VAT - presentation

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Value Added Tax is a multi-point sales tax with set off for tax paid on purchases. A tax on the value addition on the product. Burden of tax is ultimately borne by the consumer. VAT


HISTORY German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918 . Maurice Lauré , Joint Director of the French Tax Authority , was first to introduce VAT on April 10, 1954.


IN INDIA Majority of the States have already implemented VAT from 1.4.2005. Manmohan Singh introduced the idea in 1995. Credit goes to former Finance Minister Jaswant Singh for implementing it. Haryana was the first state to introduce VAT(year 2003). The committee of finance minister and chief minister suggested for it in 1995 and 98.

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VAT Terminology Output VAT : Amount received by a seller as a percentage of the gross sale price of goods or services Input VAT : Amount paid by a buyer as a percentage of the gross purchase price for goods or services used in production. Zero Rated : Transactions in which the seller collects no output tax and the corresponding input tax is fully refundable. Exports are zero rated Exempt : Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller. Financial services are commonly exempt.


FEATURES OF VAT Tax levied and collected at every point of sale. Tax levied and collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale. Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition).

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Encourages people to pay taxes. Avoids double taxation(cascading effect). Brings uniformity in taxes(state/central). Avoids additional tax, surcharge, turnover tax.


APPLICABILITY OF VAT VAT payable on the sale of goods within the State. Liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit will continue to be governed by State Sales Tax laws or by special provisions under the VAT laws. VAT will not be imposed for one year after the introduction of VAT on AED items relating to sugar, textile and tobacco. VAT on imports and service tax targeted to be integrated along with AED items into VAT in the second year.

Difference between sales tax &VAT:

Difference between sales tax &VAT CENTRAL SALES TAX 1 Paid on total amount 2 Borne by single dealer 3 Double taxation possible 4 More burden on consumer 5 High tax evasion possible 6 Under Central Govt. 7 Inter state tax VAT 1 Paid on value addition 2 Shared by all parties 3 No cascading effect 4 Less burden on retailer 5 Limited or no tax evasion 6 Under State govt. 7 Intra state tax


VAT RATES Four specific rates of VAT Tax Exempt Goods – 46 commodities comprising natural and unprocessed products in unorganized sector, items legally barred from taxation and items having social implications 1% - Special VAT Rate applicable for gold and silver ornaments; 4% - about 270 goods comprising basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. 12.5% - General VAT Rate;

Who should pay Vat?:

Who should pay Vat? An Individual, Partnership, Corporation, HUF etc, who sell goods in the course of business and who are registered or are required to register for VAT should pay VAT.


KELKAR COMMITTEE ON VAT Publicity awareness programme should be started Uniformity of all state legislations & procedures. Mutually acceptable mechanism Discount in other local taxes. Additional duty of excise may continue for textiles.

How to compute VAT?:

How to compute VAT? 1. The Subtraction method: Under this method the tax rate is applied to the difference between the value of output and the cost of input; 2. The Addition method: Under this method value added is computed by adding all the payments that are payable to the factors of production (viz., wages, salaries, interest payments, etc.); 3. Tax Credit method: T his method entails set-off of the tax paid on inputs from tax collected on sales. Indian States opted for tax credit method, which is similar to CENVAT.

Sales Tax Structure :

Sales Tax Structure Raw Material = 1000 Sales Tax @6% = Rs 60 Raw material cost = Rs. 1,060 Value add = Rs.1,000 Sales price =Rs. 2060 Sales Tax @ 10% = 206 manufacturer Input supplier Dealer Retailer Rs 60 collected & paid by input supplier Rs 206 Paid by manufacturer To Government To Government

Sales Tax Structure CONTD.....:

Sales Tax Structure CONTD..... Price to dealer = Rs.2,266 Value added = Rs.500 S.P of Dealer = Rs 2,766 Resale tax @ 1% = Rs. 28 Price to retailer = Rs.2,794 Value added = Rs.500 S.P of Retailer = Rs 3,294 Resale tax @ 1% = Rs. 33 S.P to Customer =Rs. 3,327 manufacturer Input supplier Dealer Retailer Rs 28 collected & paid by dealer Rs.33 collected & paid by retailer To Government To Government

Value Added Tax:

