1. FUNDAMENTALS OF VALUE ADDED TAX (VAT) AN INTRODUCTION by Sanjeev Malhotra, FCA,FCS,ACMA, LL.B

2. “Value” means Economic Value Economic Cycle means
WHAT IS VAT
“Value” means Economic Value
Economic Cycle means
NATURAL PRODUCT (Mining or Agriculture
Rs. 1000
MANUFACTURER
Rs. 2000
Value added Rs. 1000
WHOLESELLER
Rs. 3000
RETAILER
Rs. 4000
CUSTOMER COST IS Rs. 5000

3. WHAT IS VAT.. Contd.
Consideration other than cash would need to be converted in money figures.
Value Added means Sales price of goods minus Cost of bought outs (components and services)
Method of taxing trade.
Multi stage tax as against single stage in Sales tax.
Sum of VAT at multi stage equals single stage tax on last stage.
Truncated Vat implemented in India presently.

4. VALUE ADDED TAX IN INDIA
Indirect Taxation Enquiry Committee in1976 under Chairmanship of Sh. L.K.Jha.
Committee noted it is very difficult to administer VAT Scheme in toto because of
Small retail and Wholesale dealers maintaining primitive accounts.
Numerous products carrying different rates.
Federal Structure of the country, Union and States need to have an agreement.
Committee therefore recommended MANVAT ie VAT at manufacturing level.
MODVAT now CENVAT got introduced in 1986 initially with 37 chapters.
List of items covered slowly expanded to more than 80.
Conference of Chief Ministers of States in 1999 agreed to implement Sales Tax VAT in all states.
First Proposal was to introduce w.e.f
Consensus among states, New date of implementation is , Haryana Started from

5. VAT IN INDIA …. CONTD.
Empowered Committee(EC) of State Finance ministers of Nine states constituted on
EC decided to rationalize rates to 5 rates ie Nil, 1%, 4%, 20% and RNR of 12.5%.
Central Govt. agreed to compensate states by 100% to 50% in 3rd year.
CST was amended to reduce rates from 4% to 2% to 0% in 3rd year.
Haryana implemented the VAT in State from
Most of the other states implemented from

6. How VAT works Total VAT collected = Rs.100+100+100+100= Rs. 400
Sale Value Rs. 2000
Gross 10%=Rs. 200
VAT paid to Govt=Rs =100
Sale Value Rs. 3000
Gross 10%=Rs. 300
VAT paid to Govt=Rs =100 B
Manufacturer C
Wholesaler A
Raw Mtls. Producer D
Retailer
Sale Value Rs. 1000
10%=Rs. 100
VAT paid to Govt= Rs. 100
Sale Value Rs. 4000
Gross 10%=Rs. 400
VAT paid to Govt=Rs =100
Total VAT collected = Rs = Rs. 400

7. VAT VS SALES TAX Natural Product Rs. 1000 Manufacturer Rs. 2000
SALE TAX
Natural Product Rs. 1000
Manufacturer Rs. 2000
Whole seller Rs. 3000
Retailer Rs. 4000
Rs. 400
Customer Cost Rs including tax
VAT
Natural Product tax Rs. 1000
Tax thereon Rs. 100
Manufacturer Value addition Rs. 1000
Whole seller Value addition Rs tax thereon Rs. 100
Retailer Value addition Rs Tax thereon Rs. 100
Customer Cost Rs Tax thereon Rs. 400 with no credit

8. VAT IMPACT - TRADING Particulars S. Tax at present Ist Stage
Add. Cost to consumer
Reduced margin for distributor
Reduced margin for manufacturer
a.Selling Price of Manufacturer
100
97.27
b.Sales Tax/ 10% of a. 10
9.73
c.Gross Purchase Price (a+b)
110
107
d.Value addition by Distributor 30
27.27
e.Gross Selling Price (a+d)
140
130
127.27
10% 13
12.73
g.Input Tax Credit (b)
h.Additional Net tax paid by Distributor 3
2.73
i.Sales Price of Distributor
143
j. Impact on ultimate Buyer
k. Impact on Distributor
l. Impact on Manufacturer

9. VAT VS SALES TAX Eliminates cascading effect of taxes.
Computation of exact tax content possible.
No variation in tax burden depending on number of stages of sale.
Instrument to tax consumption as against Sale,
Simpler and Improves Compliance.
Self - Policing Mechanism by providing audit trial.
Increased tax base.
Buoyant Revenue

10. TYPES OF VAT Income Type Product Type Consumption Type
Sales minus Raw material purchase and Depreciation.
Product Type
Sales minus RM purchase price. No deduction for Capital Expenditure.
Consumption Type
Sales minus RM and Capital Goods Purchases.

11. PRINCIPLES OF VAT Origin Principle
- Taxes the value added domestically.
- Results in exempting imports and taxing exports.
- Considers origin as base for taxing.
Destination Principle
- Taxes all additions in value either domestically or abroad.
- Results in taxing imports and exempting exports.
- Goods consumed by consumers of State to be taxed by that state.

12. BENEFITS OF CONSUMPTION TYPE VAT
Easy Administration control due to Credit method.
No distinction between Capital intensive and labour intensive.
Tax evasion by classifying capital as revenue is avoided.
Harmony with the Destination Principal.
Tax burden at last stage ie consumption stage.
Becomes easier to discriminate ie Heavy tax on luxury and concession to items of common use.

