No.1 for CA/CWWA & MECICEC. MASTER MINDS PART 1. INTRODUCTION TO VAT No. QUESTION ABC 4, | Define Value Added Tax and explain the basis, on which the various state laws are | * | enacted? What are the different stages of VAT? Can it be said that the entire burden falls on the final consumer? o What are the objectives for introducing VAT? What are the features of VAT as indicated in the white paper? What are the variants of VAT? ‘What are the methods for computation of VAT? What are the advantages of VAT? What are the limitations of VAT? ele|slolelale Which goods are not covered under VAT pl>|>|>|>]>]>]o 10. | Write a brief note on rates of VAT Sales can be broadly classified in four categories: 4) inter-state sale (levied by union government unc union list) Act-powers under entry 92A of list I.¢. 1b) Sale in course of import (No sales tax is ‘ut import duty is payable) ¢) Sale in course of export (No sales ta commodities) ayable but export duty has been imposed on some d) Intra-state sale (.e., within the state) (Levied by state government under state VAT act power to levy under entry 54 of ist Ilie., state list). Q.NO.1, DEFINE VALUE ADDED TAX AND EXPLAIN THE BASIS, ON WHICH THE VARIOUS STATE LAWS ARE ENACTED. : 4. Meaning: Value Added Tax. a) Is a multi-point tax on value addition, i. increase in value. b) Which is collected at different stages of sale, and ¢) With a provision for set off for tax paid at the previous stage/tax paid on inputs, against the tax collections on sales, before remitting to the Government's account 2. Basis a) Basic Design: The Empowered Committee of State Finance Ministers brought out a White Paper, which provided a base for the preparation of various state VAT legislations b) State Dependent: Since VAT is a state subject, the State has the freedom for appropriate variations, consistent with the basic design, as agreed upon at the Empowered Committee, 3. Purpose: The purpose of introduction of VAT is to bring harmonization in the tax structure of various States and rationalize the overall tax burden IPCC_ 36.5e_IDT_VAT. BLPh: 98851 25025/26 www.mastermindsindia.com Q.NO.2. WHAT ARE THE DIFFERENT STAGES OF VAT? CAN IT BE SAID THAT THE ENTIRE BURDEN FALLS ON THE FINAL COMSUMER? (M08, N09) COMPARISON BETWEEN SALES TAX SYSTEM AND VAT [M 09, NO9 10% Sales Tax 10% VAT Particulars ice | Government | 5. | Government Price Price Revenues Revenues Mr A sells goods to Mr.B 200 200 Sales Tax @ 10% 20 20| 20 20 Total Cost to Mr. 8 220 220 Mr. B processes and creates final products with the additional labour and capital and selis | 440 400 them to Mr.C, a wholesaler with 100% markup Note Sales Tax /VAT 44 aa[_ 40] 40-20=20 Total Cost to Mr.C. 484 400) Mr.C sells to MrP, a retailer at a 25% Mark-up | 605 500 Sales Tax / VAT 60.5 605] 50 50-40=10 Cost to P 665.5 500 P sells itto the consumer at 100% Mark-up 1331 7,000 Sales Tax / VAT 133 133] ‘100| _ 100-50 = 50 Cost to Final Consumer 1464, 1,100 Total Proceeds to Government 257.50 100 Note: It is assumed that no mark-up in respect ot Vemnponent Conclusion: Price of the final product is morgdxter the sales tax system The objectives of introducing VAT are 4. To avail Credit on inputs, leading to cost efficiency. 2 3. 4. 5. Ensure equitable distribution of tax impact amongst the dealers, Easy compliance through transparent and easy procedures. Easy computation of tax Avoids double taxation through input oredit (i.e, avoidance of cascading effect of taxes), NO. WHAT ARE THE FEATURES OF VAT, AS INDICATED IN THE WHITE PAPER? The White Paper on VAT was released by the then Finance Minister, on 17.01.2008. It reflects the consensus of the State Finance Ministers on the basic design of the State Level Value Added Tax The features of VAT, as indicated in the White Paper, are as follows: 1. General a) Registration of dealers with Gross Annual Turnover above Rs.5 Lakhs would be compulsory. b) Small dealers with Gross Annual Turmover not exceeding Rs. 5 Lakhs will not be liable to pay VAT, but State can extend upto Rs. 10 Lakhs. ¢) Small dealers, with Annual Gross Turnover not exceeding Rs.50 Lakhs, who are otherwise lable to pay VAT, can opt for a composition scheme, with the payment of tax at a small percentage of gross turnover. IPCC_ 36.5e_IDT_VAT. 3.2[No.1 for CA/CWA & MECICEC MASTER MINDS d) Dealers opting for composition scheme will not be entitled to Input Tax Credit. ) There would be a Tax Payer Identification Number (TIN) 2. VAT Liability: VAT Liability of a dealer is to be calculated by deducting input tax credit from tax collected on sales during the payment period Q.NO. 5. WHAT ARE THE VARIANTS OF VAT? (PM) (N 07, N 10, M 12) Different variants of VAT Gross ae variant Income variant Consumption variant Tax is levied on all sales Tax is levied on all sales Tax is levied on all sales, and deduction for tax with set — off for tax paid with deduction for tax paid on inputs excluding colinpute) sony) paid, on all business the capital inputs is depreciation on capital inputs (including capital allowed. goods, goods.) Variant Description The gross product variant allows deductions for taxes on all \ents. No deduction is allowed for tax: Gross Product at the time of purchase and at the time yaaa Capital goods are taxed Ue of sale of goods produc ig those capital goods. b) Modernization and %9 of plant and machinery is delayed due to this double tax treatme ple: y a) The income va¥unt of VAT allows for deductions on purchase of raw materials and components, a8 well as the depreciation on capital goods. (i.e.) Credit on capital purchases are allowed in the ratio of depreciation, Income over the life of the capital asset. Variant b) Limitation: i) This method requires classification of purchases in to revenue and capital expenditure, to claim set of. There are difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset, as well as on the rate of inflation 1. Principle: a) Consumption variant of VAT allows for deduction on all_business purchases, including capital assets. b) Gross investment is deductible in calculating value added 2. Merits: a) it does not affect the decisions regarding investment, because the tax on capital goods is also set off against the VAT liability. Hence, the system is tax neutral, with respect to techniques of production (labour or capital intensive), b) It simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. 3. Limitation: The system is tax neutral from the view point of Government as it leads to loss of revenues to the Government Consumption Variant IPCC_ 36.5e_IDT_VAT. 3.3Ph: 98851 25025/26 www.mastermindsindia.com Q.NO.6. WHAT ARE THE METHODS FOR COMPUTATION OF VAT? (PM) (M09) | Methods of computation of VAT “awe Method Invoice Method Subtraction method Aggregating all the factor || Deducting tax on inputs payments and profit from tax on sales ee“ Direct Subtraction method initrd sub len meticy l Deducting aggregate value of purchases, Deducting tax, inclusive value of exclusive of tax, from the aggregate purchases from the sales and value of sales, exclusive of tax taxing difference between them, The various methods of computation of VAT are’ Method Description 4. Suitability: This method is mainly used with income variant of VAT 2. Demeri a) This method does not ee exemptions of intermediate dealers, Addition b) It does not facilitate SS invoices for detecting evasion. Method ¢) There is no rey tax credit, 3. Computation: x a) Step 1: Ag Fall the factor payments, including profits, to arrive at the total value a b) Step 2: Apply the rate on Step 1 to calculate the tax. 4. Suitability: Under Central Excise Law, this method is followed 2. Salient features: a) The most important aspect of this method is that, at each stage, tax is to be charged separately in the invoice b) In India, this method is followed under the state level VAT and the central excise law. This method is also called the "Tax Credit Method” or “Voucher Method’ 3. Merits: Invoice a) In this method the beneficiary is the trade and Industry, because the tax Method collection at all stages is very much lesser than the tax received by the State, due to the facility of set-off of tax paid. b) The possibility of tax evasion is reduced to minimum, because credit can be claimed only when the purchase invoice is produced. 4. Computatior a) Step 1: Compute the tax to be imposed at each stage of sales, on the entire sale value. b) Step 2: Set-off the tax paid at the earlier stage. (i.e, at the stage of purchases in set-off) ¢) Step 3: The differential tax is paid. IPCC_ 36.5e_IDT_VAT. 3.4No.1 for CA/CWA & MECICEC MASTER MINDS 4. Suitability: This method is normally applied, where the tax is not charged separately, 2. Salient Features: a) Tax is charged only on the value added at each stage of the sale of goods. b) This method is suitable when VAT rate is uniform on all commodities. If VAT rates are different on intermediate products and final products, the calculations become very difficult ©) Tax liability can only be calculated periodically. Since, tax payable on a product is not known, end-use based exemption cannot be given under this Subtraction method Method | 3. Methods of determination of value added: a) Direct Subtraction method: Value added = Total value of sales, exclusive of tax Less: Total value of purchases, exclusive of tax. b) Indirect Subtraction Method Value added = Total value of sales, inclusive of tax Less: Total value of purchases, inclusive of tax 4. Computation: a) Step 1: Compute the value added under either of the above methods b) Step ply the rate of tax on the amount calculated in step Q.NO.7. WHAT ARE THE ADVANTAGES OF VAT? (PM) (M10) tax as under- fhe cascading effect of taxation as it allows the 's and also such tax paid does not form part of cost. dealers to avail the credit of tax paid 2. Effect on retails price: VAT reduceS8W final retail price or does not result in its increase as the credit availed of tax paid earlier results in lower cost of production and Also Exports get cheaper as taxes paid at earlier stages could be availed as credit or refunded in cash. 3. Certainty: VAT is based simply on transactions, which prevents the assessee to go through the complex definitions like sales, sales price, purchase turnover, sales turnover etc. Also, the system has a broad scope applicable to al types sales, hence preventing need for any interpretations. ‘Thus, the system brings simplicity, certainty and less litigation in the tax system to a great extent 4, Transparency: Under VAT, the buyers know the amount of tax paid by them while buying anything as well as the Government knows the amount of tax coming at each stage. As the tax charged has to be shown clearly in the invoice, the system becomes transparent with no hidden taxes. 