1. Session 6 A Typical VAT Act
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2. A Typical VAT Act Session Overview
In the earlier sessions we discussed the basic requirements and conditions for design of VAT legislation in the major States.
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3. A Typical VAT Act
In this session we will discuss a typical VAT Act pertaining to a major State. Trainees are requested to read this participant note in conjunction with the Value Added Tax Act and Value Added Tax Rules pertaining to the States of their audit jurisdiction.
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4. Learning Objective
At the end of the session the learner will be able to state the important provisions of the Value Added Tax Act and Value Added Tax Rules of major States so far as they relate to assessment, collection and allocation of VAT.
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5. Important provisions of VAT Legislation
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6. Preamble
The Value Added Tax Act of each State starts with a preamble defining the reasons for legislation.
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7. Chapter-I Short title, extent and commencement
These provision give the name of the legislation, its extent (area of its application) and date from which the law will come into force.
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8. Definitions
Different terms used in the Act and Rules are defined in this article. The more important definitions from an Auditors angle are:
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9. Agricultural, Agriculturist
Most of the Sate VAT Acts provide zero rate of VAT on unprocessed agricultural products produced by agriculturists other than a company or a firm. This definition become important for auditors to differentiate zero rated unprocessed agricultural products from other products attracting a defined VAT rate.
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10. Assessing Authority, Commissioner, Assistant Commissioner, Appellate Authority, Commercial Tax Officer
Definition of these terms are important to identify the authority who assess tax under VAT, authority who can impose penalty and the authority with whom an appeal lies in case of a dispute.
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11. Books of Account
This term defines the books of account that a person assessed to tax under VAT has to maintain
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12. Capital Goods
Capital goods mean plant, machinery and equipment used in manufacturing or processing of goods or packing of manufactured goods for sale by a dealer (directly or indirectly) excluding civil structures as may be defined. The definition is important to auditors as capital goods may attract lower rate of VAT.
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13. Dealer
This term defines a dealer who is liable to pay Value Added Tax on goods and services handled by him during trade and commerce.
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14. Declared Goods
Declared goods mean goods declared to be of special importance in Inter-State Trade or Commerce under section 14 of the Central Sales Tax Act, Such goods may be exempted from payment of VAT. This definition is important to Auditors such goods which are exempt from payment of Value Added Tax.
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15. Goods
Goods mean all kinds of movable property (other than newspapers, actionable claims, electricity, stocks and shares and securities) and include live stock, all materials, commodities and articles and every kind of property (whether as goods or in some other form) involved in the execution of a works contract and all growing crops, grass or things attached to, or forming part of, the land which are agreed to be severed before sale or under the contract of sale.
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16. Import
Import means the bringing of goods into the State from any place outside its territorial limits.
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17. Input Tax
Input Tax in relation to a registered dealer means the tax charged under the Act by the selling registered dealer to such dealer on the sale to him of any goods for resale or for the manufacture of taxable goods or for use as containers or packing material or for the execution of works contract.
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18. Output tax
Output Tax in relation to a registered dealer means the tax payable under the Act in respect of any sale of goods by that dealer in the course of his business.
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19. Registered Dealer
Registered dealer means a dealer registered under the Act.
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20. Reverse Tax
Reverse tax means that portion of input tax on goods for which credit has been availed but such goods are used subsequently for any purpose other than resale or used as containers or packing materials within the State, or there is loss of goods arising out of theft or destruction for any reason or stock of goods remaining unsold at the time of closure of business.
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21. Sale
Sale means every transfer of property in goods other than by way of mortgage hypothecation, charge or pledge, by one person to another in the course of trade or business for cash, deferred payment or other valuable considerations
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22. Sale Price
Sale price means the amount of valuable consideration received or receivable by a dealer for sale of any goods and shall include any sum charged for anything done by the dealer in respect of goods at the time or before the delivery thereof. Sale price shall include excise duty, special excise duty or any other duty or tax
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23. Tax Invoice
Tax Invoice means an invoice which a registered selling dealer is required to issue to another registered (purchasing) dealer. Tax invoice is an evidence of payment of tax by the purchasing dealer to the selling dealer. The tax invoice is the basis on which the selling dealer pays the value added tax, collected by him, to public exchequer and also on the basis of which a purchasing dealer claims and is allowed input tax credit.
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24. Tax period
Tax Period means a calendar month or a quarter as may be prescribed.
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25. Taxable turnover
Taxable turnover means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover in such manner as may be prescribed.
