Biz Value Add Tax


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Biz Value Add Tax

  1. 1. %Bizness Read on ................................... Value Added Taxation to get things cleared in order to ascertain the taxability or otherwise of products before they - KenSource reach their final destination is much longer. Another significant Chanakya’s economic wisdom of granting states the right to tax its people problem associated with this form just as a shepherd shears his flock or as a bee gets nectar from the flower may of taxation is the cascading effect have died with him. The modern Indian state taxes its people just like the of such taxes, since they are often French use the flower for extracting perfume— in such a way that by the time levied on the selling price of the they are through, nothing much of the flower remains. Over the years, this products. Thus, when a product is suffocating system of taxation has spawned a black economy that is by many sold in Uttar Pradesh, it attracts tax estimates half as big as the white counterpart. Moreover the revenue collection on the selling price that includes system of the states was a totally corrupt one and the many efforts since the the CST paid in Tamil Nadu. This economy actually liberalised itself have brought only limited results with a cascading effect is worsened by the lot more remaining to be done. A new system of taxation based on the fact that entry taxes, Local Sales principles of value addition is scheduled to take effect from April 2005. Just Tax, luxury taxes and Octroi are all two months away from that deadline date, which of course has been missed on levied by the same state two earlier occasions, things are not very bright. The VAT regime was government; they are levied originally scheduled for implementation in April 2003 and was later revised sequentially, each being layered to June 2004 and then again postponed by an additional year or so. upon all its predecessors. 7 In an effort to bring down the anomalies associated with such a nderstanding this vital which is more than 2000 km away. cumbersome method of taxation concept of Value On reaching the state of Uttar the government, somewhere in the Added Taxation Pradesh, you need to pay mid 80’s, discovered the value system, in common something called an entry tax for added taxation method; wherein parlance referred to as taking the product inside that state. every stage in the process from VAT, needs a proper This in turn will be followed by a production to consumption is understanding of the concepts local sales tax of the state of Uttar taxed only on the basis of value involved in the tax system Pradesh. In addition, there is added by that stage. So, if a car presently in vogue and which have Octroi to be paid to the municipal marker paid excise duty while necessitated the introduction of the authorities of Uttar Pradesh. procuring steel for the newer and supposedly simpler Moreover, if the product in manufacture of cars, he paid taxes version of taxation. Let’s begin question attracts luxury taxes, the only on the value added by him in with a hypothetical scenario where number of taxes applicable goes up the process of converting steel to you intend selling product X made even further. This complicated automobiles. He could simply in Tamil Nadu and Uttar Pradesh. process of taxation is often a major document his purchase of steel As easy as that may sound it isn’t deterrent to inter state commerce. from the steelmaker using an a very appealing proposition. For As a result, India despite being one invoice and claim to be exempt doing this, one would have to first large nation, has always had a from paying excise for that input. buy the product in Tamil Nadu fractured market for most of its Starting in 1986, India moved from and pay a Central Sales Tax (CST) products. This cumbersome an excise regime to a modified to the state of Tamil Nadu. CST is process of taxation has always led value added tax (MODVAT) a tax to be paid to the state in which to inefficient producers receiving regime and now to the Central the goods are manufactured but protection to the extent of the total Value Added Tax (CENVAT) sold in some other state. Next will of origin and destination taxes on regime. Thus, value added be the shipping of the product to products, which amounts to more taxation has been in consideration the state in which the goods are to than 11% in some cases. Also, in for quite some time. be sold, Uttar Pradesh in this case, such a tax structure the time taken