5. Self-assessment: Under VAT, dealer has to self-assess his tax liability and also there are very less procedural formalities like submission of forms, maintenance of records, ete. 6. Neutrality: VAT prevents cascading effect of tax, which neutralizes the decision of how much value is to be added and at which stage it is to be added. Also, the system is neutral in respect of the choice of techniques of production and form of business organization Since tax credit of both inputs and capital goods is available, there is no distinction between labor intensive and capital intensive industries. (M13) 7. Better accounting systems: VAT leads to better accounting systems as the maintenance of records and purchase invoices is necessary in order to avail the credit of tax paid on purchases, IPCC_ 36.5e_IDT_VAT. 3.5Ph: 98851 25025/26 www.mastermindsindia.com 8. Better revenue collection and Stability: In VAT, credit of tax paid earlier is allowed only on production of purchase records. This condition leaves no scope for the dealers to suppress any purchase, hence preventing revenue leakage. 9. Helps to tax consignment of goods: Since VAT provides credit of taxes paid against taxes payable, ithelps in taxing consignment of goods, if such tax is introduced at par with VAT. 10.No Tax evasion: Under VAT. credit of tax paid on inputs is allowed only if the dealer has maintained the proper records of such purchases. If the dealer fails to maintain such records, then he won't be able to claim credit resulting in loss of revenue to him. Hence, suppression of purchases is difficult leading to no evasion of tax. 14. Effective Audit: Since the credit can be claimed only on production of purchases records, hence it becomes necessary for the dealers to maintain proper records of invoices. These invoices help in effective audit 12. Increased tax compliance: VAT acts as a self-policing mechanism as the buyer can get credit of tax paid only if the seller issues the invoice showing tax and thus, the buyer insists on getting the invoice from the seller, thereby acting as a police for the seller. Q.NO. 8. WHAT ARE THE LIMITATIONS OF VAT? (M41) Deficiencies of VAT system: The major deficiencies of VAT system as under: 1. Maintenance of detailed accounting records: VAZ system requires maintenance of detailed accounting records which increases the account st Such increased cost may not be affordable by small traders and firms as it meee ‘the benefit received by them from such system, SS 2. Problems arising due to different VAT, ind concessions: VAT is advantageous in case there exists a single rate of VAT without iptions, concessions and / or composition schemes. Such different VAT rates, exemptios ‘eessions, etc, may bring distortions and may also result in cascading effect of taxation 3. Increase in working capital requirements: Since tax is to be imposed at every stage of sale and not on last sale, it resutts in increase in working capital requirements and interest burden on the same However, this criticism is not fully correct as availability of credit on inputs decreases cost of production and ultimately final price and this reduction in price is more than increase due to interest cost. 4, State VAT not integrated with Central VAT: Until the State VAT is integrated with Central VAT and Central Sales Tax, it will be difficult to put at par the purchases from other states with the State purchases because tax on inter-state purchases (ie. CST) is not available as credit / set-off while tax on intra-state purchases (i.e. VAT) is available as credit / set-off. Thus, the advantage of neutrality is confined to purchases within the State. 5. VAT is regressive in nature: VAT is regressive in nature as it is levied on final sale price charged from the consumers and the poor people spend higher proportion of their income on necessities / consumable goods, hence incidence of VAT tends to higher on the poor. 6. Increase in administration cost: The administration cost to the State has increased due to increase in number of dealers under the VAT system. 7. Consumption favoured over production: Since, VAT is a consumption based tax, itis collected by the State consuming the goods. Thus, States where consumption is higher tend to get more revenue than States where production is higher. 8. Tax evasion through bogus invoices: Since input tax credit can be availed on the basis of invoices, dealers try to claim tax credit on the basis of fake invoices — where no purchases has been made — thereby causing loss of revenue to the exchequer. IPCC_ 36.5e_IDT_VAT. 3.6(No.1 for CA/CWA & MECICEC MASTER MINDS ) Q.NO.9. WHICH GOODS ARE NOT COVERED UNDER VAT? | 1. As per the White Paper, generally, all the goods, including declared goods will be covered under VAT and get the benefit of input tax credit 2. Goods not covered under VAT a) Petrol, diesel, Aviation Turbine Duel(ATF) or other motor spirit b) Liquor and ) Lottery tickets The above goods are not covered under VAT because their prices are not fully market determined 3. Though sale of liquor, petrol, diesel and aviation turbine fuel (ATF) is charged to tax under VAT laws in many States, taxes paid on them are not allowed as credit to the buyer. In other words, they are outside the VAT chain. ATF and petroleum products are liable to minimum 20% VAT in most of the States. Q.NO.10. Write a brief note on rates of VAT ] The following table depicts the various tax-rates prevalent under the VAT system along with a brief description as regards their applicability, - Rate Descring@r® Natural and unprocessed products in unegeed sector (e.g. firewood, plants) - Items 0% | which are legally barred from taxatio tems which have social implications (e.g national flag, salt) { Se 49 | This category is meant for pre SNones, precious and semi-precious metals, bullion, gold and silver ornaments, et 1a) Items of basic necessities like medicines and drugs, all agricultural and industrial inputs, declared goods & capital goods. Originally White Paper had proposed 4% rate 5% on such goods but many States have subsequently increased this rate to 5%. b) Rate of declared goods has also been increased to 5% by many States after amendment of CST Act w.e.f. 08.04.2011 All goods other than the goods falling under aforesaid categories and other than luxury 12.5% | Goods 20% | Luxury goods Note: Though the general rates of VAT are as given hereinabove, however, depending upon the requirements of the State, the States are imposing VAT at other rates as well TS ET 1. X,a manufacturer sells goods to Mr. B, a distributor, for Rs. 2,000 (excluding of VAT). Mr. B sells goods to Mr. K, a wholesale dealer, for Rs. 2,400. The wholesale dealer sells the goods to a retailer for Rs. 3,000, who ultimately sells to the consumers for Rs. 4,000. Compute the Tax Liability, Input credit availed and tax payable by the manufacturer, distributor, wholesale dealer and the retailer, under Invoice Method assuming VAT @ 12.5% (N09) IPCC_ 36.5e_IDT_VAT. 3.7Ph: 98851 25025/26 www.mastermind: Solution Output | Output Net VAT Particulars | Input value | Input Tax valve Tee payable (1) (2) (3) (4) (5) (6) = (5) - (3) Sale by X toB = = 2,000 250 250 Sale by B to K 2,000 250 2,400 300 50 Sale by Kto 2,400 300 3,000 375 75 Retailer Sale by DtoE, 3,000 375 4,000 500 125 2. Briefly answer the following questions:- a) Which is the most popular and common method for computing VAT liability and at what stage is the tax imposed under this method? b) Can VAT be said to be non-beneficial as compared to single stage-last point system? c) What are the items aggregated in the addition method to calculate the VAT payable? When is this method mainly used? d) Does White Paper on VAT allow only a manufacturer to avail set off of input tax credit ‘on capital goods and not a trader? (PM) Soluti a) Invoice method is the most common and pop hod for computing the tax liability under the VAT system. Under this method, tax is, d at each and every stage of sale on the entire sale value, and the tax paid at the e¢ tage is allowed as set-off. b) VAT system has many advantage; reduction in cascading effect of ta system. However, since VAT is, reduced tax evasion, transparency, certainty, which are not there in the single stage-last point 1d oF paid at various stages and not at last stage, it increases the working capital ements and the interest burden on the same. To this extent, it may be considered non-beneficial as compared to the single stage-last point taxation system though to a large extent, this rigour is brought down through input tax credits on purchases. c) Under addition method, all factor payments (excluding value of material) and profit are added to arrive at the value addition on which VAT rate is applied to compute the VAT payable. This method is mainly used with income variant of VAT. d) No. As per the White Paper on VAT, set off of input tax credit on capital goods is available to both manufacturers and traders, 3. Briefly explain whether following purchases are eligible for availing input tax credit: a) Rohan purchased goods from a registered dealer. He claims to have paid VAT on the said goods but the invoice pertaining to said purchase has been lost on account of negligence of a clerk in his office. b) Jain & Co. purchased goods from Tide Enterprises. Tide Enterprises is an unregistered dealer. c) Ankit purchased some capital goods. The final product manufactured by Ankit using these capital goods is exported. d) Mohan purchased goods for being used in execu e) Singla & Co. purchased goods from Malhotra Enterprises, a registered dealer. Malhotra Enterprises has opted for composition scheme under the provisions of respective State VAT Act. n of a works contract. f) Sahil purchased goods from Ganesh. Ganesh has not shown VAT charged on the purchase value, separately in the invoice. (PM) IPCC_ 36.5e_IDT_VAT. 3.8[No.1 for CA/CWA & MECICEC MASTER MINDS 5. Solution: a) Input tax credit cannot be claimed on purchase made by Rohan as the purchase invoice is not available with him. b) Purchases made by Jain & Co. from Tide Enterprises are not eligible for input tax credit as Tide Enterprises is not a registered dealer. ¢) Capital goods used for manufacturing/packing goods to be sold in the course of export out of the territory of India are eligible for claiming input tax credit. Thus, Ankit can claim input tax credit on capital goods purchased by him. d) Mohan can claim input tax credit as purchase of goods for being used in execution of a works contract are eligible for input tax credit e) Purchases made by Singla & Co. from Malhotra Enterprises are not eligible for input tax credit as purchases from registered dealer who opts for composition scheme under the provisions of respective State VAT Act are not eligible for input tax credit f) Purchases made by Sahil are not eligible for input tax oredit as the invoice issued by Ganesh does not show VAT charged on the purchase value separately in the invoice. Raj and Co., a manufacturer of product ‘X’, sold its goods to a distributor at Rs. 11,250. The distributor sold the goods to wholesaler for Rs. 13,500. The wholesaler sold the goods to a retailer for Rs. 16,875, The retailer sold the goods to consumer at Rs. 22,500. All the sales were inclusive of VAT @ 12.5%. Compute total VAT payable under the subtraction method. (PM) Solution Computation of VAT payable by under subtraction method Particulars (SRR added (Rs.) VAT (Rs.) Sale by manufacturer to distributor 5 14,250 1250x125 y=1,250 1125 Sale by distributor to wholesaler 13,500 - 11,250 = 2,250 12.5 [2250X 1-250 112.5 Sale by wholesaler to retailer 16,875 - 13,500 = 3,375 12.5 [3375x = ]=375 112.5 Sale by retailer to consumer 22,500 - 16,875 = 5,625 [5625x125 y=695 112.5 Total VAT payable 2,500 Compute the VAT payable at each stage using ‘invoice method’ from the particulars given belo Stage Particulars Profit (as % of cost price) 7. | Lifeline Medicaids Ltd. sold the medicines manufactured by it - ; to the distributors of medicines- Healers Pharmacy — at Rs. 80,000. 