13. METHOD OF VAT IMPLEMENTATI0N
Subtraction Method
Tax on value added by deducting Purchases from Sales.
Tax Credit Method
Tax levied on full sales price but credit is given of tax paid on purchases.

14. BENEFITS OF TAX CREDIT METHOD
Flexibility in applying varying rates to different commodities.
Self Policing mechanism, Audit control is much easier.
Useful in giving tax benefits on exports.
Tried and Tested, Adopted by most of the countries in the world.

15. TAX CREDIT AND ADJUSTMENT
Credit of taxes paid in the respective states will be given in the month of purchase irrespective of when they will be used / sold.
No tax credit on inputs procured from other states through Stock Transfer or inter state sale.
Adjustment allowed for Intra state and inter state sale.
Adjustment including refund of tax is not restrictive provided manufactured goods are manufactured and sold.
Excess unadjusted credit is eligible for carry forward and refund.

16. EXCEPTION TO INPUT TAX CREDIT
Manufacture of exempted goods except when sold by way of export.
Goods as such or goods manufactured there from are branch transferred. Reversal of 5% credits
Tax paid on ATF, Petrol, HSD, LDO except when resold.
Goods disposed other than by way of sale.

17. TAX CREDIT ON CAPITAL GOODS
Definition of Capital Goods
Only to manufacturers, processors and not to traders.
Capitalisation of Capital Assets.
Manufacture of goods for taxable sale.
Capital Assets used for execution of works contract not eligible.
Adjustment of tax credit is available from same month.

18. METHOD OF SET OFF A Inputs procured within the state in a month.Rs B
Capital Goods procured Rs C.
Output sold in a month Rs D
Tax collected on 12.5% Rs E.
Input tax paid on 5%
Rs. 5000 F.
Input tax paid on 5% Rs G
VAT payable during the month (D – E – F)
Rs. 7500

19. Treatment of Exports and Stock Transfers out of State
For all exports out of country, Input tax paid within the state will be refunded in full.
For stock transfer out of state, input tax paid in excess of 5% will be eligible for tax credit. (since inter state sales carries 5%)

20. REGISTRATION UNDER VAT
Compulsory for Existing dealers and dealers having turnover above threshold limit.
TIN will be PAN Based.

21. COMMODITY COVERAGE Two main Tax Categories
5% on all items of Industrial and Agriculture inputs, Basic necessities, Declared goods and Capital Goods.
RNR 12.5% on all other items except
1% on Precious metals, Stones etc.
20% / 12% on Petrol, ATF, diesel, liqour etc.
Provisions for exemption of items like Natural and Unprocessed goods like earthen pots, Items legally barred from tax and items having social implication like books, slate, pencils.

22. INCENTIVES
Units enjoying exemption / remission will be converted into deferment cases with extra period and amount.
Such units will have to pay tax on procurement and collect tax on their sales.
No change is proposed in units enjoying benefits under Deferment Scheme.

23. ASSESSMENT OF VAT LIABILITY
Simple procedure and few returns.
Deemed Assessment, if no notice issued.
No compulsory annual assessment.
Detailed scrutiny only of selected cases (20 to 25% each year) in scientific manner.
Arithmetical computation to be computer checked in remaining cases.

24. COMPOSITION SCHEME FOR SMALL DEALERS
Small dealers making local purchases upto 50 lacs per annum will be eligible for composition scheme.
Will issue sales invoice, not eligible to issue tax invoice.
Not eligible to receive VAT invoice, Will not claim input tax credit.
Will not charge tax separately in their invoices.
Eligible for simplified system of registration, Book Keeping, Return filing.
Scheme continues for BKOs, Lottery dealers, Halawai and works contractors.

25. SALE & SALES PRICE
Transfer of property in goods for cash, deferred payment or valuable consideration and includes
Transfer, Delivery or Supply treated as deemed sale in following circumstances.
Transfer otherwise in pursuance of contract.
Transfer of property in goods involved in execution of works contract.
The delivery on hire purchase or instalments.
Transfer of right to use
Transfer by unincorporated association or body of persons.

26. SALE ….Contd.
Supply by way of or part of any service. Food or any other article for human consumption.
Sale price includes consideration for the sale minus cash or trade discount plus charges for anything done by dealer before delivery of goods.
Warranty charges recovered from all customers will be part of sale price.

27. Features of a Works Contract
Indivisible Contract.
Work on the property of Contractee.
Contractee becomes deemed owner during construction itself.
Property transfer by principle of accretion or accession.

28. Taxation of works contract
taxation as regular dealer.
Total of materials used + profit thereon.
Sale – Labour and Service + profit thereon.
Rate of tax as is applicable on goods.
Composition Scheme.
4% rate of tax on total OR 12.5% on reduced value after taking abetment.
Contractor eligible to use C forms.
Contractor eligible to use D1 forms in HVAT.
Will not issue tax invoice.
Will not take input tax credit.

29. TDS provisions under VAT
Individuals and HUF an exception under IT Act.
Every person is liable under some VAT laws.
Even labour contracts are covered by IT Act.
Only works contracts are covered by VAT Acts.
Exemption limit in IT Act, Rs. 1 lac under VAT.
Contractors doing job work for manufactured goods an exception under VAT & not under IT.

30. Thank You Sanjeev Malhotra, FCA,FCS,ACMA, LL. B
Thank You Sanjeev Malhotra, FCA,FCS,ACMA, LL.B