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VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands. Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2
Importance of VAT in India India, particularly being a trading community, has always believed in accepting and adopting loopholes in any system administered by State or Centre. If a well-administered system comes in, it will not only close options for traders and businessmen to evade paying their taxes, but also make sure that they'll be compelled to keep proper records of sales and purchases. Under the VAT system, no exemptions are given and a tax will be levied at every stage of manufacture of a product. At every stage of value-addition, the tax that is levied on the inputs can be claimed back from tax authorities. Advantages of VAT 1. Coverage ± If the tax is considered on a retail level, it offers all the economic advantages of a tax of the entire retail price within its scope. The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers. 2. Revenue Security - Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value added at the last stage. Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is picked up at later stage. Even if it is not picked up later, the government will at least have collected the VAT paid at previous stages. Where as if evasion takes place at the final/last stage the state will lose only tax on the value added at that particular point. 3. Selectivity - VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption-type. VAT gives full credit for tax included on purchases of capital goods. 4. Co-ordination of VAT with direct taxation - Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate income taxes. Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection. To know more about advantages of VAT click here: Advantages of VAT Disadvantages of VAT 1. 2. 3. 4. VAT is regressive VAT is difficult to operate from position of both administration and business VAT is inflationary VAT favors capital intensive firms
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.5% VAT 12. as presently applicable by the CST Act. particularly in neighboring states c.00 Total to Govt. Under the new VAT system. whether within the state or in the course of interstate.25 D Consumer 134 150. the tax. all industrial and agricultural inputs. Precious metals such as gold and bullion will be taxed at 1%. The remaining items would attract 12. This will ensure By doing this that there will be level playing fields to avoid the trade diversion in connection with the different states. d. capital goods as well as declared goods would attract 4 % VAT in India. o 10-12% on goods called Revenue Neutral Rates (RNR). Rate of Tax VAT proposes to impose two types of rate of tax mainly: o 4% on declared goods or the goods commonly used.25 14. Tax implication under Value Added Tax Act Selling Price (Excluding Tax) 100 Invoice value ( Incl Tax) 104 Seller Buyer Tax Rate 4% CST 12. VAT is not cascading or additive though the tax on the goods sold is collected at each stage. no refund would be provided. Discretion has been given to the states when it comes to finalizing the RNR along with the restrictions. Silent Features Of VAT a. diesel or aviation turbine fuel are proposed to be kept out from the VAT system as they would be continued to be taxed. will be covered under VAT.50 VAT CST 1.25 1. In case of export.the tax. paid on the goods purchased within the state.25 0* 14.1% on silver or gold and 20% on liquor. o Two special rates will be imposed-. the tax would be fair and equitable to all.5% VAT Tax Payable Tax Credit Net Tax Outflow A B 4 0 4.25 16. certain commodities are exempted from tax.75 15. In case of the branch transfer or consignment of sale outside the state.75 16. payable on the sale. Tax on petrol. Uniform Rates in the VAT system. Adjustment of the tax paid on the goods purchased from the tax payable on the goods of sale All the tax.75 4. More than 550 items are covered under the new Indian VAT regime out of which 46 natural & unprocessed local products will be exempt from VAT Nearly 270 items including drugs and medicines.50 14.50 15.5 % VAT. There would be no fall in such remaining goods. Collection of tax by seller/dealer at each stage. it is not cascading or additive because the net effect would be as follows: . The taxable commodities are listed in the respective schedule with the rates. This rate must not be less than 10%.5% VAT 12. No concession to new industries Tax Concessions to new industries is done away with in the new VAT system. would be adjusted against the tax.00 B C 114 128. previously paid on . would be refunded. e. paid on purchase outside India. b. 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 f.Items covered under VAT y y y y y y All business transactions that are carried on within a State by individuals/partnerships/ companies etc.25 C D 124 139. Petrol and diesel are kept out of the VAT regime in India. This was done as it creates discrepancy in investment decision.
