HERE IS VAT SPECIAL FOR CA STUDENTS
-WRITTEN TWO YEARS BACK- CA SUDHIR HALAKHANDI
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VALUE ADDED TAX IN INDIA – A COMPREHENSIVE STUDY
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- CA SUDHIR HALAKHANDI
VAT i.e. the Value added tax is relatively a new concept in our country and it was practically introduced in the year 2005 in large number of states of the country though initially it was introduced but taken back in mid 90’s in the state of Maharashtra. Further Haryana was the first state to introduce it successfully in 2003. The VAT introduction schedule in India can be seen as under: -
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STATES
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DATE OF IMPOSITION OF VAT
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NUMBER OF STATES
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1.Haryana
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1-4-2003
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1
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2. Andhra Pradesh, West Bengal, Kerala, Karnataka, Orissa, NCT Delhi, Tripura, Bihar, Arunachal Pradesh, Sikkim, Punjab, Goa, Mizoram, Nagaland, Jammu and Kashmir, Manipur, Maharashtra, Himachal Pradesh, Assam and Meghalaya.
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1-4-2005
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20
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3.Uttaranchal
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1-10-2005
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1
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4. Rajasthan, Gujarat, MP, Chhatisgarh and Jharkhand.
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1-4-2006
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5
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5.Uttar Pradesh and Tamil Nadu
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Still not decided
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2
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One can understand from the above table that practically the VAT was only introduced in our country less than 5 years back and further in most of the states it is more recent event than this period.
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1.HOW SALE OF GOODS WAS TAXED BEFORE VAT
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This seems to be a very interesting question since it is the fact that sale of goods was also taxed before VAT and before going to understand VAT one should know how the goods were taxed in traditional Non-VAT sales tax system.
In pre-VAT era we have a single point sales tax system in which the tax is charged on first point of sale and thereafter no tax was payable on further points of sale and goods were sold Sales Tax Paid on all such further sales within the state. Let us try to understand this with the help of an example: -
X and Company, a manufacturer of refined edible oil, sold 1000 tins of the oil to Y and company, a wholesale trader and the rate of state sales tax on edible oil was 4% and rate of edible oil was Rs. 1000.00 per tin. The total sale price of goods excluding sales tax was Rs. 10 Lakhs and sales tax on this amount was Rs. 40000.00. Hence the total cost of goods for Y and company is 10.40 Lakhs including tax.
Now the per tin cost of oil for Y and company is 1040.00 and if after adding it’s profit @ 5% the goods were sold by Y and Company to retailers at Rs. 1092.00 and this is the sale price for Y and company and the Goods are sold Sales tax paid or more better known as STP and no further tax is required to be paid.
The cost for the retailer was Rs. 1092.00 and if the goods are sold by the retailers after adding 10% as their profit then the sale price for the retailer was Rs.1200.00 and here also the retailer have sold the goods to the consumer without paying further tax i.e. goods were sold STP.
Here see that the ultimate sale of goods to the consumer was at Rs. 1200.00 but the Government had received tax only Rs.40.00 i.e. on Rs. 1000.00, the sale price of the Manufacturer. The value addition from wholesaler to retailer and retailer to consumer remained tax-free and this is the basic difference, which should be kept in mind to understand VAT, which we are discussing just now in coming paragraphs.
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2.WHAT IS VAT
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The “VAT” is a multipoint taxation system in which the seller collects tax from the purchaser at each stage of sell but at the time of deposit of the same to the Government, the tax paid by the seller on his own purchases is deducted.
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We can understand it as a tax on value addition on each point of sale. A very simple definition can be given to this tax, as VAT is a tax on value added hence it is called Value added tax.What is value addition and how it was not taxable in the traditional sales tax system has been explained in the preceding paragraph and now try to understand how value addition has been made taxable under VAT with the help of following Examples: -
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(i). MANUFACTURER
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The Manufacturing company ZIG-ZAG shoemaker Pvt. Limited has purchased raw material worth Rs.50000.00 after paying state tax of Rs.2000.00 @ 4%. The Labour contents are Rs.40000.00 and the margin towards administrative and selling expenses and profit are Rs.10000.00 hence the total sell price is Rs. 100000.00. Suppose the tax rate is 12.5% he will charge Rs.12500.00 as tax from the whole seller. Since he has already paid tax of Rs.2000.00 on the raw material hence his net tax liability will be Rs. 10500.00 after getting a credit of Rs. 2000.00 tax paid by him on Raw material. This is VAT for manufacturer.
