Ca Final Vat

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Prof. Tayals Indirect Taxes

Tayal Institute (P) Limited, Mumbai 9321144703, 32420612
403, D-Definity, Road No. 1, J P Nagar, Goregaon(E), Nr. Station, Mumbai 400063

VALUE ADDED TAX

Main features of VAT scheme
Taxable event for the purpose of VAT is sale of goods. (Goods means all
movable)
Sale shall be within the state.
VAT is imposed only on the amount of value addition measured by
deducting the purchase price from the sale price.
VAT is equally applicable to the traders as well as manufacturers. Both are
referred as Dealers.
VAT prevents cascading effect of taxation by providing set-off/input-
credit of tax paid at earlier stage. Hence, VAT is a multi-point sales tax
collected on the amount of value addition at each stage.

Constitutional Validity: As per Entry 54 in List II (State List). of Schedule VII
to Constitution of India, States are empowered to levy tax on sale or purchase
of goods other than news-paper.

Differences between Sales-Tax and VAT.

Current Sales Tax Under VAT
1. Tax levied at the stage of the first sale 1. Tax levied and collected at every point
or at the final stage of sale
2. Successive sales (resale) of goods on 2. Tax collected at every point of sale
which tax is already paid do not attract and the tax already paid by the dealer
tax at the time of purchase of goods will
be deducted from the amount of tax
paid at the next sale

3. Dealers reselling tax paid goods do 3. Dealers reselling tax-paid goods will
not collect any tax on resale and file have to collect. VAT and file returns
NIL returns and pay VAT at every stage of sale
(value addition)
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Variants of VAT

Gross Product Variant Income Variant Consumption Variant
VAT Credit of non-capital
inputs only
VAT credit on non-capital
inputs and depreciation
element of capital inputs:
VAT credit on all inputs
viz, non-capital inputs as
well as capital inputs:

(1)
Gross Product Variant - VAT Credit of non-capital inputs only

(a) Taxation: VAT is levied on all sales i.e. there is multipoint tax system.
(b) Scope of credit: VAT credit/set-off/deduction is allowed only of VAT
paid on raw material and components other than capital inputs. In other
words, VAT credit is allowed on non-capital inputs, and, thus, no VAT
credit is allowed of VAT paid on purchase of capital goods.
(c) Merits: Cascading effect is prevented due to allowance of VAT credit on
non-capital inputs. The VAT credit reduces the working capital needs,
due to less payment of VAT on sales.
(d) Demerits: VAT paid on purchase of capital goods (like plant and
machinery) will not be eligible for credit and will, therefore, form part of
the cost for the purposes of computing depreciation. The depreciation
element will include a proportion of VAT, which will form part of cost of
the ultimate product. The price of the ultimate product will be higher
and, consequently, the VAT on sales will higher. Therefore, there is
cascading effect of taxes to the extent of depreciation of capital goods.
Example 1Gross product variant : A manufacturer has purchased raw
material for Rs. 1,04,000 (inclusive of 4% VAT) and plant and machinery for
Rs. 2,25,000 (inclusive of 12.5% VAT). The manufacturing and other expenses
(excluding depreciation) are Rs. 3,00,000. He sells the resultant products at
50% above cost (VAT on sales is 4%). The plant and machinery is to be
depreciated at 50% straight line. Compute the amount of VAT payable in
cash, as per the Gross Product Variant of VAT:

Solution: Computation of VAT payable in cash
Rs.
Raw material net of VAT (1,04,000 x 100104) 100,000
Depreciation on plant and machinery
(50% of 2,25,000 - VAT credit not allowed) 112,500
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Manufacturing and other expenses 300,000
Total cost 512,500
Add: 50% mark-up on cost 256,250
Sale price 768,750
VAT on sales (4% of 7,68,750) 30,750
Less: Input tax credit on raw material (1,04,000 x 4 104) 4,000
VAT payable in cash 26,750

(2)
Income Variant - VAT credit on non-capital inputs
and depreciation element of capital inputs

(a) Taxation: VAT is levied on all sales i.e. there is multipoint tax
system.
(b) Scope of credit: VAT credit/set-off/deduction is allowed of VAT
paid on all raw material and components. In case of capital goods,
VAT-credit is allowed only to the extent of depreciation on them. In
other words, VAT credit on capital goods is apportioned to various
years in the ratio of depreciation allowable on such capital goods in
those years. VAT credit on capital goods can be availed of fully, but,
can be utilized only in a pro-rata or deferred manner.
(c) Merits: Cascading effect is prevented due to allowance of VAT
credit. . It reduces the working capital requirement, due to lesser
payment of VAT on sales.
(d) Demerits: There is uncertainty and non-uniformity in computation
of VAT credit, as there is no specified method of computation of
depreciation.

Example 2Income variant: Using the data given in above question, compute
the amount of VAT payable in cash, as per the Income Variant of VAT.
Rs.
Raw material net of VAT (1,04,000 x 100 104) 100,000
Depreciation on plant (50% of price net of VAT i.e. 50% of
2,25,000 x 100 112.5) 100,000
Total cost 500,000
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Sale price 750,000
VAT on sales (4% of 7,50,000) 30,000
Less: Input tax credit as follows:
input tax credit on raw materials and components
(1,04,000 x 4104) 4,000
Input tax credit on plant
(50% of VAT i.e. 50% of 2,25,000 x 12.5 112.5) 12,500 16,500

(3)
Consumption Variant - VAT credit on all inputs
viz, non-capital inputs as well as capital inputs

(a) Taxation: VAT is levied on all sales i.e. there is multipoint tax
system.
(b) Scope of credit: 100% VAT credit/set-off/deduction is allowed of
VAT paid on all raw material and components as well as capital
goods.
(c) Merits: The merits of consumption variant are as follows -
(i) Cascading effect is eliminated.
(ii) It reduces the working capital requirement, due to the least payment
of VAT on sales.
(iii) it helps in modernization and upgradation of plant and machinery.
(iv) It reduces litigation, as there is no need for any differentiation
between capital goods and non Capital goods, both of which are
treated alike. Further,, there is no need to specify life of Capital good
and rate of depreciation allowance, as is required in case of income
Variant.
(v) Since the VAT paid on capital goods is set-off against VAT liability
on sales, this system is tax neutral.
(d) Demerits: No demerit for manufacturer. But, there is revenue deferment
to the Government i.e. while the credit on capital goods is fully allowed
in the year of purchase, but, the products manufactured by the use of
capital goods are sold in future years, thereby, causing lower revenue in
the years of purchase of capital goods and higher revenue thereafter.
Example 3 -Consumption variant: Using the data given in Example 1,
compute the amount of VAT payable in cash, as per the Consumption Variant
of VAT.
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Rs.
Raw material net of VAT (1,04,000 x 100 104).... 100,000
Depreciation on plant (50% of price net of VAT i.e..
50% of 2,25,000 x 100 112.5) 100,000
Total cost 500,000
Sale price 750,000
VAT on sales (4% of 7,50,000) 30,000
Less: Input tax credit as follows :
Input tax credit on raw materials and components
(1,04,000 x 4 104 ) 4,000
Input tax credit on plant (2,25,000 x 12.5 112.5) 25,000 29,000