2, | Healers Pharmacy sold the medicines to the wholesalers- All 18% Well Medicos. 3. |All Well Medicos sold the medicines to the refailers- Cure 20% Medicines. @._| Cure Medicines sold the medicines to the ultimate consumers 28% IPCC_ 36.5e_IDT_VAT. 3.9Pl 8851 25025/26 www.mastermind: om Assume that the VAT rate is 4% and that there was no value addition at various stages of sale except profit margin. (MTP)(FEB 14) Solution: Computation of VAT payable:- Stage Less VAT Tax to Particulars VAT Liability Grea cone 1.__| Medicines sold by Lifeline 0,000 « 4% = 3,200 Medicaids Ltd. to Healers = 3,200 Pharmacy at Rs.80,000 2. | Medicines sold by Healers 3,200 480 Pharmacy to All Well Medicos at Rs, 92,000 (Rs. 80,000 x 115%) 3.__| Medicines sold by All Well to 10,400 * 4% = 3,680 736 Cure Medicines at Rs. 1,10,400 | 4,416 (Rs. 82,000 x 120%) 4. | Medicines sold by Cure (38,000 * 4% = 4416 7,104 Medicines to ultimate consumers | 5,520 at Rs. 1,38,000 (Rs. 1,10,400 *125%) 6. Sowmya Enterprises, a dealer i i Chandigarh, purchased the raw material worth Rs. 50,00,000 (excluding VAT) and manufactured finished goods worth Rs. 90,00,000 from such raw material in the month of April, 2016. It acquired Plant & Machinery worth Rs. 30,00,000 on which 100% input tax credit is available in the year of acquisiten itself. Sowmya Enterprises incurred manufacturing expenses of revenue nature @wORh Rs. 12,00,000 for the manufacture of finished goods. It incurred manufacturing e} % of capital nature worth Rs. 22, 00,000 for the manufacture of finished goods. Compgte¥he VAT liability of Sowmya Enterprises for the month of April, 2016 under gross prodyéSvgiant and consumption variant of VAT. Input and ‘output VAT rate is 4%. State which va fonts ‘beneficial to Sowmya Enterprises? (RTP)(N 13) an Solution Ss Under gross product variant of VAP deduction for taxes on all purchases of raw materials and components is allowed. However, deduction for tax paid on capital goods is not allowed. Hence, the VAT liability under gross product variant would be calculated as under: Computation of VAT liability under Gross Product V: Particulars Rs, VAT payable on sales (90,00,000 x 4%) 3,60,000 Less: Input VAT allowed on raw material (50,00,000 x 4%) 2,00,000 Net VAT payable 1,60,000 Under consumption variant of VAT, deduction for taxes paid on all business purchases including capital goods is allowed, Hence, VAT liability under consumption variant would be calculated as under. Computation of VAT liability under Consumption Variant Particulars Rs. Rs. VAT payable on sales (90,00,000 x 4%) 3,60,000 Less: Input VAT allowed on raw material (50,00,000 * 4%) 2,00,000 Input VAT allowed on capital goods (30,00,000 « 4%) (whole input tax credit is allowed in the year of acquisition itself 1,20,000 | 3,20,000 Net VAT payable 40,000 Since, the net VAT liability under consumption variant is less than the VAT liability under gross product variant, consumption variant is beneficial to the Sowmya Enterprises, THE END IPCC_ 36.5e_IDT_VAT. 3.10(WWo.t for CAICWA & MECICEC MASTER MINDS ) PART 2. CONCEPTS OF INPUT TAX CREDIT UNDER WAT NO. QUESTION ABC 1. | Elucidate the concept of input-tax as well as output-tax B 2, | What purchases are not eligible for input tax credit? OR What are the |, "| exception to input-tax credit 3.__| Eligible purchases for availing input tax credit A 4,__ | What is carrying over of input-tax credit? When is refund of unutilized input- | tax credit allowed What is need for allowing credit of capital goods? Write a note on provisions relating to capital goods in the White Paper on State-VAT laws How is input credit allowed on common goods used for taxable goods & tax-free goods Incentives to exporters and deemed exporters Differentiate between exempt sales and zero-rates sales How are stock/branch transfers accounted for under VAT laws - leis} > >lal>} > | > Q.NO.1, ELUCIDATE THE CONCEPT OF INPUT-TAX AS WELL AS OUTPUT-TAX Input tax: Input tax means the tax paid or payable by a dealer of a State on purchases 4. Of any goods (including raw materials; capital goods i for resale; or other inputs), Sj 2. Made in the course of his business, S SS Copyrghs Reserved 3. From a registered dealer within the State. QO To MASTER MINDS, Guntur nt, machinery, ete., goods intended Output tax: 1. Output tax is the tax charged or charg by a registered dealer on sale of goods made by him in the course of his business. 2. The output tax for a seller becomes the input tax for the purchaser. Example: 4. Mr. A sells goods valuing Rs.1 lakh to Mr, B, The VAT rate is 4%, In this case, Mr. A will collect Rs 4,000 (4% of Rs.1 lakh) from Mr. B. This sum of RS 4,000 is “output tax” for Mr.A 2. Mr. B.will pay Rs.1,04,000 (Rs.1 lakhs towards the price of the goods and Rs. 4,000 towards the tax). Tax of RS 4,000 paid by Mr. B is “input tax” for him, Q.NO.2. WHAT PURCHASES ARE NOT ELIGIBLE FOR INPUT TAX CREDIT/ OR WHAT ARE THE EXCEPTION TO INPUT-TAX CREDIT? Following are not le for input tax credit: 1. Dealer specific res! Purchases from a) An unregistered dealer, or b) Arregistered dealer who has opted under composition scheme for payment of VAT 2. Goods specific restriction: Purchase of goods a) As may be notified by the State Government, as being ineligible b) Goods in stock, which have suffered tax under an earlier act but under VAT act they re covered under exempted items (This is a transactional provision) IPCC_ 36.5e_IDT_VAT. BALPh: 98851 25025/26 www.mastermindsindia.com 3. Invoice related restrictions: Purchase of goods where the purchase invoice a) Does not show the amount of tax separately b) Is not available with the claimant, or ¢) Has not been issued by the selling registered dealer from whom the goods are purported to have been purchased (based on evidence available) (i.e., "bogus purchases” or “fake bills") 4. Location specific restrictions: Goods imported from a) Outside India (i.e. “high seas purchases’ — custom duty paid cannot be taken as input tax) b) Other states (i.e. “inter-state purchases" - CST cannot be taken as input tax ) 5. Use related restrictions: Purchase of goods, which are being utilized a) In the manufacture, of exempted goods, or (partial credit is available in some states) b) As fuel in generation of power, or c) For personal use/consumption d) For given away free of change as gifts (partial credit is available in state of Maharashtra) Q.NO 3. ELIGIBLE PURCHASES FOR AVAILING INPUT TAX CREDIT. (N12) Purchases eligible for input tax credit: The purchase shall be eligible for availing input tax-credit if they are made — 4. For sale / resale within the State; & 2. For sale to other parts of India in the course oS tate trade or commerce. 3. To be used as - a) Containers or packing materials; ©} b) Raw materials; or SS ¢) Consumable stores, Required for the purpose of manufacture of taxable goods or in the packing of such manufactured goods intended for sale in the State or in the course of inter-State trade or commerce; 4. For being used in the execution of a works contract, 5. To be used as capital goods required for the purpose of manufacture or resale of taxable goods; 6. To be used as - a) Raw materials ) Consumable stores; and b) Capital goods d) Packing materials / containers, For manufacturing / packing goods to be sold in the course of export out of the territory of India: 7. For making zero-rated sales. (Zero-rates sales are the sales of those goods, which are chargeable to VAT at 0% rate of tax.) Q.NO.4. WHAT IS CARRYING OVER OF INPUT-TAX CREDIT? WHEN IS REFUND OF UNUTILIZED INPUT-TAX CREDIT ALLOWED? Input-tax oredit is to be utilized, sequentially, as under ~ 4. For payment of VAT for the relevant period ; 2. Excess credit remaining, if any, can be adjusted against CST for the relevant period IPCC_ 36.5e_IDT_VAT. 3.12[No.1 for CA/CWA & MECICEC MASTER MINDS 3. If, after set-off against VAT and CST as above, the excess of input VAT credit, if any, a) will be eligible to be carried forward to the next tax-period and so on upto the next financial year, b) Ifthere is any, excess, unadjusted input tax credit at the end of second year, then the same is, required to be claimed as refund c) However, some States grant refund after the end of first financial year itself. Illustration: Treatment of input VAT- credit: Mr.A presents following details for March, 2017 4. Opening Balance of Input VAT credit as on 1-3-2017: Rs. 15,000. Inputs purchased during the month of March: Rs. 15 lakh. Within the state sales of manufactured goods: Rs. 20 lakh. aeN Inter-state Sales: Rs. 4 lakh CST rate is 2%. There was no inventory as 1-3-2017 or 31-3-2017. The VAT laws governing Mr, A provide for the refund of input-VAT credit after the end of the first financial year itself. VAT rate is 12.5% on inputs and 4% on sales. Compute the amount of refund available to Mr. A Solution: Computation of refund available to Mr. (amounts in Rs.) Opening balance of input VAT-credit 15,000 Add: VAT credit availed on inputs purchased during March (12.5% of 15 lakhs) | 1,87,500 Less: VAT payable on sales (4% on RS 20 lakh) (80,000) Less: CST payable on inter-state sales (2% on 4 lakh) (8,000) Balance lying as VAT-credit as on 31-3-2017 eligiblétoy refund 1,14,500 Q.NO.5. WHAT IS NEED FOR ALLOWING CREDCSP CAPITAL GOODS? WRITE A NOTE ON PROVISIONS RELATING TO CAPITAL GOODS(0L THE WHITE PAPER ON STATE-VAT LAWS. 7 IRe credit of VAT paid on capital goods is not allowed, then, the cost of the capital goods ag@XS'depreciation thereon will be higher. This will ultimately increase the selling price of the goodSMhereby, leading to cascading effect of taxation since VAT will be imposed on selling price, which includes depreciation element on capital goods inclusive of VAT not allowed as credit. 2. Policy in white paper as regards credit on capital qoods: The White Paper on State-VAT laws contains the following policy decisions as regards credit on capital goods — 4. Need for input-credit on capital g a) Credit to all dealers: Input credit on capital goods will be available to traders and manufacturers, b) Negative list for capital goods: Not all capital assets are eligible for credit as capital goods. There will be a negative list for capital goods, which will not be eligible for input credit. Such negative list is to be based on certain principles agreed to by the Empowered Committee, ¢) Deferred credit scheme: The State Government have been authorized to allow the credit of capital goods either at once ie. 100% credit of VAT paid on capital goods is allowed immediately on purchase of capital goods, or, alternatively, the State Governments may allow input-credit on capital goods on installment basis. The number of installments cannot exceed 36 months or 3 years. Q.NO.6. HOW IS INPUT CREDIT ALLOWED ON COMMON GOODS USED FOR TAXABLE GOODS & TAX-FREE GOODS? 