3. Indian Taxation. Value Added Tax (VAT)

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  • 1. INDIAN TAXATION 3 VALUE ADDED TAX (VAT) I. INTRODUCTION Sales Tax is levied on sale of goods. A Transaction is considered as sales when following conditions are fulfilled: 1. Transfer of ownership 2. Valuable considerations 3. Movement of goods Movement of goods shall decide which type of Sales Tax will be imposed. Following scenarios are usually applicable. 1. Movement of goods within state: Value Added Tax (VAT) 2. Movement of goods interstate: Central Sales Tax (CST) 3. Movement of goods internationally: Customs Duty or Export Tax II. DEFINITIONS VAT Based Tax Definition:  Input Tax: Tax paid on VAT applicable Purchases i.e. within state purchases made from registered dealers of the state.  Output Tax: Tax charged on VAT applicable sales i.e. within state sales.  Tax Invoice for VAT dealer: Sales invoice issued by a registered dealer to a registered dealer in a format as prescribed by the Sales Tax Department. This sales invoice is then preserved for claiming Input Tax Credit. Calculations for claiming Input Tax Credits are illustrated in examples ahead.  Retail Invoice: Sales invoice issued in a format as prescribed by the Sales Tax Department, used for exempted sales and sales to an unregistered dealer on which no Input Tax Credit can be availed.  Purchase Tax: Tax paid on purchases from unregistered dealers. Type of Entities  Registered dealer within state: Dealer registered with Sales Tax Department (in the State of business operation) and by virtue of this registration, possess Tax Identification Number (TIN No.) and Central Sales Tax Number (CST No.)  Unregistered dealer: Dealer not registered with Sales Tax Department and by virtue of this does not possess TIN No and CST No. The unregistered dealer can neither avail Input Tax Credit nor issue a Tax Invoice. In an event he charges VAT or CST for the sales within sate or interstate, the amount of VAT collected has to be fortified to the State Government. Besides, the government will initiate action against him for charging taxes under both acts. There is penalty under Sec 9A of the CST Act, if tax is collected for interstate sale by an unregistered dealer.  Registered interstate dealer: Dealer registered with Sales Tax Department of another state but operates in the subject state. Such dealer possesses TIN No. and CST No. of another state.  Consumer: The consumer carries out final consumption of the product.  Composite dealer: Dealer registered with Sales Tax Department under Composite Scheme. Dealer whose annual gross turnover does not exceed `50,00,000 in a year. The rate of Composite Tax can be as low as 0.25% on taxable turnover i.e. Turnover of more than `10,00,000. The state governments can provide for different type of Composite Schemes to be notified for different classes of dealers. However, the dealer cannot avail Input Tax Credit or issue Tax Invoice. Due to non issuance of Tax Invoice, the purchaser also cannot avail Input Tax Credit on purchases from dealer operating under Composite Scheme. Essence of VAT is providing setoff for the tax paid earlier, and this is given effect through the concept of Input Tax Credit/ Rebate. III. ELIGIBLE PURCHASES FOR AVAILING INPUT TAX CREDIT For availing Input Tax Credit, the taxable goods should have been purchased for the following purposes:  For sale/resale within the state  For sale to other parts of India in course of trade or commerce  To be used as:  Containers or packing materials  Raw materials Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 2.     