3/14/2016

Background
Value Added Tax Before the implementation of VAT, Delhi had
two systems to collect sales tax.

1) First point tax system (Tax was levied at

the time of first sale)

2) Last point of tax (tax was always paid by

Created By:
the last registered dealer)
CA Priyanka Ostwal
(Priyanka.ostwal@gmail.com)

Background
Problems in Old Tax Structure –

Cascading effect
No Transparency
Inefficient administrative control
Multiplicity of taxes

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CONSTITUTIONAL Article 265 :

VAT in Delhi
PROVISIONS Constitutional
Authority

Article 245 :
Powers of
The present Delhi Value Added Tax Act, 2004 (Delhi
parliament and
state
Act 3 of 2005) was passed by the Legislative
Assembly of the National Capital Territory of Delhi on
Article 246: 22nd December 2004 and received the assent of the
Schedule VII
President of India on 15th February 2005.
LIST III :
LIST I : LIST II :
CONCURRENT
UNION LIST STATE LIST
LIST The Act came into force with effect from 1st April
2005 vide Notification No. F.101(318)/2005-
ENTRY
NO.54 Fin.(A/Cs)(i)/8581, dated 30th March 2005.
• Entry No.54 in List II (state list) of Schedule VII of
constitution of India , empowers state levy tax on sale or
purchase of goods other than news papers

What is VAT???

The VAT constitutes a method of taking final

All states have adopted VAT
It has replaced Local Intra State taxes levied at
state level E.g.. Local Sales Tax, Turnover Tax,
Additional Taxes and Surcharge on sales tax
Central Sales Tax (CST) governing inter-state
sales continues to be operational, but its rate
is 2% w. e .f. 01.04.2010
consumer spending in the economy by instalments
or in stages. The method consists of levying a tax on
value added to a product at each stage of its
production and distribution.
Under VAT, collection of tax is on retail value of sale.
And is a consumption tax as the final consumer bears
the burden of it

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Illustration Need for Introducing VAT

VAT is calculated by deducting tax credit from tax
collected during the payment period: Equitable way of taxing
Rs.
More Transparent
Purchase Price 100
Simpler-easy computation
Tax paid on purchase @10% 10

Cost Efficiency
Sale Price 180

Better Compliance through self policing

Tax on Sale Price @12.5% 22.5

VAT payable (Rs. 22.5 – Rs. 10) 12.5 Prevents Cascading effects

Illustration Merits of VAT

Eliminates Multiple Tax
X Ltd is a manufacturing company. It purchases raw material from P Certainty and Easy Understanding
and Q. Manufactured goods are sold by X Ltd to a wholesaler Y Ltd. Y Lowering of Tax Burden
Ltd. sells goods to retailer Z. Retailer Z sells goods to consumers. Fairness
Particulars Tax evasion will be reduced
Raw Material supplied by: Tax Transparency
P to X Ltd (VAT Charged by P@12.5%) Rs. 1,000
Q to X Ltd (VAT Charged by Q@ 4%) Rs. 6,000 Higher Tax Revenue
Manufactured goods sold by: Uniformity
X Ltd to Y Ltd (VAT charged by X Ltd from Y Ltd @ 12.5%) Rs. 10,000 Simpler
Eliminates multiple rate regime
Goods sold by wholesaler:
Y Ltd to Z (Retailer) (VAT charged by Y Ltd from Z @ 12.5%) Rs. 17,000 Neutral
Stable Source of Revenue
Goods sold by Retailer:
Economy in exports
Z to consumers (VAT charged by Z from consumers @ 12.5%) Rs. 22,0000

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Demerits of VAT
It does not cover goods as well as services
What is Input Tax Credit
Exemptions The essence of VAT is in providing se-off for the tax paid
earlier and this is given effect through the concept of input tax
Floor Rate
credit/rebate.
General rate of 12.5% is too high
Classification of capital goods
Input tax credit means setting off the amount of input tax by a
Inclusion of capital goods and industrial inputs at concessional registered dealer against the amount of his output tax
rate
Applicability of VAT on MRP
The VAT is based on the value addition of goods and the
Distortions due to concessions related VAT liability of the dealer is calculated by deducting
Federal structure of India input tax credit from tax collected on sales during the
Increase in compliance cost payment period
Increase in working capital
Preference for consumption over production
Tax Evasion

