This document provides an overview of value added tax (VAT) including: 1. VAT is an indirect tax assessed on the value added to goods and services at each stage of production and distribution. Over 130 countries have introduced VAT. 2. VAT was introduced in India in 2005 and is administered by the government revenue authority. It is a multi-stage tax collected fractionally at each stage of production/distribution. 3. Advantages of VAT include increased tax base and revenue, transparency, avoidance of double taxation, coordination with income tax, and simplification compared to other tax systems.

1. VALUE ADDED TAX
(VAT)
A
Presentation by
Sanjay Jagarwal

2. 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.

3. 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).

4. Direct Taxes:
 Banking Cash Transaction Tax
 Corporate Tax
 Capital Gains Tax
 Double Tax Avoidance Treaty
 Securities Transaction Tax
 Personal Income Tax
 Tax Incentives

5. 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)

6. 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.

7. 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 )

8. 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 ".

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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

15. 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

16. 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.

17. 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/-

18. 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

19. 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 4.00
B C 114 12.5% 128.25 14.25 0* 14.25
VAT
C D 124 12.5% 139.50 15.50 14.25 1.25
VAT
D Consumer 134 12.5% 150.75 16.75 15.50 1.25
VAT
Total to Govt. VAT/ 16.75
CST 4.00

20. Cont…
Note: The transaction chain under VAT assuming
that a profit of Rs 10 is retained during each sale.
Note: CST Paid cannot be claimed for credit. CST is assumed to
remain the same though it could to be reduced to 2% when VAT is
introduced and eventually phased out.
VAT can be considered as a multi-point sales tax with set-off for
tax paid on purchases (inputs) and capital goods. What this means is
that dealers can actually deduct the amount of tax paid by him for
purchase from the tax collected on sales, thereby paying just the
balance amount to the Government.

21. 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.

22. 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 VAT
Act:
 sale in the course of inter-State trade or commerce which shall
continue to be liable to tax under the Central Sales Tax Act,
1956;
 sale which takes place outside the State; and
sales in the course of export or import

23. 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

24. 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

25. 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.

26. 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.

27. 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

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.

33. 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 tax
administration. However, it is worth noting that wherever VAT
was introduced one of its effects was the rationalisation and
simplification of the previous indirect tax system and its
administration. Each of the previous indirect taxes such as
customs duties, purchase tax and excise duties replaced by VAT
had its own rate structure as well as a different tax base and
separate administrative procedure. The consolidation and
incorporation of numerous indirect taxes into the VAT would
simplify the rate structure, tax base, and administration of the
indirect tax system, thereby eliminating the overlapping auditing
practices that had plagued those systems

34. Cont…
(b) Business:It is true that the VAT is collected from a larger
number of firms than under any form of income tax or single
state sales tax; to the typical smaller firms the complexities of the
tax and the need for more extensive records (for example, to
justify deductions) are likely to prove serious.
However, it is often overlooked that businesses already function
with considerable administrative responsibility for a number of
laws including the National Insurance Act and the Income Tax
Act.
Under the Income Tax (Accounts and Records) Regulations of
1980 every person, without exception is required to maintain
detailed and extensive records of all its transactions.

35. 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.

36. 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

37. 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

38. 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 the
States for example Ornaments made of rolled gold and
imitation gold are eligible to VAT @4% in M.P. whereas in
Delhi chargeable to VAT @12.5%
Applicability of VAT on Deemed Exports
– No specific exemption, methodology of payment of
tax and refund.

39. VAT – A Roadmap to GST
Phase - I
 Single point tax with multiple rate of taxes without any
provision of set off
Phase - II
 Multipoint taxation with provision of set off known as
VAT
Proposed
 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