VAT

2011-12 BY
HARSHA.S 10ATCM5014 MFA III SEM Govt R.C COLLEGE OF COMMERCE & MANAGEMENT

Introduction
As back as 1921. F.von Siemans proposed Value Added Tax as a substitute in place of German Turn over Tax. VAT was introduced in France as early as in the year 1954 and its scope was expanded to include services in 1978, agriculture in 1983. VAT therefore became one of the most important fiscal innovations of the last century For efficient use of resources a revenue generating, and more neutral taxation system is needed. Although, VAT is innovated tax system, it is considered as the best form of indirect taxes and has world wide application as a vastness of tax reforms. But the business community was confused about this system and was making strong voices when Indian government was implementing VAT from 1st of April 2005.

Background of VAT

VAT was initiated first in France in mid-1950s.

Then in European countries in 1960s Subsequently introduced in about 130 countries, including several federal countries. In Asia, it has been introduced by a large number of countries from China to Sri Lanka.

BRIEF HISTORY OF INDIAN VAT SYSTEM-I

In India, whatever we called as VAT is not a PURE VAT SYSTEM. In Foreign countries there is no such called Excise Duty or service Tax. There exists only payment of TAX is VAT ONLY i.e. PURE VAT SYSTEM OF
TAXATION.

In 1982, Indian cabinet ministers visited foreign countries to analyze the

Tax structure and after analyzing, they (Govt.) decided to Introduce VAT system of TAXATION on sale of Goods.

But Government immediately fails because here federal Structure of

Taxation is followed.

BRIEF HISTORY OF INDIAN VAT SYSTEM-II

Later on, In 1986 Central Govt. decided to provide Credit to manufacturer In 1991, the Finance Minister of that time i.e. Mr. Manmohan Singh analysed that State level VAT should be introduced. Thereafter a committee of State Finance Ministers is formed and it is decided to introduce STATE LEVEL VAT IN INDIA. After that government changed the nomenclature of MODVAT into CENVAT [Central value Added Tax] where Central Government is allowed to set off Excise Duty and service Tax amongst each other.

Finally in the year 1st April 2005 was Introduced,

DISADVANTAGE OF OLD SYSTEMS

Narrow base Multiplicity of Levies &Complexity of Structure Cascading Effects High tax Rates Lack of Transparency Vertical Integration Exports un competitive Administrative in efficiency Lot of Disputes.

Introduction of VAT in India

Central Government initiated discussions with State Governments in 1995. After lot of arguments by Central Government, all States ultimately agreed to introduce State Level Vat at the conference of Chief Ministers all States at Delhi in November, 1999. A high power committee consisting of senior representatives of all 29 States was constituted under Chairmanship of Dr. Asim Dasgupta, Finance Minister, West Bengal. After deliberations and many meetings, it was announced that all States have agreed to introduce VAT w.e.f. 1-4-2005.

BASIC ELEMENTS OF VAT

VAT provide broad tax base

VAT is an indirect tax on consumption

VAT is charged and collected at each stage of production/processing /trading i.e. multi point VAT mainly requires maintenance of accounts of tax paid on purchases and sales VAT contemplates rebating of tax paid on inputs/purchases and capital goods In VAT, the tax component in any transaction is identifiable/transparent.

VAT would give the big push for a micro jump in the economy
VAT enhances tax neutrality in the international trade.

WHAT IS VAT?
THE value added Tax is a tax on the value

added by a business firm, VAT could be

defined as a Tax on Value addition at different stages of manufacturing and distribution of goods and services. It is a form of indirect tax in the nature of a multi point sales tax with a set off or credit for tax paid on purchases/services.

EXAMPLE
A salesman pays 10 rupees for sliced bread and carries it to the retailer for 15 rupees; he has added 5 rupees of the value to the bread. A certain percentage of tax is levied on the added value at various levels of such production and distribution. In this sense, a VAT is a multistage sales tax.

EXPLAINATION
The VAT = Value added * tax rate For example, (A) VAT at primary production = 90*12.5%=11.25 (B) VAT paid by spinner in his production = 130 * 12.5%=16.25 (C) VAT paid by wholesaler = 70*12.5%=8.25 (D) VAT paid by Retailer = 100*12.5%=12.5 Revenue received by the government in the economy = 390*12.5%=48.25

VAT DESIGN
VAT rates- a set of exempted goods, 4% on necessities and selected inputs, minimum RNR of 12.5% ,1% for gold & jewels and 20% for Petroleum Rebate of state tax paid on purchases in local / inter state sale of goods CST to continue- with amendments & later to be phased out Export to be zero rated Petrol, Diesel, ATF, and Sugar can be kept out of VAT Special VAT rate for jewels and alcohol TOT, Entry tax etc to be merged in VAT Sales tax exemption to be removed Composition Scheme for small businesses No rebate for inter state purchases Rebate for goods sent out of state as Branch Transfer in Consignment beyond 4% CST rate

FEATURES
Value Added Tax is collected on each sale or resale.

