Value Added Taxes (VAT) in India

Value Added Tax (VAT) was introduced in 1999 and came to effect on 1st April 2005. VAT is a
general consumption tax that is assessed on the value added to goods & services. VAT is a multi-
stage tax, levied only on value that is added at each stage in the cycle of production of goods and
services. It is the indirect tax on the consumption of the goods, paid by its original producers
upon the change in goods or upon the transfer of the goods to its ultimate consumers.

Scope of VAT:

VAT covers all commercial transactions done within a state borders by any individual,
partnership or corporation.

Objectives of VAT:

 To have a relatively simple tax system to administer and to achieve complete compliance
of books of account.
 To implement a uniform tax-base throughout the country.
 To facilitate enforcement by providing audit trial through different stages of production
and sales.

Methods of VAT Calculation:

There are several methods to calculate the “value added” to the goods for levy of tax. The 3
commonly used methods are:

1. Addition Method

2. Subtraction Method

 Direct subtraction Method

 Indirect/Intermediate subtraction Method

3. Invoice Method

1. Addition method: This method is based on the identification of value-added, which can be
estimated by summation of all the elements of value added (i.e., wages, profit, rent and interest).
This method is also known as income approach.

2. Subtraction method: This method estimates value added by means of difference between
outputs and inputs. This is also known as product approach.

(i) Direct Subtraction method: It is equivalent to a business transfer tax whereby tax is levied
on the difference between the aggregate tax-exclusive value of sales and aggregate tax-exclusive
value of purchases.
(ii) Intermediate Subtraction method: It is based on the deduction of the aggregate tax-
inclusive value of purchases from the aggregate tax-inclusive value of sales taxing the difference
between them.

3. Tax-Credit method: Under this method the tax on inputs is deducted from the tax on the sales
to arrive at the VAT payable by the dealer. The indirect subtraction method entails deduction of
tax on inputs from tax on sales for each tax period. This method is also known as invoice
method. In practice, most countries use this method.

VAT payable= Total tax charged on the outputs of sales-Total tax paid to the suppliers on inputs
or purchases.

Practical implication of VAT:

VAT is most certainly a more transparent and accurate system of taxation. The transaction chain
under VAT assuming that a profit of Rs 10 is retained during each sale:
 Central Sales Tax (CST), 1956:
Central tax will get tax revenue from Income Tax and Customs. State Government will get tax
revenue from Sales tax, excise on liquor and tax on agricultural income. Municipalities will get
tax revenue from Octroi and house property tax.

Objectives of CST:

1. To formulate principles for determining:

When a sale or purchase takes place in the course of inter-state trade or commerce.

When a sale or purchase takes place outside a state.

When a sale or purchase takes place in the course of imports into or export from India.
2. To provide for levy, collection and distribution of taxes on sales of goods in the course of
inter-state trade or commerce.

3. To declare certain goods to be of special importance in inter-state trade or commerce and

specify.

4. To specify the restrictions and conditions on the State laws, imposing taxes on the sale or
purchase of such goods of special importance.

5. To provide for collection of taxes from companies under liquidation.

Scope of CST:

 This Act is applicable to sales/purchases taking place in course of inter-state trade and
commerce.
 If sale/purchase occasions movement of goods from one State to another State it is an
inter-state sale. A sale, effected by transfer of documents of title to goods when goods are
in inter-state movement, is also an inter-state sale.
 CST Act determines sites of sale: i.e., State in which the sale takes place. Accordingly the
sites are to be decided on the location of the goods at the time of sale.
 The sale/purchase taking place in course of import/export and such transactions are
immune from levy of any tax by State Government or Central Government.

Incidence of CST:

As per the Constitution, tax on Inter State sale/purchase can be levied only by Union
Government. CST Act has been enacted for this purpose. Every dealer shall be liable to pay tax
under this Act on all sale of goods effected by him in the course of Inter-State trade or
Commerce.

Central State Tax Rules:

A dealer should submit an application (Form A) for registration under section 7 of the Act. This
application should be duly signed by the proprietor and verified by a competent authority. Only a
single application will be entertained even if an applicant has multiple places of business in a
state. The certificate of registration should be kept at the principal place of business and copies
of the registration should be displayed at other business locations. In case a registration
certificate is lost or destroyed, the applicant should make a payment in the form of court fee
stamps to receive a duplicate copy.

How to get Central Sales Tax Registration?

Individuals wishing to register for Central Sales Tax need to furnish their TIN registration
number. This TaxPayer Identification Number is the first step in the process, post which they are
required to fill in the necessary forms and pay the registration fee for the same.

Documents Required:

Individuals registering for CST need to furnish the following documents:

 Government approved ID proof

 Address Proof
 PAN card
 Photographs
 Address proof of business establishment
 Purchase invoice
 Bank statement
 Security/Reference

Central Sales Tax Exemptions:

Central Sales Tax is exempted on certain occasions, some of which are mentioned below:

 Central Sales Tax is excluded if outward freight is charged separately and if the outward
insurance of goods are passed on to a buyer during dispatch.
 No CST is to be paid if goods are returned within 180 days.
 CST is exempted in cases when a sale within a particular state is exempt.
 Any sale to SEZs and foreign missions are exempt from CST
 Central Sales Tax is exempted on certain occasions, some of which are mentioned below:
 Central Sales Tax is excluded if outward freight is charged separately and if the outward
insurance of goods are passed on to a buyer during dispatch.
 No CST is to be paid if goods are returned within 180 days.
 CST is exempted in cases when a sale within a particular state is exempt.
 Any sale to SEZs and foreign missions are exempt from CST

Sales can be broadly classified in three categories which are as follows:

1. Inter-State Sale: A sale or purchase of goods shall be deemed to take place in the course of
inter-State trade or commerce if the sale or purchase:

 Occasions the movement of goods from one State to another; or

 Is effected by a transfer of documents of title to the goods during their movement from
one State to another.

