INDIA : BEFORE AND AFTER VAT

Sales Tax

Sales tax is a consumption tax charged at the point of purchase for certain goods and service

Revenue –Redistribution – Reprising

In economic terms, taxation transfers wealth from households or businesses to the government of a nation

Central Sales Tax

• The constitution of India gave power to the state legislature to levy sales tax on sale or purchase of goods which takes place within the state.

• Although, the State Government were empowered to levy and collect tax on sales made within its own territory but there was no specific provisions of levying tax on sale and purchase having interstate composition.

• As a result, same goods came to be taxed by several states on the ground that one or more ingredient of sale was present in their state.

• Therefore central sales tax Act 1956 was enacted by the Parliament and received the assent of the president on 21.12.1956. Imposition of tax became effective from 01.07.1957

IMPORTANT FEATURES OF THE ACT.

1. It extends to the whole of India2. Every dealer who makes an inter-state sale must be a registered

dealer and a certificate of registration has to be displayed at all places of his business.

3. The rules regarding submission of returns, payment of tax, appeals etc. are not given in the act

4. Under this act, the goods have been classified as:

• Declared goods or goods of special importance in inter-state trade or commerce

•Other goods.

5. The tax is levied under this act by the Central Government but, it is Collected by that state government from where the goods were sold.

Types of sales on which taxes is levied.

• Inter state sales-

• Intra state sales-

• Sale during import and export-

Rates of Tax

Declared goodsRate of tax

Undeclared goodsRate of tax

Sale to Government Lower of 4% orlocal sales rate

Lower of 4% orlocal sales rate

Sale to registered dealer ofspecified good

Lower of 4% orlocal sales rate

Lower of 4% orlocal sales rate

Tax free goods in state Nil Nil

Other sale Twice the localsales tax

10% or local sales taxrate whichever is higher

Declared goods

Cereals

Coal

Cotton

Crude Oil

Jute

Oil seeds

Pulses

Sugar

It includes those goods which are considered to be of special importance in inter-state trade or commerce

Changes in central sales tax.

• CST has been reduced to 3% from 4% on 1-04-

2007.

• Tobacco product removed from the list of

declared goods.

• On 01-06-2008 CST reduced to 2%.

Goods Under CST Act

• Goods must be ‘movable’.

• NO TAX ON IMMOVABLE PROPERTY.

• No tax on Newspapers though they are ‘goods’.

• Goods of intangible character are ‘goods’.

• Plant & machinery assembled at site is not ‘goods’.

Provisions of State Laws applicable to CST

• Periodic Returns• Advance payment of taxes• Registration of transferee and imposition of tax

liability on transferee• Recovery of tax from third part.• Refunds, rebate, penalties and interest• Treatment of documents furnished by dealer as

confidential.• Offences and penalties (except those covered in CST

Act itself)

Problems with previous Sales Tax System :

• Tax levied on gross value without any input tax

credit

• Multiplicity of rates

• Apart from general sales tax ,states levied

surcharge.

• High probability of tax evasion

• Cascading Effect

VAT ( Value Added Tax )

What is VAT ?

• Tax levied on value added at each stage of product

being produced and sold & not on gross value.

• It is a multi point sales tax

• It gives credit for input taxation.

• Eliminates cascading effect – through input rebate

• Aimed at creating uniform tax structure

throughout.

VAT – Brief History

• Introduced in Morocco in the year 1962

• Followed by Brazil, Denmark, France and Germany

during 1967-68

• Implemented in many countries during the 1980’s

• Presently in more than 160 countries

• US still working under the sales tax regime

• Haryana introduced VAT, w.e.f. 1 April 2003, Most

other

States on 1 April 2005, U.P. still a non VAT State

Country Standard rate Reduced rate

INDIA 12.5% 4%,1%,0%

AUSTRALIA 10% 0%

GERMANY 19% 7% or 0%

UNITED KINGDOM 17.5% 5% or 0%

CHINA 17% 6% or 3%

VAT RATES IN INDIA & WORLDWIDE

• Uniformity In Rates

– Exempt Rate - 0% On 46 Commodities Consisting Of

– Natural And Unprocessed Products Like-

Firewood, Plants, Garlic

– Items Legally Barred From Taxation Like - News

Papers, Electricity Energy

– Items Having Social Implications Like- Salt, Life

Saving Drugs

– Special Rate - 1%

• Gold And Silver Ornaments

VAT RATES IN INDIA

• Uniformity in Rates– Essential/Mass Consumption Rate - 4%

• 270 goods comprising basic necessities and– Industrial inputs;

– IT related goods

– medicines and drugs;

– Iron, Aluminum, Copper, zinc etc.