Illustration
X Purchases input worth Rs. 15,00,000 and records sales of Rs. 22,00,000
in the month of January 2016. Input tax rate and output tax rate is 12.5%.
Input tax credit/ set-off shall be computed as follows:

Input procured within estate in a month [a] Rs. 15,00,000

Output sold in the month [b] Rs. 20,00,000
INPUT TAX CREDIT Input Tax Paid @12.5% on (a) [c] Rs. 1,87,500
Tax Collected 12.5% on (b) [d] Rs. 2,75,000
VAT payable during the month [(d)-(c)] [e] 87,500

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Coverage of Input Tax Credit Coverage of Input Tax Credit

No Credit is available in respect of purchases given below: Other Points:
Goods purchased from unregistered dealers Live Link between Input and Output not required
Goods purchased from other states/countries
Purchase of goods used in manufacture of exempted goods or in sale of tax-free
Input tax credit allowed only when VAT is paid by the seller of input goods
goods
Purchase of goods used as fuel in power generation
Purchase of goods to be dispatched as branch transfers outside states Proportionate tax credit if goods are utilised partly for sale of tax free
Purchase of goods used in manufacture of goods to be dispatched outside any state goods and partly for sale of taxable goods
as branch transfer/consignments
Purchase of goods in case where the dealer does not have invoices showing Input tax credit in case of stock transfer
amounts of tax charged separately by the selling dealer
Purchase of non-creditable goods
Carrying Over of Tax Credit
Purchases from a dealer who have opted for composition scheme
Purchase of goods where purchase invoice is not available
Purchase of goods for personal consumption Treatment of Exports (VAT paid within state will be generally refunded in
Purchase of goods where purchase invoice is not available
full within a stipulated period. Units located in SEZ and EOU will be
generally granted either exemption or refund or input tax paid)
Purchase of goods from outside India
Purchase of goods for distribution as gift or as free samples

Coverage of Input Tax Credit Input Tax Credit in case of Stock

Input Credit Available on:
For sale/resale within state
Transfer
For sale to other parts of India in course of inter-state trade or commerce
For being used in execution of a works contract
X Ltd; a dealer in Delhi, purchases Article A (Input goods) in Delhi on May
To be used as capital goods required for the purpose of manufacture and 15, 2015 (7,000 units at the rate of Rs. 30 per unit, VAT paid at the rate of
resale of taxable goods 12.5% comes to Rs. 26,250). 5,000 units are sold in Delhi on May 28, 2015
For making zero rated sale @ Rs. 70 per unit, 1,000 units are sold in Delhi on July 6, 2015 @ Rs. 72
To be used as containers or packing material, raw material, consumable per unit and 800 units are transferred by way of stock transfer to Pune
stores, manufacture of taxable goods or in the packing of such Branch on July 20, 2015. Calculate Input credit available.
manufactured goods
To be used as raw material, capital goods, consumable stores, packing
material, containers, etc. or manufacturing and /or packing goods to be
sold in the course of export out of India

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Illustration

ABC & Co purchases raw material A for Rs. 40,00,000 (plus VAT @12.5%).
Out of such raw material 70% was used for manufacture of taxable goods
and the balance for the manufacture of exempted goods
Different modes of
Another raw material B is purchased for Rs. 30,00,000 on which VAT paid
is @ 1%. Out of the raw material B, 60% is used for manufacture of taxable
computation
goods and the balance for manufacture of exempt goods.

The entire taxable goods are sold for Rs. 64,00,000 (plus VAT @ 12.5%).
There was no opening or closing inventory of taxable goods or raw
materials. Compute the VAT liability of ABC & CO.

Illustration Variants of VAT

B, a registered dealer, submits the following information for the month of VAT could be levied with three specific variants:
February 2016:
Details of Purchase :
1. Raw Material purchased from another state (CST @ 2%) Rs. 20,00,000 A) Gross Product Variant (Allows deduction for all purchases of raw
2. Raw material X purchased within the State (VAT @ 4%) Rs. 25,00,000 materials and components but no deduction is allowed for capital inputs)
3. Raw material Y imported from Singapore (includes custom duty @
12.36%) Rs. 21,00,000 B) Income Type Variant (Allows deduction for purchases of raw material and
4. Raw Material Z purchased within the State (VAT @ 4%) Rs. 8,00,000 components as well as depreciation on capital goods)
Details of Sales:
1. Sale of goods produced from raw material X (VAT @ 12.5%) Rs. 37,00,000 C) Consumption Type Variant (Allows deduction for all business purchases
2. Sale of goods produced from inter state purchase and imported raw including capital assets)
materials Rs. 22,00,000 (VAT @ 4%)
3. Sale of goods produced from Raw Material Z (VAT @ 1%) Rs. 9,00,000
(Consumption Type Variant is normally preferred over other variants as it does
Assume that there is no opening or closing inventory, compute the amount of not affect decision regarding investment)
VAT payable by B for the month of February 2016.