4. Input VAT credit is allowed only in respect of those goods/inputs, which have been used in the manufacture or processing, etc. of the taxable goods. IPCC_ 36.5e_IDT_VAT. 3.138851 25025/26 www.mastermind: om 2. No input-VAT credit is allowed in respect of inputs used in manufacture, etc, of tax-free goods. 3. Taxable goods Means the goods, which are chargeable to VAT i.e. goods other than the goods specified as tax-free goods' in the Schedule to the VAT-law. 4, Common goods: Where any inputs are used in the manufacture, etc. of taxable as well as exempt (tax-free goods), then, input-tax credit shall be allowed proportionately only in respect of those inputs which have been used in the manufacture, etc. of the taxable goods. Illustration - Input-credit on common goods: Mr. K, 2 manufacturer of taxable as well as tax-free goods, furnishes the following information for the month of March, 2017 a) Sale of Product A (tax-free goods):Rs. 50 lakhs b) Sales of Product B (taxable goods):Rs. 100 lakhs (VAT @ 12.5%); ¢) Purchases of input ’ (used in manufacture of Product A only):Rs. 30 lakhs (VAT @ 4%) ; d) Purchases of input ‘Y’ (used in the manufacture of Product B only):Rs.75 lakhs (VAT @ 4%) e) Purchases of input Z' (used in the manufacture of Product A & B):Rs.15 lakhs (VAT @ 20%). There was no inventory as on 1-3-2017 as well as on 31-3-2017. Compute the amount of VAT payable in cash by Mr. K for the month assuming that input ‘Z' is used in product A and B in the ratio of 1:2. Ignore implications under other laws. Solution: Computation of VAT liability of Mr. K for the month of March, 2017 (Amt in lakhs) VAT on sales of product B (RS 100 lakhs x 12, 5%S 126 Less: Input VAT credit on input 'Y’ (75 lakh: 3 Proportionate credit on input Z (15 lakhs ee 2 VAT payable in cash by Mr. K € 78 NO. INCENTIVES TO EXPORTI ND DEEMED EXPORTER’ 4. Refund to Exporters: a) Exports are zero rate sale and are not liable to VAT b) Credit of VAT paid on inputs used in manufacture of export goods or goods exported is allowed ¢) Refund: Hence, the white paper provided that in case the goods are exported, the input tax paid by the dealer shall be refunded d) Time: It is to be granted within 3 months from the end of period during which export was made. 2. Exemption or refund to SEZ & EOU units: Units located in Special Economic Zones and Export oriented Units (EOUs) are not liable to VAT, as they are only engaged in export of goods out of india They are provided incentives in respect of input-tax credit on purchases made by them in either of the following manner — a) Exemption from payment of tax on purchases (i.e. procurement of inputs/ capital goods without payment of any Input-VAT); or b) Refund of input-VAT credit on purchases made by them within 3 months from the date / tax- period of purchase. (State Government may reduce this time-period of 3 months), IPCC_ 36.5e_IDT_VAT. 3.14(No.1 for CA/CWA & MECICEC MASTER MINDS ) Q.NO.8. DIFFERENTIATE BETWEEN EXEMPT SALES AND ZERO-RATE SALES. | Exempt sale: In case of exempt sale, no VAT credit is available. In case of non-taxable transactions like samples / gifts, Zero rating: Zero rating means tax on any goods is fixed at 0%. As against exempt sale, in case of Zero rated sales (e.g. export sales), the dealer can avail input VAT credit. Q.NO.9. HOW ARE STOCK/BRANCH TRANSFERS ACCOUNTED FOR UNDER VAT LAWS? ] Stock/Branch transfers i.e. transfer of stock from head office to the branch or vice-versa (viz. Inter- State transfers) do not involve sale and, therefore, they cannot be subjected to sales-tax/VAT. However, if - a) Inputs are used in the manufacture of finished goods, which are stock/branch transferred; or b) Goods purchased for re-sale are stock/branch transferred. Then, tax paid on such inputs/goods will be available as input tax credit subject to retention of 2% out of such tax by the State Governments For example, Mr. Ram purchases goods valuing Rs.1 lakh (VAT @ 12.5%) from Rajasthan and transfers the same to his branch located at Delhi. In this case, out of total input credit of Rs.12,500, the credit of only Rs.10,500 (in excess of 2% i.e. 10.5% (12.5% -2%) of RS. 1 lakh) will ly be availabl only be available. 2 UTS UY 4. Show the format of a TAX Invoice. Solution: No prescribed statutory format n for tax invoice in any State VAT Act. A proforma might look as below TAX INV IGINAL BUYER'S COPY Seller's Name Tax Invoice No: Address: Date’ Phone No. Challan No. and Date: VAT Registration No: Buyer's Name and Address: CST Registration No: Buyer's VAT Registration No. (If any) Se ee Rupees in figures E&OE Signature (Selling Dealer or his authorized Employee) IPCC_ 36.5e_IDT_VAT. 3.15Pl 8851 25025/26 www.mastermind: 2. Compute net VAT liability of Rishi, from the following information: Particulars Rs. Rs. Raw materials from foreign market 1,20,000 (Includes duty paid imports @ 20%) Raw material purchased from local market 2,50,000 Cost of raw material 40,000 Add: Excise duty @ 16% 2,90,000 14,600 Add: VAT @ 4% 3,01,600 Raw material purchased from neighboring state (includes CST @ 2%) 51,000 Storage and transportation cost 9,000 Manufacturing expenses 30,000 Rishi sold goods to Madan and earned profit @ 12%, on the cost of production. VAT rate ‘on sale of such goods is 4%. (Pm) Solution Particulars Rs Raw materials from foreign market 7,20,000 Raw material purchased from local market (cost-portion only) 2,90,000 Raw materials purchased from neighbouring, 51,000 Storage and transportation cost 9,000 Manufacturing expenses \S 30,000 Cost of production Q ,00,000 Add: Profit margin at 12% 60,000 ‘Sale Value SS 5,60,000 VAT on sale value at 4% 22,400 Less: VAT on purchases = (2,90, 080 x 4%) 11,600 Net VAT liability 10,800 3. Compute the total value of purchases, eligible for input tax credit, from the following particulars: Particulars Rs. Inputs purchased from a registered dealer, who opts for composition 10,000 scheme, under the VAT Act Inputs purchased for being used in the execution of a works contract 7,00,00 Raw material purchased from unregistered dealers 70,000 High seas purchases of inputs 1,00,000 Goods purchased for sale to other parts of India, in the course of Inter-| 20,000 State trade or commerce Solution Computation of purchases eligible for Input Tax Credit Particulars Rs. je Purchases Input purchased for being used in the execution of a works contract, 1,00,000 Add: Goods purchased for sale to other parts of India in the course of Inter- State trade or commerce 20,000 IPCC_ 36.5e_IDT_ VAT. 3.16(No.1 for CA/CWA & MECICEC MASTER MINDS 4, Purchases eligible for input tax credit 1,20,000 Ineligible purchases Inputs purchased from a registered dealer who opts for composition scheme under the VAT Act 10,000 Raw material purchased from unregistered dealers 70,000 High Seas purchases of Inputs 4,00,000 Purchases not eligible for put tax credit 180,000 Note: For the purpose of computation of value of purchases eligible for input tax credit, the following have not been included: a) Inputs purchased from a registered dealer, who opts for composition scheme, under the provisions of the Act, of worth Rs. 10,000. b) Raw material purchased from unregistered dealers, of worth Rs. 70,000 c) The inputs imported from outside the territory of India, commonly known as high seas, purchased of worth Rs. 1,00,000 Mr. Rajesh is a registered dealer and gives the following information. You are required to compute the net tax liability and total sales value, under Value Added Tax a) Rajesh sells his products to dealers in his state and in other states. b) The profit margin is 15% of the cost of production and VAT rate is 12.5% of sales. c) Intra State purchases of raw material costs Rs. 2,50,000/- (excluding VAT at 4%) d) Purchases of raw material from an unregistered dealer for a cost of Rs. 80,000/- {including VAT at 12.5%) ) High seas purchases of raw material are for Rs.1,85,000 (excluding the custom duty, at 10% of Rs.18,500) f) Purchases of raw materials from other states (excluding CST at 2%) Rs. 50,000. 9) Transportation charges, wages and other manufacturing expenses, excluding tax, amounts Rs.1,45,000. h) Interest paid on bank loan is Rs. 70,000 (PM) (RTP MAY ~ 16) (N 10) Solution Particulars Rs. Intra State Purchases 2,50,000 Purchase from unregistered Dealers 80,000 High seas purchases (1,85,000 + 18,500) - (Including Customs Duty paid will be considered) 2,03,500 Purchase from other states (50,000+1,000)- (Including CST paid will be considered) 51,000 Transportation charges, wages and other manufacturing expenses 1,45,000 Cost of Production 7,29,500 Add: Profit Margin at 15% 1,09,425 Sale Value 8,368,025 VAT on Sale Value at 12.5% 104,866 Less: VAT on purchases = (2,50,000 x 4%) (10,000) Net VAT Liability 94,866 IPCC_ 36.5e_IDT_VAT. 3.178851 25025/26 www.mastermind: Note: 4. Interest paid will not form part of cost of production. 2. VAT paid on raw materials purchased from unregistered dealers, are not eligible for input credit, and hence added with cost. 5. Mr. Goenka, is a trader who sells raw materials to a manufacturer of finished products. He imports his stock in trade, as well as purchases the same from the local markets. Following transaction took place during the financial year 2016-17. Calculate the VAT and invoice value charged by him to a manufacturer. Assume the rate of VAT @ 12.50 percent. (PM) Particulars Rs. Cost of imported materials (from other state), excluding tax 1,00,000 Cost of local materials, including VAT 2,25,000 Other expenditure, includes storage, transport, interest and loading and unloading, and the profit earned by him 87,500 Solution If raw material imported Particulars from other State is subject to CST @ 2% Rs. Cost of material imported from other State 7,00,000 CST on the above WS 2,000 Cost of local material, excluding VAT NS (Rs. 2,25,000 x 100 + 112.5) 2,00,000 Other expenditure, including storage, loading / unloading expenditure, and the profit 87,500 Total 3,89,500 Add: VAT @ 12.5% 48.687 Total 4,38.187 X can claim an input VAT credit to the extent of Rs. 25,000 (i.e., cost of local raw material: Rs. 2,25,000 x 12.5 + 112.5) 6. From the following information provided by M/s RA Ltd., registered under VAT law of Gujarat as dealer in consumer goods, compute the amount of net VAT payable for the month of July, 2016 and VAT credit to be transferred, if any (PM) Purchase of raw material (within the State) Item Amount in Rs. Rate of VAT Goods X 7,50,000 Exempt Goods Y 25,00,000 1% Goods Z 35,00,000 12.5% Sales Particulars of State in which goods are sold Amount | VAT/ CST finished goods sold Value inRs. Rate % i) Produced from | Gujarat 5,00,000 | 12.5% VAT Sota Inter-State sales to Maharashtra 6,00,000 2% CST IPCC_ 36.5e_IDT_VAT. 3.18(No.1 for CA/CWA & MECICEC MASTER MINDS ii) Produced from Gujarat 30,00,000 