Consumable stores For manufacturing or packing goods to be sold within the state, interstate or exported for the purpose of trade and commerce To be used in execution of works contracts To be used as capital goods required for the purpose of manufacture or resale of taxable goods For making zero-rated sales IV. PURCHASES NOT ELIGIBLE FOR AVAILING INPUT TAX CREDIT Input Tax Credit may not be allowed under following circumstances:  Purchases from an unregistered dealers  Purchases from dealers who opt for Composite Scheme under the provision of Act.  Purchases of goods as may be notified by the state government  Purchases of goods where the purchase invoices are not available with the claimant for whatever reasons.  Purchases of goods where the invoices doesn’t show the amount of tax (VAT/ Input Tax Credit) separately  Purchases of goods to be used for personal consumption or to be provided as gifts  Goods imported from outside the territory of India  Goods like motor vehicles, toilet articles, furniture etc. which are not used for production of goods or held for sale/resale. V. INPUT TAX CREDIT and VAT LIABILITY CALCULATIONS VAT is based on value addition to the goods, and the related VAT liability of the dealer is calculated by deducting Input Tax Credit from the Tax collected on sales during the payment period (say a month). Subject to the provision relating to the credit of Input Tax, the net tax payable by a taxable dealer for a tax period can be calculated on the basis of the following formula: A-B Where A Total of the tax payable with respect of the taxable supplies during the period. B Total Input Tax Credit allowed during the period. Examples of Input Tax Credit, VAT, CST and Import liabilities calculation extracted from Commercial Taxes Department, Government of Tamil Nadu. The table is simplified for better understanding. Example 1 A. A dealer is purchasing taxable goods within the State and selling those goods as such within the State, without any Interstate sales. His total turnover is `9,90,000. He need not get himself registered under TNVAT Act, 2006, (Tamil Nadu Value Added Tax Act) since his turnover is below `10,00,000. If he voluntarily registers himself, he can collect tax on sales. He has to pay that tax amount to the Sales Tax Department, even if his turnover does not exceed `10,00,000 in that year. B. A registered dealer affects purchase and sales, both within the state in a financial year. INPUT (PURCHASES) OUTPUT (SALES) Value in ` Value in ` VAT exempted goods 2,00,000 VAT exempted goods 1,50,000 Goods taxable at 4% VAT 3,00,000 Goods taxable at 4% VAT 1,80,000 Goods taxable at 12.5% VAT 8,00,000 Goods taxable at 12.5% VAT 6,70,000 Total 13,00,000 Total 10,00,000 Corresponding to the table above the Input Tax Credit and VAT liability is calculated as mentioned hereunder: INPUT TAX CREDIT OUTPUT TAX Value in ` Value in ` 0% VAT 0 0% VAT 0 4% VAT 12,000 4% VAT 7,200 12.5% VAT 1,00,000 12.5% VAT 83,750 Total 1,12,000 Total 90,950  Input Tax Credit - Output Tax = 1,12,000 - 90,950 = ` 21,050 (Input Tax Credit to be carried over to the next month) Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 3. C. A register dealer affects purchases locally. He sells locally and interstate in a financial year. INPUT (PURCHASES) OUTPUT (VAT) (SALES) Value in ` Value in ` VAT exempted goods 2,00,000 VAT exempted goods 1,50,000 Goods taxable at 4% VAT 2,00,000 Goods taxable at 4% VAT 1,80,000 Total 4,00,000 Total 3,30,000 OUTPUT (CST) (SALES) Goods taxable at 4% ( With C Form) 1,50,000 Total 1,50,000 Corresponding to the table above the Input Tax Credit, VAT and CST liabilities are calculated as mentioned hereunder: Note: Since the total turnover of the dealer is less than `10,00,000 there is no liability for him under VAT. INPUT TAX CREDIT OUTPUT TAX (CST) Value in ` 0% VAT 0 4% VAT 8,000 Total Value in ` 8,000  4% CST 6,000 Total 6,000 Adjustment from Input Credit Tax of ` 8,000 against CST of ` 6,000 = (8000-6000) = ` 