VALUE ADDED TAX (VAT) A Presentation by Sanjay Jagarwal
Introduction: TAX: A fee charged ("levied") by a government on a product, income, or activity. Types of taxes: 1.Direct Tax 2. Indirect Tax Taxes are most often levied as a percentage, called the tax rate.
Cont… The term direct tax generally means a tax paid directly to the government by the persons on whom it is imposed. The indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the consumer).
Direct Taxes: Banking Cash Transaction Tax Corporate Tax Capital Gains Tax Double Tax Avoidance Treaty Securities Transaction Tax Personal Income Tax Tax Incentives
Indirect Taxes: Anti Dumping Duty Custom Duty Custom Duty Sales Tax Service Tax Value Added Tax or V. A. T. Goods and Services Tax (GST)
Value added tax Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services. Over 130 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it. VAT has been introduced in Indian Taxation System from April 1, 2005.
Cont… It is considered to be a multi-stage tax. VAT is not applicable on following: 1. Food (with some exceptions) 2. Newspapers 3. Magazines 4. Children’s clothing VAT is administered by HM Revenue & Customs. 550 items covered (270 basic need items )
Cont… VAT was first suggested in Germany during the post-World War I period. It is not a charge on companies. It is charged as a percentage of price. A Person cannot make sale to himself. It is collected fractionally. Each state and union territory has formulated its VAT legislation except for " ANDAMAN & NICOBAR ".
The Three Type Of VAT: Consumption Method Net Income Method Gross National Product Method of Value- added Tax The VAT is applied to imported products.
VAT Applicability Below 5 Lakhs turnover – No Tax & No. Regn required. 5 – 40 Lakhs – TOT will apply & VAT is optional. Above 40 Lakhs – VAT will apply.
VAT AND SALES TAX: Sales tax is imposed on the total retail price of the item sold, while VAT tax is imposed on the value added at each stage of production and distribution. value-added tax systems have more checks against tax fraud because the tax is assessed at more than one point in the distribution process.
VAT Terminology – Input Tax INPUT TAX Input Tax is the Tax shown in our purchase bills. As per the norms, every trader need to show Tax separately and it is considered as Input Tax. Apart from Trade Purchases, Tax on Capital Goods purchases like A.C., Computers etc.. is also considered for this Input Tax.
VAT Terminology – Output Tax OUTPUT TAX Output Tax is the Tax charged on all the Taxable sales of a Vat Dealer. Output Tax is the Tax charged on all the Taxable sales of a Vat Dealer. For Ex. Tax shown by us our Output Tax and it becomes Input Tax for our customer.
VAT Rates There are three main rates for Input and Output Vat tax. 0% for Agriculture products. 1% for Jewellery 4% for Pharma, Computers, Soaps etc. 12.5% for FMCG, Automobile
Input Tax Amount Calculation Month Purchases Gross Value X Rate of Tax For ex.: Input Tax = 10,00,000 * 0.04 = 40,000/- Purchases, includes Trade purchases and Capital Goods purchases as per the existing VAT Rate. E.g. Purchase price - Rs 100 Tax paid on purchase - Rs 10 (input tax) Sale price - Rs 120 Tax payable on sale price - Rs 12 (output tax) Input tax credit - Rs 10 VAT payable - Rs 2
Output Tax Amount Calculation Month Sales X Rate of Tax Output Tax = 20,00,000 * 0.04 = 80,000/- On the invoice, we should show, Items Amount, VAT Value and Total Value In case of discounts, it should be given before VAT.
Tax Credit If Input Tax is greater than Output Tax, then we should not pay Tax to Government. This amount will be carried forward to the next month. This is the Tax Credit Amount. Input Tax 1,00,000/- Output Tax 50,000/- Tax Credit = Input Tax – Output Tax = 1,00,000 – 50,000 = 50,000/-
Tax Amount Calculation Output Tax – (Input Tax + Tax Credit + Opening Stock Vat Adjustment Amount) VAT Equation Sales Value – Purchase Value = G.P X VAT Rate. Tax Paid Date If not paid by 20th of the month then 5000/- penalty
A Brief Discussion:Seller Buyer Selling Tax Rate Invoice Tax Tax Net Price value Payable Credit TaxOutfl (Excludi (Incl Tax) ow ng Tax)A B 100 4% CST 104 4 0 4.00B C 114 12.5% 128.25 14.25 0* 14.25 VATC D 124 12.5% 139.50 15.50 14.25 1.25 VATD Consumer 134 12.5% 150.75 16.75 15.50 1.25 VATTotal to Govt. VAT/ 16.75 CST 4.00
Cont…Note: The transaction chain under VAT assumingthat a profit of Rs 10 is retained during each sale.Note: CST Paid cannot be claimed for credit. CST is assumed toremain the same though it could to be reduced to 2% when VAT isintroduced and eventually phased out.VAT can be considered as a multi-point sales tax with set-off fortax paid on purchases (inputs) and capital goods. What this means isthat dealers can actually deduct the amount of tax paid by him forpurchase from the tax collected on sales, thereby paying just thebalance amount to the Government.
New Terms… CENVAT ( Central Value Added Tax) MODVAT (Modified Value Added Tax) The light diesel oil, high-speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Input service means any service used by a provider of taxable service for providing an output service.