Exempt goods Y iii) Produced from | Gujarat 40,00,000 | 4% VAT goods Z Raw materials valued at Rs. 5 lakh of goods Z have been transferred to the branch in Madhya Pradesh during the month. All figures of purchases and sales given above are exclusive of taxes. Make assumptions where required and provide suitable explanations. Solution Computation of Net VAT payable by M/s. RA Ltd. for the month of July, 2016 Particulars ‘Amount in Rs. (A) | Output VAT payable On sale of finished goods produced from Goods X within 62,500 Gujarat (Rs. 5,00,000 * 12.5%) On sale of finished goods produced from Goods Z within 1,60,000 Gujarat (Rs. 40, 00,000 « 4 %) Total (A) 2,22,500 (B) [input tax credit available (i) Goods X (Exempt) Nil (ii) Goods ¥ (Note-2) Nil (iii) Goods Z transferred to branch (Rs. 5,00, 00@¢5%) (Note-3) 52,500 (iv) Remaining Goods Z after transfer to heen 3,75,000 [Rs. (35,00,000- 5,00,000)x12,5%} Total (B) S 4,27,500 Net VAT payable = (A)-(B) (2,085,000) CST payable (Rs. 6,00,000 x 2%SRS 12,000) on inter-state sale 12,000 of goods produced from coogi (Note-4) Excess input tax credit carried forward to next month 1,93,000 Notes: a) It is assumed that there is no opening and closing inventory. Hence, entire purchases of the raw materials have been used to manufacture the respective finished goods. b) Goods utilized in the manufacture of exempted goods are not eligible for input tax credit. Hence, no input tax credit is available in respect of VAT paid on purchase of Goods, 'Y’ as they have been used to produce goods which are exempt from VAT. ¢) In case of stock transfer, input tax paid in excess of 2% can be claimed as input tax credit. d) Input tax credit can be used to set off the central sales tax payable on the inter — state sales. 7. ABC & Co. purchased raw material ‘A’ for Rs. 30,00,000 plus VAT at 12.5%. Out of such raw material 80% was used for manufacture of taxable goods and the balance for the manufacture of exempted goods. Another raw material ‘B’ was purchased for Rs. 20,00,000 on which VAT was paid @1%. Out of the raw material ‘B’, 50% was used for manufacture of taxable goods and the balance for the manufacture of exempted goods. The entire taxable goods were sold for Rs. 44,00,000 plus VAT at 12.5%. There was no ‘opening or closing inventory of taxable goods or raw materials. Compute the Vat liability of ABC & Co. (PM) IPCC_ 36.5e_IDT_VAT. 3.19Ph: 98851 25025/26 www.mastermind: Solution Computation of VAT ty of ABC & Co. Particulars Rs. Rs. ‘Output VAT (44,00,000 x 12.5%) (A) 5,50,000 Input VAT (B) Raw material ‘A’ (30,00,000 x 80% x 12.5%) (Refer Note 1) 3,00,000 Raw material ‘B’ (20,00,000 x 50% x 1%) (Refer Note 2) 40,000 | _3,10,000 Net VAT payable by ABC & Co. (A) - (B) 2,40,000 Notes: 4. In respect of the raw material ‘A’, input tax credit is allowed only to the extent raw material ‘A’ is used in manufacture of taxable goods and hence the same is restricted to the extent of 80%, 2. In respect of the raw material ‘B', input tax credit is allowed only to the extent raw material ‘B is used in manufacture of taxable goods and hence the same is restricted to the extent of 50%. 8. The following particulars are provided by Mr. Prohit of Calcutta, who has purchased raw materials for manufacturing PVC Cans and PVC Pipes from Mr. Arvind. The State VAT for raw materials and other materials was 12.5%. (PM) Particulars Rs. 1._ | Cost of raw materials purchased SF 41,00,000 2._| VAT paid by Mr. Arvind 12,500 3._| Cost of other materials-Local_ <3 20,000 4._| Interstate purchases 40,000 5._| VAT paid on local materials pirahased -12.5% 2,500 6. | CST paid @ 2% 800 7._ | Manufacturing expenses 39,200 8._| Profit margin (on Sale Value) 20% Mr. Prohit utilized and manufactured 75% of production as PVC cans and 25% of production as PVC pipes. While PVC cans are subject to 12.5% VAT, PVC pipes are exempt. All materials were used in production and there was no closing stock of raw materials and other materials. What would be the invoice value of sales charged by Mr. Prohit if all the manufactured goods were sold within the State? What would be his liability to VAT? Solution Computation of invoice value of sales charged by Mr. Prohit: PVC Cans PVC Pipes (12.5% VAT) (exempt) Particulars Rs Rs 75% 25% Cost of raw materials purchased 75000 25000 VAT paid NIL (refer Note 2) | 3125 (refer Note 3) Cost of other materials local 15000 5000 VAT paid Nil (refer Note 2) | 625 (refer Note 3) Interstate purchases 30000 10000 IPCC_ 36.5e_IDT_VAT. 3.20[No.1 for CA/CWA & MECICEC MASTER MINDS CST paid (Refer Note 4) 600 200 Manufacturing expenses 29400 9800 Cost of goods sold 150000 53750 Add: Profit is 20% on sales (ie., 25% of cost) 37500 13438 Sale price 187500 67188 ae payable (rounded off to nearest ae mat Invoice value 210938 67188 ‘Computation of VAT liability for PVC Cans: Particulars Rs. Output VAT. 23438 Less : Input VAT = [(12500 * 75%)+(2500%75%)] refer Note 5 11250 Net VAT liability 12188 Notes: 1, Allthe expenses have been apportioned in the ratio of 3:1 on pro-rata basis 2. Since PVC Cans are taxable goods, VAT paid on raw materials is allowed as input tax credit and thus, the same will not form part of total cost. 3. Since PVC pipes are exempt goods, VAT paid on raw materials will not be allowed as input 5. Input tax credit to the extent (75%) used gage oesn of taxable PVC Cans is allowed, 9. Following are the details of purchase , etc. effected by Vasudha & Co., a registered dealer, for the year ended 31.3.2017:<©) NBurticulars: Rs. Purchase of raw materials within State (1000 units) inclusive of VAT levy at | 2,70,000 12.5% Inter-State purchases of raw materials, inclusive of CST at 2% 2,04,000 Import of raw materials, inclusive of customs duty of Rs. 35,000 4,35,000 Capital goods purchased on 1.5.2016, inclusive of VAT levy at 10% (input | 3,30,000 credit to be spread over 2 financial years) Other manufacturing expenses 4,50,000 Sale of taxable goods within State, inclusive of VAT levy at 4% 7,28,000 Sale of goods within State, exempt from levy of VAT (Goods were | 1,20,000 manufactured from the Inter-State purchase of raw materials) Closing stock as on 31.3.2017 was 100 units of raw materials purchased within the State Input tax credit is allowed only on raw materials used in manufacture of the taxable goods. Compute net VAT liability of the dealer for the year ended 31.3.2017. (PM) Solution Computation of Net VAT liability of Vasudha & Co. for the year ended 31.3.2017 Particulars Rs. Input tax credit: Intra-State purchases of 1000 units raw materials (2,70,000X12.5/112.5) 30,000 Inter-State purchases of raw materials [Refer Note 1] = IPCC_ 36.5e_IDT_VAT. 3.218851 25025/26 www.mastermind: 10. Import of raw materials [Refer Note 2] = Purchase of Capital Goods [Refer Note 3] 15,000 Other manufacturing expenses [Refer Note 4] = Total input tax credit available (A) 45,000 (Output VAT payable: Sale of taxable goods within State [( Rs. 7,28,000 x 4)/104] 28,000 Sale of exempted goods within State [Refer Note 5] - Total VAT payable (B) 28,000 Net VAT liability [VAT credit to be carried forward) [(B)-(A)] (17000) Notes:- 4. CST paid on intra-State purchases is not eligible for input tax credit 2. Customs duty is not eligible for input tax credit 3. VAT paid on purchase of capital goods is eligible for input tax credit. However, the same has to be spread over a period of two years 25%: 4, No input tax credit can be availed on expenses incurred on manufacturing 5. No VAT will be payable on sale of goods exempted from levy of VAT. Further, since these goods were manufactured from the inter-State purchases of raw materials (nonvattable inputs), input tax credit is not affected 6. VAT system allows credit in respect of purct fade during a period to be set-off against the taxable sales during that period, irre of when the supplies/inputs purchased are utilized/ sold. Therefore, input tax cred ect of closing stock of raw materials need not be reduced from total input tax credit le. Determine net VAT liability of X for, inth of December, 2016 using invoice method of computation from the following d. (PM) Purchase price of goods acquit§trom local market (including VAT) Rs. 52 lakhs VAT rate on input 4% Transportation, insurance, warehousing and handling cost incurred by X Rs. 20,000 Goods sold at a profit margin (% of cost of production) 14% VAT rate on sales 12.50% Solution ion of Net VAT liability Particulars Rs. Purchase price of goods acquired from local market excluding VAT (input tax credit does not form part of cost of production) (52,00,000X100/104) 50,00,000 Transportation, insurance ete 20,000 Cost of production 50,20,000 Profit @ 14% on cost of production 7,02,800 Total Sales 57,22,800 Output VAT payable @ 12.5% 7,15,350 Less: Input tax credit [VAT paid on goods acquired from local market is eligible 2,00,000 for input tax credit] Net VAT payable 5,15,350 IPCC_ 36.5e_IDT_VAT. 3.22[No.1 for CA/CWA & MECICEC MASTER MINDS 11, The particulars regarding sale, purchase etc. of Shubham Udyog for the last quarter of the year 2016-17 are as under: S.No. Particulars Rs. 1. | Purchases of raw material within the State taxable @ 1% 40,00,000 taxable @ 4% (Inputs were used in the manufacture of goods meant for intra-State sale, exempted sale and inter-State sale in | 60,00,000 the ratio of 2:1:1) jaxable @ 12.5% 10,00,000 2. | Sale of goods manufactured from raw material purchased @ 4% tax rate 20,00,000 {i) Sale within the State (tax rate 4%) 10,00,000 (ii) Exempted sale within the State 10,00,000 (iii) Sale in the course of Inter-State trade or commerce (CST rate 2%) Sale of raw material purchased @ 1% tax rate '44,00,000 4. | Goods manufactured from the raw material purchased @ 12.5% tax rate were given on lease. The deemed sale price of such goods is Rs.12,00,000, taxable @ 12.5%. s You may assume that input tax credit of tax paid on raw material used in manufacture of leased goods is available immediately. Compute the amount of net Value Added Tax (VAT) payable by M/s Shubham Udyog for the relevant quarter. There was no opening or closing inventory. All figures of purchases and sales given above are exclusive of taxes. How can he utilize the balance of input tax credit le, if any? (PM) Solution Sj Computation of Net VAT payable fora quarter ending 31st March, 2017 eats Rs. Output VAT payable ‘On sale of taxable finished ein the state (Rs. 20,00,000 « 4%) 80,000 ‘On raw material (Rs. 44,00,080% 1%) 44,000 ‘On leased goods (Rs. 12,00,000 x 12.5%) (Deemed sale) 1,50,000 Total(A) 2,74,000 B.