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
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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)
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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)
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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.
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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.
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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)
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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.
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