Advantages of VAT:
VAT structure is superior to the sales tax system because of the following
advantages/ benefits
1. Eliminates multiple tax - It eliminates cascading effect of sales tax
system by setting off the tax paid earlier at every stage of sale (i.e., a set
off will be given for input tax as well as tax paid on previous purchases).
2. Simple - VAT helps in simplifying the indirect tax system. Because it is
based simply on transactions and not on a base that requires complicated
definition like income or wealth. VAT has the merit of certainty and is
relatively easy to understand.
3. Lowering of tax burden - VAT reduces tax burden and helps reduce
prices.
4. Fairness - VAT is a move towards more efficiency, equal competition and
fairness in the taxation system. VAT helps common people, trade,
industry and also the Government. Other taxes, such as turnover tax,
surcharge, additional surcharge, etc. will be abolished as a result of
introduction of VAT. Overall tax burden is rationalized.
5. Tax evasion will be reduced - The adoption of VAT helps in reducing
evasion of tax. There is self-assessment and, therefore, better tax
compliance being less chances of tax evasion. It has the merit of self-
policing in that it induces businesses to demand invoice from their
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suppliers to enable them to obtain credit for the tax paid on their
purchases against their total tax liability. Under a system where the tax is
levied only at one stage, primarily at the first point of sale, as has been
the predominant practice under state sales taxes, shifting the value
added to subsequent stages can reduce tax liability. VAT serves to
counter this by bringing the value added at all stages under the tax.
While evasion can still occur, compared to a single-stage sales tax VAT
provides a built-in mechanism to counter evasion because of the audit
trail it creates. The application of the tax at each point of sale ensures that
if the tax is evaded at one stage the full tax will be realized at a
subsequent stage.
The sales tax system had considerable amount of evasion. Studies related
to evasion of sales tax in India, for instance, indicate that evasion ranges
between 5 and 85 per cent of the tax base depending upon the type of
commodity. As against the system of administration of sales tax, VAT
requires that all the dealers must issue .tax invoices. The subsequent
dealer would maintain these invoices in order to benefit from tax
deduction. This would enable the tax authority to cross check the
declared transactions between taxpayers, consequently reducing the
propensity to evade tax.
6. Tax transparency - VAT has a novel feature of tax transparency. That is,
the total burden of tax on a particular commodity is clearly seen from the
transactions. Hence, the economic analysis of the tax structure is
convenient. Under the sales tax system it is difficult to estimate the exact
amount of refund for export.
7. Higher tax revenue - There is higher revenue growth.
8. Uniformity - There is a greater uniformity in this system.
9. Neutral- Under VAT, the tax liability does not depend on the number of
times a product is traded before reaching the final consumer or how
much of the value is added at what stage in the production-distribution
process. Under VAT, the allocation of resources is left to be decided by
the free play of market forces and competition and not driven by tax
considerations.
10. Stable source of revenue - Because consumption is less volatile than
income, it provides a stable and flexible source of Government revenue.

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Disadvantages in Indian context - The design of VAT that has been adopted
by the States in, India meets several of the criteria of a good VAT as defined
above but is deficient in some crucial respects. Some of these are given
below
1. It does not cover goods as well as services - While VAT extends to the
retail stage, its base is; not comprehensive enough to comprise all goods
and services that go into final consumption. A grievous shortcoming of
the base is non-inclusion of services. The Union Government taxes
services, while VAT is governed by State Governments. The Central
Government may delegate, the powers to tax some services to the states.
But that is yet to come. Besides whether the base of state VATs, which
now extends only to goods, can be integrated fully with the tax on
services eventually is not clear. Hence, as of now, the state VAT base
suffers from a major drawback.
2. Exemptions - As per the scheme of the state VATs was expected to be
fairly comprehensive as exemptions were supposed to be few. Besides,
various concessions extended under the erstwhile sales tax regime for
new industries and so on were also to be eased out. However, under
continuous pressure from various quarters the number of commodities,
which are flow being exempted from VAT in various states, is not that
small.
3. Floor rate - The other deficiency of the design of VAT being implemented
by the states is the one embedded in the structure of the rates. The states
have two basic rates; general rate of 12.5 per cent and a reduced rate of 4
per cent (and 1 per cent for gold, etc.). These are supposed to be applied
uniformly in all states and so although they are described as floor rates,
the States will have no discretion to go below or above the prescribed
rates, contrary to what a floor rate ordinarily implies.
4. General rate of 12.5 per cent is too high - The general VAT rate of 12.5
per cent is unduly high. This is supposed to be a revenue neutral rate,
though it is difficult to see how a uniform rate could be revenue neutral
for all States. A high rate became all the more necessary on revenue
considerations because a large number of commodities and industrial
inputs have been included in the 4 per cent categories. Many (not all of
them basic necessities) are in the exempt category.
5. Classification of capital goods and Revenue goods - Classification of
goods under different lists creates doubts and disputes as to whether a
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particular item comes within the lower rate category or not, on whether
they are of capital nature or they are or revenue nature.
6. Increase in Cost: Compliance of accounting cost would increase for
traders and small firms.

Role of Chartered Accountants in VAT
The Chartered Accountants can play an pivotal role in proper implementation
of VAT by providing following services -
(1) Record keeping: VAT requires proper record keeping and accounting of
purchases and .sales, input credit on purchases and proper utilization of
such credit against payment of tax on sales.
(2) Tax planning: In order to minimize the incidence of tax, effective tax
planning is required, which involves an analysis of the impact of various
alternatives and selection of the best alternative.
(3) Negotiations with suppliers to reduce price: A chartered accountant will
ensure that the benefit of availability of input tax credit is passed on by
the suppliers to his clients. He may also help the suppliers in availing
VAT credit so that the cost of suppliers is reduced, thereby, reducing sale
price.
(4) Handling the audit by departmental officers: In case an audit is
conducted by the sales-tax/VAT Department of the State, the Chartered
Accountant can represent his clients so as to satisfy the auditors by
replying their queries and meeting out their audit objections, if any.
(5) External audit of VAT records: In order to ensure compliance with the
VAT-laws, the laws of certain states provide for audit by external
agencies in case the turnover of the assessee exceeds a specified limit. The
Chartered Accountants are competent/authorized to carry out such
audit. VAT audit is discussed later at a greater length.

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Meaning of Input Tax and Output Tax

Input tax: Input tax means the tax paid or payable by a dealer of a State on
purchases - of any goods
a. made in the course of his business,
b. from a registered dealer within the State.

Output tax: Output tax is the tax charged or chargeable by a registered dealer
on sale, of goods made by him in the course of his business.

