finance Ministers.nic.vat. ”Goods and Services Tax for India”.”A White Paper On State-Level Value Added Tax”.Value Added Tax – By Sales Tax Department.pdf 6 Dasgupta. Available at http://www. A..in/downloads/reports/whitepapervat. New Delhi. The Empowered Committee Of State Finance Ministers. Deloitte Touche Tohmatsu India Private Limited.(2009).nic.(2009).com 3. www.pp 6-8 Available at: www.in Dasgupta. A. www.finmin. 2. New Delhi.maharashtra.pp 37-38 8 Dasgupta. www.pdf 5 Dasgupta.tax4india. “The pre GST Survey”. A. 2005. “First Discussion Paper On Goods and Services Tax In India”. “First Discussion Paper On Goods and Services Tax In India”.