INTRODUCTION TO

VALUE ADDED TAX - VAT

INDIRECT TAXES SALES-TAX

WHAT IS VAT
Sales tax being a State subject, Sales Tax Act of each State was different from each other, in the rates, scope and chargeability, rules and other related subject. Transactions between parties of different states were covered by Central Sales Tax Act, a federal law. There were turnover tax, surcharge and additional surcharge etc. in different states, which was over and above Sales Tax. There was no uniformity in the rates, items taxed and the rules and procedures. To avoid these chaotic situations, a centralised and unified policy for levy of sales tax was introduced at the initiative of Central govt. which is the scheme of VAT.

HISTORY OF VAT
An act similar to VAT was first introduced in Brazil in 1960. By 1970, VAT became popular in Europe. In India, it was discussed for the first time by Dr. Man Mohan Singh, then Union Finance Minister, in 1995 at the Chief Ministers meeting. It was discussed in detail later in many meetings. The scheme of VAT was introduced in Parliament and considered at length. Though States objected to the encroachment into their territory of taxation, they were convinced of the advantages of VAT. The disputes raises were also answered. It was also the plan to phase out the Central Sales Tax gradually, though this is yet to take place as on today.

ADVANTAGES OF VAT
There will be uniformity of sales-tax system across the country. A set off will be given for tax on input as well as tax paid on previous purchaser. Therefore, each person pays tax only on the value addition in his hands. Other taxes such as turnover tax, surcharge, additional surcharge etc. will be done away with altogether. Overall burden will be rationalised Prices in General would fall.

ADVANTAGES OF VAT Contd.

There will be a system of self-assessment by each dealer, which would be more foolproof and easily verifiable. Transparency of the system will increase There would be substantial revenue growth; Tendency of evasion & manipulation would be minimal. Easy to administer, by tax authorities.

SCHEDULES AND RATES

For the purpose of VAT all the materials traded on are divided into 5 schedules, each having different tax rates. Schedule A Exempted items. Initially, 54 items were included in the list, on which no VAT is leviable. Schedule B Rate of VAT 1% - This schedule contains may items like precious metals, precious stones, etc. Schedule C - Rate of VAT 4% - Initially, there were about 109 items and their sub-items.

SCHEDULES AND RATES.

Schedule D Assorted rates of VAT eg. Foreign Liquor/Country liquor/molasses at 30%, and various items having VAT at 20%, 25%, 10%, 24%, 28%, etc. Schedule E All residuary items VAT rate at 12.5% The list in the each Schedule is subject to changes, additions and deletions, depending on the policies of the respective State Govt.

HOW TO CHARGE VAT..

Each dealer has to work out the tax on the sales value, at the rates applicable for such item, as mentioned in the respective schedule. Reduce the VAT element in the purchase/ input. The payment of VAT element by the supplier will have to be proved, by his invoice mentioning the VAT element therein.

HOW TO CHARGE VAT

The balance is the tax payable by the trader, which will be collected from his customer. The VAT will be ultimately borne by the ultimate consumer. This being a indirect tax, the incidence of the tax is on each trader but the impact is on the ultimate consumer.

EXAMPLE
A manufacturer purchases molasses for Rs.1,00,000 and sell country liquor made out of it to the Area Distributor, who sells to Wholesaler, who then to Retailer and retailer to the customer. Presuming the profit margin of 20% by all and rate of VAT at 30%, what would be the total tax paid by the consumer. The cost to manufacturer includes VAT on molasses of Rs.23,077/-

2.In the hands of Manufacturer

Particulars Cost Profit @ 20% Total VAT at 30% Less: Credit for VAT paid by supplier VAT payable Sales Price 12,923 1,32,923 Amount Rs. 1,00,000 20,000 1,20,000 36,000 23,077 12,923 Tax Liability Rs.

3.In the hands of Distributor

Particulars Cost Profit @ 20% Total VAT at 30% Less: Credit for VAT paid by earlier suppliers VAT payable 11,852 1,71,360 Amount Tax Liability Rs. Rs. 1,32,923 26,585 1,59,508 47,852 36,000 11,852

4.In the hands of Wholesaler

Particulars Cost Profit @ 20% Total VAT at 30% Less: Credit for VAT paid by supplier VAT payable Sales Price 13,838 2,19,470 Amount Rs. 1,71,360 34,272 2,05,632 61,690 47,852 13,838 Tax Liability Rs.

5.In the hands of Retailer

Particulars Cost Profit @ 20% Total VAT at 30% Less: Credit for VAT paid by supplier VAT payable Sales Price 17,319 2,80,681 Amount Tax Liability Rs. Rs. 2,19,470 43,894 2,63,362 79,009 61,690 17,319

The incidence and impact

Incidence VAT Paid (Incidence) Cumulative (Impact)

VAT paid by molasses dealer VAT paid by Manufacturer VAT paid by Distributor VAT paid by Wholesaler VAT paid by Retailer Total VAT collected by Govt. Total VAT impact on consumer

Rs. Rs. Rs. Rs. Rs. Rs. Rs.

23,027 Rs. 12,923 Rs. 11,852 Rs. 13,838 Rs. 17,319 Rs. Rs. Rs.

23,027 36,000 47,852 61,690 79,009 79,009 79,009

REGISTRATION & RETURN

Every dealer having annual turnover of over Rs.5 lakhs in any year, has to obtain a VAT registration. He has also to obtain his TIN, (Taxpayers Identification Number). Every dealer who has collected VAT from his customer has to pay the same to the Government and has to file the Return every quarter. If tax liability exceeds Rs.1,00,000/the Returns are to be filed every month.