Input-tax Credit (ITC)
Input tax credit: Input tax credit means setting-off the input tax paid by a
registered dealer against the amount of output tax payable by him.
Need: Under VAT system, the tax is imposed only on the amount of value
addition made by a dealer. The value addition is difference between the value of
the output/sales and the value of input/purchases. Hence, the tax paid on
inputs (input tax) by a dealer is set-off against the tax payable by him on his
sale (output tax). Thus, he is required to pay the difference only in cash.

Scope of Input tax credit: The following points bring about the scope of input
tax credit-
* It is allowed only to a registered dealer;
* The dealer may be trader or a manufacturer
* VAT credit is allowed on purchase of capital goods also.
* VAT credit is allowed only on goods purchased within the state.
* It is allowed to be set-off against the output tax;
* For the purpose of set-off, output tax includes not only the VAT payable
on within the State-sale by the dealer but also the Central Sales Tax
payable on the inter-state sale. In other words, input tax credit can be set-
off against VAT payable on intra-state sale or CST payable on inter-state
sale.

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VAT credit is not allowed
Input tax credit is generally given for the entire VAT paid within the state on the
purchases of taxable goods meant for resale or for further manufacture of
taxable goods. However, in case of certain purchases, no VAT credit is allowed.
1. Purchases from unregistered dealers;
2. Purchases of goods from other states viz. Inter-state purchases;
3. Import of goods from outside the territory of India
4. Purchases from registered dealer who has opted for composition scheme;
5. Purchase of non - creditable goods as may be notified by the State
Government;
6. Purchase of goods where the purchase invoice is not available
7. Purchases of goods in cases where the selling dealers invoice doesnt
show amount of tax charged separately;
8. Purchases of goods for use in the manufacture of exempted goods;
9. Goods in stock, which have suffered tax under an earlier Act;
10. Purchase of goods used for personal use or gifts;
11. Purchases of capital goods where credit is available in some cases in
installments
12. Purchases of goods for use as fuel in generation of power;
13. Purchases of goods for being dispatched to outside states as branch
transfer.

Excess Input-tax credit is to be utilized, as under -
1. for payment of VAT;
2. Excess credit remaining, if any, can be adjusted against CST for the
relevant period.-
If, after set-off against VAT and CST payable for the concerned period,
there remains any excess of input VAT credit, the same will be eligible to
be carried forward to the next tax-period and so on upto the next
financial year.
If there is any excess unadjusted input tax credit at the end of second
year, then the same is required to be claimed as refund. However, some
States grant refund after the end of first financial year itself.

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Input-tax credit on capital goods

Capital Goods: Input tax credit on capital goods is available for registered
dealers being traders as well as manufacturers. In order to manufacture goods
or trade in such goods, a dealer has to purchase capital goods viz, plant and
machinery, furniture, fixture, electrical installations, vehicles etc. Such capital
goods, if taxable, are liable to VAT, which is borne by the dealer.
Sometimes, the dealer may himself manufacture capital assets by purchasing
input raw materials and using them in manufacture. Such input items are also
taxable, the VAT being borne by the dealer.
Capital goods are defined differently in the State-VAT laws of the respective
states.

Need for input-credit on capital goods: A dealer is required to pay VAT on the
purchase of capital goods. Such capital goods are used either in the manufacture
of products or in - facilitating trade in the products. A portion of the cost of such
capital goods is included in the cost of the product by way of depreciation. This
ultimately affects the selling price of the goods.
If the credit of VAT paid on capital goods is not allowed, then, the cost of the
capital goods and the depreciation thereon will be higher This will ultimately
increase the selling price of the goods, thereby, leading to cascading effect of
taxation. VAT will be imposed on selling price, which includes depreciation
element on capital goods inclusive of VAT not allowed as credit.

Policy in white paper as regards credit on capital goods: The White Paper on
State-VAT laws -contains the following policy decisions as regards credit on
capital goods
(a) Credit to all dealers: Input credit on capital goods will be available to
traders and manufacturers. Under the traditional sales-tax system, in
some States, partial credit was allowed on capital goods to the
manufacturers only; no credit was allowed to traders. This anomaly has
been removed.
(b) Negative list for capital goods: Not all capital assets are eligible for credit
as capital goods. There will be a negative list for capital goods, which will
not be eligible for input credit. Such negative list is to be based on certain
principles agreed to by the Empowered Committee.
(c) Deferred credit scheme : The State Government have been authorized to
allow the credit of capital goods either at once i.e. 100% credit of VAT
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paid on capital goods is allowed immediately on purchase of capital
goods, or, alternatively, the State Governments may allow input-credit on
capital goods on installment basis. The number of installments cannot
exceed 36 months or 3 years.

Mode of allowing credit on capital goods: The credit of VAT on capital goods
is allowed as under -
(a) No credit is allowed on capital goods mentioned in the negative list.
(b) Some states like the State of Maharashtra have provided 100% credit in
respect of capital goods in the month of purchase of such capital goods.
However, if the capital goods is sold within 36 months (or 3 years), then,
the proportionate input-credit thereon is withdrawn.
(c) Some other states have opted for allowing the credit of VAT paid on
capital goods in monthly installments (maximum no. of installments
being 36 or 3 years).

Procedural requirements:
(a) In respect of the capital goods eligible for input-credit, the dealers should
keep supporting evidences like VAT-invoice of the purchase of such
capital goods, gate-pass, delivery challan, etc.
(b) The other procedural requirements like use of the asset, etc. as specified
in the state-VAT law will have to be complied with. In case any
permission is required to claim input-credit, such prior permission must
also be obtained;
(c) If credit is allowed in installments, the set-off/credit is to be claimed
accordingly in the returns.
(d) The set-off claimed can be adjusted against normal VAT liability of the
concerned tax-period.

Input VAT credit on goods
Input VAT credit is allowed only in respect of those goods/inputs, which have
been used in the manufacture or processing, etc. of the taxable goods. No input-
VAT credit is allowed in respect of inputs used in manufacture, etc. of tax-free
goods.
Taxable goods means the goods, which are chargeable to VAT i.e. goods other
than the goods specified as tax-free goods in the Schedule to the VAT-law.
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Common goods: Where any inputs are used in the manufacture, etc. of taxable
as well as exempt (tax-free goods), then, input-tax credit shall be allowed in
proportion of sales.

Incentives to exports / units of SEZ and EOU
(1) Refund to Exporters : The White-paper on State-level VAT provides that
in case of goods exported out of India, the exporter will be allowed
refund of the input-VAT paid by them. This refund is to be allowed
within a period of 3 months from the end of the tax-period in which the
goods were exported.
(2) Exemption or refund to SEZ & EOU Units located in Special Economic
Zones and Export- oriented Units (EOUs) are not liable to VAT, as they
are only engaged in export of goods out of India.
They are provided incentives in respect of input-tax credit on purchases
made by them in either of the following manner -
(a) Exemption from payment of tax on purchases (i.e. procurement of
inputs/capital goods without payment of any Input-VAT) ; or
(b) Refund of input-VAT credit on purchases made by- them within 3
months from the date/tax-period of purchase. State Governments
may reduce this time-period of 3 months.