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26. Turnover
Turnover means the aggregate amount for which the goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or for any other valuable consideration.
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27. Turnover Tax
Turnover tax means a tax leviable on the turnover as per the provision of the Act
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28. Zero Rated Sales
Zero Rated Sales means the sales which are subject to tax as per the provision of the Act, but on which no tax is charged and credit for input tax paid in the State is allowable. Goods exported outside the territory of India, or supplied in the course of such export or sold or supplied to SEZ’s (Special Economic Zones) within the country. Such sales shall be Zero Rated.
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29. Chapter-II-Taxation Authorities, Appellate Tribunal, Settlement Commission, Special Investigation Unit, etc.
This chapter defines various authorities vested with powers under the Act for assessing tax, accepting appeals, etc.
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30. Chapter-III-Incidence and Levy of Tax
From an auditors point of view, this is the most important part of any VAT Tax Act, as it contains various provisions relating to levy, incidence and collection of tax. Some of the important provisions of this Chapter are:
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31. Incidence, levy and Rate of Tax
These provisions define the dealer whose trade turnover during the tax period exceeds the defined threshold limit shall be liable to pay tax under the VAT Act on all sales effected and purchases made after coming into force of the VAT Act.
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32. Incidence, levy and Rate of Tax
The provisions also define the point at which tax will be levied on sales and/or purchases and the rate of tax payable on the sales/ purchases. The provisions also define the treatment of trade discounts and certain cases in which trade discounts are to be treated as sale and treatment of the cost of containers and packing material for tax purposes.
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33. Output Tax
Output tax is an important concept in the Value added Tax Act. It is the tax payable by a registered dealer in respect of any sale of goods by that dealer in the course of business. The dealer shall be liable to pay Output Tax under the VAT Act at such rate and subject to such conditions as may be prescribed from time-to-time.
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34. Input Tax Credit
The input tax credit means the amount of tax paid or payable by way of tax under the Act, by a purchasing registered dealer to a selling registered dealer on the purchase of goods (in the course of business) for resale, or for use in the manufacture of taxable goods or for use as containers or packing material or for the execution of works contract.
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35. Input Tax Credit
The Input Tax Credit which a registered purchasing dealer as such is entitled to claim is the amount of input tax paid or payable by him to a selling registered dealer, on the turnover of purchases made by him during the tax period, which is allowed subject to certain prescribed conditions and is calculated as provided in the Act.
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36. Conditions for Claiming Input Tax Credit
The input tax credit is available to a registered dealer, if such dealer has:
the original VAT invoice, issued to him by the dealer from whom the purchases were effected, the tax has been separately charged in it, and
maintained proper accounts recording therein in chronological order details of all purchases of goods eligible for input tax credit and all adjustments thereto.
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37. Conditions for Claiming Input Tax Credit
The dealer claiming credit against input tax, has in addition, to
be a registered dealer;
have a valid certificate of registration, which should be current and not suspended;
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38. Tax payable
The net tax payable by a registered dealer for a tax period shall be the difference between the output tax plus purchase tax, if any, and the input tax.
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39. Tax payable
The net tax payable by a dealer liable to pay tax but not registered under the Act for a tax period shall be equal to the output tax payable for the said period as determined under the Act.
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40. Tax payable
If the tax payable under the Act under the formula (Net Tax Payable = (O + P) –I) is a negative quantum, then the same shall be set off as per Act against any outstanding tax liability, penalty or interest payable under the Act and the excess Input Tax credit remaining after adjustment may be carried forwards to the subsequent tax period(s) but not beyond the end of second financial year. Refund of excess Input Tax Credit shall be allowed only after the end of the second financial year.
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41. Reverse Tax Credit
If goods purchased are intended for the use for resale, or for use in the manufacture of taxable goods or for use as containers or packing material or for the execution of works contract, for which input tax credit is or has been allowed, but are subsequently used , fully or partly, for purposes other than those specified in the VAT Act or there is loss of goods arising out of theft or destruction for any reason or stock of goods remaining unsold at the time of closure of business,
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42. Reverse Tax Credit
the input tax credit availed at the time of such purchase shall be reduced from the tax credit for the period during which the said utilization has taken place. This reduction from ‘Input Tax credit’ is called ‘Reverse Tax Credit’.
