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VAT AND ITS NEED

A consumption tax which is levied at each stage of production based on the value added to the product at that stage.

.VAT AND ITS NEED


India - April 1, 2005 - states and Union Territories.
Transparent Tax Collected on sale of goods Applies for all manufacturers, wholesalers, retails VAT Chain - Its does away with Tax on Tax Consumer pays less - compared to Sales Tax Problems with Sales Tax

FEATURES
Tax levied and collected at every point of sale. Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale. Dealers reselling tax paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition) It is transparent and easier. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale.

FEATURES
At the most a few forms are required. Tax on goods and services both.

Self assessments by dealers.


Penalties will be stricter.

MERITS OF VAT
Coverage -The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers.

Revenue Security - Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value added at the last stage.

MERITS
Selectivity - VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption-type.
Co-ordination of VAT with direct taxation Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection.

DEMERITS
VAT was to be applied in all states but it failed to do so.

VAT is regressive :- Its burden falls disproportionately on poor people since the poor are likely to spend more of their incomes

VAT is too difficult to operate from the position of both the Administration and business

LATEST EXAMPLES
Traders buying wheat from UP, Rajasthan on Punjab's high VAT

The total tax paid by a private trader in Punjab works out to 14.5 per cent With Punjab raising Value Added Tax (VAT) on wheat purchase from 4 per cent to 5 per cent. Due to higher VAT on whet private traders have decided to go to Uttar Pradesh and Rajasthan to purchase wheat .The total tax paid by a private trader in the state works out to 14.5 per cent.

LATEST EXAMPLES
Over 75 Percent of Mobiles Sold Without VAT in India
The Central Board of Direct Taxes (CBDT) released a statement on March 13, 2011 saying that a series of raids have been conducted on several mobile phone retailers around New Delhi who were selling phones which were not properly registered and are considered to be a potential security threat. According to the CBDT, retailers have been importing mobile phones which do not have the legally required International Mobile Equipment Identity(IMEI). The devices were predominantly imported from China. No records are made of the phones as they enter the country, and they are sold to consumers with no Value Added Tax (VAT) charge.

EXAMPLE
RAW MATERIAL SUPPLIER Price of raw material- Rs.100 Input tax paid -Rs.10 Selling price -Rs 110 CONSUMER

MANUFACTURER A. Cost of goodsRs100 B. Input tax paidRs10 C. Total purchase cost-Rs110 D. Product priceRs120 E. Output tax charged-Rs12 F. Total selling price Rs132 G. Vat payable-(E-B)= Rs.2 Profit (F-G-C)= Rs.20

RETAILER A. COST OF PRODUCTRS.120 B. INPUT TAX PAID RS.12 C. TOTAL PURCHASE COST- RS132 D. PRODUCT PRICERS150 E. OUTPUT TAX CHARGED- RS15 F. TOTAL SELLING PRICE RS165 G. VAT PAYABLE-(E-B)= RS.3 PROFIT (F-G-C)= RS.30