2,000 (Input Tax Credit to be carried over to next month) D. A register dealer affects local and interstate purchases as well as sales in a year. INPUT (PURCHASES) OUTPUT (VAT) (SALES) Value in ` Goods taxable at 4% VAT 10,000,00 Value in ` Goods taxable at 4% VAT Goods taxable at 12.5% VAT 5,00,000 Goods taxable at 12.5% VAT Goods taxable at 4% CST 5,00,000 Total Total 20,00,000 12,00,000 3,00,000 15,00,000 OUTPUT (CST) (SALES) Goods taxable at 4% (With C Form) 4,00,000 Total 4,00,000 Corresponding to the table above the Input Tax Credit, VAT and CST liabilities are calculated as mentioned hereunder: INPUT TAX CREDIT OUTPUT TAX Value in ` Value in ` 4% VAT 40,000 4% VAT 48,000 12.5% VAT 62,500 12.5% VAT 37,500 Total 85,500 4% CST (No Input Tax Credit for CST) Total Nil 1,02,500 OUTPUT TAX (CST) 4% CST(With C Form) Total  16,000 16,000 Total Input Tax Credit – Output Tax Credit = 1,02,500 – ( 85,500 + 16,000) = `1,000 (Input Tax Credit to be carried over to the next month) Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 4. E. A register dealer affects local, interstate and import purchases and interstate sales in a year. INPUT (PURCHASES) OUTPUT (VAT) (SALES) Value in ` Goods taxable at 12.5 % VAT 5,00,000 Goods taxable at 4% CST 5,00,000 Goods taxable at 4% (Import) (Spl. CVD) 5,00,000 Value in ` Total 15,00,000 Goods Taxable under VAT 0 OUTPUT (CST) (SALES) Goods taxable at 10% (No C Form) 6,00,000 Goods taxable at 12.5% (No C Form) 4,00,000 Total 10,00,000 Corresponding to the table above the Input Tax Credit, VAT, CST and Import liabilities are calculated as mentioned hereunder: INPUT TAX CREDIT OUTPUT TAX Value in ` 12.5% VAT 62,500 Value in ` 10% CST 60,000 50,000 4% CST 0 12.5% CST 4% Import 0 Total CST Due Total 1,10,000 62,500 Reverse Input Tax Credit Calculations Input Tax Credit (ITC) 4% Interstate ITC 12.5% Interstate Nil 50,000 [(Output {4,00,000})/ (Input{5,00,000})] x [Total ITC (62,500)] (Input Tax Credit – Input Tax Credit Reversed) = 62500 – 50,000 = `12,500  Total CST Payable = [Total CST Due – (Input Tax Credit – Input Tax Credit Reversed)] = [1,10,000 – (12,500)] = ` 97,500 VI. BILLING SYSTEM UNDER VAT Incorrect Method Cost Price Input VAT (12.5%) Cost for Billing Add: Transportation Charges etc. Landing Cost Add: Profit Margin (20%) Selling Price Output VAT (12.5%) Final Price to the Customer Correct Method 100.00 100.00 12.50 12.50 112.50 100 2.50 2.50 115.50 102.50 23.00 20.50 138.00 123.00 17.25 15.38 155.25 138.38 VII. EXEMPTION OR REFUND TO SPECIAL ECONOMIC ZONES (SEZ) AND EXPORT ORIENTED UNIT (EOU) The units located in SEZ or EOU are either granted exemption from payment of Input Tax or refunded the Input Tax within 3 months. In some states, United Nations Organizations (UNO), Consulates and also embassies of other countries avail reimbursement on Input Tax subjected to the fulfillment of provisions under the Act. VIII. SCHEDULE OF STATE VAT As on 2011, India is a union of 28 states and 7 union territories. Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 5. For information on Schedule of VAT from all States and Union Territories, visit http://www.stvat.com. IX. EXAMPLES OF VAT INVOICES (TAX INVOICES) Example1: The format of ‘Tax Invoice for VAT dealer’ as prescribed by Commercial Tax Department, Government of Kerala. Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 6. Example 2: Sales (VAT) Tax Invoice from a registered dealer to a Delhi based dealer. (Note: Freight and Insurance are not included for VAT) Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com
  • 7. Example 3: The format of ‘Tax Invoice for customer where Input Tax Credit is not required’ as prescribed by Commercial Tax Department, Government of Kerala. Prepared by Divyanshu Dayal. Information for Purchase Manager. dayal1005@gmail.com