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Variants of VAT: Continued Advantages of Adopting Tax Credit

Reason for preference of consumption variant :
Method
A) Tax is neutral in respect of techniques of production The following points may be noted in this regard:

B) It is more in harmony with the destination principle
C) It is more convenient from the point of administrative expediency
1. It makes cross-checking of tax paid at earlier stage, more amenable, as
dealers are required to state the amount of tax in invoices.
2. Tax burden being dependent upon the tax rate at the final stage, dealers
at intermediate stages do not have any incentive to seek treatment in tax
rate.

3. Under the invoice method, exports can easily be relieved of domestic

indirect taxes through zero rating of exports.

Different Modes of Computation General Scheme of the Delhi VAT Act

VAT is computed by adopting three alternative methods. These are:

A dealer is liable to pay tax at the prescribed rates on every

sale of goods effected by him. The goods are taxed at the
A) Addition Method (Also known as Income Approach. Based on the
identification of value added (i.e. wages, rent, interest and profits)) following rates:
(i)Goods specified in the first schedule (Exempted) Nil
B) Subtraction Method (This method estimates value added by means of (ii) Goods specified in the second schedule 1%
difference between outputs and inputs. Also known as product approach.
Has two variants: Direct Subtraction an Intermediate Subtraction) (iii) Goods specified in the third schedule 4%
(iv) Goods specified in the fourth schedule 20%
C) Tax Credit or Invoice Method (Tax on inputs is deducted from the tax on (v) Unspecified goods 12.50%
the sales to arrive at the VAT payable by the dealer)