– Revenue Neutral Rate - 12.5 %

– No specific rate of VAT on Liquor, Petrol,

Diesel & Aviation Turbine Fuel.

VAT RATES IN INDIA

•Gross product variant.•Income variant.•Consumption variant.

TYPES OF VAT

Under the Gross Product Variant taxes paid on purchases of raw materials and components alone is allowed as deduction. Taxes paid on capital goods is not allowed as deduction. This method is not in use, as it does not allow tax deduction of capital goods like plant & machinery on which the tax is large due to the price of the capital goods. This method is discouraged, as it does not take into account all the taxes paid by the buyer.

The income variant of VAT allows for deduction on purchases of raw materials & components as well as depreciation on capital goods. This method is also discouraged, as there is no one method by which depreciation can be calculated as depreciation always depends upon the life of the asset.

The consumption variant of VAT is the most popular method and is followed widely in many countries. This variant of VAT allows for deduction of taxes paid on all business purchases including capital assets.

Different ways to calculate VAT

– Addition Method– Invoice Method– Subtraction Method

VAT is calculated by deducting tax credit from tax collected during the payment period.

Example: (Rate of tax assumed at 10%). Purchase Price

Rs.100. Tax paid on purchase

Rs. 10(input tax). Sale Price Rs. 150. Tax payable on sale price Rs. 15(output

tax).

Input tax credit Rs. 10.

VAT payable Rs. 5. Total tax collection by govt. --------

On the sale price of Rs. 100 paid on the purchase by the dealer Rs. 10. Net VAT paid by the dealer on value addition after resale Rs. 5. Total tax at 10% on the last sale price of RS. 150 Rs. 15.

How To Calculate VAT?

FAQ

Who pays VAT?

• All dealers registered under VAT. • All dealers with an annual turnover of more than Rs. five lacs

shall register for VAT. • Dealers with turnovers less than Rs. five lacs may register

voluntarily. • Dealers having annual turnovers between Rs. five lacs and

twenty-five lacs may opt for a simple composition tax at a

nominal rate in place of VAT.

How to pay VAT? • VAT will be paid along with monthly returns. • Credit will be given within the same month for entire VAT paid

within the state on purchase of inputs and goods. Credit thus accumulated over any month will be utilized to deduct from the tax collected by the dealer during that month. If the tax credit exceeds the tax collected during a month on sale within the state, the excess credit will be carried forward to the next month.

What will happen to the Central Sales Tax? • In an ideal VAT regime there is no room for CST. To begin with,

the GOI is contemplating certain amendments in the CST.

What will happen to the Sales Tax Act?

• Continues for the pending assessments, appeals and

recoveries. • Continues for certain commodities as Govt. may decide.

Current Position Under VAT

Tax levied at the stage of the first sale (only for cotton, leather and natural gas at the final stage).

Tax levied and collected at every point of sale.Tax levied and collected at every point of sale.

Dealers reselling goods on which tax has already been paid do not collect any tax on resale and file nill returns.

Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition).

On 19 goods used as raw materials there is no input tax credit on the tax paid on such goods and 2% tax is levied on other goods used as raw materials for manufacture.

The manufacturer will pay VAT on the goods purchased as raw materials but the VAT paid on raw materials will be deducted on the sale of goods manufactured. Thus duplication of tax burden on raw materials will be avoided.

Computation of tax liability is complex. It is transparent and easier.Sales Tax is not levied at the time of purchases against statutory forms but there is misuse of such forms resulting in tax evasion.

VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale.

Returns and chalans are filed separately and in returns the dealers have to give numerous details. Scrutiny of returns is also difficult.

The return and the chalan will be filed together in a simple format after self-assessment done by the dealer himself which will be subject to scrutiny.

Huge number of forms required in procedure.Six taxation rates.

At the most a few forms required.Only two rates.

Tax only on goods. Tax on goods and services both.Assessment done by the department. Self-assessments by dealers.Penal provisions for defaulters and evaders of tax not very strict. Penalties will be stricter.

