VAT useful for CA CMA CS ICWA exams November/December 2015

1. Value Added Tax
• Ajay Babu Bandi
 Practising Chartered Accountant
 M.Com, FCMA,ACA,IFRS(Certified)

2. VAT Basics
 Value Added Tax-
 -- is a multi-point tax on value addition i.e., increase
in value
 Which is collected at different stages of sale, and
 With a provision for set-off for tax paid at the
previous stage/tax paid on inputs against the tax
collections on sales before remitting to the
Government’s account

3. Objectives of VAT
 Prevents distortion – in trade and economy through
uniform tax rates
 Easy computation of tax
 Harmonization in the tax structure of various
states
 Availing of credit on inputs leading to cost
efficiency and rationalization
 Avoids Double taxation through input credit
 Ensure equitable distribution of tax impact
amongst dealers
 Easy compliance and procedures through
transparency

4. Meaning of Goods
 VAT is applicable only if there is a
transfer of property in goods from one
person to another for a consideration
 Goods means all kinds of movable
property

6. Constitutional provisions relating
to State level VAT

7. Rates of VAT

10. Variants of VAT

12. Addition Method
 Suitability : This method is mainly used with
Income variant of VAT
 Computation :
 Step1 : Aggregate all the Factor Payments including
Profits to arrive at the Total Value Addition
 Step2: Apply the Rate on Step 1 to calculate the tax

13. Invoice Method
 Suitability : This method is followed under Central
Excise Law
 Computation :
 Step1 : compute the tax to be imposed at each stage of
sales on the entire sale value
 Step2: Set-off the Tax paid at the earlier stage
 Step3: The differential Tax is paid

14. Subtraction Method
 Suitability : This method is normally applied
where the tax is not charged separately
 Methods of determination of Value Added:
 Direct Subtraction Method
 Intermediate Subtraction Method
 Indirect Subtraction Method

15. Direct Subtraction Method
 Compute Value Added =Total Value of Sales exclusive
of Tax
 (less)
 Total value of Purchases exclusive of tax
 Compute VAT amount =
Value Added X Tax rate

16. Intermediate Subtraction Method
 Compute Value Added =Total Value of Sales inclusive
of Tax
 (less)
 Total value of Purchases inclusive of tax
 Compute VAT amount =
Value Added X Tax rate

17. Indirect Subtraction Method
 Compute Value Added =VAT on Sales
 (less)
 VAT on Purchases
 Note :
This is same as Invoice Method

20. Understanding VAT …

24. Utilization of ITC

35. Inputs
 Are goods meant for re-sale or use in manufacturing,
processing of other goods or packing of goods
manufactured

36. Input Tax
 Means..
 Tax paid or payable under VAT law
 By a Registered Dealer to another Registered Dealer
 On the purchase of goods ,including Capital Goods in
the course of Business

37. Output
 Means …
 Sale of goods made by a Registered Dealer to another
Registered Dealer
 And
 Consumers in the course of his business

38. Output Tax
 Is tax collected on sale of goods from the Buyer.
 The output tax is calculated by applying the rate of tax
on Taxable turnover of these goods

39. Dealer
 Means any person..
 Who carries on the business of
buying,selling,supplying or distributing goods,
directly or otherwise,
 Whether for Cash/Deferred payment/commission,
Remuneration/ other valuable Consideration

40. Sales
 Means …
 Every transfer of property in goods (other than by way
of a mortgage , hypothecation ,charge or pledge)
 By one person to another, in the course of business
 For cash , deferred payment or other valuable
consideration

41. Eligibility for Input Tax Credit
 Dealer—required to be registered under the
respective state Law
 Eligible Purchases- Tax paid on purchases which
are meant for sale or for utilization in the process
of production for such sale
 Eligible Sales- Input Tax credit will be given to both
manufacturers and traders for purchase of
inputs/supplies meant for both sales within the state
as well as to other states

42. Tax Payment
 VAT liability of the Dealer is calculated by
deducting VAT credit from Tax payable on
Sales during the tax/ payment period

43. Carry forward of VAT Credit &
Refund
 If VAT credit exceeds the tax payable on sales in a
month, the excess credit may be carried over to
the future month(s) and the unadjusted VAT
credit at the end of the specified period is eligible
for REFUND

44. Eligible Purchases
Particulars Examples
Sale or re-sale within the State Computers purchased and
sold in A.P.
Sale to other parts of India in
the course of inter-state trade
or commerce
Computers purchased in A.P.
and sold in T.N.