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(ii). WHOLE - SELLER
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The whole seller “Tough shoe seller” has purchase goods worth Rs.100000.00 after paying tax of Rs.12500.00 as mentioned above. Let us assume his margin for profit and expenses is Rs.7000.00 then he will sell the goods for Rs. 107000.00 to the retailer and also charge tax of Rs. 13375.00 from the retailer.
Since he has already paid tax of Rs. 12500.00 on his purchases hence his net tax liability will be Rs. 13375.00 – Rs. 12500.00 = 875.00. Let us see the effect of VAT on whole seller and here we will be able to understand VAT much better. Since the expenses and margin of profit for the whole seller is Rs.7000.00 and this is the value added to the product by the whole seller and value added tax on whole seller is Rs. 875.00 and one can calculate it as 12.5% 0n Rs.7000.00.
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(iii). RETAILER
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The retailer “M/s Bright Shoe Point” has purchased goods for Rs. 107000.00 after paying tax of Rs. 13375.00. Suppose his margin for profit and expenses is Rs. 10000.00 thus he will sell the goods to the customer at Rs. 117000.00 and charged tax Rs. 14625.00. His net tax liability will be Rs. 14625.00 – 13375.00= 1250.00 and we can verify it as 12.5% of Rs. 10000.00 since the value added by the retailer is Rs.10000.00.
In simple words value added is the difference between the sale price and purchase price for all these THREE segments of the economy and value added tax is a tax on this value added by each chain of sales and in that sense it is a different from the age old traditional sales tax.
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3.HOW THE TAX IS CALCULATED UNDER VAT
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The tax collected by a dealer, who may be a manufacturer, whole-seller or retailer is termed as Out put Tax and tax which was paid by the seller on his own purchases is called input credit and the tax payable is the difference between the two.
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The tax payable under VAT is the calculated as under: -
Tax payable= Out put Tax – Input credit
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If for a tax period i.e. for one month or three months depending on the VAT laws of particular state, input credit is more than the out put Tax then the balance tax will be carried forward to the next tax period or refunded to the tax payer at his option, if the tax system of a particular state permits refunds for each tax period. Normally the tax is carried forward to next tax period and adjusted against the tax payable in the next tax period.
Now for the purpose of calculation of tax liability under value added tax system input tax credit and out put tax are important factors. Input tax credit is the tax paid by the dealer on eligible purchases and out put tax is tax collected by the taxpayer on his sales. Let us study this term with the help of some examples.
A manufacturer has of a state A has purchased Raw material from the same state worth Rs. 100000.00 after paying tax of Rs. 12500.00 @ 12.5%. His input tax credit will be Rs. 12500.00.
If he sold goods worth Rs. 250000.00 @ 12.5% then his out put Tax will be 31250.00 and his tax liability will be Rs. 18750.00.
A whole seller purchased goods from a manufacturer of the same state worth Rs.50000.00 after paying tax of Rs.6250.00 @ 12.5%. His input tax credit will be Rs. 6250.00. If he sells goods for Rs. 60000.00 @ 12.5 % then his out put Tax will 7500.00 and his net tax liability is Rs. 1250.00.
We have discussed above is based on the presumption that all the purchases have been made within the state.
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4.INPUT TAX CREDIT ON CST PURCHASES
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As we have already mentioned above that what we have discussed above is based on the presumption that all the purchases are being made within the state and if the purchases are made from another state i.e. the seller purchased goods from the state other than his own state then such purchases are called “Inter-state purchases” or more popularly known as “CST” Purchases and no input credit is available on the tax paid on goods purchases from other states by paying central sales tax.
You may ask a question Why Not?
The reply of this question is very simple. The CST is collected by the selling state and naturally the tax collected by the other sates cannot be adjusted in another state. Let us try to understand this with the help of an example. A dealer of Punjab has purchased goods worth Rs.100000.00 from a dealer of Delhi after paying CST of Rs.4000.00 during the course of interstate sales against 4% against form C. He sold these goods in his own state after charging LST of Rs. 13750.00. His tax paid is Rs.4000.00 and he wants to take credit of Rs.4000.00 CST paid by him. This credit of CST paid by him will not be available to him. The tax paid by him has been charged by the state of Delhi and it will not be possible for his own state Punjab to give credit of tax received by another state.
