WHITE PAPER ON VAT

Cascading effect ± to continue
‡EXCISE DUTY /SERVICE TAX ‡CENTRAL SALES TAX ‡LEVIES BY LOCAL AUTHORITIES , SUCH AS OCTROI ‡TAX ON GOODS LIKE DEMERIT GOODS , EXCLUDED FROM VAT SYSTEM ‡RESTRICTED ITC UNDER SPECIFIED CIRCUMSTANCES

Preface

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Is the collective efforts of all the States in formulating the basic design of the State-level VAT

‡The long-awaited White Paper on State level Value Added Tax (`VAT·) has finally been released by the Empowered Committee of State Finance Minister constituted by the Ministry of Finance. ‡The Finance Minister in his speech, while releasing White Papers, has reaffirmed the introduction of VAT with effect from April 1, 2005.

Objective of Empowered
‡To strike a balance federal flexibility

Committee

between the common points of convergence and

‡To end unhealthy sales tax rate ´warµ among the states ‡To harmonize sales tax rates by uniform floor rates of sales tax for different categories of commodities ‡To discontinue sales tax incentives ‡Introduce state level VAT

Treatment of Opening Stock 8. Coverage of Set-off/ ITC 4. Compulsory Issue of tax invoice. Registration. Carrying Over of Tax credit 5.Coverage in White Paper White paper addresses on : 1. Design of State level VAT 2. Inputs procured from other States 7. Small Dealers and Composition Scheme . Treatment of Exports 6. Concept of VAT and set-off /ITC 3. Cash Memo or Bill 9.

Penal Provisions 18. Audit 14. Tax Payer¶s identification No 11. Return 12. Other Taxes 17. Procedure of Self Assessment 13.Coverage in White Paper White paper addresses on : 10. VAT rates and classification of commodities . Coverage of Goods 19. Incentives 16. Declaration Form 15.

aviation turbine fuel and other motor spirit will continue to be governed by State Sales Tax laws or by special provisions under the VAT laws.Highlights -Applicability of VAT ‡ VAT would be payable on the sale of goods within the State. ‡ VAT on imports and service tax targeted to be integrated along with with AED items into VAT in the second year. textile and tobacco. lottery tickets. ‡ VAT will not be imposed for one year after the introduction of VAT on AED items relating to sugar. petrol. diesel. . ‡ Liquor.

Special VAT Rate applicable for gold and silver ornaments. ‡ 4% . . items legally barred from taxation and items having social implications ‡ 1% .General VAT Rate.5% .Highlights ±VAT rates Four specific rates of VAT as follows ‡ Tax Exempt Goods ² 46 commodities comprising of natural and unprocessed products in unorganized sector. all agricultural and industrial inputs. ‡ 12.about 270 goods comprising basic necessities such as medicines and drugs. capital goods and declared goods.

Highlights ± Other issues ‡ ‡ Phase out of CST to be reviewed after a year All other existing taxes such as turnover tax. 50 lakhs shall have an option for a composition scheme with payment of tax at a small percentage ‡ ‡ . additional surcharge and special additional tax (SAT) would be abolished ‡ The States who have already implemented Entry Tax and intend to continue under the VAT regime are required to make it VAT-able. surcharge. ‡ Existing Incentive Scheme can be continued by the State in an appropriate manner after ensuring that the VAT chain is not affected. Small dealers with gross annual turnover not exceeding Rs. 5 lakhs will not be liable to VAT Dealers with gross annual turnover not exceeding Rs.

The States may at their option reduce this number of installments .Highlights ±ITC ± Contd. In case of stock transfer/consignment sale outside the State. irrespective of when this will be utilized/sold Tax paid on inputs procured from other States will not be eligible for credit. ‡ ‡ Input Tax Credit will be allowed for both manufacturers and traders Credit will be allowed on purchase of inputs/supplies meant for sale within the State as well as to other States. input tax paid in excess of 4% will be eligible for tax credit ‡ ‡ ‡ Tax credit on capital goods (except items under negative list) will be allowed and to be adjusted over a maximum of 36 equal monthly installments.

