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All about value added tax (vat )

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  • 1. ALL ABOUT VALUE ADDED TAX (VAT ) by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763
  • 2. MY WORDS... Ours is a great country with immense entrepreneurial potential. However, our taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. I wish that more people should become entrepreneurs, rather than becoming an expert in avoiding taxation. Let us wish that some likeminded person is able to reach policy making level and is able to change these. I have tried to simplify taxation system for Indian entrepreneurs – but it is so complicated that even if you simplify it, it will remain complicated. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of the nation, so latest honestly work to simplify our taxation systems and let us hope that law should be made by those who practice it in their day to day life .....
  • 3. About me.... I am not an advocate and nor a chartered accountant. I believe that law should be understood by every person and so why not an ordinary person like me should also try to understand it. If there are any mistakes in this, please pardon me, but loose your spirit to understand law. Believe it, you can also understand it as I did... if not, we can together try to change the system...
  • 4. DONWLOAD LINKS PL. DOWNLOAD FOLLOWING MATERIAL ON INCOME TAX ALSO : http://www.scribd.com/doc/28597434/Income-Tax-Law-of-India
  • 5. WHAT IS VAT ? SAME RATE OF SALES TAX ALL OVER THE COUNTRY TAX IS APPLIED ON VALUE ADDITION - RATHER THAN JUST PRINT PRICE OF THE GOODS IT MINIMISES CASCADING EFFECTS OF MULTIPLE TAXES
  • 6. HISTORY OF VAT IN INDIA Manmohan Singh Introduced the idea in 1995 Credit goes to former Finance Minister Jaswant Singh ji for implementing it Haryana was the first state to introduce VAT the committee of finance minister and chief minister had suggested for it in 1995 and 98. it was to be introduced in 1/4/2, but actually implemented from 1/4/3.
  • 7. White paper on VAT Dr. Asim Dasgupta prepared a white paper on VAT in 2005 download it : www.smenetwork.net/VAT_whitepapaer.pdf
  • 8. Kelkar Committee Kelkar committee report also discussed implementation of VAT
  • 9. Limit for exemption Small dealers with turnover of less than Rs. 5 lakhs need not get registered for VAT.
  • 10. CST TO BE REMOVED When VAT is introduced, there is no need for separate sales tax by centre and states. So CST (central sales tax) will be removed now. D form has already been abolished. At present CST of 4% is applicable in some cases, but it will be abolished shortly. It is there just to minimise losses to the states during the period of transition from traditional system to VAT.
  • 11. VAT COVERS SERVICES ALSO VAT is wider than sales tax. It covers services also. Thus it is goods and services tax. It covers contract labour also and there is works contract tax on contracts. Thus VAT is wider in scope.
  • 12. 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: Under this method, it 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.
  • 13. Example of subtraction method .. Price of finished goods is 2 lakhs price of inputs (raw materials) is Rs. 1.5 lakhs thus tax will be applied on difference = .5 lakhs
  • 14. Example of addition method Add all the factor costs : wages :10000 interest 10000 other expenses 10000 profit 10000 total = 40000 to tax will be levied on 40000
  • 15. Example of tax credit method Sales tax on finished goods : Rs. 2 lakhs taxes paid on raw material purchased which were used in manufacture of the goods : Rs. 1 lakh net tax payable : (2-1) = 1 lakh
  • 16. The problems .... In India we have tax credit system. The VAT paid on inputs is allowed as credit and if credit is not availed this year, it can be taken next year also. However, tax paid in other states is not allowed as credits. For inter-state sales CST still continues. Thus it will take some time for VAT to become completely operational.
  • 17. Rates of VAT There are 5 rates of VAT : 0% (exempted goods like agricultural products) 1% (semiprecious and precious metals etc.) 4% (on manufacture inputs, capital goods etc) 20% (on luxury goods) 12.5% (normal goods)
  • 18. Old system of SALES TAX... There were 2 systems : LPT= last point tax FPT =first point tax.
  • 19. Example of FPT COST = 1000, TAX RATE = 10%, TAX PAID = 100 MARGIN OF TRADERS= 20% A makes goods of 1000 in FPT, he will pay tax @10% and give to B. B will add his margin @ 20% (1100+220)= 1320 and sell to C and C will add his margin : (1320+264) = 1584 to be paid by customer.
  • 20. EXAMPLE OF LPT A makes goods of 1000, gives it to B. B will add his margin @ 20% (1000+200)= 1200 and sell to C and C will add his margin : (1200+240) = 1440, now before it is sold to customer, tax of Rs. 100 will be charged – so final price to be paid by customer is 1540
  • 21. EXAMPLE OF VAT A makes goods of 1000 in FPT, he will pay tax @10% and give to B. B will add his margin @ 20% and pay VAT on his margin (1100+220+22)= 1342 and sell to C and C will add his margin and pay tax on his margin: (1342+268+27) = 1637 to be paid by customer.
  • 22. Registration of dealers All dealers whose turnover is Rs. 5 lakhs or more will have to get registered. Then only they can get credit under VAT. Those with less than Rs. 5 lakh tunover are exempted, but they dont 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.
  • 23. When does VAT chain break? There are many cases : 1. when goods passes to non-registered dealer 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).
  • 24. What is ZERO RATING? It means VAT rate is 0%. it is different from exempt VAT. Here the taxes paid on inputs is used to provide credit thus there is provision of refund also. Example : you have purchased goods of Rs. 100 which contain VAT of Rs. 10. These goods have been used in manufacture of zero rating goods. You can claim refund of Rs. 10 from government (VAT refund).
  • 25. Self assessment VAT requires self assessment the authorities pick up a small % of cases for audit and they check out those accounts for verification.
  • 26. Implementation in states Each state has enacted its own law of VAT for implementation of VAT The officers are having powers equal to public servants under section 21 of the Indian Penal Code, 1860 (45 of 1860), they can seize documents / goods and enforce collection of VAT.
  • 27. THANKS.... GIVE YOUR SUGGESTIONS AND JOIN AFTERSCHOOOL NETWORK / START AFTERSCHOOOL SOCIAL ENTREPRENEURSHIP NETWORK IN YOUR CITY [email_address] PGPSE – WORLD'S MOST COMPREHENSIVE PROGRAMME IN SOCIAL ENTREPRENEURSHIP

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