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TAX LAWS VALUE ADDED TAX

Indirect Tax Structure in India


The states initially levying a first-point cascade type sales tax. The system suffered from all the weaknesses of Cascading, uncontrolled incidence, Multiplicity of rates etc.


With the deficiencies in the existing tax system, the Government of India (GOI) took the initiative to replace this system with subnational VAT. GOI as a facilitator. Empowered committee a good example of cooperative federalism.

 

Interstate Tax- Earlier Position




CST Act, 1956 to govern principles of taxation of such sales. The tax, however, has been assigned to the states The tax is levied on the basis of origin when goods are sold to another states. For interstates sales while the dealers make use of C form, govt. deptt. uses D form for availing same benefits.

 

 What

is Value Added Tax (VAT) ? on Value addition taxation

 Tax

 Multi-point  A state

subject

VAT is a tax on sale or purchase of goods levied at every stage from manufacture or first sale in chain of distribution till the retailer, with a provision to deduct tax paid or payable on purchase from tax payable on sale.

 Brief

History was first introduced in France in

 VAT

1954
 50

Countries switched over to VAT during last decade 130 countries worldwide have introduced VAT over the past three decades

 Over

Indian VAT
Implemented in all states in a phased manner

Evolution of VAT
The first preliminary discussion on State-level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. - Basic issues on VAT Second State Finance Ministers Committee met in 1998

Overview of VAT System


Raw Material Supplier Particulars Price of Raw Materials VAT 100.00 TNGST 100.00 Input Tax Paid @ 4% 4.00 4.00 Selling Price 104.00 104.00 Supplier collects Rs.104 from the manufacturer and pays Rs.4 to the Government Manufacturer Particulars Cost of Goods Input Tax Paid @ 4% Total Purchase Cost Product Price Output Tax Charged @ 4% Total Selling Price Tax Payable (6 - 4) Profit (156 - 104 - 2) Particulars Cost of Product Input Tax Paid @ 4% Total Purchase Cost Product Price Output Tax Charged @ 4% Total Selling Price Tax Payable (8 - 6) Profit (208 - 156 - 2) VAT 100.00 4.00 104.00 150.00 6.00 156.00 2.00 50.00 VAT 150.00 6.00 156.00 200.00 8.00 208.00 2.00 50.00 TNGST 100.00 4.00 104.00 150.00 6.00 156.00 6.00 46.00 TNGST 150.00 6.00 156.00 200.00 8.00 208.00 8.00 44.00

Retailer

Consumer

Process of Reforms
The Four stages of Reforms
 Back

ground work for VAT. of Central and State VAT- A Dual VAT service tax.

 Introduction

system.
 Integration of  Reforms  Reforms

in CST. to have a goods and services tax (GST)

VAT Structure in India


GLOBAL SCENARIO All Indirect Taxes INDIA Phase 1 State Sales Tax and Entry Tax INDIA Phase 2 Phase 1 + Service Tax + Reduction in Rate of CST INDIA Phase 3 Phase 2 + Abolition of CST + All Indirect Taxes except Customs Duty VA T VA T VA T VAT / GST

VAT in India - Legislation




Implementation on April 1, 2005  Applicability - Virtually universal  Tax on intra-state transaction of goods Mode - Set off  Tax on inputs to be set-off against tax on final products Taxes abolished  Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc. Entry Tax  Already imposed by States - to be made Vatable  Entry tax in lieu of Octroi - not Vatable Central Sales Tax  To be continued in the first year  Position to be reviewed after a year

VAT in India - Legislation


 VAT
  

not levied on

Inter-state sale / Inter-state branch transfer Exports Imports


j

Proposal of VAT on imports being discussed Proposed Rs. 10 Lakhs

Dealers below threshold level


j

 No


VAT on liquor, lottery tickets, petrol, diesel, aviation turbine fuel


To be governed by State Sales Tax laws

 No


VAT for a year on items presently attracting AED (sugar, textile and tobacco)
The position to be reviewed

VAT COMPUTATION METHODS


VAT can be computed by using either of the three methods detailed below: The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input. The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales

VAT in India - Transitional Provisions - TN


 All

existing dealers will be automatically registered under VAT




Required to obtain Tax Identification Number (TIN)

 Credit
  

available on goods in stock on April 1, 2005

purchased on or after April 1, 2004 Documentary evidence for tax payment Credit available between July 1, 2005 and December 31, 2005

 Incentives


States given option to continue incentive schemes


j

Subject to VAT chain remaining unaffected

VAT in India Input Tax Credit


Key Concepts


Accrual
  

Application
   

VAT paid on inputs VAT paid on Capital Goods Sales Tax paid on Goods lying in stock Entry Tax (not in lieu of Octroi)

VAT payable on Finished Goods CST payable on Inter State Sales Refund in case of exports Refund of unutilised credit at the end of 2nd year

Input Tax Credit = (A+B) (C+D) Where A = ITC c/f from previous month / year B = ITC accrued during the month / year C = ITC reversed during the month / year D = ITC refunded during the month / year

VAT in India Input Tax Credit




VAT credit available in case of:  Within State sales OR  Intra-state sales VAT credit restricted on Inter State Stock Transfer  Available in excess of 4% or CST rate applicable

VAT Credit not available in case of  Inputs used in the manufacture of exempted goods  Purchases for other than manufacture/re-sale  Purchases made inter State/in-transit  Purchases of goods of negative list j Delhi - Fuel in the form of Petrol, Diesel and Kerosene, LPG, CNG, Coal j AP - Fuel, Coal and Natural Gas used for power generation j Jharkhand - Consumables j Tripura Credit available in excess of 4% on petroleum products (other than petrol, ATF and diesel) and other fuels

VAT in India Input Tax Credit


VAT credit in case of Capital Goods  Available and to be adjusted over a period of three years j States can reduce this period  Not available on Capital Goods specified in negative list  VAT Credit will be refunded within three months in case of exports  Unutilised Credit will be carried over till the end of the succeeding financial year and if it remains unutilised will be refunded.  Units in SEZ and EOU have an option of either  Not paying VAT on inputs; or  Claim full refund within three months


Input tax credit shall be claimed only on the basis of original purchase invoice issued by registered selling dealer.

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