‡ Units located in SEZ and EOU will have an option of not paying input tax or claiming refund of the input tax paid within three months. ‡ Unadjusted tax credit to be carried over to the end of next financial year. 2004 will be eligible to receive input tax credit subject to documentary proof. ‡ Tax paid goods in stock purchased on or after April 1. . ‡ All existing dealers will be automatically registered under VAT.Highlights -ITC ‡ Tax paid on exports made out of India will be refunded in full within three months. Any excess unadjusted tax credit at the end of second year will be eligible for refund. The credit will be available over period of six months after an interval of three months.

‡ Every registered dealer will be required to issue Tax Invoice containing specified details ‡ Returns to be filed monthly or quarterly as specified in the State Acts/ Rules.Highlights ±Procedural Requirements ‡ Self-assessment & Audit Scheme to replace the existing compulsory assessment scheme. ‡ No need for declaration forms as there will be no concessional rate of VAT. .

Design [State Level] Part 2 Related Issues Part 3 .3 Parts Justification & Back ground Part 1 VAT.White Paper.

‡ ‡ ‡ ‡ ‡ .State list] ‡ The VAT will provide full set-off for input tax & on previous purchases . Overall tax burden will be rationalized . VAT will replace the existing system of inspection by a system of built-in self assessment by traders and manufacturers. The tax structure will become simple and more transparent. such as TOT.Justification of VAT ± State level VAT (part 1) [Entry 54 . This will significantly improve tax compliance and also help increase revenue growth.. ASC . CST is to be phased out. SC. SAT etc. it will also abolish the burden of several existing taxes. and prices in general will fall.

‡ . and this is given thro· the concept of input tax credit /rebate.Design of State ±Level VAT (part 2) ‡ The essence of VAT is in providing set-off for the tax paid earlier . This ITC will be given for both manufacturers and traders ‡ for purchase of inputs /supplies meant for both sale within the State as well as to other states & ‡ Irrespective of when these will be utilized /sold.

then the same will be eligible for refund. .Design of State ±Level VAT (part 2) ‡ ‡ ITC in excess of 4% will be given for stock transfer/ consignment sale of goods Carrying over of Tax credit: ‡ If the tax credit exceeds the tax payable on sales in a month . ‡ If there is any excess unadjusted ITC at the end of 2nd year. the excess credit will be carried over to the end of next financial year.

Design of State ±Level VAT (part 2) ‡ Carrying over of Tax credit: ‡ ITC on capital goods available ‡ Tax credit on capital goods ² 36 equal monthly instalments. ‡ SEZ and EOU ² either exemption from payment of ITC or refund of ITC paid with in 3 months. . tax paid with in the state will be refunded in full. ‡ There will be a negative list for capital goods not eligible for ITC ‡ Treatment of Exports : ‡ For all exports made out of the country.

‡ Comprehensive inter-state tax information exchange system is being set up.Design of State ±Level VAT (part 2) ‡ Inputs procured from other states: ‡ Tax paid on inputs procured from other states thro· inter-state sale or stock transfer will not be eligible for credit ‡ CST shall be phased out. .

Design of State ±Level VAT (part 2) ‡ Treatment of opening stock : ‡ All tax paid goods purchased on or after April 1. 2005 ² eligible to receive ITC subject to submission of requisite docs.4. 2004 and still in stock as on April 1 . ‡ Resellers holding tax paid goods on April 1.2005 ‡ ITC will be given for the ST already paid in the previous year. ‡ This tax credit available over a period of 6 months after an interval of 3 months needed for verification . 2005 ² also be eligible for ITC ‡ VAT will be levied on the goods when sold on or after 1.

Cash memo or Bill : ‡ VAT dealers to issue serially numbered tax invoice with the prescribed particulars ‡ This tax invoice will be signed and dated by the dealer or his regular employee showing the reqd particulars ‡ Dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. . ‡ Failure to comply with the above will attract penalty.Design of State ±Level VAT (part 2) ‡ Compulsory Issue of Tax Invoice .

T.Design of State ±Level VAT (part 2) ‡ Registration . ‡ A new dealer will be allowed 30 days time from the date of liability to get registered.O ‡ Dealers opting for this composition scheme will not be entitled to ITC.T. . ‡ States will have flexibility to fix threshold limit within Rs 5 lacs ‡ Small dealers with annual G. small dealers and Composition Scheme : ‡ Regn of dealers with gross T.O not exceeding Rs 50 lacs who are otherwise liable to pay VAT ²have the option for a composition scheme with payment of tax at a small % of G.O above Rs 5 lacs ² compulsory ‡ Provision for voluntary regn ‡ All existing dealers will be automatically registered under the VAT Act.T. ‡ Small dealers with G.O not exceeding Rs 5 lacs ² not liable to pay VAT.

