SUDHIR SIR KEE CLASS-IPCC VAT

CA SUDHIR HALAKHANDI (PRACTICING CHARTERED ACCOUNTANT) (13196 Points)

22 May 2009

“SUDHIR SIR KI CLASS”

IPCC- VAT

CA Sudhir Halakhandi –

Good Morning to all the students!! Let us straightway start the subject and first of all we should know what your syllabus is for IPCC – Vat. Somebody can narrate me and other students the syllabus. Please!

Amit: -

Yes sir! We have a subject on taxation comprising in 3 parts. The income tax is of 50 Marks and VAT of 25 marks. The rest 25 Marks are devoted to service Tax.

CA Sudhir Halakhandi –

Nicely said!! Thank you Amit! Now somebody tell us what is our syllabus for Vat!!!

Ajay: -

Yes sir! We have to study the following under Vat –

VAT- The concept and General principals
Calculation of VAT liability including the input tax credits
Small dealers and composition schemes
VAT procedures

CA Sudhir Halakhandi: -

Well said Ajay!! Students you should note that VAT in our country is basically a state subject and all the states have separate VAT Acts and Rules. So here your study is confined to the basic concept of Vat and since Vat is a state subjects so here you can not read and study the Acts and Rules of each and every subject. So I think a Good News for all of you!! No definitions no procedural aspects!!!

Students: -

Sir, really it is good thing!!

CA Sudhir Halakhandi –

Now we are starting our study of Vat. Let us first you should know that In our country the Vat in real sense was introduced in 2005 though before that some of the states like Maharashtra (introduced and taken back) and Haryana experimented it but only success before 2005 was Haryana state and this state has successfully introduced VAT in 2003 itself . The schedule of all the states with regard to implementation of VAT is as under:-

STATES	DATE OF IMPOSITION OF VAT	NUMBER OF STATES
1.Haryana	1-4-2003	1
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.	1-4-2005	20
3.Uttaranchal	1-10-2005	1
4. Rajasthan, Gujarat, MP, Chhatisgarh and Jharkhand.	1-4-2006	5
5.Uttar Pradesh and Tamil Nadu	After 2006	2

Jyoti: -

Basically sir please tells us what is Vat?

CA SUDHIR HALAKHANDI:-

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.

Let us try to understand this with the help of following examples:-

First see the meaning of Vat for a Manufacturer:-

(i). MANUFACTURER

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 is 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.

Now see the meaning of Vat for a Whole-Seller

(ii). WHOLE - SELLER

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.

And the see how the Goods reaches to the ultimate user i.e. to consumer and for this purpose here see the meaning of VAT for a Retailer:-

(iii). RETAILER

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.

Vijay: -

Sudhir Sir, you told us that Vat in our country was practically introduced in 2005. What was the system of taxing the sale of goods before that and how it was different from the Vat?

CA SUDHIR HALAKHANDI:-

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: -

FIRST SALE

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.

THE SECOND SALE

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 FINAL SALE TO CONSUMER

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.

This is the Traditional system of tax on sale of goods and it is pre VAT system.

Rashmi: -

Sir! Why it is called Value added Tax?

CA SUDHIR HALAKHANDI:-

Yes a good question! 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 we have also seen that how value addition has been made taxable under VAT.

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.

Abhas:-

Sir! How the tax is calculated under Vat?

CA SUDHIR HALAKHANDI:-

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.

The tax payable under VAT is the calculated as under: -

Tax payable= Out put Tax – Input credit

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 is 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.

Example -I

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.

Example- II

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.

Rajat: -

OK Sir, I understood the concept of input tax credit but sir you told us that input tax credit is allowable only on the state purchases. What is its meaning sir? Why the input credit is not allowable on the purchases from the other states?

CA SUDHIR HALAKHANDI:-

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?

Students: -

Yes why not sir?

CA SUDHIR HALAKHANDI:-

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.

Preeti:-

This is really a big problem sir!

CA SUDHIR HALAKHANDI:-

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% and then to 2% and at present the rate is 2% but the Government has promised to make it 1% in 2009 and then it will be abolished. At present the rate of CST is 2% but we are waiting for the notification of the Government to make it 1% as it is promised and it will be

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. 1^st. April 2007 to make way for extended version of VAT, the Goods and service tax- 2010.