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PROCEDURES
Invoice:
Every registered dealer having turnover of sales above an
amount specified, shall issue to the purchaser serially
numbered tax invoice with prescribed particulars.
Invoice shall be signed and dated by the dealer of his regular
employee.
Dealer shall keep a counterfoil or duplicate of such invoice
duly signed and dated
Contents of VAT Invoice
The word “Tax Invoice” should be printed in a prominent place on the
invoice
Name, address and VAT registration number of the seller
Date of issue of invoice
Mechanically printed Serial No. of the Invoice
Quantity and description of the goods sold
Unit Price and amount charged (excluding VAT)
Rate and Amount of VAT charged
Name, address and VAT registration number of the purchaser
GR No and name of the transporter, if any
Signature of authorized person
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Registration
Any Dealer who wants to carry on the business of purchase and
sale of goods in a State and is liable to pay tax, can not carry on
the business unless he gets himself registered and holds a valid
certificate of registration under VAT regulations
Mandatory Registration
Every Dealer is required to register under the act if he
fulfills any of these conditions :
His taxable turnover in the preceding year exceeded the
minimum exemption limit.
His taxable turnover in the current year exceeds the
exemption limit.
he is involved in interstate sales or purchase irrespective
of the quantum of turnover.
A Dealer is exempted from registration if he deals
exclusively in goods which are exempted under VAT.
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Registration Documents to be attached :
procedure Address proof
1. Place of business
2. Place of residence
• Application of registration is Non refundable Fees
required to be made in 1. Voluntary Reg. : Rs 5000
prescribed form along with
2. Mandatory Reg.: Rs 500
prescribed security to the
commissioner or any other Deposit of Rs 25000 only in case
specified authority of voluntary registration
Constitution of business
e.g. Partnership deed, Articles &
Memorandum of Association
Shop Act number
Profession Tax number
Photos (2)
Bank Account details along with a
cancelled cheque
PAN CARD.
Sample
image
of
Registration
Certificate
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Cancellation of Registration
 When a registered dealer has ceased to pay taxes, or interest/ penalties, if any;
 When a misleading or deceptive return has been filed by the dealer intentionally;
 When the dealer has contravened any provision of the Act or committed any
other offence, the Commissioner, after looking into the matter, may cancel the
dealer’s registration;
 When the owner of a proprietorship business dies, leaving no successor to carry
on the business;
 Where a partnership firm or association of persons or an incorporated entity is
closed down;
 When a dealer has stopped carrying on business activities, which entitled him to
be registered under the VAT Act;
 Where the Commissioner, after making necessary inquiries, is satisfied that
registration of the dealer should be cancelled.
Filling of Return
 A return under DVAT Act 2004 is a statement in which details of gross
turnover, local turnover, central turnover, output tax, input tax credit and
net VAT payable/ refundable for a particular tax period is shown.
 It is mandatory for a registered dealer to file his DVAT return otherwise
penalties shall be imposed upon the dealer as well as he shall not be
given right of self assessment.
 Quarterly DVAT return shall be filed within 28 days of the next month
following the quarter online.
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What is Composition Scheme
 Small dealers with annual gross turnover not exceeding a
specified amount (Rs. 50 Lakhs) who are otherwise liable to pay
VAT, shall however have the option for a composition scheme
with payment of tax at a small percentage of gross turnover. The
dealers opting for this composition scheme will not be entitled to
input tax credit.
Features of Composition Scheme:
1. Optional
2. Very Small tax is payable (Can be as low as 0.25%)
3. Simple Return form
What is Composition
Scheme: contd…
Who is eligible for Composition Scheme:
a. He is a registered dealer under VAT regulations of the State,
b. He purchases and sells goods only within the state
c. His sales turnover for the immediately preceding financial year does
not exceed Rs. 50,00,000
d. He is liable to pay tax under the respective State VAT Act only
Who is not eligible for Composition Scheme:
a. A manufacturer or a dealer who sells goods in course of inter-State
trade or commerce,
b. A dealer who sells the goods in course of import into or export out of
territory of India
c. A dealer transferring goods outside the State
d. A dealer, who wants to issue invoice inclusive of VAT
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What is Composition
Scheme: contd…
Advantages of Composition Scheme:
a. Tax Calculation is very simple and tax rate is low
b. Return form is simple
c. Dealer opting for this scheme is not required to maintain any statutory
records as prescribed under VAT regulations. Only records for
purchases, sales and inventory are required.
Disadvantages of Composition Scheme:
A Dealer can not avail any input tax credit under this scheme
Other Issues….
 Taxpayer’s Identification Number (TIN) (consists of 11 digits numerals)
 Self Assessment of VAT Liability
 Significance of Audit (Certain percentage of dealers)
 How Many goods are covered under VAT (All goods including declared
goods. Exempted goods includes liquor, lottery tickets, petrol, diesel,
aviation turbine fuel and other motor spirit)
 VAT rates and Classification of Commodities
 Records to be Maintained (Purchase account, sales records, VAT Account
and record for exempted sales)
 Status of VAT in Special Transactions (Stock Transfer, Work Contract and
Lease Transactions and hire purchase)
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VAT and Stock Transfer
 Inter state stock transfer does not involve sale. Such a transaction is
generally not subject to sales tax. Same position is adopted by the
different states under VAT regime. Generally tax paid on-
a. Input used in manufacture of finished goods which are stock
transferred; or
b. Purchases of goods which are stock transferred.
Is available as input tax credit after retention of a specified percentage
of such tax by the concerned State Government.
VAT and Work Contract
 Typically every work contract involves an element of sale of goods
and provision of service.
 Transfer of property in goods involved in execution of works
contract is deemed to be sale of such goods.
 Work contract can be segregated into contract of sale of goods and
contract of provision of service.
 Portion pertaining to sale of goods is taxable under VAT and the
remaining portion of the contract remains a contract for provision of
service which is chargeable to service tax
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VAT and Lease Transactions
 Transfer of goods by way of hiring, leasing, licensing “Without
transfer of right to use such goods” is declared service and
chargeable to service tax
 Conversely, “Transfer of right to use any goods” for any period for a
consideration is “deemed sale” and is subject to VAT or CST
VAT and Hire Purchase
 Goods delivered on hire purchase or any system of payment by
instalments, is “Deemed sale”. State Government can impose VAT
on intra-state transactions. In case of inter-state transactions, CST is
applicable.
 In hire purchase, there are two different transactions, viz., financing
transaction and equipment leasing transaction.
 Financing transaction (represented by interest) is a “Declared
service” and chargeable to service tax.
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