(i) Occasions movement of goods from one state to another:

A sale can be treated as an inter-state sale if; the following conditions are satisfied:

 Transaction is a completed sale.

 The contract of sale contains a condition for the movement of goods from one state to
another.
 There should be physical movement of goods from one state to another.
 The sale concludes in the state where the goods are sent and that state is different from
the state from where the goods actually moved.
 It is not necessary that sale precedes the inter-state movement of goods. Sale can be
entered before or after the movement of goods.
 It is immaterial in which state the ownership of goods passes from seller to buyer.

(ii) Sale by transfer of documents:

If sale or purchase of goods is effected by transfer of documents of title to the goods during their
movement from one state to another then, such sale or purchase shall be deemed to take place in
the course of inter- state trade.

A Document of title to goods bears internal evidence of ownership of goods by holder of

document. Some of the examples are Lorry Receipt (LR) in case of transport by road; Railway
receipt (RR) in case of transport by rail, bill of Lading (BL)in case of transport by sea, Airway
bill (AWB) in case of transport by air.

2. Sale within a State (Intra State Sale):

A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within
the State, in the case of specific or ascertained goods, at the time the contract of sale is made; and
in the case of unascertained or future goods, at the time of their appropriation to the contract of
sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such
appropriation.

3. WHEN IS A SALE OR PURCHASE OF GOODS SAID TO TAKE PLACE IN THE

COURSE OF IMPORT OR EXPORT?

A sale or purchase of goods shall be deemed to take place in the course of the export of the
goods out of the territory of India only if the sale or purchase either occasions such export or is
effected by a transfer of documents of title to the goods after the goods have crossed the customs
frontiers of India,

A sale or purchase of goods shall be deemed to take place in the course of the import of the
goods into the territory of India only if the sale or purchase either occasions such import or is
effected by a transfer of documents of title to the goods before the goods have crossed the
customs frontiers of India.
Example: Ajay sells goods “A” and “B”. A is charged at 4% and B at 2%. The total sales price
before deducting central sales tax of A and B is Rs. 8 lakhs, which includes Rs. 5 lakhs of goods
A and Rs. 3 lakhs of goods B. What is the turnover of Ajay?

Goods A:

Aggregate Sales price = Rs. 5, 00,000 :Rate of Tax = 4%

CST = 4*5, 00,000

--------------------

100+4

= Rs. 19,230

Turnover for Good A = Rs. 5, 00,000 - Rs. 19,230 = Rs. 4, 80,770

Goods B:

Aggregate Sales price = Rs. 3, 00,000: Rate of Tax = 2%

CST = 2*3, 00,000

--------------------

100+2

= Rs. 5,882

Turnover for Good B = Rs. 3, 00,000 - Rs. 5,882

= Rs. 2, 94,118

Total turnover for Ajay = Rs. 4, 80,770 + Rs. 2, 94,118

 = Rs. 7, 74,888

Practical issues of CST:

 Sales tax is a single-point system of tax levy, the manufacturer or importer of goods into
a state is liable to sales tax but there is no sales tax on the further distribution channel.
 In the sales tax structure, there were problems of double taxation of commodities and
multiplicity of taxes, resulting in a cascading tax burden. For Ex:, in the sales tax
structure before a commodity is produced, inputs are first taxed, and then after the
commodity is produced with input tax load, output is taxed again. This results an unfair
double taxation with cascading effects.
 It increases the sale tax burden of the ultimate consumer.
 Application of sale tax is restricted only for goods.
 Dealers of reselling goods have no responsibility to collect tax and to file return if sales
tax has already been paid on re-selling goods.
 Sales tax is not levied at the time of purchase against statutory forms and as a result there
is an ample scope of tax evasion.
 Computation of sales tax is too much complicated. Sales tax deals with six different
taxes. The rate of CST is 4% or local state rate whichever, is lower on the first point or
inter-state sale, if, the goods are sold to the government or to a registered dealer, and on
the fulfillment of specified condition, subsequent sales during the movement of same
goods will be exempted from tax. But, if any of the dealers in these subsequent sales is or
an unregistered dealer then the last registered dealer will collect tax @ 10% from an
unregistered dealer to whom goods have been sold.
 Sales tax returns are filed separately and in returns the dealers have to give numerous
details which invite scrutiny in detail.
 Assessment of sales tax is entrusted to the sales tax department.
 There is no exemption limit of turnover for the levy of central sales tax. It is applicable
for all dealers.
 Sales tax penal provision for defaulters and evaders of tax are not very strict and these
loopholes invite various crises.
 The tax is levied under this Act by the Central Government but, it is collected by that
State Government from where the goods were sold. The tax thus collected is given to the
same state government which collected the tax. In case of union territories the tax
collected is deposited in the consolidated fund on India.
 Even though the central sales tax has been framed by the central government but, the
State governments are allowed to frame such rules, subject to such notification and
alteration as it deem fit.