TIN ‡ TIN consists of 11 digit numerals throughout the country ‡ First two characters will represent the State code as used by the ministry of Home Affairs ‡ The set-up of next 9 characters may be different in different states ‡ Return : ‡ Simplified form of returns will be notified ‡ Returns to be filed monthly/ quarterly as specified in the State Acts/Rules ‡ Returns will be accompanied with payment challans ‡ Returns furnished by dealers will be scrutinized within prescribed time from the date of filing the return .Design of State ±Level VAT (part 2) ‡ Tax payer·s Identification number.

‡ If no specific notice is issued proposing dept audit of the books of accounts of the dealer within the time limit specified in the Act. ‡ Provision for ´self ²assessmentµ will be stated in the VAT bills of the States .Design of State ±Level VAT (part 2) ‡ Procedure of Self. the dealer will be deemed to have been self assessed on the basis of returns submitted by him.Assessment of VAT liability: ‡ VAT liability will be self assessed by the dealers ‡ No compulsory assessment at the end of each year as is existing now.

.Design of State ±Level VAT (part 2) ‡ Audit : ‡ Correctness of self-assessment will be checked thro· a system of Departmental Audit ‡ Audit will be completed with in 6 months. ‡ Delinked from tax collection wing. ‡ Dealers ² selected on scientific basis ‡ Dealer will get a copy of audit report. ‡ Comprehensive cross-checking system is to be introduced.

Design of State ±Level VAT ( part 2) ‡ Declaration Form: (local) ‡ Dispensed with. . ‡ There will not be any reference to these taxes in the VAT bills. SAT would be abolished. ‡ Other Taxes : ‡ TOT. ASC. SC. ‡ Incentives : ‡ Existing incentive schemes may be continued in the manner deemed appropriate by the States after ensuring that VAT chain is not affected.

 Penal provisions:  Should not be more stringent than in the existing Sales Tax Act. .Design of State ±Level VAT (part 2)  Entry Tax should be made VATable  If not made VATable ² should be abolished  This may not apply to entry tax that may be levied in lieu of Octroi.

lottery tickets . diesel . petrol . . fuel and other motor spirit since their prices are not fully market determined. aviation turbine. ‡ These will continue to be taxed under the Sales Tax Act or any other State Act or even by making spl provisions in the VAT Act itself and with UFR decided by EC.Design of State ±Level VAT (part 2) Coverage of Goods under VAT : ‡ ‡ All the goods including declared goods Out side VAT : ‡ Liquor.

Design of State ±Level VAT (part 2)  VAT rates and classification of commodities:      VAT system covers 550 goods Two basic VAT rates of 4% & 12.decision would be reviewed after one year .5% plus A specific category of tax exempted goods A special VAT rate of 1% only for gold and silver ornaments States have now been given an option to keep rice and other food grains out of VAT ( earlier @4%).

capital goods and declared goods. Optional rate (4%) for Tea In 46 exempted commodities ² states have freedom to select max 10 from a broader approval list for VAT exemption. . tobacco) VAT will not be imposed for one year after the introduction of VAT and position will be reviewed after one year. drugs . agricultural and industrial inputs.5% VAT on AED items ( sugar.Design of State ±Level VAT (part 2) VAT rates and classification of commodities: Exempted category ² about 46 commodities comprising of natural and unprocessed products in unorganized sector which have social implications Under 4% VAT rate ² largest no of goods (about 270) common for all the states.items of basic necessities such as medicine . Remaining goods at 12. textiles.

000 cr ² every year.1st year . 75% -2nd year.3rd year ‡Loss is computed on agreed formula ‡Loss of CST ² Rs 15.Related Issues ± ( part 3) ‡Loss to the States ² compensation: ‡100 % . 50% . ‡Position regarding CST ² EC will review during 2005-06 .

‡Comprehensive campaign on national level as well as on State level will be launched .Related Issues ± ( part 3) ‡ Discussion between EC and GOI : ‡Proposal for VAT on imports including collection mechanism .Collection and appropriation of service tax by the Centre and States ‡ For close interaction with Trade and Industry ² ‡EC has set up a Consultative Committee with one representative from each of the national level trade organizations and national level chambers of commerce and Industry. ‡All the States have agreed to amend their earlier VAT bills so to conform broadly to the common design as elaborated in this white paper.