__| Input tax credit available i) _ | On raw material purchased @ 1% (Rs. 40,00,000 x 1%) 40,000 ii) _[ On raw material purchased @ 4% (Rs. 60,00,000 « 4%) x 3/4 (Note-1) 1,80,000 iii) | On raw material purchased @ 12.5% (Rs. 10,00,000 12.5%) 4,25,000 Total (B) 3,45,000 Net VAT payable = (A)-(B) (74,000) CST payable on inter-state sale adjusted (Rs. 10,00,000 x 2%)(Note-2) 20,000 Excess input tax credit can be carried forward to next quarter (Rs. 81,000 71,000 ~ Rs. 20,000) Notes: 4. If goods manufactured from raw material are exempt from tax, no input tax credit is available on such raw material. Thus, out of total sales of Rs. 40,00,000 of goods manufactured from raw material purchased @ 4%, credit will not be allowed on 1/4th of the inputs used in manufacture of exempted goods. In other words, input tax credit will be allowed in respect of 3/4th of the inputs 2. If finished goods are sold in the course of inter-state trade and commerce, input tax credit can be set off against the output tax liability. IPCC_ 36.5e_IDT_ VAT. 3.23Pl 8851 25025/26 www.mastermind: om 42. Sidharth Enterprises, a dealer in Gujarat, purchased raw material worth Rs. 80,00,000 (excluding VAT) and manufactured finished goods worth Rs. 1,50,00,000 from such raw material in the month of February, 2017. It transferred these finished goods to its branch in Mumbai on March 15, 2017 so that the goods can be sold from there. Thereafter, it received an order from Mr. X for the said finished goods in Mumbai on March 20, 2017 and hence sold the said goods to Mr. X from Mumbai branch. Compute: i) Amount of input tax credit available for the month of March, 2017 ii) Net VAT payable for the month of March, 2017, and iil) Balance input tax credit carried forward to next month, if any. Input VAT rate is 12.5% and output VAT rate is 4%. (RTP NOV 16) (PM) Solution: Computation of VAT payable and input tax credit of Sidharth enterprises in Gujarat for the month of March, 2017 Particulars Rs. ‘Output VAT payable (Note-1) Nil Less: Input tax credit 80.00.000x'12.5-2) note 2) 240,000 Net VAT payable Nil Balance input tax credit carried forward to next month 8,40,000 Notes: 1. Inter-State stock transfers do not involve, ind, therefore they are not subject to VAT. Further, CST is not payable as there isting agreement for the sale of the goods so transferred, BS 2. In case of stock transfer of finish s, input tax paid (on inputs used in manufacture of such finished goods) in excess, is available as input tax credit 13. Pulaka Ltd. of Hyderabad made’ a total purchases of input and capital goods of Rs. 60,00,000 during the month of November, 2016 including the following purchases:- i) Goods worth Rs. 8,00,000 were purchased from Mysore on which C.S.T. @ 2% was paid. Goods purchased for personal use amounted to Rs. 12,00,000 and goods purchased from unregistered dealers amounted to Rs. 18,00,000. It purchased capital goods (not eligible for input credit) worth Rs. 9,50,000 and those eligible for input credit for Rs. 9,00,000. The input VAT credit on eligible capital goods is available in 36 equal monthly installments. (Note: All purchases given are exclusive of tax and VAT @ 4% is paid on them) Pulaka Itd. sold goods in Hyderabad during the month of November, 2016 worth Rs. 12,00,000 on which VAT @ 12.5% is payable. Calculate i) The amount of input tax credit available for the month of November, 2016 VAT payable for the month of November, 2016 and Input tax credit carried forward, if any. (MTP) (FEB 14) Solution Particulars Rs. Rs. A. Purchases made in November, 2016 60,00,000 IPCC_ 36.5e_IDT_VAT. 3.24[No.1 for CA/CWA & MECICEC MASTER MINDS Less: 8,00,000 i) Inter-State purchases (input tax credit not available) 12,00,000 ii) Goods purchased for personal use (input tax credit not available) 18,00,000 iil) Purchase from unregistered dealer (input tax credit not available) 950,000 | 47,50,000 iv) Capital goods (not eligible for input tax credit) Total purchases eligible for input tax credit 12,50,000 B. Input tax credit available VAT credit on inputs @ 4% of (Rs. 12,50,000-Rs. 9,00,000) 74,000 i.e. 4% of Rs. 3,50,000 VAT credit on eligible capital goods (4% of Rs. 9,00,000) x 1/36 7,000 Input tax credit available for November, 2016 15,000 C. VAT on sales @ 12.5% of Rs. 12,00,000 7,50,000 Less: Input tax credit 15,000 Net VAT payable 1,385,000 Input tax credit carried forward to December,2016 Nil 14, State the eligibility of purchases for input tax credit in the following cases:~ i) Aggarwal & Co. purchased goods for using them in the execution of a works contract. paid by him separately in the invoice. Solution i) Purchases made by Agarwal & Co are eligible execution of works contract are eligible for in credit. ii) Purchases made by Sandeep are not invoice does not show the amount oft 45. Compute net VAT payable by R the month of March, 2016:- we Sandeep purchased goods from Mandeep. Mandeep has not shown the amount of VAT (MTP)(APR 14) tax credit as purchases for use in the for input tax credit as the purchases where ately are not eligible for input tax credit. Co. from the following details furnished by it for Inputs procured (Rs.) 4._| Raw material at Nil rate of VAT 5,00,000 2. | Raw material at 4% VAT 20,00,000 3._| Raw material at 12% VAT 10,00,000 Output (Rs.) 1. [intraState sale of finished goods at 4% VAT (these goods were | 800,000 produced entirely from raw material procured at Nil VAT) 2. | Exempted sales (60% of the raw material procured at 4% VAT was used | 10,00,000 in producing these goods) 3.__| Intra-State sale of finished goods at 12% VAT 10,00,000 4. | Intra-State sale of raw material purchased at 4% VAT 5,00,000 5. | 50% of the raw material produced at 12% VAT has been produce capital goods for the manufacturing process in Rainbow & Co's factory (Market Value is Rs. 7,50,000) There was no opening and closing stock of goods. Solution Computation of Net VAT payable by Rainbow & Ci (PM\(RTP)(N 14) Particulars. Rs. ‘Output VAT payable: Sale_of goods at 4% VAT (Rs.8,00,000 x 4%) (manufactured out of exempted [ 32,000 IPCC_ 36.5e_IDT_VAT. po.8851 25025/26 www.mastermind: material) ‘Sale of finished goods at 12% VAT (Rs.10,00,000 * 12%) 1,20,000 Sale of raw materials purchased at 4% VAT (Rs 9,00,000 = 4%) 20,000 Total (A) 1,72,000 Input tax credit available: Purchase of raw material @ 4% VAT 40% of (Rs.20,00,000 x 4%) [Note — 1] 32,000 Purchase of raw material @ 12% VAT including purchases used for manufacturing | 1,20,000 capital goods produced (12% of Rs.10,00,000) [Note - 2] Total (B) 1,52,000 Net VAT payable (A) - (B) 20,000 Notes: 1. Input tax credit in respect of goods used to produce exempted goods is not allowed. Hence, 60% of the input tax credit has been disallowed on goods purchased at 4% VAT which are utilized to produce exempted goods. 2. Input tax credit on raw materials is allowed even if the same has been consumed to produce capital goods. Hence, full input tax credit on goods purchased at 12% VAT has been allowed. 16. Vivitha & Co., a registered dealer in Ludhiana, furnishes the following details of purchases and sales pertaining to the month of May, 2017 (PM) Particulars Rs. (in lakh) (Opening balance in VAT input credit brought forward 0.20 Purchases of raw materials within the on invoice value) From 26.00 registered dealers From dealers opting for Composition Scheme 5.20 Purchases from outside the State (fing2invdice value) 10.20 Sales within State of finished goods{xtfuding VAT 40.00 Input VAT rate for raw materialsiQuge Output VAT rate is 10%. Determine the VAT liability of the dealer. Solution: ‘Computation of Net VAT liability of Vivitha & Co. for the month of May, 2017 Particulars Rs. (in lakh) Input VAT: Opening balance of input VAT credit 0.20 VAT paid on purchases of raw materials within the State from registered 1.00 dealers [Rs. 26 lakh * 4/104] VAT paid on purchases of raw materials within the State from dealers opting Nil for composition scheme [ Note 1] (CST paid on purchases from outside the State [Note 2] Nil Total input tax credit available (A) 7.20 (Output VAT. VAT @ 10% on sale of finished goods within the State [Rs. 40 lakh = 10/100] 4.00 (B) Net VAT liability [(B)-{A)] 2.80 Notes: 4. Purchases of raw materials within the State from dealers opting for composition scheme are not eligible for input tax credit. 2. Inter-State purchases are not eligible for input tax credit, IPCC_ 36.5e_IDT_VAT. 3.26[No.1 for CA/CWA & MECICEC MASTER MINDS 17. Mr. Pankaj, a registered dealer is required to make payment of Rs. 1,75000 under VAT for the month of July, 2017 . His unutilized balance of VAT input credit for the month of June, 2017 is Rs. 2,80,000. He has also made interstate sale of goods upon which he is liable to pay CST of Rs. 30,000 for the month of July, 2017. Determine the input tax credit to be carried forward, if any, by Mr. Pankaj to the next month. (RTP)(N 13) Solution: Input tax credit is first to be utilized for payment of VAT. The excess credit can be then adjusted against the central sales tax (CST) for the said period. After the adjustment of VAT and CST, excess credit, if any, will be carried over to the end of the next month. Particulars Rs. ‘a)_Input tax credit available for the month of June, 2017 2,80,000 b) Less: VAT payable for the month of July, 2017 4,75,000 ¢) Excess credit left 1,05,000 d) CST payable for the month of July, 2017 30,000 e) Tax credit to be carried to the next month (6) - (d) 75,000 Hence, Mr. Pankaj can carry forward the tax credit of Rs. 75,000 to the next month. 18. ete. for the month of May, 2017. Mis Madhav & Co., a registered dealer provides the following details of purchases, sales, Particulars a Inter-State purchases of raw materials, inclusive of CST at 4% 4,08,000 Purchase of raw materials within State (400 units, ey ‘sive of VAT levy at 11,25,000 12.5%) S' Purchase of raw material from registered deal€t@pting for composition 6,10,000 scheme, inclusive of VAT at 4%. Import of packing material, inclusive of egtams duty of Rs. 10,000 3,20,000 Purchase of goods for personal use, i#eidsive of VAT at 4%. 