VAT- ISSUES AND

CONCERNS

• Differential tax treatment• Phasing out of CST• Incentive schemes • Exemption schemes• Accounting systems

• No uniformity in the rates

• Movement of goods• Additional burden

on tax authorities, producers and shopkeepers

• Possibility of tax evasion

Current status of VAT in India

Tamil Nadu

J & K

Orissa

Bihar

Jharkhand

Chattisgarh

Uttaranchal

Pondicherry

Gujarat WB

Punjab

Assam

Kerala

DelhiHaryana

MP

UP

Maharashtra

Goa

Rajasthan

AP

Karnataka

Chandigarh

20 States VAT live April 1, 2005

2 State/ UT implementing VAT between the period April 1, 2005 to March 31, 2006

5 States implementing VAT wef April 1, 2006

2 State/UT implementing VAT on or after January1 ,2007

All States: VATUP:- 1st Jan 2008

Current Scenario

• If the annual turnover of a business remains lower than Rs. 5 lakh

• The tax revenue of the 31 VAT States/UTs in 2006-07 -21% and growth of 14.6 per cent during the first six months of 2007-08 for 32 states

• Central Government had declared a compensation package• Tax on inputs to be set-off against tax on final products

Turnover Annually ReturnPayment of

Taxes

Up to Rs.25 Lakhs Quaterly Quaterly

From Rs.25 L to 1 Cr Quaterly Monthly

Above Rs.1 Cr Monthly Monthly

Last date of filling Return & Payment of taxes is 20th of next month/Qtr

04/11/2023 Department of Sales Tax 33

VAT SYSTEM

Producer Manufacturer Trader Consumer

Pays the FIRST Pays tax on Pays tax onPOINT tax VALUE ADDED VALUE ADDED

Total tax incidence on consumer = FP tax paid by producer + Tax on Value added by M/F+ Tax on value added by trader

= Tax on retail sale price

• Taxes abolished – Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc.

• Entry Tax – Has been made Vatable – Entry tax in lieu of Octroi - not Vatable

• Central Sales Tax– Charged @3% from 1 April 2007– Abolished by 2010

• Uniformity in Rates– Exempt Rate - 0% on 46 commodities consisting of – Special Rate - 1%

• Conclusion – Survey done in 2nd Nov 2010

Advantages• No requirement of Forms.

No double taxation as if tax is collected once

Lesser chances of evasion

Assessments can be taken up immediately after the close of the return period.

• Voluntary registration

• VAT results in more savings and less consumption

• Simplification of the previous indirect tax system and its administration

• Increased Revenue

Disadvantages

• Amount Lost In Implementation

• VAT Favours The Capital Intensive Firm

• VAT Is Inflationary • Regressive Tax System

Why do we need GST ?

GST in India and it’s key features

Benefits of GST

Issues and Challenges of GST

Industry expectation from GST

Impact on operations

FAQ’s

Conclusion

Why do we need GST ?

Part of a tax restructuring exercise, to enable India to

integrate with the globally accepted tax rationale.

To remove cascading impact of various indirect taxes.

Taxed on consumption and not on income.

To broaden the tax base and also score further on revenue

generation with equity and transparency.

Subsume Multiple taxes – ED, ST, VAT Etc.

Simplified Procedure – Uniform Rates, HSN,

Exemption Lists etc.

Integration with Global Trends- Cost, Efficiency &

Administration.

GST in India and it’s Key Features

GST is an indirect tax on consumption.

Dual GST : a central and state GST to apply on the

same base (CGST and SGST).

IGST proposed for inter-state transactions.

Central and state taxes to be subsumed in GST. - central excise, additional excise duties, service tax, additional customs duty,

special additional duty of customs, surcharges for the centre - state VAT, entertainment tax, luxury tax, betting taxes and surcharges on supply of

goods and entry tax not in lieu of Octroi.

Rate Structure:

All present exemptions of goods to continue. On tobacco, alcohol and petroleum products, it is proposed that status quo remains.

Three rates on the rest of the transactions – two rates for goods – a lower rate for “necessary items and goods of basic importance” and a standard rate for the rest, and a third rate for services.

Exports to be zero-rated and all imports in to the country would be subject to GST.

PAN-linked taxpayer identification number, to allow

for easy sharing of information across the different

tax administrations.

Benefits of GSTGST will boost up economic unification of India and

evade the cascading effect in Indirect tax regime.In GST system, both Central and state taxes will be

collected at the point of sale. Both components (CGST and SGST) will be charged on the manufacturing cost.

Lower transaction cost for final consumers.It will result in a simple, transparent and easy tax

structure.

It will bring uniformity in tax rates with only one or

two tax rates across the supply chain.

Good administration of tax structure.

It will result in cost competitiveness of goods and

services in Global market.

It will result in increased tax collections due to

wider tax base and better conformity.