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COMPOSITION SCHEME FOR SMALL DEALERS

Threshold Exemption limit upto Rs. 5 lakhs (or Rs. 10 lakhs): In order to
provide relief to small dealers, various states have given threshold limit before a
dealer becomes liable to pay VAT. This threshold limit is between 5 lacs to 10
lacs, varying from state to state.
The dealers having turnover upto the threshold limit are not required to get
themselves registered with the VAT-authorities. While the purchases made by
them may have been charged to VAT, the sales made by them are not
chargeable to VAT. Such dealers are not allowed any input-VAT credit.

Composition Scheme for dealers having turnover exceeding threshold limit
but not exceeding Rs. 50 lakhs: The dealers having turnover not exceeding the
threshold limit are fully exempt from VAT liability but the dealers having
turnover exceeding the threshold limit but not exceeding Its. 50 lakhs during
the financial year are allowed to opt for composition scheme under which the
small dealers can discharge their net VAT liability by way of payment of a
composite amount calculated at a specified percentage of turnover. No input-tax
credit is allowed to such dealers opting for composition scheme.

Legal provisions of composition scheme
(1) Discharge of VAT liability under Composition Scheme: If any eligible
dealer opts for the composition scheme, his VAT liability shall be
discharged as under -
(a) the dealer shall be required to pay a composite amount of tax.
Composite tax = Gross annual turnover x Composite Rate of Tax
prescribed by the State Government;
(b) the dealer will not be allowed any input-VAT credit on inputs; and
(c) the dealer will not be authorized to issue VAT-able invoices.
(2) Provisions of the scheme: The scheme may have one or more of the
following provisions
(a) the rate of composition tax may be reduced upto 0.25%;
(b) the states may levy composite tax on taxable turnover instead of
gross annual turnover;
(c) States may provide for different types of composition schemes for
different classes of retailers.
(3) Dealers not eligible for Composition Scheme: Every registered dealer
who is liable to pay tax under the concerned State-VAT law and whose
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turnover didnt exceed Rs. 50 lakhs in the last financial year is eligible to
opt for the composition scheme. However, the following person shall not
be eligible to opt for composition scheme
(a) a manufacturer or a dealer who sells goods in the course of inter-
state trade or commerce (i.e. dealers effecting inter-state sales and
purchases only) ; or
(b) a dealer who sells goods in the course of import into or export out of
the territory of India (i.e. importers and exporters) ; or
(c) a dealer transferring goods outside the State otherwise than by way
of sale or for execution of works contract (i.e. branch transfers viz.
Consignor, etc. or works contractors)
(4) Mode of exercising option for availing Composition Scheme:
(a) Option: The composition scheme is, generally, optional for the
dealers.
(b) Intimation: A dealer, intending to avail such composition scheme,
will have to exercise the option in writing. The option so exercised
shall be intimated to the Commissioner having jurisdiction over him.
(c) No need to maintain statutory records: if a dealer avails of the
Composition Scheme, he need not maintain any statutory records as
required under the VAT-law He will be required to maintain only
the records of purchase, sales and inventory. A dealer not availing of
the Composition Scheme shall have to maintain all statutory records
and registers as required under the Act.
(d) No inter-state purchases: The dealer opting for composition scheme
should not have any stock of goods which were brought from
outside the State under composition scheme. Further, once the
option for composition scheme is exercised, the dealer shall not use
any goods brought from outside the State.
(e) No input credit on existing stock: The dealer will not be allowed to
claim input tax credit on the inventory available on the date on
which he opts for composition scheme.

Effect of Composition Scheme on VAT chain
(1) VAT Chain: Under VAT system, the supplier of basic raw -material pays
VAT, which is availed of by the manufacturer as input-VAT credit. The
manufacturer pays VAT on sales of manufactured goods by him after
setting-off input-VAT credit. The VAT paid by the manufacturer is
availed of as input-VAT credit by the wholesaler, who utilises such
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input-VAT credit for payment of output-VAT on sales effected by him.
This continues so on and is often referred to as the VAT Chain.
(2) Break in the VAT-chain: The VAT-chain gets broken as soon as the
goods are purchased by -
(a) an unregistered dealer, or
(b) a dealer opting for composition scheme, or
(c) a dealer the goods produced by whom are exempt/tax-free, or
(d) the ultimate consumer.
The VAT-chain is broken because the aforementioned dealers/the
ultimate consumers cannot issue VAT-able invoices so as to pass on the
credit of VAT to the buyers. .
(3) Loss to the seller-dealer due to Composition Scheme: As soon as a
dealer opts for Composition Scheme, he cannot avail of the credit of the
input-VAT paid by him. This will have the, effect of increasing the cost of
the inputs. Therefore, he will not be able to pass on the benefit of input-
VAT credit to the buyer and the cost of the final product will increase.
(4) Loss to the purchaser: A buyer purchasing goods from a dealer operating
under composition scheme shall not get any credit for composite tax paid
by him on the purchases made by him from such dealer. This will
increase his cost as well.

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Coverage of goods under VAT
Generally, all goods, including declared goods, are covered under the VAT-laws
of respective States and, thus, get the benefit of input-tax credit. However, the
following goods are outside the VAT are -
(1) Petrol, diesel, Aviation Turbine Fuel (ATF) or other motor spirit,
(2) Liquor and
(3) Lottery tickets.
The States may or may not bring these commodities under VAT laws.
However, it has been agreed that all these commodities will be subjected to
20% rate of tax.

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Various VAT rates under different states
The following table depicts the various tax-rates prevalent under the VAT
system along with a brief description as regards their applicability, -
Rate Description
0% This category has around 50 commodities comprising of
natural and unprocessed products in unorganized sector (e.g.
unprocessed agricultural goods),
items which are legally barred from taxation,
items/goods having social implications
Out of this commodities different states have notified certain goods which are
based on its social importances and remaining goods are common for all
states.
1% This category is meant for precious stones, precious and semi-precious
metals, bullion, gold and silver ornaments, etc
4% This category covers largest number of goods common for all the States,
comprising of-
items of basic necessities such as medicines and drugs,
all agricultural and industrial inputs,
capital goods and
declared goods
12.5%
All goods other than the goods falling under aforesaid categories and
other than luxury goods
20% Luxury goods

Meaning
Exempt sale: In case of exempt sale, no VAT credit is available. In case of non-
taxable transactions like samples/gifts, the input credit availed is to be
reversed. It is called Reverse Credit of Input Tax.
Zero rating: Zero rating means tax on any goods is fixed at 0%. As against
exempt sale, in case of zero rated sales (e.g. export sales), the dealer can avail
input VAT credit.