2,20,000 Capital goods purchased on ma \clusive of VAT levy at 10% (input | 11,00,000 credit to be spread over 2 finan rs) ‘Sales of taxable goods within Stat®, inclusive of VAT levy at 4% 65,00,000 ‘Sales of goods within State, exempt from levy of VAT (Goods, were 7,60,000 manufactured from the Inter-State purchase of raw materials) Compute the VAT liability of the dealer for the month of May, 2017. (RTP)(N 13) Solution Computation of VAT liability of M/s Madhav & Co for the month of May, 2017. Particulars mee Tnput tax credit available on: Inter-State purchases of raw materials (CST paid on inter State purchases is not Nil eligible for input tax credit.) Intra-State purchases of 400 units of raw materials 1125 000x125. oe Purchase of raw material from registered dealer opting for composition scheme, Ni inclusive of VAT at 4%, (Purchases from registered dealer opting for composition scheme is not eligible for input tax credit) Import of packing material (Customs duty is not eligible for input tax credit) Nil Purchase of goods for personal use, inclusive of VAT at 4% Purchase of goods for personal use is not eligible for input tax credit Nil Purchase of Capital Goods: (VAT paid on purchase of capital goods is eligible for input tax credit.) IPCC_ 36.5e_IDT_VAT. po 8278851 25025/26 www.mastermind om However, the same has to be spread over a period of two years Henogexte ae Total input tax credit available (A): 1,75,000 ‘Output VAT payable on: Sale of taxable goods within State [(65,00,000 x 4)/104] 2,50,000 Sale of exempted goods within State [See Note below] Nil Total output VAT payable (B) 2,50,000 Net VAT payable (B) - (A) 75,000 Note: Since these goods were manufactured from the inter-State purchases of raw materials (non-vatable inputs), input tax credit is not affected Verified by: Narasimhulu Sir, Rajasekar Sir, Pavan sir Executed by: Srinivas sir Copyrights Reserved To MASTER MINDS, Guntur THE END IPCC_ 36.5e_IDT_VAT. 3.28No.1 for CA/CWA & MECICEC MASTER MINDS PART 3. SMALL DEALERS AND COMPOSITION SCHEME No. QUESTION ABC 1. | Explain the composition scheme available for small dealers, under VAT, act A 4. Eligible dealers: A dealer is eligible to opt for the Composition Scheme (scheme) i a) he is a registered dealer, b) he is liable to pay tax under the respective State VAT Acts; c) his turnover does not exceed Rs. 50 lakhs in the last financial year, and 4) all his purchases and sales are within the State, 2. Non - eligible dealers: The following dealers are not eligible for the scheme: a) Dealer making inter-state purchases b) Dealer making inter-state sales: ¢) Dealer importing the goods for sale in India; d) Dealer stock transferring goods outside the State; ) Dealer exporting the goods; & f) Dealer desirous of issuing VAT-able invoice. S 3. Conditions: a) A dealer who intends to avail the com to the commissioner in writing, for registered scheme shall exercise the option by intimating or part of the year, in which he gets himself b) The dealer should not have any SQW of goods, which were brought from outside the state, on the day he exercises his option to Bay tax, by way of composition and shall not use any goods brought from outside the state, after such date. c) The dealer should not claim input tax credit, on the inventory available on the date, on which he opts for composition scheme, d) The dealers, opting for composition scheme, will not be entitled to input tax credit ) The dealer shall not be authorized to issue tax invoices. 4. Rate of tax: a) The composition tax can be levied on the taxable turnover, instead of Gross annual turnover, at the rate denoted by the State Governments. b) The empowered committee has permitted the states to reduce the rate of composition tax to 0.25% ¢) The state governments may also provide for different types of composition schemes, notified for different classes of retailers. 5. Advantages: a) Lower tax: Tax will be payable at a lower rate b) Savings in effort: It saves a lot of labour and effort, in keeping records. c) Simple tax calculation: It also simplifies the calculation of tax liability of a dealer. Generally 2 small tax is payable (normally 4% or lower). IPCC_ 36.5e_IDT_VAT. 3.29Ph: 98851 25025/26 www.mastermindsin om d) Minimum Records: If a dealer avails the scheme, he need not maintain any statutory records prescribed under the act. Only the records for Purchases, Sales and Inventory should be maintained, ‘e) Simple return: A simple return form covers longer return period under such schemes 6. Disadvantages / Break in VAT chain: VAT chain under composition scheme a) Loss to seller: i) Ifthe composition scheme is availed by a dealer, then such dealer cannot avail input credit, in respect of input tax paid, Hence, the dealer will loose the input tax credit, on purchases made by him, and he will not be able to pass the benefit of input tax credit, which will add to the cost of goods Ill) Hence, the dealers who have desired to avail input tax credit on their purchases may not prefer to buy from composition dealers. b) Loss to the Purchaser: i) The purchaser shall not get any tax credit, for the purchases made by him from the dealer operating under the composition scheme. Therefore, as soon as a dealer opts for the composition scheme, VAT chain will be broken, and benefit of tax paid earlier will not be passed on to the subsequent buyers, Copyrights Reserved ee by: Narasimhulu Sir, samba siva Sir, To MASTER MINDS, Guntur Rajasekhar Si, pavan sit WS & Executed by: Srinivas sir IPCC_ 36.5e_IDT_VAT. 3.30No.1 for CA/CWA & MECICEC MASTER MINDS PART 4, VAT PROCEDURES No. QUESTION ABC ‘Who are liable for registration under VAT? How to apply for registration under VAT act? 1 2. 3.__[ What are the circumstances in which the registration will be cancelled? 4. | What is meant by TIN and what are the uses of TIN? 5._| Explain the return filing procedure under VAT law? 6. 7. 8. 9. Write short notes on deemed assessment? Explain the system of cross checking? ‘What is the need for audit of the tax paid under VAT, act? VAT invoice 10. _| Explain the role of chartered accountant in vat vlolalol>|a|a|a/a/>/> 11. | How can a chartered accountant help a client in the handling of vat audit called for by the department and in conducting external audit of vat records 12._| Write a note on Incentives Sales Tax and VAT? B Q.NO.1. WHO ARE LIABLE FOR REGISTRATION UNDER VAT? 1. Registration: a) Meaning: Registration is the process of ob! Certificate of Registration (RC), from VAT authorities, under the respective State Act 2. Persons liable: The following persons are liable for Registration: a) Dealers, whose total turnover exceeds prescribed limit, in respect with the purchases and sales in the state, as per the state VAT Act are to get registered under the act. b) Casual traders, agent of non-resident dealer and dealers in jeweler, irrespective of quantum of turnover, shail obtain registration. ¢) Dealers, who intend to commence the business, on option, may obtain registration. d) Exception — Small dealers: i) Registration under the VAT act will not be compulsory for the dealers, with gross annual turnover, not exceeding Rs. 5 lakhs. However, the empowered committee of state finance ministers subsequently allowed the states to increase the threshold limit for the small dealers to Rs. 10 lakhs, with the condition that, the concerned states would bear the revenue loss, on account of the increase in limit beyond Rs. 5 lakhs. Q.NO.2. HOW TO APPLY FOR REGISTRATION UNDER VAT ACT? 1. Application: New dealer should file an application in the specified form, along with fee to the registering authority, in whose jurisdiction his principle place of business is situated, with a sufficiently stamped self addressed envelope, with necessary documents required in the application form, IPCC_ 36.5e_IDT_VAT. 3.31Ph: 98851 25025/26 www.mastermindsindia.com A new dealer will be allowed 30 days of time, from the date of liability, to get registered, 3. Compulsory Registration: a) If an Assessee fails to obtain registration under the VAT Act, he may be registered compulsorily by the Commissioner. b) The Commissioner may assess the tax due from such person, on the basis of evidence available with him, and the assessee shall to forthwith pay such amount of tax. c) Consequences on failure: The dealer, on his failure to get registered, shall be liable to pay penalty and forfeiture of eligibility, to set off all Input tax credit related to the period, prior to the compulsory registration. 4. Voluntary Registration: a) A dealer may also obtain registration, even if Turnover is less than the limit prescribed, if the commissioner is satisfied that the business of the applicant requires registration b) The commissioner may also impose any terms or conditions, which he thinks fit. Q.NO.3. WHAT ARE THE CIRCUMSTANCES UNDER WHICH THE REGISTRATION WILL BE CANCELLED? : The registration can be cancelled, in any of the following situations: 4. Discontinuance of business, SP Copyrights Reserved 2 onl, S [Sars 3. Transfer of business to a new location, \S 4. Annual turnover of a manufacturer! a trg the specified amount. Se Sealing in designated goods/ services, falling below SS Q.NO.4, WHAT IS MEANT BY ‘TIN’ AND WHAT ARE THE USES OF ‘TIN’? 1. TIN: Tax payer's Identification Number, is the registration number of the dealer. It is a code to identify the tax payer. 2. Representation of characters: The Taxpayer's Identification Number will consist of 11 digit numerals, throughout the country. First two characters represent the State code, by the union ministry of home affairs. The set up of the next nine characters will be different in different states. 3. Uses: a) TIN facilitates computer applications, such as detecting stop filers and delinquent accounts. b) TIN also helps in cross check of information on tax payer's compliance. Eg. Selective cross checking of sales and purchases among VAT taxpayers. Q.NO.5. EXPLAIN ‘THE RETURN FILING PROCEDURE’ UNDER VAT LAW? 1. Qbiective of return filing: a) Reducing the compliance costs, incurred by the business, in completing and filing their returns. b) Encouraging business to comply with their obligations, to file returns and pay VAT through the application of penalties, in case of late payment of VAT and late fling of returns. c) Ensuring the efficient processing of the data included in the returns, IPCC_ 36.5e_IDT_VAT. 3.32[No.1 for CA/CWA & MECICEC MASTER MINDS 2. Procedures for return filing: a) Retums are to be filed monthly / quarterly / annually, along with the requisite details, as per the provisions of the state acts or rules. Returns should be filled along with the payment challans. If the state has devised return cum challans, then the returns along with the payment can be filed with the treasury. b) Revised return: The returns filed can also be revised c) Scrutiny: Every return furnished shall be scrutinized within the prescribed time limit from the date of filling the return. If any technical mistake is detected on scrutinizing, the dealer shall be required to pay the deficit appropriately. Q.NO.6. WRITE SHORT NOTES ON DEEMED ASSESSMENT? ] Under VAT systems, there is no compulsory assessment at the end of each year. 2. The VAT liability is self assessed by the dealer himself, at the time of filing the returns If no specific notice is issued proposing for audit of the books of account of the dealer within the limit specified in the act, the dealer will be deemed to have been self assessed, on the basis of the returns submitted by him 4. Scrutiny may be done in cases, where a doubt arises of under-reporting of transaction or evasion of tax Q.NO.7. EXPLAIN THE SYSTEM OF CROSS CHECKING? (N14, M12) 1. Across checking computerized system is being wor on the basis of coordination between the tax authorities of the State Government and tJ orities of Central Excise and Income Tax. 2. Under VAT, systems of cross checking are e P since more emphasis has been laid on self assessment SS 3. The system constantly compares the t fins and set off documents of VAT system of the States and those of Central Excise ai e-Tax 4. Dealers may be asked to submit the POF sales or purchases above a certain monetary value or to give the dealer wise list, from whom or to whom the goods have been purchased or sold 5. Advantages: a) The comprehensive cross-checking system will help to reduce tax evasion & also lead to significant growth of tax revenue b) This system helps in protecting the interests of tax-complying dealers, against the unfair practices of tax-evaders. ¢) The system will also bring in more equal competition, in the sphere of trade and industry. Q.NO.8. WHAT IS THE NEED FOR AUDIT OF THE TAX PAID, UNDER VAT ACT? ] 1. The VAT Act provides for self assessment of tax i.e., the tax liability is calculated and paid by the payers through their periodical returns 2. There will not be regular assessment of all returns and only a few returns will be scrutinized. Hence, the tax payer has to discharge their tax liability properly, while filing the returns. If no audit is prescribed under the VAT law, the chances of evasion of VAT will increase, causing decrease in revenue for the government. 