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5.PHASING OUT OF CST
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Since sales tax is a state subject hence this problem will remain in federal system of governance. The feasible solution will be phasing out of CST, which is being considered by the central Government and phasing out of the central sales tax is already started and the rate of CST has been reduced from 4% to 3% w.e.f. 1-4-2007 and the phasing out program of CST is as under: -
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PERIOD
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RATE OF CST
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1-4-2007
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3%
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1-4-2008
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2%
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1-4-2009
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1%
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1-4-2010
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NIL
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The CST has been considered as the biggest hurdle in smooth implementation of VAT but in our country VAT was introduced successfully simultaneously with continuation of CST though it was agreed between the states and the centre at very earlier stage of the discussion of VAT that CST will ultimately be phased out.
Now the phasing out of CST has started but this is not a result of introduction of VAT but the phasing out process which is just started w.e.f. 1st. April 2007 to make way for extended version of VAT, the Goods and service tax- 2010.
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6.INPUT CREDIT ON CST SALES
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The tax payable on CST sales will be covered by the output Tax i.e. the Tax payable by the dealer and it can be adjusted against any input credit of tax paid on purchases within the state and the logic behind this is very simple. CST is only the name of a tax on interstate sales tax and central Govt has nothing to do with the revenue of this tax. The Name “CST” is creating this confusion.
Actually “CST” is an interstate sales tax and the state of the selling dealer is getting the revenue of it hence it will not be difficult for the Selling state to give the adjustment of Tax paid by the dealer on these goods within the state .
Let us first try to understand this situation with the help of a dealer’s example. M/s Royal Supply Company has purchased goods worth Rs. 100000.00 from M/s Specific Ball Company after paying local sales tax Rs.12500.00. It’s input tax credit is Rs.12500.00. Now he sale these goods to a dealer of another state and charged 4% tax against C-form on Rs.105000.00. His tax liability will be Rs. 4200.00 and you can term it as his output tax. He can adjust this output tax credit of Rs.4200.00 against his input tax credit of Rs. 12500.00.
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7.TAX INVOICE
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A proper Tax invoice containing the required details is the basic requirement of claiming input tax credit.In general, the states have prescribed the details of invoice without prescribing the standard Performa of the same.
Generally the “Tax invoice” must contain the name of selling dealer, his TIN, amount of tax charged coupled with the general information about the goods sold . Further it should be serially numbered and to be made in duplicate to keep one copy of the same with the selling dealer. The word “TAX INVOICE” should be mentioned on it prominently to make it different from Non vatable bills.
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8.GOODS SOLD AT LOWER PRICE
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Value added tax has an inbuilt mechanism to take care of loss on sales and this unique feature of VAT give an upper hand to the VAT over traditional sales tax system. Let us see this system of compensating the unfortunate dealers sustain genuine business losses.
Let us try to understand this situation with the help of an example: -
M/s Yash trading company has purchased goods worth Rs. 1000000.00 after paying tax of Rs.40000.00 @ 4% within the state. Due to fall in prices the, the goods were sold by it for Rs. 800000.00 after bearing the loss of Rs.200000.00. In the traditional sales tax system these goods were sold STP i.e. sales tax paid and no credit for excess payment of tax was available.
In VAT the input credit of tax is Rs. 40000.00 and out put Tax is Rs. 32000.00 hence there is an excess of input credit of Rs. 8000.00, which can be carried forward or can be claimed as refund as per the procedure laid down by state law.
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9.SUPERIOR THAN SALES TAX SYSTEM
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Alongwith with the Mechanism of compensating the dealer in case of loss the VAT system has one more superior characteristic and this is related to the transparency of the system. In VAT the last consumer is in a position to know the ultimate burden of tax since tax is written on each invoice issued by a VAT dealer.
Are there some more positive features of VAT for Taxpayers?
Yes, take an example of a dealer who purchased some goods after paying tax within the state but these goods are not sold by him and remained in the stock. The same dealer has sold some other taxable goods and collected tax on it. The dealer can adjust the Tax paid by him on the goods purchased by him but not sold and remained in stock against the output tax of the other goods sold by him.