the tax paid on the manufactured goods would be adjusted against the tax payable on the manufactured goods. It will be like levying tax on goods. relating to filing of returns. VAT is free from such conditions. However. Procedure of simplification Procedures. Computerization the VAT proposes computerization which would focus on the tax evaders by generating Exception Report. applicable to the goods. This is necessary as the CST Act stipulates that the tax levies at the first stage or the last stage differ. 5. This will eliminate any disputes that relate to rates of tax and classification of goods as this is the most usual cause of litigation. It is collected at each stage. there would be no discretion involved in the imposition of penalty. which the goods have suffered. In the VAT system. Simplification Under the CST Act. 20% and 25%. Therefore. Therefore. In a large number of cases. would make the tax department more efficient and responsive. shown separately in the invoice. The basic principle of the value added tax is to collect the tax at the inception of the goods that is going to be manufactured. Further such adjustment of the purchased goods would depend on the amount of tax that is payable. 6. is not known at the subsequent stage. the question of which stage of tax it falls under becomes another reason for litigation. Subtraction Method Under this method. payment of tax. if the trader is purchasing goods at Rs 100 then he needs to pay the value added tax of 10% similar kind of tax will be paid by the manufacturer while purchasing the raw material. 2%. Earlier across the India there is a sales tax applicable on all the manufacturing goods however later on VAT or value added tax came into existence. no refund would be admissible. which would form a part of integral computerization. 3. 12%.g. 4. Invoice or tax credit method The tax is collected and charged separately on the basis of the tax that is paid on the purchase and the tax that is payable on the sale. sold in the last state or at retail stage. 8%. This tax (VAT) helps the government to generate the revenue in a systematic way. The tax earlier paid can be allowed as set off or credit. It means VAT is the tax which consumers ultimately face. VAT would not have such restrictions. the difference between the tax paid on purchase and the tax payable on sale as per the invoice is the VAT. . The management information system. it is called as Last Point Tax VAT in Various States of India VAT or value added tax has replaced the sales tax in India. 2. Such system would be free from all these harassment 8. Methods Of Collecting And Charging The VAT Generally. 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. This is because the amount of tax. under the present VAT system. Fair and Equitable VAT introduces the uniform tax rates across the state so that unfair advantages cannot be taken while levying the tax. 2. there are 8 types of tax rates. the tax is collected and charged on the aggregate value of the tax payable on sale and purchase by applying the rate of tax. Consequently. late payment of tax or non payment of tax or in case of tax evasion. late filing of returns. there would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector. there are 2 methods that are followed while charging and collecting the VAT: 1. Advantages Of VAT 1. For e.the sale of goods.1%. CST would not have the provisions on refund or carry over upon such goods except in case of export goods or goods. Therefore. 4%. would be fully adjusted. Under the VAT system. Similarly. the amount of tax would be known at each and every stage of goods of sale or purchase. Minimize the Discretion the VAT system proposes to minimize the discretion with the assessing officer so that every person is treated alike. the difference between the sale price and purchase price would be VAT. non-filing of returns. Adjustment of tax paid on purchased goods Under the present system. tax would be levied at each stage of the goods of sale or purchase. Transparency The tax that is levied at the first stage on the goods or sale or purchase is not transparent. It also helps to determine the relevant stage of the tax. manufactured out of the country or sale to registered dealer. For example. 10%. on interstate sale on tax-paid goods. Such adjustment is conditional as such goods must either be manufactured or sold. 7.
the sale value is Rs. the tax burden would be shared by all the dealers from first to last. Under the CST Act. Thus. However. either the first or the last dealer. the tax burden is shared equally by the last dealer. Under the CST law. Under VAT law. Tamil Nadu and Rajasthan.100. E. VAT is not a standard denomination in all the states it is varied in different part of the country. the retailers are not subject to tax except for the retail tax. first. Reduces tax evasion. the burden of the full tax bond is borne by only one dealer. Therefore. VAT has been imposed on various states such as Andhra Pradesh.120 and the tax thereon is 15%. The present VAT structure provided by the government is not turned out to be a foolproof formula hence central government keeps on removing it sometimes due to the agitation of the manufacturer and dealer. the tax is collected at one stage of purchase or sale of goods. The input tax is 15%. F. On an average there are two average tax slabs the first one is 4% that covers all the essential items where as the second slab consist of 10% that covers all the luxury items. The VAT regime will do away with such concessions as it would provide the full credit on the tax that has been paid earlier. The subsequent dealer pays tax on the portion of the value added upon such goods. The tax on this is 12. D. In a simple language the difference between the tax paid on purchase and tax paid on sales. the dealer pays tax on the sale or purchase of goods. concessional rates are provided on certain taxes. we give you an example as follows: At the first point of sale. under the VAT system. In other method tax is collected on the cumulative value of tax paid on sales and tax paid on purchase. 2. Relevant Components of Calculating VAT y y y y y y Sale or purchase price of the goods Turnover of sale or purchase including the taxable turnover Output Tax Input Tax Input Tax paid on purchase on which the credit or set off claim Net tax payable Difference between VAT And CST Under the CST Act. the value of goods is Rs. general and specific exemptions are granted on certain goods while VAT does not permit such exemptions. At the second change of sale. surcharge on sales tax. Enhances tax compliance and results in higher revenue growth. To illustrate the whole procedure of VAT. Kerala. The tax that is to be paid at every point is 15%. Tax structure becomes easier and more visible. Then. additional surcharge etc have been put an end to. B. Encourages competitiveness of exports. There are two sub slabs also that is 1% for jewellery and 20% for non-essential goods. This should be noted that there are two ways to collect VAT: 1. You will get a credit for first change in . The key benefit that is given on the basis of Value added tax (VAT): A.Let¶s have a look on the simplest way of calculation of VAT. such tax would be passed upon the final consumers. the tax is levied at a single point. the net VAT would be 12. Maharashtra. Advocated an internal system of self assessment for VAT liability. Under the CST Act. Multiple taxes such as turnover tax. Madhya Pradesh. Under the VAT system. C. Orissa. Therefore.5%. Purchase price paid by the dealer 1 from broker Rs 100 + 10% tax= Rs 110 (here tax is Rs 10) If the dealer 1 sells the good to other dealer 2 Rs 120+10% tax = Rs 132 (here after including profit of Rs 10 by dealer1 tax is Rs 12) This will reduce the tax of dealer1 and added the excess amount while selling the goods to dealer2.5%. In the very first method tax is charged both on the basis of the tax that is paid by the customer on its purchase this tax is simply applicable on sales.
the sale value is Rs. .75% -15% = 3.75%. 15% -12.5% will be the net rate.75% would be the net VAT. 3.5%-.75%.e.75%. 18. Therefore.5%.i. This means that VAT is paid in the last point tax under the sale tax regime. At the last stage. You get a credit for second change in sale?i. At the third change of sale. Therefore.150 and the tax on this is 18. the tax paid is 18.75%.sale of 2. The Input Tax is 18. 2.e.
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