Value Added Tax Raw Material = 1000 VAT @6% = Rs 60 Raw material cost = Rs. 1,060 Raw material recorded = Rs. 1,000 Value add = Rs.1,000 Sales price =Rs. 2000 Vat @ 10% = 200 manufacturer Input supplier Dealer Retailer Rs 60 collected & paid by input supplier Rs. 200 collected by manufacturer Rs 200- 60 = 140 Paid by manufacturer To Government To Government


VAT CONTD..... Price to Dealer = Rs.2,200 Recorded by dealer = Rs.2,000 Value added = Rs.500 S.P of Dealer = Rs.2,500 VAT @ 10% = Rs. 250 Price to Retailer = Rs.2,750 Recorded by Retailer= Rs.2,500 Value added = Rs.500 S.P of Retailer = Rs.3,000 VAT @ 10% = Rs. 300 S.P to customer = Rs.3,300 manufacturer Input supplier Dealer Retailer Rs 250 collected by dealer Rs. 250 collected by retailer Rs 300- 250 = 50 Paid by Retailer To Government To Government Rs. 250-200 = 50 Paid by Dealer

Difference in tax collection:

Difference in tax collection STAGES INPUT SUPPLIER MANUFACTURER DEALER RETAILER TOTAL TAX COLLECTION Under Sales Tax 60 206 28 33 327 Under VAT 60 140 50 50 300

Registration of Dealers:

Registration of Dealers All dealers whose turnover is Rs. 5 lakh or more will have to get registered. Then only they can get credit under VAT. Those with less than Rs. 5 lakh turnover are exempted, but they don’t get credit also and they cant pass credit also. They will have to pay composition tax. The chain of VAT will break at that point.

When does VAT chain break?:

When does VAT chain break? 1. when goods pass to non-registered dealers 2. when goods are not sold but gifted 3. when goods are used in manufacture of exempted goods (the tax paid in inputs will be permitted as credits).

Problems in Implementation of Value Added Tax in India:

Problems in Implementation of Value Added Tax in India Billing Lack of uniformity Concession for New Industry Number of Taxes impose by the Government Lack of infrastructure facilities Dealing in Variety of Goods


BENEFITS OF VAT Reduction in tax evasion Spreading of tax burden over all parties Helps in boosting trade in particular state Simplicity and transparency Easy cross checking by Govt.


BENEFITS TO VARIOUS PARTIES Manufacturers 1 Will be reimbursed fully for the tax paid on their purchases 2 No Retention , Tax on Tax and Surcharge etc. Distributor/Retailer 1 Will have to pay tax on their profit margin, instead of resale tax 2 VAT would reduce the tax burden of them Consumer Bears the final burden. Would reduce and lower the price & consumer would benefit Government 1 Broaden tax base and finally increase tax revenue


DISADVANTAGES OF VAT Multiple rate structure. Tax Evasion. Difficult to Operate due to tax rivalry. Lots of paper work.


ECONOMIC IMPACT OF VAT State revenues would not be affected severely. Some products could actually become costlier. Increase in the tax registration. VAT and Inflation



What is Goods and Services Tax(GST)?:

The Goods and Services Tax (GST) is a comprehensive value added tax (VAT) on goods or services with fewer tax exemptions. France was the first country to introduce this value added tax system in 1954 devised by a public servant What is Goods and Services Tax(GST)?


GST will lower the tax rate by broadening the tax base and minimizing exemptions. Reduce compliance cost. All India tax will be based on value added. No value added means no tax to the government. Supply chain will be tax neutral. BENEFITS OF GST


ADMINISTATIVE ISSUES / BOTTLENECKS (GST) Services have to be appropriately integrated in the tax network. Lack of IT preparedness of certain States is a key bottleneck The basic exemption limit in excise of Rs. 1.5 Crore will be taken away in GST, thereby slowly killing the SSI. Getting tax refunds for exempted goods based on budgetary allocation may delay refunds.

Main Differences Between VAT and GST:

VAT Only by the States; Centre has no role Only on goods. GST To be imposed by the Centre and the States in coordination Centre and States to tax both goods and services States’ exclusive legislative power to tax sale of goods Replaces only the State sales tax; central excise and other taxes are unaffected No input tax credit for inter-State transactions Centre to be empowered to tax goods; States to be empowered to tax services Will replace central excise and service tax etc. imposed by the Centre, and VAT, entry tax etc. imposed by the States Tax paid in exporting State would be available as credit against inter-State transactions Main Differences B etween VAT and GST

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