  2. 2. %Bizness Read on ................................... authority for various taxes. based purely on the selling price How Value Added Tax (VAT) of the product has certain distinct works The basic principles of VAT disadvantages. Some of the The value added method of The Value Added Tax system disadvantages of the cascading taxation has been acknowledged as has its origin in the West European effect of taxes are as under: one of the best methods of taxation countries. Generally, taxes are The computation of the exact and almost 120 countries have till levied on the selling price of a tax component becomes difficult now adopted this system of product. Today raw material The tax burden varies taxation. VAT works on the passes through a number of stages depending upon the number of principle that when raw material and processes until it reaches the stages in the production process of passes through various ultimate stage. For instance, steel the commodity manufacturing stages and the ingots are made in a steel mill, It discourages ancillarisation manufactured products pass which are then rolled into plates in It increases cost of production through various distribution a re-rolling unit and after this a However, in the second column stages tax should be levied only on Cascading Effect of Taxation the value added at each stage and Actual VAT System not on the gross sale price. This Selling Price of Manufacturer ‘A’ 100.00 100.00 ensures that the same commodity is not taxed repeatedly and there Add: Tax @ 10% 10.00 10.00 is no cascading effect. Simply put Total selling price of ‘A’ 110.00 110.00 “value added” means the Cost to Manufacturer ‘B’ 110.00 110.00 difference in the selling price and Add: Further Processing Charges of ‘B’ 40.00 40.00 purchase price. VAT is a multi- point tax with a provision for set- Selling price of ‘B’ 150.00 150.00 off of the tax paid at the earlier Add: Tax @ 10% 15.00 4.00 stages. Thus, the tax burden is Total selling price of ‘B’ 165.00 154.00 passed on when the goods are sold. This process continues until finally third manufacturer will make we have demonstrated how the the goods are consumed. Hence, furniture from these plates. Thus, value added tax system works and VAT is called a ‘consumption type’ the output of the first manufacturer efficiently reduces the tax burden tax and it works on the principle becomes the input of the second to a large extent. VAT essentially of the tax credit system. However, manufacturer, who carries out works on the tax credit system VAT in its pure form is suitable further processing and supplies it wherein the tax is collected on the only where there is a single taxing to a third manufacturer. This full sale price but a credit is given authority unlike India, where we process continues till the final for the tax paid on purchases. have a federal structure of product emerges. The product Thus, tax is levied only on the government with no single then goes to the distributor or value added and not on the entire wholesaler who in turn will sell it selling price. to the retailer and he will finally Highlights of State VAT Acts turn it over to the consumer. Thus, if tax is levied on the selling price Following are the broad of a product, the incidence of tax highlights of the State VAT Act, goes on increasing as the raw which have been published in draft material and final product pass form. The broad principles from one stage to another. The followed by all State VAT Laws are following tabulated example will same. However, States have made enable to make things clearer: many changes and alterations to Thus, the computation of tax suit their particular requirements.
  3. 3. %Bizness Read on ................................... and not in the first year itself. Invoices i.e. VAT Invoice as well as ‘Retail Invoice’, depending on No Credit of SAD on imported goods - Importers have to pay their customer base. However, this Special Additional Duty (SAD) at may not be compatible with the the rate of 4%. This SAD is principles of VAT. considered in lieu of sales tax, Debit note and credit note - If sale though provisions of Customs Act price is increased/reduced do not specifically state so. There subsequent to sale, the transaction is no proposal to grant credit of will be recorded through proper SAD paid on imports. debit/credit note. The buyer will adjust the input credit available to Procedural provisions - him accordingly. General procedural provisions are as follows - Registration provisions - Generally, provisions are Invoice based credit - Tax credit on the following lines - will be given on the basis of a document, which will be a ‘Vat Floor rate of exemption – VAT tax Tax credit – The manufacturer will Invoice’. Such invoice can be will be payable only after some be entitled to a credit of tax paid issued only by a registered dealer, minimum turnover is achieved. on inputs used by him in who is liable to pay sales tax. The Small traders will be totally manufacture. A trader (dealer) will invoice should be serially exempted from the VAT net. be entitled to get credit of tax on numbered. The tax payable should Neither do they have to register goods, which he has purchased for be shown separately in the Invoice. with sales tax authorities, nor pay re-sale. VAT Invoice and Retail Invoice - any tax. The empowered Input Tax Credit – A credit will be VAT Invoice is an invoice on the committee at its meeting on 23-4- available of tax paid on inputs basis of which a buyer can avail of 2003 has decided that the purchased within the State. a credit of tax. This should be exemption limit should be a Packing material will be eligible for serially numbered and should be turnover of Rs. 5 lakhs per annum. input credit. Credit will be issued in triplicate. Tax charged Tax Identification Number - A available as soon as inputs are should be shown separately in system of audit checks will have to purchased. It is not necessary to invoice. Otherwise, the buyer will be established to keep a check on wait till the goods purchased