45. Inputs used as raw
materials, consumable
stores, containers or
packing materials intended
to be sold in the state or
inter state
Carton boxes & other
packing materials
For the use in works contracts Cement and steel purchased by
construction company within
the state of A.P.
To be used as Capital Goods Plant & Machinery installed in
factory

46. Particulars Examples
Inputs used as raw materials,
consumable stores, containers
or packing materials intended
to be sold in the course of
export
Goods manufactured in A.P.
exported to Singapore
For making zero rated sales
other than those referred to in
the point above

47. Non availability of Input Tax Credit
 Purchases from Unregistered Dealers
 Purchases from other states/countries
 Purchase of goods used in manufacture of exempted
goods
 Purchase of Capital Goods (credit is available in
installments)
 Purchase of goods used as a fuel in power generation
 Purchase of goods to be dispatched as branch transfers
outside states/consignment

48. Non availability of Input Tax Credit
 Purchase of goods where the purchase invoice is not
available
 Purchase of goods where the Dealer does not have Invoices
showing amounts of tax charged separately by the selling
Dealer
 Purchase of non-creditable goods
 Purchase from a Dealer who has opted for composition
Scheme
 Goods in Stock , which have suffered tax under an earlier
Act, but exempted under VAT
 Purchase of Goods for personal use

49. Zero Rated Sale
 Export
 Deemed Export /Penultimate Sale
 Zero rated Sale
 Refund to exporters (within 3 months)

50. Sale to Dealers in Special Economic
Zone (SEZ)
 Sale should be made to a Registered Dealer in SEZ
 Purchase for Manufacture at SEZ
 AUTHORISED by central Government
 Exemption to SEZ and EOU or refund of Input Tax
paid within 3 months

51. VAT on Capital Goods
 Definition…as understood under CENVAT CREDIT
RULES, 2004
 State Governments can provide to give set-off on a
staggering basis , at the most in 36 installments
 Capital Goods mentioned in Negative List would NOT
be eligible for Input Tax Credit
 If prior permission is required, the same should be
duly obtained

52. VAT on Stock Transfer
 Transfer from one state to another state
 Transfer other wise than by a sale
 Branch transfer
 Transfer to Agent or Principal
 Burden of proof on the Dealer

53. VAT credit for Stock Transfer
 VAT credit is given to a Dealer for purchase of
inputs/supplies in a state meant for sales within
the state as well as in other states
 Even for stock transfer/consignment sale of goods
out of the state, Input tax paid in excess of 2% is
eligible for VAT credit

54. Composition Scheme for Small
Dealers

55. ELIGIBILITY …

56. NOT Eligible

58. VAT and Sales tax incentives

60. Works Contracts
 Dealers have 2 options…

61. Works Contracts
 Option 1…
 Pay tax on the value of the goods at the time of
incorporation of such goods in the works executed, at
the rates applicable to the Goods….
 or

62. Works Contracts
 Option 2
 Pay tax by way of composition at applicable rates on a
certain percentage of the Total consideration
received as may be prescribed
 No VAT Credit or only partial VAT Credit

63. Deemed Sale

64. Hire Purchase is a deemed sale

65. Lease transactions…liable to TAX

66. Registration
 is the process of obtaining Certificate of Registration
(RC) from VAT authorities under the respective State
Act
 A Dealer registered under the state VAT law is called a
Registered Dealer
 Persons liable…
 Dealers whose turnover exceeds the prescribed limit
 Casual traders , agent of Non-resident dealer, dealers
in jewellery (irrespective of quantum)

67. Registration-Cancellation
 Discontinuance of business
 Disposal of business
 Transfer of business to a new location
 Annual turnover falling below the specified amount

68. Taxpayer’s Identification Number
(TIN)
 is the registration number of the Dealer
 11 digit numerals (first 2 digits state code)

69. Maintenance of Books
 VAT invoice is a document listing goods sold with
price, tax and other details
 Contents of VAT invoice
 Tax invoice
 Name & Address of the selling Dealer
 Registration number of the selling Dealer
 Name & Address of the purchasing Dealer
 Registration number of the purchasing Dealer

70. Contents of VAT invoice
 Pre printed serial number
 Date of issue
 Description, quantity and value of Goods sold
 Rate and amount of tax charged
 Signature of the selling dealer

71. Importance of VAT invoice
 Helps in determining the input tax credit
 Prevents cascading effect of taxes
 Facilitates multi point taxation on value
addition
 Assists in audit and investigation
 Checks evasion of tax

72. Records to be maintained
 Sales Records
 Purchase Records
 VAT Account
 Goods Details
 Penalty –failure to maintain records
 No concessional Sales

73. Assessment Procedure
 Filing of Return—monthly , quarterly /annually
according to the state laws
 Assessment – no compulsory assessment..dealer can
assess himself
 Cross Checking computerized system between tax
authorities of state and central Governments

74. VAT Audit
 Basically a self assessment tax
 Types—Departmental audit or Audit by CAs
 Role of CA in VAT
 Record keeping
 Tax planning
 Negotiations with suppliers
 Handling departmental audit

75. Merits of VAT
 Proper Accounting Systems
 Deterrent to Tax Evasion
 Neutrality
 Certainty
 Transparency

76. Merits of VAT
 Better Revenue Collection and Stability
 Effect on Retail Price
 Self Assessment
 Other taxes get abolished
 Fairness
 Encourages Small Scale Industry

77. Demerits of VAT
 Differential Rates of Tax
 Disintegration
 Accounting Costs
 Increasing Working Capital Requirements
 Inequality of Taxation
 Increase in Administration Costs
 Non-coverage of both goods and Services
 Higher Base Rate

78. Demerits of VAT
 Floor Rate
 Treatment of Exempted goods
 Huge list of Exemptions
 Extensive Definitions
 Arbitrary Classification of Goods
 Concessional rates based on End Stage
 Revenue loss due to concessional Rate