Stock/branch transfers under VAT laws
Stock/Branch transfers i.e. transfer of stock from head office to the branch do
not involve sale and, hence it cannot be subjected to VAT. However, if inputs
are used in the manufacture of finished goods, which are branch transferred
- 18
then, tax paid. on such inputs goods will be available except 2% out of such tax
retained by the State Governments.
For example, Mr. Ram purchases goods valuing Rs.1 lakh (VAT @ 12.5%)
from Rajasthan and transfers the same to his branch located at Delhi. In this
case, out of total input credit of Rs. 12,500, the credit of only Rs. 10,500 (in
excess of 2% i.e. 10.5% (12.5% - 2%) of Rs. 1 lakh) will only be available.

VAT on imports:
Under the Constitution of India, the power to levy tax on imports vests with the
Central Government. The States cannot levy sales-tax/VAT on imports.
It is necessary to bring imports also into the VAT chain. On account of
availability of input-tax credit/ set-off, the cascading effect of tax would be
reduced and the tax compliance would also improve. However, in order to
bring imports under VAT chain, the power to levy tax on imports would be
required to be brought under the State List of the Schedule VII of the
Constitution.
This would require an amendment in the Constitution and therefore as of now
no credit in VAT is allowed and it forms part of purchase cost from inputs.

- 19
Procedures of VAT

Registration
(1) Eligibility for Registration: Dealers having turnover upto Rs. 5 lath (or
increased limit of Rs. 10 lakhs) need not obtain registration but once
turnover exceed Rs. 5 lakh (as increased limit of Rs.10 lakh in few states)
registration is compulsory, While for others registration is mandatory. All
existing dealers under the state-level sales-tax laws have been deemed to
be registered under the VAT-Act.
(2) Application for Registration: An application for registration is required
to be made in prescribed form along with prescribed authority or any
other specified authority within prescribed time-period (generally, 30
days).
(3) Compulsory Registration: if an assessee, though required to do so, fails
to obtain registration under the VAT Act, he may be compulsorily
registered by the Commissioner, with the following results -
(a) the Commissioner may assess the tax due from him on the basis of
evidence available with him;
(b) the assessee shall have to pay such amount of tax forthwith;
(c) he will be liable to penalty for such default, and
(d) he will not be eligible to set-off input tax credit related to period
prior to compulsory registration.
(4) Voluntary registration: A dealer for whom it is not obligatory to obtain
registration may also obtain registration if the Commissioner is satisfied
that the business of the. applicant requires registration. The
Commissioner may also impose any terms or conditions that he thinks fit
(5) Cancellation of registration: The registration is liable for cancellation in
any of the following cases -
(a) permanent discontinuance of business; or
(b) disposal of business; or
(c) transfer of business to a new location; or
(d) annual turnover of a manufacturer or a trader dealing in designated
goods or services falling below the specified amount; or -

Taxpayers Identification Number (TIN).
TIN is a. 11-digit numerical code allotted to every dealer obtaining registration
under the VAT-law. It is the registration number, which is intended to identify a
tax payer.
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The 11-digit numerical code shall be made as follows -
(a) First 2-digits: State code as used by the Union Ministry of Home Affairs;
(b) Next 9-digits: Code allotted by each state to the registrant.
TIN is required to be stated on each invoice; hence, TIN will help cross-check
information on tax payer compliance, for example, the selective cross-
checking of sales and purchases among VAT taxpayers.

Invoices
The White Paper mainly provides for the following provisions, after being
registered which are mandatory, and failure to comply with these attracts
penalty:
(i) Every registered dealer whose turnover of sales exceeds the specified
amount shall issue to the purchaser a serially numbered tax invoice, cash
memo or bill with the prescribed particulars.
(ii) The tax invoice shall be dated and signed by the dealer or his regular
employee, showing the required particulars.
(iii) The dealer shall keep a counterfoil or duplicate of such tax invoice duly
signed and dated.
Invoices should be preserved with full care. In case any original invoice is lost
or misplaced, a duplicate authenticated copy must be obtained from the
issuing dealer.
A VAT invoice:
(i) help in determining the input tax credit;
(ii) prevents cascading effect of taxes;
(iii) facilitates multi-point taxation on the value addition;
(iv) promotes assurance of invoices;
(v) assists in performing audit and investigation activities effectively;
(vi) checks evasion of tax.

Contents of VAT invoice
(i) name and address of the selling dealer;
(ii) registration number of the selling dealer;
(iii) name and address of the purchasing dealer;
(iv) registration number of the purchasing dealer (may not be required under
all VAT legislations);
(v) pre-printed or self-generated serial number;
(vi) date of issue;
(vii) description, quantity and value of goods sold;
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(viii) rate and amount of tax charged in respect of taxable goods;
(ix) signature of the selling dealer or his regular employee duly authorized by
him for such purpose.
Records
Every dealer liable to pay: tax under the VAT-law should maintain the
following records-
(a) Value and Quantity of Purchases;
(b) Value and Quantity of Goods manufactured;
(c) Value and Quantity of Sales;
(d) Value and Quantity of goods disposed of otherwise than by way of
sale;
(e) Value and Quantity of Inventory/Stock;
(f) Separate record of any exempt sale;
(g) Copies of all invoices, credit and debit notes, etc. issued, in serial
number;
(h) All purchase invoices, copies of customs entries.
(i) Details of the amount of tax charged on each sale or purchase;
(j) VAT Account and total of the output tax and the input tax in each
period
All these records should be preserved for the period specified in respective
state-laws (generally, 5 years from the end of the year to which they relate).

Returns
(1) Periodic Returns Form and Time period: The respective State-VAT
laws require every registered dealer to file VAT-returns periodically
(monthly/quarterly/annually). The returns are to be filed in prescribed
form within the prescribed time from the end of the period concerned.
(2) Contents: The returns are to be accompanied with the challans
evidencing payment of VAT. In some states, the return-forms are
inclusive of challan, in which case, the returns can be filed along with
payment of challan with the Treasury. The VAT-returns contains
requisite details, such as, details of dealer, details of input-VAT and
output-VAT, payment of VAT, inventory details, etc.
(3) Revision: In some states, opportunity has been given to revise any
mistake or omission in the periodical returns filed by the dealers.
(4) Self assessment: The VAT-laws make provision for self assessment of
VAT-returns filed by various dealers themselves. Such self assessment
involves checking the overall-correctness of the information given and
- 22
also checking whether requisite information has been duly furnished or
not. Any mistake is required to be corrected by the dealer and any
shortfall in payment of tax will be required to be paid to the credit of
respective State Government .
(5) The biggest advantage in case of VAT return as compared to sales tax
return is it is easy, compact and accurate. With the self assessment
scheme there are very less chances of tax evasion.