No exemption is made for sales to registered persons i.e.

sales to both registered and non-registered persons are taxable.

Only registered persons are allowed to claim a credit/

refund of tax paid purchases for use in taxable activities. VAT is levied only on the value added at each stage of transaction

VARIANTS OF VAT
Variants mean items on which VAT credit is available. VAT has three VARIANTS namely: GROSS PRODUCT VARIANT INCOME VARIANT

CONSUMPTION VARIANT

VARIANTS OF VAT Gross Product Variant Income Variant

VAT is levied on sales and deduction for tax paid on input is allowed excluding capital inputs Credit of tax on Capital goods is not allowed which discourages investments in capital goods. VAT is levied on sales with deduction for tax paid on all business inputs including capital goods.

Consumption Variant

VAT is levied on sales with setoff for tax paid on inputs and depreciation is charged only on capital goods

capital goods carry a heavier tax burden as taxed twice. Mordernisation and up gradation of capital goods is delayed due to double taxation.

This method is suitable when tax is not charged separately in invoice

Easy to operate and does not discriminate between labor intensive industries and capital intensive industries

This method is the most popular method all over the world.

COMPUTATION OF VAT Credit

VAT can be computed by adopting three alternative methods they are:

Addition Method: calculation of value added can be done by

summation of all the elements of value added (i.e. wages, profits, rent, and interest) This method is known as addition method Subtraction Method: estimates value added by taking the difference between the value of outputs and inputs Tax credit Method: under this method the tax on inputs is deducted from the tax on sales to arrive at the VAT payable by the dealer (Out put Input) In practice, most countries use this method.

Accounting treatment of VAT-1

ICAI has issued Guidance Note on Accounting for State level VAT on 15-4-2005. The guidance note is based on principles of VAT as contained in White paper released on 171-2005. However, there are variations in respect of each State. Hence, accounting policies will have to be adopted to suit provisions of VAT law of the particular State. Following broad principles should be kept in mind:(a) As per AS-2, cost of purchase for purpose of inventory valuation should not include tax, if credit of tax paid is available. (b) For purpose of income tax, inventory valuation should be inclusive of taxes, even if its credit is available, as per section 145A of Income Tax Act.

(c) Purchase account should be debited with net amount. VAT credit receivable on purchases should go to 'VAT Credit receivable (Input) Account.

Accounting treatment of VAT-2

(d) Account of each rate i.e. 0%, 1%, 4%, 12.5% etc. is required to be kept separately.

(e) In case of capital goods, as per AS-10, cost of fixed assets should include only non-refundable duties or taxes.
(f) If entire credit of tax on capital goods is not available immediately, the credit that is available immediately should be debited to VAT Credit Receivable (Capital Goods) Account and credit which is not available immediately should be taken to 'VAT Credit Deferred Account'. (g) In case of sales, the sales account should be credited only with net amount (i.e. exclusive of VAT). Tax payable should be credited to separate account 'VAT Payable Account' [This is 'exclusion method'. Interestingly, in case of excise duty paid on final product, 'inclusive method' is permitted, i.e. sale account is credited inclusive of excise duty on final product]. (h) If any VAT is payable at the end of period (after adjusting VAT credit available), the bal-ance is to be shown as 'current liability

Demerits
1. VAT does not cover service

2. Floor rate:- State will have no discretion to go below or above the

prescribed rates. 3. Non-Integration of CST with State VAT (no credit of CST from output

VAT)
4. No refund / setoff if final product is exempt. 5. Accounting burden 6. General rate (Revenue neutral rate i.e. 12.5%) is too high.

TAX RATES
0% = Goods having social implication and items which are legally

barred from taxation (e.g. new paper, national flag etc.). This will
contain 46 commodities. 10 will be chosen by state (local and social important). Other will be common for all States. 2% = Gold and silver ornaments, precious semi-precious stones. 5% = Goods of basic necessities. This consist 270 commodities. 14% = on others.
Note: Petrol, diesel and motor spirit, Aviation Turbine fuel, Liquor, cigarettes, lottery tickets are kept outside VAT. The States may or may not bring these commodities under VAT laws. However, it is agreed that all these commodities will be subject to 20% floor rate of tax

CONCLUSION
VAT is the most certainly a more transparent and accurate system of taxation; it has the experience of most of the countries with increase in revenue to the extent of 27% of total tax revenue over 5% of GDP. It is the money making machine to the Government. While existing sales tax structure allows for double taxation thereby increase the burden. However VAT can be considered as a multipoint sales tax with set-off for tax paid on purchases and capital goods.