‡There is no need for another VAT audit ‡No upper cap for items out of VAT ‡ No mention about ´deemed salesµ and no VAT design for such transactions ‡No mention about the uniformity in State Rules (procedure part) ‡No mention on uniformity with regard to Powers given to Govt officials thro· enabling provisions .Defects in the White Paper ‡The flexibility given to States in certain matters ² leads to disparities ‡No clear cut road map for CST to be phased out.

a restrictive provision ‡ Need for an appropriate VAT rate for CNG ² exemption will divert the trade and adoption will lead to dip in diesel consumption ² This is a contentious issue .Defects in the White Paper ‡States can choose only 10 items of local importance to be placed under exempted category out of master list of goods finalized by EC.

Purchases v.No Type Eligibility of ITC YES/NO/N. Input Tax Credit Sr.A Yes 7 Purchased used in final Products directly exported Yes .cash refund 8 Purchased used in final Products under deemed export .A 1 2 3 4 Local Purchases from VAT dealers for manufacturing taxable goods for sale Purchases for "Resale" in the same form within the state Inter-State Purchases Purchases from non VAT dealers / dealers opted for composition scheme Yes Yes No No 5 6 Imports Purchases from inter units covered under one registration N.cash refund Yes .

Input Tax Credit Sr.Purchases v. branch transferred outside the state for sale Yes Yes No No Not clear No To apply the formula To apply the formula Full reversal of ITC / Minimum tax @ 4% on inputs used 18 19 Capital goods .No Type Eligibility of ITC YES/NO/N.A 9 10 11 12 13 14 15 16 17 Purchases for use in the works Contract within the state Right to use the goods under "lease" within the state Inputs used in the final products given away as samples or free issues Inputs used in repairs under warranty /guarantee periods When the Unit is merged or amalgamated with other unit When Business is discontinued Common input for exempted and taxable goods Non taxable goods declared as taxable or vice versa thro Notfn Final products .locally procured Client's materials Yes but staggered No .

AREAS OF CONCERN.is it a better option ? .Capital Assets Capital Assets ‡ Capitalization would be state dependent ‡ ‡ ‡ ‡ ‡ Definition of capital goods & eligibility criteria Tax audit requirement Tracking mechanism for availing ITC on capital goods over Periodic review especially in plants/ works ITC to be reversed if asset is discarded /transferred/ sold a long period ‡ Inter State purchase .

AREAS OF CONCERN -PROCEDURAL Pending assessments Returns should match with books of accounts Self assessment and tax audit Closing stock as of 31st march ‡ bifurcation of purchases ‡ tracking the source docs for 12 months ‡ preparation of statement of likely credit ‡ Audit certificate .

for . This methodology will change as per each state rules.AREAS OF CONCERN -PROCEDURAL ‡ Flow of original tax invoices to branches to avail ITC ‡ Like sales tax register ² purchase register is required at branches taking care of ITC ‡ Education to vendors/ sub contractors /C &F agents ‡ Some divisions may carry out invoices on behalf of assessing centres on A4 stationery thro· Deskjet printers .

Inter-state sales ‡Avoid multiple local agencies /trading companies .Restructuring ----Contd. ‡Branch Transfers vs.liability is restricted to 4% ‡Sales of the products at the semi finished stage within the group companies for finishing /final taxable product ² within the same state to claim full ITC. ‡If ITC is not available in case of ´Tax free/Exempted products.procure materials/goodsµ against ´Cµ form .

supplies / SAP .Restructuring ---‡ Registration ‡ TIN ‡ Declaration of Stock as of 1/4/2005 ² Minimum Inventory ² Claim full set-off ² Request Vendors to submit bills ‡ Invoice / Debit /credit ² format design ‡ Tax Invoice ‡ Proforma invoice ² to be discouraged ‡ Sales Tax Register /Purchase Register ‡ Self Assessment /Audit / C form Liability ‡ TDS .

we can make the future happen. -Finance Minister . And this century will be India·s century. and walk the path of honour and courage.Let us make the future happen----FM If we bring thought and passion to our governance .

VAT is a journey and not a destination .