Let us try to understand this with the help of an example. M/s Mohan and company has purchased goods “A” worth Rs. 100000.00 after paying tax of Rs. 12500.00 within the state. This commodity they purchased with a intention to hold in stock till next 6 months. During the same month they sold a commodity “B” purchased from agriculturist amounting to Rs. 200000.00 and collected tax of Rs. 8000.00
Now consider this situation in the pre- VAT era i.e. in old sales tax system M/s Mohan and company has to deposit a tax of Rs. 8000.00 to the govt. though it has stock of tax paid goods, which have suffered a tax of Rs. 12500.00.
But if transaction is taking place in a VAT then there is a comfortable situation for M/s Mohan and company because due to it’s input credit of Rs. 12500.00 no tax will be required to be paid for their out put tax liability of Rs. 8000.00. The simple principal is there Tax paid on commodity “A” can be adjusted against the Tax due on commodity “B” and while final payment of tax whole the input tax credit is considered without differentiating between the goods sold and remained in stock.
Imagine if the amount involved is bigger the results will be far much amazing because of interest cost on money involved.
This particular benefit is the result of inbuilt system of VAT. Manufacturers stocking the raw material will be the biggest beneficiaries of this provision.
Certain industries have to stock raw material in a certain period for the whole year because of seasonal availability or because of favorable price. Suppose M/sXZY Mfg. And trading company has purchased raw material worth Rs.50 Lakh after paying of Rs. 2 Lakh. In traditional sales tax system it had to pay regular sales tax on the sale of finished goods but under VAT during the first some months it’s tax liability will be very low or Zero due to the adjustment of Tax paid on it’s purchases.
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10.THE WHITE PAPER ON VAT
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Here note that the introduction of VAT in our country was not as smooth as it appeared after it’s successful implementation. An empowered committee of Fiannce Ministers of all the states was constituted under the chairmanship of Dr. Asim Das Gupta, the Finance Minister of West Bengal. First it was decided that the VAT would be introduced in 2003 i.e. from 1st. April 2003 but due to political situation and scheduled elections in most of the states VAT was postponed though Haryana was the only state to adopt VAT in 2003 itself.
Later in 2005 the VAT was introduced in 20 states as stated in the schedule given above and before introduction of VAT, a white paper was prepared by this Empowered committee of state Finance Ministers and released by the Finance Minister of the Country. In this White paper various modalities were set regarding procedural aspect of VAT alongwith the broad suggestive guidelines regarding this new concept of taxation in our country. The white paper also suggested a broad rate structure having minimum number of rates.
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11.TAX RATES UNDER VAT
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The rates under VAT are minimum in numbers as suggested by the White paper as mentioned above and these rates are: -
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1. Exempt or Tax Free.
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2. 1 Percent.
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3. 4 Percent.
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4. 12.5 Percent.
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All these four rates i.e. from Exempt to 12.5% were suggested by the White paper but most of the states have invented a new rate i.e. 20% to tax some of commodities to balance their revenue and local needs.
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12.NO INPUT CREDIT ON EXEMPTED GOODS
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Normally no input credit is given for tax on purchase of raw material if the goods manufactured from it is exempted goods and if certain goods are exempt and others are taxable using the same raw material, proportionate input credit is available.
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13.EXPORTS ARE ZERO RATED
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Exports are Zero rated under VAT i.e. the input credit on the goods purchased for exports and goods used as raw material and packing material for exports will be available to the exporter and is refundable. All the states have made special provisions for early refund in this respect.
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14.COMPOSITION SCHEMES UNDER VAT
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For dealers dealing directly with the consumers the, composition scheme of paying composition amount in lieu of the tax, ranging from 0.25% to 1% is introduced by almost all the VAT states. The general upper limit for the Composition dealers is Rs. 50 Lakhs.
The dealers opting for this scheme are not able to claim or pass on any input credit hence practically they can sell goods to consumers only and re-sellers or non-consumers are not purchasing goods from them. Before opting for the composition scheme a cost benefit analysis is must to ascertain it’s feasibility.
The maximum rate of composition in lieu of tax is 1% but some of the states have introduced a much lower rate but in any case cost benefit analysis is necessary for opting for composition scheme.
Further the dealers under Composition scheme are not eligible for CST purchase i.e. they cannot purchase goods from other states and CST sales i.e. cannot sale goods to other states.
End
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