are not be eligible to get tax credit. bogus invoices. One essential consumed or sold. However, there VAT dealer and retail dealer - It requirement is to give a TIN (Tax may be exceptions to this. is envisaged that there will be two Identification Number) to all No credit of CST paid - Credit of types of registered dealers i.e. VAT registered dealers, so that it can be Central Sales Tax (CST) paid on dealers and retail dealers. The VAT ensured that (a) The tax as shown inputs and capital goods dealers will issue VAT Invoice and in the invoice has indeed been purchased from other States will will be entitled to avail of input tax paid, and (b) There is no double not be available, as the revenue of credit. Retail dealers will not be credit on basis of the same invoice. CST goes to the other State. entitled to issue VAT invoice. They TIN will have to be indicated on will have to pay tax at a flat rate each invoice issued so that a State Credit of tax paid on capital goods – A credit will be available of tax on the basis of their annual level computer network with paid on capital goods purchased turnover. They can only issue a checks based on TIN can be within the State. Credit will be ‘Retail Invoice’. established. Otherwise, misuse available only in respect of capital will be rampant. Can the VAT dealer issue both goods used in manufacture or type of invoices? - Draft laws of Minimum tax payable per month processing. The credit will be some States have provided that a - A ‘Retail Dealer’ will be required spread over three financial years VAT dealer can issue both types of to pay some minimum tax per
  4. 4. %Bizness Read on ................................... You Have Belled The CAT What about GD? month - - some traders take sales and drugs, AED items (textiles and tax registration number even if sugar), capital goods [Tax rate of their sales are negligible. Such 4% on drugs and medicines was dealers will find it highly agreed at the meeting of uneconomical to do so. empowered committee on 23-4- Tax payable - Purchase and sales 2003]. The Group Discussions Book is tax will be payable by VAT dealer. 12.5% RNR (Revenue Neutral rate) targeted primarily towards B-School Retail dealers will only have to pay on other goods [Floor rate is fixed applicants who will not only find ‘composition amount’ as 10%]. general tips in the introductory chapters Purchase tax - If goods are Aviation turbine fuel (ATF) and purchased from an unregistered on how to ace the GD sessions during petroleum products will be out of dealer, purchase tax will be the admission screening at top B- VAT regime. Liquor and cigarettes payable. However, the purchase will also be taxed at a higher rate. schools, but also be able to read essays tax so paid will be available as Special Additional Tax - on 50 topics that may be debated at the credit, if otherwise eligible. The Petroleum products, fuels, and e- GDs. These essays will enable them to disadvantage is that earlier credit merit goods (cigarettes and liquor) form an idea of the kind of topics they on such goods, if any, is lost, as the will be subject to SAT (Special may be asked to discuss and also chain of credit has been broken. Additional Tax). It will be 20% or provide a basic knowledge platform Rates of VAT - Ideally, VAT above. The SAT will not be entitled from which the students may launch should have only one rate. Though for credit, i.e. SAT paid will not be into further research and draw their this is not possible, it is certain that allowed as input credit. inferences. there should be minimum Composition Scheme - Small To Order Your Copies variations in rates. Broadly, traders may not be in a position to Visit your nearest IMS Learning Center following VAT rates are proposed Or maintain detailed records of tax Book your copy online, by visiting 0% on natural and un-processed paid on inputs and tax payable on or produces in unorganised sector final products. In such case, they Or (like milk, meat, fresh vegetables will pay tax at a flat rate based on Prepare a Cheque/DD/MO in favour of and fruits, betel leaves, earthen pot their turnover. Naturally, they IMS Learning Resources Pvt Ltd of the etc.), goods of social importance cannot issue a VAT Invoice and requisite amount (Add (like educational books, slates, cannot show sales tax separately in Rs. 20/- for outstation Cheques) payable pencils etc), life-saving drugs, and their invoice. The empowered at Mumbai. Send your order items like newspapers, national committee has agreed that dealers along with payment to: The flag barred from taxation. with turnover up to Rs 40 lakhs per Publications Division, IMS Learning 1% floor rate for gold, silver, annum will be entitled to the Resources Pvt. Ltd., th E-Block, 6 Floor, NCL Premises, precious and semi-precious stones composition scheme, by just Bandra Kurla Complex, Bandra [East], 4% for basic necessities (bread, paying 1% of their turnover as Mumbai - 400 051. paper), industrial and agricultural composition tax. Dealers with Tel: 022-56771077-79 inputs (like beedi leaves, fibres, turnover below Rs. 5 lakhs per Fax: 022-56771075 seeds), declared goods (iron and annum are to be completely (Allow 2-4 weeks of processing time after the receipt of your steel, hide and skin etc), medicines exempt from VAT. payment)