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43. Net Tax Credit
Net Tax credit to which a registered dealer is entitled in determined by the formula:
Net Tax Credit= A+B-C;
Where ‘A’ represents the Input Tax Credit, ‘B’ represents outstanding credit brought forward, if any and ‘C’ represents the ‘Reverse Credit’.
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44. Credit Notes and Debit Notes
Where a tax invoice has been issued and the amount shown as tax charged in the tax invoice exceeds the tax payable under the VAT Act in respect of that sale, the registered dealer making the sale is required to issue a ‘Credit Note’ containing the required particulars.
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45. Credit Notes and Debit Notes
Conversely, where tax payable under the VAT Act exceeds the tax indicated in the tax invoice, the dealer making the sale is required to issue a ‘Debit Note’ containing the required particulars. Similarly in the case of goods rejected or goods returned, a ‘Credit Note’ will be issued by the selling dealer to the purchaser and a Debit Note will be issued by the purchaser to the selling dealer.
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46. Adjustment of Input Tax Credit
In cases where a Credit Note or a Debit Note has been issued, as discussed above, and as a consequence of which the input tax credit availed in any period in respect of which the purchase of goods relates, becomes less or excess, the dealer shall compensate such less credit or excess credit by adjusting the amount of tax credit allowed to him in respect of the tax period in which the Credit Note or Debit Note has been issued or goods returned subject to such conditions as may be prescribed.
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47. Turnover Tax
Under the VAT Act all dealers, except importers and manufacturers, who sell their goods locally and do not consign any goods outside the concerned State and whose gross turnover is within the prescribed limit, may pay in lieu of tax specified under the Act (as discussed above), pay a tax at such percentage of the gross turnover of such sales and purchases as the State Government may notify. Such a dealer will not be allowed input tax credit and no tax invoice shall be issued by such dealer.
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48. Chapter-IV-Registration of Dealers
This chapter deals with the registration of dealers who are liable to pay VAT under the VAT Act, voluntary registration of those dealers who may not be required to get themselves registered under the Act, security for registration, cancellation of registration and penalty on dealers for failure to get themselves registered.
Briefly, the provisions of this chapter are as under:
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49. Registration
Registration under the Act is essential for dealers who are liable to pay tax under the provisions of the Act. A dealer who is liable to pay tax cannot carry on business unless he has been registered and possesses a valid registration certificate. In the case of a casual dealer, however, the authorities may dispense with the requirement of a valid certificate of registration on payment of a fee.
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50. Deemed registered dealer
Any dealer who was registered under the General Sales Tax Act, and continued to be so before the commencement of the Value Added Tax Act, shall be deemed to have been registered.
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51. Voluntary Registration
A dealer who sells taxable goods, and is not liable to register under the provisions discussed above may, if he so desires, register himself voluntarily in the prescribed manner and shall pay tax only when his gross taxable turnover exceeds the specified taxable quantum.
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52. Deemed registered dealer
When a dealer fails to apply for registration in contravention of the provisions of the Act, the Assessing Authority shall register such dealer and grant him a certificate of registration and it shall be effective as if it had been made on dealer’s application
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53. Procedure for registration Application Form
A dealer has to apply for registration under the category he falls in the prescribed forms and enclose therewith all the details called for, enclose a deposit receipt for payment of registration fee.
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54. Certificate of registration
The Assessing Authority upon scrutiny of the documents and on finding them correct shall issue the appropriate certificate of registration. The registration certificate shall specify amongst other things
The location of the business and of any branch of business;
The nature of the business;
The tax or the return period; and
The intervals at which the tax shall be payable.
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55. Taxpayer’s Identification Number
Shall consist of 11 numeric digits for:
State code2 digits;
Charge code2 digits;
Registration Number4 digits;
Act Identification code1 digit;
Check code2 digit
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56. Amendment, Cancellation, Suspension or Renewal of registration
The certificate of registration of a dealer may be amended when the dealer applies for it in the following circumstances;–
Transfer of his business, or
Change in the name (constitution) or nature of his business, or
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57. Amendment, Cancellation, Suspension or Renewal of registration
he wants to open a new place of business or
Make any changes either in place or in class or classes of goods specified in the certificate of registration for resale or use in manufacture of goods for sale.
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58. Suspension of registration
The certificate of registration may be suspended if the dealer or the person has violated any provision of this Act or rules made there under.
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59. Cancellation of registration
The certificate of registration can be cancelled in the following circumstances;
if the dealer sells or otherwise disposes of his business or any place of business or discontinues his business, or
if the dealer dies, or
for any other sufficient cause including misuse of the certificate of registration or cessation of the liability to payment of tax under the Act.