Issues and Challenges of GSTIntegration of a large number of Central & State

Taxes – multiplicity of taxes and tax rates.How to levy tax on consumptions whether as multi

point levy or levy at final consumptions.Power to levy and collect taxes – necessary

constitutional amendments.Rationalization of thresholds and exemption limits.Operating a seamless input credit system – no

cascading.

Integrating the origin based tax with the

destination based GST.

Standardization of systems and procedures.

Training of tax administrators and assesses.

Protecting and balancing the present and future

revenues of the Centre and the States.

Safeguarding the interests of less developed States

with lower revenue potential.

Industry expectation of GSTPolicy related• Seek cross-credit between CGST and SGST• Continue area based exemptions• Removal of entry tax / Octroi, cess• Common frame-work of laws with binding

directives• Uniformity in rates across StatesTransition related• Allow utilization of accumulated credit• Early release of the reporting requirement to gear

up systems

Compliance Related• GST Registration based on the existing registrations• One Window administration including e-payments

and e-refunds• Integration of check-posts• Introduction of digital signatures.

Others• Speedy disposal of existing refund applications

under existing laws

Impact of GST

• India could gain as much as $15 billion

annually once the GST is in place.

• The impact of Goods and Services Tax on

certain sectors are discussed hereunder :

Food Industry• Impact On Those Living Under Subsistence Levels

• Complete Exemption For Food Items Would Drastically

Shrink The Tax Base

• Food Includes A Variety Of Items, Including Grains And Cereals, Meat, Fish, And Poultry, Milk And Dairy Products, Fruits And Vegetables, Candy And Confectionary, Snacks, Prepared Meals For Home Consumption, Restaurant

Meals, And Beverages.

FMCG Sector

• Size Of $25 Billion (Rs 120,000 Crore) At Retail

Sales In 2008

• Expected To Fuel Growth Further And Raise The

Industry’s Size To $47 Billion (Rs 225,000 Crore)

By 2013 And $95 Billion (Rs 456,000 Crore) By

2018

• Implementation of GST will have several

benefits for the FMCG sector including uniform,

simplified and single point taxation and thereby

reduced prices.

Rail Sector

• Suggestions For Including The Rail Sector Under

The GST Umbrella To Bring About Significant Tax

Gains And Widen The Tax Net So As To Keep The

Overall GST Rate Low.

• The Added Benefit Of Ensuring That All Inter-

State Transportation Of Goods Can Be Tracked

Through The Proposed Information Technology

(IT) Network.

Impact On Small Enterprises

• Three categories of small enterprises in the GST

regime

– Below The Threshold

– Between The Threshold And Composition

Turnovers

• Turnover Based Tax

– Turnover Threshold

Conclusion

• Implementation of a comprehensive GST across goods

and services is expected, ceteris paribus, to increase

India’s GDP somewhere within a range of 0.9 per cent

to 1.7 per cent.

• The corresponding changes in absolute values of GDP

over 2008-09 is expected to be between Rs. 42,789

crore and Rs. 83,899 crore, respectively.

• Gains in exports are expected to vary between 3.2 and

6.3 per cent with corresponding absolute value range

as Rs. 24,669 crore and Rs. 48,661 crore.

Contd...• Imports Are Expected To Gain Somewhere Between 2.4

And 4.7 Per Cent With Corresponding Absolute Values

Ranging Between Rs. 31,173 Crore And Rs. 61,501

Crore.

• In Sum, Implementation Of A Comprehensive GST In

India Is Expected To Lead To Efficient Allocation Of

Factors Of Production Thus Leading To Gains In GDP And

Exports. This Would Translate Into Enhanced Economic

Welfare And Returns To The Factors Of Production, Viz.

Land, Labour And Capital.

FAQ

• How Does It Work ? Stage Of Supply Chain

Purchase Value Of

Input

Value Addition

Value At Which

Supply Of Goods

And Services Made To

Next Stage

Rate Of GST

GST On Output

Input Tax Credit

Net GST= GST On

Output - Input Tax

Credit

Manufacturer 100 30 130 10% 13 10 13-10 = 3

Whole Seller 130 20 150 10% 15 13 15-13 = 2

Retailer 150 10 160 10% 16 15 16-15 = 1

FAQ – Contd...

• How Will GST Benefit Industry, Trade And

Agriculture ?

– Wider Coverage Of Input Tax Set-off And Service Tax

Set-off

– Subsuming Of Several Central And State Taxes In The

GST

– Phasing Out Of CST

The transparent and complete chain of set-offs which

will result in widening of tax base and better tax

compliance may also lead to lowering of tax burden on

an average dealer in industry, trade and agriculture.

Thank You