Introduction to Value Added Tax - Vat

7/31/2019 Introduction to Value Added Tax - Vat

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INTRODUCTION TO

VALUE ADDED TAX - VATINDIRECT TAXES SALES-TAX


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WHAT IS VAT

Sales tax being a State subject, Sales Tax Act of each Statewas different from each other, in the rates, scope andchargeability, rules and other related subject. Transactionsbetween parties of different states were covered by CentralSales Tax Act, a federal law.

There were turnover tax, surcharge and additionalsurcharge etc. in different states, which was over and aboveSales 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 ofCentral govt. which is the scheme of VAT.


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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. ManMohan Singh, then Union Finance Minister, in 1995 at the

Chief Ministers meeting. It was discussed in detail later inmany meetings. The scheme of VAT was introduced inParliament and considered at length.

Though States objected to the encroachment into theirterritory 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.


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ADVANTAGES OF VAT

There will be uniformity of sales-tax systemacross the country.

A set off will be given for tax on input as well astax paid on previous purchaser. Therefore, eachperson pays tax only on the value addition in hishands.

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.


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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 beminimal.

Easy to administer, by tax authorities.


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SCHEDULES AND RATES

For the purpose of VAT all the materials traded onare divided into 5 schedules, each havingdifferent tax rates.

Schedule A Exempted items. Initially, 54 itemswere included in the list, on which no VAT isleviable.

Schedule B Rate of VAT 1% - This schedulecontains may items like precious metals, precious

stones, etc. Schedule C - Rate of VAT 4% - Initially, there were

about 109 items and their sub-items.


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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 tochanges, additions and deletions, depending

on the policies of the respective State Govt.


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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.


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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.


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EXAMPLE

A manufacturer purchases molasses forRs.1,00,000 and sell country liquor made out

of it to the Area Distributor, who sells to

Wholesaler, who then to Retailer and retailerto 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/-


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2.In the hands of Manufacturer

Particulars Amount

Rs.

Tax Liability

Rs.

Cost 1,00,000

Profit @ 20% 20,000

Total 1,20,000VAT at 30% 36,000

Less: Credit for VAT paid by supplier 23,077

VAT payable 12,923 12,923

Sales Price 1,32,923


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3.In the hands of Distributor

Particulars Amount

Rs.

Tax Liability

Rs.

Cost 1,32,923

Profit @ 20% 26,585

Total 1,59,508VAT at 30% 47,852

Less: Credit for VAT paid by earlier suppliers 36,000


1,71,360


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4.In the hands of Wholesaler

Particulars Amount

Rs.

Tax Liability

Rs.

Cost 1,71,360

Profit @ 20% 34,272

Total 2,05,632VAT at 30% 61,690





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5.In the hands of Retailer

Particulars Amount

Rs.

Tax Liability

Rs.

Cost 2,19,470

Profit @ 20% 43,894

Total 2,63,362VAT at 30% 79,009





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The incidence and impact

Incidence VAT Paid

(Incidence)

Cumulative

(Impact)

VAT paid by molasses dealer Rs. 23,027 Rs. 23,027

VAT paid by Manufacturer Rs. 12,923 Rs. 36,000

VAT paid by Distributor Rs. 11,852 Rs. 47,852

VAT paid by Wholesaler Rs. 13,838 Rs. 61,690

VAT paid by Retailer Rs. 17,319 Rs. 79,009

Total VAT collected by Govt. Rs. Rs. 79,009

Total VAT impact on

consumer

Rs. Rs. 79,009


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REGISTRATION & RETURN

Every dealer having annual turnover of overRs.5 lakhs in any year, has to obtain a VATregistration. 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 theGovernment and has to file the Return everyquarter. If tax liability exceeds Rs.1,00,000/-the Returns are to be filed every month.

Documents

Introduction to Value Added Tax - Vat