What are the `sales not liable to tax under the VAT Act?Since the VAT Act applies only to sales within a State,the following sales shall not be governed by the VATAct: sale in the course of inter-State trade or commerce which shallcontinue to be liable to tax under the Central Sales Tax Act,1956; sale which takes place outside the State; andsales in the course of export or import
Ultimate Objective Of VAT Calculation Easy and Simple Transparency Increased Tax Base Competitive Price Uniform Tax Structure More Revenue NO Revenue Leakage Avoids Double Taxation Co-ordination of VAT with direct taxation
Advantages of VAT: Coverage � If the tax is considered on a retail level, it offers all the economic advantages of a tax of the entire retail price within its scope. The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers Revenue Security - Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value added at the last stage
Cont… Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is picked up at later stage. Even if it is not picked up later, the government will at least have collected the VAT paid at previous stages. Where as if evasion takes place at the final/last stage the state will lose only tax on the value added at that particular point. Selectivity - VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption-type. VAT gives full credit for tax included on purchases of capital goods.
Cont… Co-ordination of VAT with direct taxation - Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate income taxes. Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%, 8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. This will eliminate any disputes that relate to rates.
Cont… Adjustment of tax paid on purchased goods Under the present system, the tax paid on the manufactured goods would be adjusted against the tax payable on the manufactured goods. Such adjustment is conditional as such goods must either be manufactured or sold. VAT is free from such conditions. Transparency The tax that is levied at the first stage on the goods or sale or purchase is not transparent. This is because the amount of tax, which the goods have suffered, is not known at the subsequent stage. In the VAT system, the amount of tax would be known at each and every stage of goods of sale or
Cont… Fair and Equitable VAT introduces the uniform tax rates across the state so that unfair advantages cannot be taken while levying the tax Procedure of simplification Procedures, relating to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the tax payer and the tax collector Minimize the Discretion the VAT system proposes to minimize the discretion with the assessing officer so that every person is treated alike.
Cont… For example, there would be no discretion involved in the imposition of penalty, late filing of returns, non- filing of returns, late payment of tax or non payment of tax or in case of tax evasion. Such system would be free from all these harassmen. Computerization the VAT proposes computerization which would focus on the tax evaders by generating Exception Report. In a large number of cases, no processing or scrutiny of returns would be required as it would free the tax compliant.
Disadvantages of VAT: VAT is regressive. VAT is difficult to operate from position of both administration and business. VAT is inflationary. VAT favors capital intensive firms.
VAT is regressive It is claimed that the tax is regressive, ie its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world and even Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort. Further, there is now a tendency in most countries to reduce this progressivity of taxes as has been done in Guyana where a flat rate of income tax has been introduced. In any case VAT recognises and makes room for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties.
VAT is inflationary. Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity. However, temporary price controls, a careful setting of the rate of VAT and the significance of the taxes they replace should generally ensure that there is no increase if any in the cost of living. To the extent that they lead to a reduction in income tax, any price increases may be offset by increases in take-home pay. In any case, any price consequence is one time only and prices should stabilise thereafter.
VAT is too difficult to operate from the position of both the administration and business(a) The administration:It is often argued that VAT places a special burden on taxadministration. However, it is worth noting that wherever VATwas introduced one of its effects was the rationalisation andsimplification of the previous indirect tax system and itsadministration. Each of the previous indirect taxes such ascustoms duties, purchase tax and excise duties replaced by VAThad its own rate structure as well as a different tax base andseparate administrative procedure. The consolidation andincorporation of numerous indirect taxes into the VAT wouldsimplify the rate structure, tax base, and administration of theindirect tax system, thereby eliminating the overlapping auditingpractices that had plagued those systems
Cont…(b) Business:It is true that the VAT is collected from a largernumber of firms than under any form of income tax or singlestate sales tax; to the typical smaller firms the complexities of thetax and the need for more extensive records (for example, tojustify deductions) are likely to prove serious.However, it is often overlooked that businesses already functionwith considerable administrative responsibility for a number oflaws including the National Insurance Act and the Income TaxAct.Under the Income Tax (Accounts and Records) Regulations of1980 every person, without exception is required to maintaindetailed and extensive records of all its transactions.
Cont… Under any form of sales taxation, small businesses have to be granted special treatment because of their inability to cope with the requirements of keeping adequate records which larger enterprises can handle at a reasonable cost. In the larger businesses with proper staff and computers, the task is really one of double entry book-keeping and any additional work is hardly ever noticed.
VAT favors capital intensive firms It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm compared to the capital- intensive competitor, since the ratio of value added to selling price is greater for the former. This is a real problem for labour-intensive economies and industries
India needs to take following steps: Application of information technology Wide spread computerization Bringing all registered dealers into tax net Avoiding exemptions and incentives Granting rebate on already paid tax Phasing out of Central Sales Tax
Procedural Issues:Different rate of VAT on Petroleum products – Delhi 20%, M.P. – 29%, Gujarat – 24% ~ 38%•List of goods eligible to VAT @4% not uniform for all theStates for example Ornaments made of rolled gold andimitation gold are eligible to VAT @4% in M.P. whereas inDelhi chargeable to VAT @12.5%Applicability of VAT on Deemed Exports – No specific exemption, methodology of payment of tax and refund.
VAT – A Roadmap to GSTPhase - I Single point tax with multiple rate of taxes without any provision of set offPhase - II Multipoint taxation with provision of set off known as VATProposed Levy of service tax on specified services by the States Uniformity of rates Abolishing CST in a phased manner Arriving at a consensus rate of Goods & services Implementation of GST ( Goods and Service Tax) by 1 April 2010