5. Therefore, it is essential that the audit of the VAT system is attempted on a regular basis. 6. However, it is not possible to conduct the audit of all VAT dealers. Criteria for audit can be the amount of turnover or the class of dealer dealing in specified commodities. IPCC_ 36.5e_IDT_VAT. 3.33Ph: 98851 25025/26 www.mastermindsindia.com Q.NO.9. VAT INVOICE. (PM) (M11) Invoice is a document listing goods sold with price, tax charged and other details as may be prescribed and issued by @ dealer authorized under the Act. 2. The whole structure of the VAT, with input tax credit, is founded on the documentation of a tax invoice, a cash memo or a bill 3. The White Paper mainly provides for the following provisions, which are mandatory, and any failure to comply with these attracts penalty: a) Every registered dealer, whose turnover of sales exceeds the specified amount, shall issue to the purchaser a serially numbered tax invoice, cash memo or bill, with the prescribed particulars. b) The tax invoice shall be dated and signed by the dealer or his regular employee, showing the required particulars. c) The dealer shall keep a counterfoil or duplicate of such tax invoice, duly signed and dated d) Exception: Composition scheme dealer cannot issue a tax invoice. Importance of VAT Invoice: a) Helps in determining the input tax credit, b) Prevents cascading effect of taxes, ¢) Facilitates multi — point taxation on the value ste d) Promotes assurance of invoices, €) Assists in performing Audit and investigation QY effectively. f)_ Checks evasion of tax Contents of VAT Invoice: VAT legis| of all States provide for the contents of the tax invoice. A regular invoice can also, 1ed as tax invoice, if it has the prescribed contents. Generally, the various legislations SRNWe that the tax invoice should have the following contents: a) The words ‘TAX INVOICE’ in a prominent place; b) Name and address of the selling dealer, ¢) Registration number of the selling dealer, d) Name and address of the purchasing dealer; €) Registration number of the purchasing dealer (may not be required under all VAT legislations); f) Pre-printed or self-generated serial number: g) Date of issue; h) Description, quantity and value of the goods sold; i) Rate and amount of tax charged, in respect of taxable goods; i) Signature of the selling dealer, or his regular employee, duly authorized by him for such purpose. 1. Record keeping: For effective utilization of input tax credit, systematic records of the same have to be maintained. Chartered Accountants are well-equipped to ensure compliance of such record keeping requirements prescribed under VAT laws of different States. 2. Handling audit by Departmental officers: By maintaining proper records of the client, a Chartered Accountant is able to satisfy the Departmental auditors. His professional expertise helps him in effectively replying to audit queries and resolving audit objections. IPCC_ 36.5e_IDT_VAT. 3.34(No.1 for CA/CWA & MECICEC MASTER MINDS 3. Procedural requirements of VAT laws: Chartered Accountants ensure compliance of various Procedural requirements prescribed under VAT laws of different States like submission of periodical returns, statements etc. by utilizing their technical knowledge and analytical abilities. 4, External audit of VAT records: Under VAT, assessee is required to self-assess the VAT liability and only a few returns would be scrutinized on a selective basis. Hence, a check on compliance gains paramount importance. Chartered Accountants help in ensuring tax compliance by audit of VAT accounts. Q.NO.11. HOW CAN A CHARTERED ACCOUNTANT HELP A CLIENT IN THE HANDLING OF VAT AUDIT CALLED FOR BY THE DEPARTMENT AND IN CONDUCTING EXTERNAL AUDIT OF VAT RECORDS? (M14) Handling audit by Departmental Auditors: There are audit wings in VAT Departments and certain percentage of dealers are taken up for audit every year on scientific basis. Chartered Accountants can ensure proper record keeping to satisfy the Departmental auditors. The professional expertise of a Chartered Accountant will help him in effectively replying audit queries and sorting out audit objections, External audit of VAT records: Under VAT system, trust has been reposed on tax payers as there will be no regular assessment of all VAT returns, but only few retums will be scrutinized. In other cases, retums filed by dealers will be accepted. Thus, a check on compliance becomes necessary. Chartered Accountants can play a very vital role in ensuring tax compliance by audit of VAT accounts. Q.NO.12. WRITE A NOTE ON INCENTIVES SALES TAX, 4. Exemption from tax: \S a) Neither tax charged nor tax collected by. ible industry b) Input tax also not payable on purcha: ‘aw materials. c) Exemption ceases either with ity of exemption period or the exemption amount, whichever occurs first. 2. Deferment of tax liability: a) Tax collected from the buyers but the payment thereof to the Government deferred b) After the expiry of the prescribed period, the liability to be paid in specified installments, 3. Remission of tax: a) Tax collected from the buyers but the payment thereof remitted. b) Input tax paid on purchases by the unit to be refunded UTS 1. Lee Traders, a registered dealer having stock of goods worth Rs. 30,000, purchased from ‘outside the State, wishes to opt for Composition Scheme. Advise the dealer whether it is possible. (PM) Solution: If a dealer wishes to opt for Composition Scheme, he should not have any stock of goods which are brought from outside the State on the day he exercises the option to pay tax by way of composition. Hence, it is not possible for Lee Traders to opt for Composition Scheme as it has goods worth Rs. 30,000 purchased from outside the State on the day it wishes to opt for the Composition Scheme. IPCC_ 36.5e_IDT_VAT. 3.35Pl 8851 25025/26 www.mastermind: om 2. Strong Constructions undertakes works contracts and maintains sufficient records to quantify the labour and other service charges. From the details given below, calculate the taxable turnover, input tax credit and net VAT payable under the State VAT Law: Particulars Rs. ._| Total contract price (excluding VAT) 1,80,00,000 2. | Matel js purchased and used for the contract taxable at 12.5% VAT | 33,75,000 (inclusive of VAT) 3._ | Labour charges paid for execution of the contract 40,00,000 Other service charges paid for the execution of the contract 20,00,000 5. | Cost of consumables used not involving transfer of property in| 10,00,000 goods Strong Constructions also purchased a plant for use in the contract for Rs. 20,80,000 clusive of VAT). In the VAT invoice relating to the same, VAT was charged at 4% separately. Assume 100% input tax credit is available on capital goods immediately and output VAT is leviable at 12.5%. Make suitable assumptions where required and show the workings. (PM) Solution Under works contract, VAT is imposed on the sale price of the goods in which there is a transfer of property. Labour and other charges incurred for such execution are deductible. Computation of the taxable turnover, ine or credit and net VAT payable Particulars [ere Rs. Total contract price Ys I 1,80,00,000 Less | Deductions admissible S: Labour charges paid for executing the $aattact 40,00,000 Service charges paid for execution @fcentract 20,00,000 Cost of consumables not involvingeAster ‘of property in goods 10,00,000 | _70,00,000 Taxable turnover 4,10,00,000 Output VAT payable @ 12.5% 13,75,000 Less : Input tax credit admissible On the material purchased 1937,000x25 3,75,000 On the plant purchased [20, 80.0004] 80,000 Total input tax credit I 4,55,000 Net VAT payable '9,20,000 3. State with reasons in brief whether the following statements are correct or incorrect with reference to the provisions of value added tax laws: i) It is permitted to issue ‘tax invoice’ inclusive of VAT i.e., aggregate of sale price & VAT. ii) VAT laws of different States require a registered dealer to compulsorily get his books of accounts audited irrespective of the quantum of his turnover. ili) Taxpayer's Identification Number (TIN) is a 10 digit alpha numeral. (PM) Solution i) Incorrect. One of the requirements under the contents of the tax invoice is that rate and amount of tax charged in respect of taxable goods should be distinctly shown in the ‘tax invoice’, in order to claim input tax credit. IPCC_ 36.5e_IDT_VAT. 3.36[No.1 for CA/CWA & MECICEC MASTER MINDS ii) Incorrect. Different States have prescribed different turnover limits for VAT audit and only if the turnover of the registered dealer crosses such limit, he is required to get his books of accounts audited under VAT laws. ) Incorrect. Taxpayer's Identification Number (TIN) is a 11 digit numeral. The first two characters represent the State Code as used by the Union Ministry of Home Affairs and the next nine characters are different in different states. 4. M/s Swabhiman Enterprises, a paper merchant, was a registered VAT dealer. However, due to financial problems, he discontinued his business. Can his registration be cancelled? If yes, enumerate other circumstances under which VAT registration can be cancelled as per the White Paper on VAT? (RTP)(M 14) Solution: VAT registration of M/s Swabhiman Enterprises may be cancelled as he has discontinued his business. Other circumstances under which VAT registration can be cancelled are as follows i) Disposal of business; ii) Transfer of business to a new location; iii) Annual turnover of a manufacturer or a trader dealing in designated goods or services falling below the specified amount. 5. State whether the following statements are true or false giving reasons to substantiate your answer: i) Under VAT, the merits accrue in full measure only under a situation where there is only ‘one rate of VAT without any exemptions thereof. ii) All VAT Retums are required to be filed on mo} asis. (RTP)N 13) Solution i) True, The merits accrue in full measure ider a situation where there is only one rate of VAT and VAT applies to all commos ithout any question of exemptions whatsoever. Once concessions like differential VAT, composition schemes, exemption schemes, exempted category of goods eto, iit into the system, distortions are bound to occur and the fundamental principle that VANWIl totally eliminate cascading effects of taxes will also be subject to qualifications False, All VAT Returns are not required to be filed on monthly basis. VAT returns are to be filed on monthly/quarterly/annual basis as per the provisions of the State Acts/Rules. Verified by: Narasimhulu Sir, samba siva Sir, Rajasekar Sir, pavan sir Executed by: Srinivas sir THE END IPCC_ 36.5e_IDT_VAT. 3.37