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60. Renewal of registration
The certificate of registration of a dealer may be renewed for a specific period in a specified manner and on payment of the prescribed fee.
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61. Security from certain class of dealers
If it appears to the Commissioner or any other authority appointed in this regard that obtaining a security is necessary for proper realization of the tax levied under the Act, he may for reasons to be recorded impose a condition of furnishing of security by the dealer.
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62. Forfeiture/Refund of security
The authority granting the certificate of registration , may after giving the dealer and the surety a reasonable opportunity of being heard (for good and sufficient reasons) by an order in writing forfeit the whole amount or part of the security furnished by the dealer for realizing any amount of tax , penalty or interest payable by the dealer.
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63. Chapter-V-Returns, Assessment, Recovery and Refund of Tax
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64. Periodical returns and payment of tax
The VAT Acts provide that a registered dealer shall furnish returns, duly signed by the dealer or his authorized agent, of his turnover in such form, for such period and by such dates as may be prescribed.
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65. Periodical returns and payment of tax
The Acts may also provide that if the Assessing Authority has reasons to believe that the turnover of sales and purchases of any dealer has exceeded or is likely to exceed the taxable limit, it may by notice require such dealer to furnish return as if the dealer was a registered dealer under the Act.
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66. Periodical returns and payment of tax
The VAT Acts also allow a dealer to file a revised return before the expiry of three months from the last date of filing the return in case he discovers any omission or any error in the original return filed by him.
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67. Periodical returns and payment of tax
Along with the return, or the revised return, the dealer has to pay the assessed tax or differential tax calculated in the return as per provisions of Vat Acts.
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68. Scrutiny of returns
Each and every return filed under the VAT Acts shall be scrutinized by the Assessing Authority within a period of three months of filing such return to verify the correctness of calculations, application of correct rates of tax, and interest and input tax credit claimed therein and full payment of tax and interest payable by the dealer during that period.
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69. Tax Audit
The Commissioner or any other Tax Officer, as directed by him, shall undertake tax audit of records, stock in trade and the related documents of the dealers, who are selected for such audit. The tax audit may be taken up in the office, business premises or warehouse of the dealer. During the tax audit, correctness of the return(s) filed and admissibility of various claims, including input tax credit shall be examined.
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70. Self Assessment
The State VAT Acts are based, mainly, on self-assessment to tax by dealers and if a dealer has filed a return within the prescribed time and paid the self-assessed tax and the return so filed is found to be in order by the Assessing Authority, it shall be accepted as self-assessment subject to adjustment of any arithmetical error apparent on the face of the return.
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71. Sales not liable to Value Added Tax
VAT Acts also provide that a Value Added Tax shall not be imposed on the sales or purchase of goods outside the State, sales or purchase of goods in the course of inter-State trade or commerce and sale or purchase of goods in the course of import of goods into the territory of India or export of goods out of the territory of India.
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72. Chapter VII Accounts and Records
This chapter of the State VAT Acts generally deals with Accounts and Records required to be maintained by registered dealers under the VAT Act. This Chapter also prescribes the period for which the prescribed records are required to be kept and also audit of VAT records of dealers by Chartered Accountants or by Cost and Works Accountants subject to the turnover exceeding the prescribed limit.
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73. Chapter VIII-Liability in Certain Cases
This chapter deals with liability to Value Added Tax in case of death of a registered dealer by his successors, liability of certain agents on behalf of the principal, liability of partners in case of firms and liability in cases of amalgamation of companies.
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74. Chapter IX-Inspections and Searches
This Chapter deals with the inspection of the premises, warehouses and records of dealers by the Assessing Authority in certain cases, and establishment of check posts and inspection of goods in transit by tax authorities.
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75. Chapter X-Offences and Penalties
This chapter deals with defaults, conviction for offences, and composition of offences.
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76. Chapter XI-Appeals and Revision
This chapter deals with the procedure for appeals, hearing by tribunals and hearing by High Courts in cases the dealers are aggrieved against any order of assessing authority.
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77. Chapter XII-Survey and Data Collection
This chapter deals with the powers of the tax administration for conducting surveys and for collection of data for identification of dealers who are liable to pay tax under the VAT Acts but have remained unregistered.
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78. Chapter XII- Miscellaneous
This chapter deals with miscellaneous matters arising in the implementation of VAT acts.
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