Assessment
Assessment means determination of the tax liability of a dealer under the
respective VAT-law. Assessment involves determination of taxable turnover
and tax liability thereon along with any other liability under the VAT-law.
Self - assessment: Under VAT, there is no system of compulsory assessment at
the end of each year by the VAT-authorities. VAT-system is based on the
presumption that, unless the contrary is established, every dealer is honest.
The VAT liability is computed by the dealer himself while submitting returns
after setting off the input-tax credit.
Deemed assessment: The VAT-laws of the respective states provide that except
where a specific notice is issued proposing scrutiny assessment within specified
time, the dealer shall be deemed to have been assessed on the basis of the return
filed by him for the period to which such return relates.
Compulsory Assessment: There is a system of compulsory assessment under
which those returns filed by the dealers are selected and subjected to assessment
in a prescribed manner. Any mistake found is required to be corrected by way
of revised return or in any other manner within the prescribed time along with
payment of differential amount, if any.
Assessment in Special Circumstances: The VAT-laws contain special
provisions in respect of assessment where there has been evasion or avoidance
of tax and also for escaped assessments.
System of cross checking : Since VAT emphasizes upon self-assessment,
therefore, there arises a need of cross-checking the contents of the returns
submitted by a dealer with his other records and the information submitted by
him to other authorities under other laws. Accordingly, -
(a) dealers may be asked to submit a list of sales/purchases (containing the
name of purchasing / selling dealers) made by them above a certain
amount;
(b) a computerized system of cross-checking is being worked, which will
involve comparing the VAT-returns/documents submitted to the VAT-
- 23
authorities with the returns/documents submitted the Central Excise,
Customs, Service Tax and Income-tax authorities of the Central
Government. This shall be possible only on the basis of coordination
between the tax authorities of State Governments and that of Central
Government.
Need: The aforesaid system of cross-checking will act as a deterrent for tax-
evaders and will also lead to significant growth of tax revenue. Since there
will be early identification of tax-evasion, the habitual offenders will fear
adopting tax evasion practices and, therefore, there will be equal competition
amongst the traders/dealers.

VAT audit
Most of the State VAT laws in India provide for audit of accounts of a registered
dealer, if his turnover exceeds an amount specified in the law itself. Such audit
is to be carried out by a practicing Chartered Accountant or sales tax
practitioner and report thereof is to be submitted in prescribed form within the
prescribed time.

Need for VAT audit: VAT audit ensure effective implementation of the VAT
law. The need for VAT audit is summarized in the points mentioned below -

Statutory provisions relating to VAT audit
(1) Compulsory VAT-Audit or External Audit: With a view to check
massive tax-evasion, the State-VAT laws have incorporated audit of
VAT-records by Chartered Accountants or STPs on some specified basis.
Such audit is compulsory for all dealers whose turnover exceeds a
prescribed limit (say, 40 lakhs in the State of Maharashtra and Rajasthan).
Such audit shall be conducted by chartered accountants. The report of
such audit is required to be filed within prescribed time and in prescribed
form.
The audit report is required to contain various particulars, as are
prescribed by each State.
(2) Departmental Audit or Selective Audit : While there is provision for
compulsory audit by a chartered accountant in case the turnover exceeds
prescribed limit, there exists a provision for audit by the authorities of the
VAT-department which is not mandatory but is resorted to in selective
cases. The Departmental audit is provided with a view to promote
compliance with the provisions of VAT-law.
- 24
The Departmental audit is resorted in either of the following cases -
(a) dealers selected on the basis of a specified criterion or the dealers
selected on random basis;
(b) where Departmental audit is found necessary in view of requirement
of detailed scrutiny.
If any evasion is detected in the course of audit, the previous records
of the concerned dealer may be taken up for audit. The audit is
conducted in the following manner -
(a) the authorized officers of the department will visit the business place
of the dealer to conduct the audit.
(b) the auditors will be supplied all the information gathered from or
submitted to various agencies such as suppliers, income-tax
department, excise and customs department, banks etc.;
(c) the auditors will examine the correctness of the returns vis-a-vis the
books of account of the dealer or any other information available
with them;
(d) the officers of the higher rank will supervise the audit work to
ensure that it is done in a free, fearless and impartial manner. In
order to complete the disputes and the matters which are pending
with appellate purpose, appeals to commissioner or appellate
tribunal are also form under this law.

VAT authorities
The State-VAT law is administered by various authorities. The authorities and
responsibilities of such authorities are specified in the Act or the rules or the
notification issued there under.
The various authorities under the VAT-law include -
(a) Commissioner of Commercial Taxes,
(b) Joint/Deputy/Assistant Commissioners,
(c) Deputy Commissioner (Appeals), and
(d) Commercial Taxes Officer.
Further, for administrative and appellate purposes, tax law board, appellate
tribunal and other authorities have also been constituted.

************

- 25
Practical questions

Illustration 1-Operation of VAT system and VAT accounting:

XYZ Mfg. Co. Ltd. of Rajasthan purchased raw material A from Rajasthan for
Rs. 10,400 (inclusive of 4% VAT), raw material B from Rajasthan for Rs. 22,500
(inclusive of 12.5 % VAT), raw material C from China for Rs. 33,000 (inclusive
of 10% import duty) and raw material D from Maharashtra for Rs. 15,450
(inclusive of 2% CST). The plant and machinery required for manufacture was
purchased for Rs. 2,08,000 (inclusive of 4% VAT). The manufacturing and
other expenses (excluding depreciation) were Rs. 61,550. The plant is to be
depreciated at 100%. The manufacturers margin is 20% on cost. The VAT rate
on the manufactured product is 4%.
By way of necessary accounting entries and VAT chart, show the mode of
operation of VAT system. Ignore the Central Excise implications, assuming
that there is no excise duty on the manufactured product.
Solution: VAT CHART (amounts in Rs.)
Raw material A (net of VAT Rs. 400) 10,000
Raw material B (net of VAT Rs. 2,500) 20,000
Raw material C (import duty will form part of cost, as it is
not available as credit) 33,000
Raw material D (CST will form part of cost, as it is not available as credit) 15,450
Depreciation on plant and machinery (100% of 2,00,000 i.e. price net of
VAT of Rs. 8,000) 200,000
Cost of the product 340,000
Add: 20% margin 68,000
Selling price 408,000
Add: VAT @4% of 4,08,000 16,320
Cost to the purchaser 424,320
VAT payable in cash by the manufacturer 16,320-400-2,500-8,000= Rs. 5,420.

- 26
Illustration 2-VAT liability at different stages : .Manufacture X extracted raw
produce X and raw produce Y from mines at Rs. 10,000 and Rs. 15,000
respectively and sold the same at 100% margin to Manufacturer B (VAT rate
is 4% on produce X and 12.5%on produce Y). Manufacturer B used X and Y as
raw material and sold the resultant product for Rs. 2,00,000 to wholesaler C
(VAT rate is 4%). Wholesaler C sold the same to Retailer D at 25% above cost
(VAT rate is 4%). The retailer D sold the same to a consumer at 20% above
cost (VAT rate is 4%). Compute the amount of VAT payable in cash by each
person.
Solution: VAT CHART (all amounts in Rs.)
1. VAT payable in cash by Manufacturer A
4% on produce X i.e. 4% of 20,000(10,000+ 100% of 10,000) 800
12.5% on produce Y i.e. 12.5% of 30,000 (15,000 +100% of 15,000) 3,750 4,550

2. VAT payable in cash by Manufacturer B
VAT @ 4% on sale price of Rs. 2,00,000 8,000
Less: VAT credit on raw produce X & Y 4,550 3,450

3. VAT payable in cash by Wholessler C
VAT @ 4% on sale price of Rs. 2,50,000(2,00,000+25% of 2,00,000) 10,000
Less: VAT credit on purchases from Manufacturer B 8,000 2,000

4. VAT payable in cash by Retailer D
VAT @ 4% on sale price of Rs. 3,00,000(2,50,000 + 20% of 2,50,000) 12,000
Less: VAT credit on purchases from Wholesaler C 10,000 2,000
Total VAT paid to the Government 12,000

The above illustration shows that the VAT paid to the Government at various
stages (here, Rs. 12,000) is equal to the VAT collected from the ultimate
consumer (here, Rs. 12,000 or 4% of 3,00,000).
- 27
Illustration 3
Computation of VAT liability: Mr. X of Rajasthan started business w.e.f. 1-1-
2009 and got himself registered with VAT authorities. He presents the
following details for the month of January, 2009 -
Purchases from Rajasthan 2,000,000
Purchases from Delhi 8,00,000
Sales within Rajasthan out of purchases from Rajasthan 16,00,000
Sales within Rajasthan out of purchases from Delhi 2,00,000
Sales to dealer of Maharashtra Out of purchases within Rajasthan 8,00,000
Sales to dealer of Maharashtra Out of purchases from Delhi 4,00,000
Compute tax payable by Mr. X. Aforesaid amounts are exclusive of taxes.
VAT rate is 4%. CST rate is 2%.
Solution : The tax payable by Mr. X for the month is computed hereinbelow -
Sales within Sales outside
Rajasthan (VAT) Rajasthan (CST)
Total Sales 18,00,000 12,00,000
Gross VAT liability @ 4 % & CST liability @ 2 % 72,000 24,000
Input VAT credit available on purchases
from Rajasthan @ 4% 72,000 8,000
Net taxpayable NIL 16,000
Excess VAT credit to be utilised against payment of CST** 8,000
The VAT liability on sales within Rajasthan is Rs. 72,000 while the VAT credit
availed on purchases from within Rajasthan is Rs. 40,000. Hence, whole of the
output tax of Rs. 36,000 will be paid out of the input tax credit of Rs. 40,000.
The excess credit of Rs. 4,000 will be used for payment of CST on sale outside
the State of Rajasthan. The balance amount of (ST payable of Rs. 8,000(12,000 -
4,000) will be paid in cash.

- 28
Illustration 4
Treatment of input VAT-credit: Mr. A presents following details for March,
2009
1. Opening Balance of Input VAT credit as on 1-3-2009: Rs. 15,000.
2. Inputs purchased during the month of March: Rs. 15 lakh.
3. Within the state sales of manufactured goods: Rs. 20 lakh.
4. Inter-state Sales : Rs. 4 lakh.
CST rate is 2%. There was no inventory as on 1-1-2009 or 31-3-2009. The VAT
laws governing Mr. A provide for the refund of input-VAT credit after the
end of the first financial year itself. VAT rate is 12.5% on inputs and 4% on
sales. Compute the amount of refund available to Mr. A. -
Solution : Computation of refund available to Mr. A (amounts in Rs.)
Opening balance of input VAT-credit 15,000
Add: VAT credit availed on inputs purchased during March (12.5% of 15
lakhs) 187,500
Less : VAT payable on sales (4% on Rs. 20 lakh -80,000
Less : CST payable on inter-state sales (2% on 4 lakh) -8,000
Balance lying as VAT-credit as on 31-3-2009 eligible for refund 114,500

- 29
Illustration 5: Need for input-credit on capital goods:

Mr. X manufactures product A out of raw material X. The cost of raw material
X is Rs. 1 lakh. The labour and other manufacturing cash costs are Rs. 4 lakh.
The manufacturing process requires a machinery of Rs. 10 lakh (subject to
VAT @ 12.5%).
The useful life of the plant is 4 years with no salvage. The expected output of
product A is 1,000 units.
Mr. X fixes a profit margin of Rs. 100 per unit. Compute the selling price of
product A and its cost to consumer if - (a) No credit is allowed on the capital
goods; (b) credit is allowed on the capital goods. The VAT rate on final
product is 12.5%. There is no VAT on raw material.

Solution: Computation of selling price of product A
(a) No credit on (b) Credit available capital goods on capital-goods
Raw material cost 1,000,00.0 1,00,000.0
Labour and other manufacturing cash costs 400,000.0 400,000.0
Depreciation on machinery:
(10 lakh + 12.5% VAT) 4 (VAT credit not available )281,250.0
10 lakh +4 (VAT credit available, hence, VAT not cost) 250,000,0
Total cost 781,250.0 750,000.0
Cost per unit 781.3 750.0
Profit per unit 100.0 100.0
Selling price per unit 881.3 850.0
Add : VAT @ 12.5% 110.2 106.3
Cost to consumer 991.4 956.3
Thus, the availability of VAT credit on capital goods reduces the cost and
resultant selling price of the goods and, therefore, eliminates cascading effect
of taxation.

- 30
Illustration 6
Input-credit on common goods: Mr. K, a manufacturer of taxable as well as
tax-free goods, furnishes the following information for the month of March,
2009: -
(a) Sales of Product A (tax-free goods) : Rs. 50 lakh
(p) Sales of Product B (taxable goods) : Rs. 100 lakhs (VAT @ 12.5%);
(c) Purchases of input X (used in manufacture of Product A only) : Rs. 30
lakhs (VAT @ 4%);
(d) Purchases of input Y (used in the manufacture of Product B only) : Rs.
75 lakhs (VAT @ 4%);
(e) Purchases of input Z (used in the manufacture of Product A &.B) :.Rs. 15
lakhs (VAT @ 20%).
There was no inventory as on 1-3-2009 as well as on 31-3-2009.
Compute the amount of VAT payable in cash by Mr. K for the month
assuming that input Z is used in product A and B in the ratio of 1 :2. Ignore
implications under other laws.
Solution: Computation of VAT liability of Mr. K for the month of March, 2009
(amounts in Rs. lakhs)
VAT on sales of product B (Rs. 100 lakhs x 12.5%) 12.5
Less : Input VAT credit on input Y (75 lakhs x 4%) 3
Proportionate credit on input Z (15 lakhs x 20% x 2/3) 2
VAT payable in cash by Mr. K 7.5

- 31
Illustration 7
Computation of VAT liability : Calculate the total tax liability under the State
VAT law and under the Central Sales Tax Act for the month of October 2008
from the following particulars:
Particulars Rs.
Inputs purchased within the state 170,000
Capital goods used in the manufacture of the taxable goods 50,000
Inputs purchased from a registered dealer who opts for composition
scheme under the provisions of the Act 10,000
High seas purchases of inputs 100,000
Finished goods sold :
(a) within the state 200,000
(b) in the course of inter-State trade 250,000
Applicable tax rates are as follows : -
Case (a) : VAT rate on capital goods 12.5% ; Input tax rate within the state
12.5% ; Output
tax rate within the state 4%; Central sales tax rate 2%
Case (b) : VAT rate on capital goods 4% ; input tax rate within the state 4% ;
Output tax
rate within the state 12.5% ; Central sales tax rate 2%.
*Note The capital goods are not the goods included in the negative list.
(RTP June, 2009)
Ans : Case (a): Computation of the tax liability for the month of October 2008-
Particulars Rs.
Output-VAT on sales within the State @ 4 % 8,000
CST on the inter-state sales @ 2% 5,000
Total tax due 13,000
Less : Input credit on eligible purchases and capital goods i.e. 12.5%
of 220000 (inputs purchased within state and capital goods).
- Inputs purchased from dealer under composition scheme
and high-seas purchases/import of inputs is not eligible for
input credit. 27,500
Balance input-credit to be carried forward 14,500
Case (b) : Computation of the tax liability for the month of October 2008 -
Particulars Rs.
Output-VAT on sales within the State @ 12.5% 25,000
- 32
Less : Input-credit on eligible purchases and capital goods i.e.
4% of 220000 (Inputs purchased within state and capital goods).
Inputs purchased from dealer under composition scheme
and high-seas purchases/import of inputs is not eligible for input credit. 8,800
Total tax payable for the month 21,200

Illustration 8
Computation of VAT liability: Calculate the VAT liability for The period Jan.
1, 2009 to Jan. 31,2009 from the following particulars:
Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth
of finished goods were sold within the State and Rs. 1,00,000 worth of goods
were sold in the course of inter-State trade. VAT paid on procurement of
capital goods worth Rs. 1,00,000 during the month was at 12.5%. If the input
and output tax rate in the State are 1.5% and 4% respectively and the central
sales tax rate is 3%, show the total tax liability under the State VAT law and
under the Central Sales Tax Act (Nov. 08 (NS) 5 Marks)
Ans : Computation of the tax liability for the period Jan. 1, 2009 to Jan. 31, 2009:-
Particulars Rs.
Output-VAT on sales within the State @ 4% 8,000
Less : Input-credit on eligible purchases and capital goods i.e.
12.5% of 200000 (Inputs purchased within state and capital goods) 25,000
Balance input-credit to be carried forward 14,000

- 33
Illustration 9
Normal Taxation v. Composition Scheme: Mr. A, a retailer who keeps no
inventories, presents the following expected information for the year -
(1) Purchases of goods :.Rs. 20 lakhs (VAT @ 4%)
(2) Sales (at fixed selling price indl of all taxes) : Rs. 30 lakhs (VAT on sales @
4%).
Discuss whether he should opt for composition scheme if composite tax is 1%
of turnover. Expenses of keeping detailed statutory records required under
the VAT-laws will be Rs. 50,000 p.a., which shall get reduced to Rs. 20,000 if
composition scheme is opted for. Other expenses are Rs. 3,00,000 p.a.
Solution : The cost to the ultimate consumer under two schemes is as under -
Normal Composition
VAT Scheme*
Cost of goods sold (*No credit under composition scheme,
hence, cost of goods sold will be higher) 2,000,000 2,080,000
Add: Costs of maintaining records 50,000 20,000
Add: Normal Expenses 300,000 300,000
TOTAL COSTS 2,350,000 2,400,000
Sales (inclusive of all taxes) 3,000,000 3,000,000
Less : Tax (VAT =30 lakh x 4+104);
(Composite Tax =30 lakh x 1%) 115,385 30,000
Sales (net of taxes) 2,884,615 2,970,000
Profit of the dealer (Sales, net of taxes Total Costs) 534,615 570,000
Conclusion: It is apparent that while cost to ultimate consumer, in both the
cases remains same, the profit of the dealer is higher if the dealer opts for
composition scheme. Hence, composition scheme should be opted.

Illustration 10
Loss of VAT-chain due to composition scheme: Manufacturer A extracted
raw produce X and raw produce Y from mines at Rs. 15,000 and Rs. 20,000
respectively and sold the same at 150% margin to Manufacturer B (VAT rate
is 4% on produce X and 12.5% on produce Y). Manufacturer B is a dealer
operating under composition scheme who is liable to VAT @ 0.4% of
turnover. Manufacturer B of Jaipur used X and Y as raw material; added 100%
of cost of raw materials towards manufacturing expenses and profits and sold
the resultant product to wholesaler C. Wholesaler C sold the same to Retailer
D at 25% above cost (VAT rate is 4%). The retailer D sold the same to a
- 34
consumer at 20% above cost (VAT rate is 4%). Show the amount of VAT
payable by each person.
Solution: VAT CHART (all amounts in Rs.)
Particulars VAT on sales VAT creditNet VAT payable
1. Manufacturer A 7,750 No input tax 7,750
2. Manufacturer B ( Opted for Composition
Scheme) 762 No credit 762
3. Wholesaler C 9,525 No credit 9,525
4. Retailer D 11,430 9,525 1,905
Notes :
(A) The VAT liability at each stage is shown below Rs.
Cost to Manufacturer A (15,000 + 20,000) 35,000
Add: Profit of Manufacturer A @ 150% of cost 52,500
Sale price of Manufacturer A 87,500
Add: VAT [4% of (15000 + 150% of 15000) 12.5% of
(20000 + 150% of 20000) 7,750
Raw material Cost to Manufacturer B 95,250
Add: Margin for expenses and profits at 100% of raw material cost 95,250
Sale price of manufacturer B/Cost to C (Composite Tax cannot be
recovered) 190,500
Add: Profit margin @ 25% 47,625
Sale price of Wholesaler C 238,125
Add: VAT @ 4% 9,525
Purchase price of Retailer D (inclusive of VAT) 247,650
Cost to retailer D (net of VAT) 238,125
Add : 20% margin of D 47,625
Sale price of retailer D 285,750
VAT @ 4% thereon 11,430
(B) This illustration shows the effect of breakage of chain due to composition
scheme. A single dealer who has opted for composition scheme in the
chain of sale of a product would lead to increase in cost due to no input-
VAT credit to him and no VAT-able invoice issued by hint.

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Prof. Tayals Indirect Taxes

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