CONCEPT OF “VAT”:VAT is an acronym for VALUE ADDED TAX. It is a simple form of existing sales tax.
India has entered in to a VAT regime from 01/04/2005 onwards.
It is a multi-point tax at each stage of production and distribution process. VAT avoids / reduces
CASCADING effect of Indirect taxes. Tax paid at one stage is available as credit at the next stage
and only the value added at each stage is charged to tax.
Under VAT tax is cost only for the consumer and not for the dealer.
VAT reduces discrimination as to origin of goods and services and enhances equality of tax burden.
VAT is also simple to administer and has self-policing mechanism. As the credit of VAT paid at the
preceding stage is available on the basis of a documentary proof, each entity in the chain would need
a tax invoice.
VAT enables a wider tax base as all the entities in VAT chain are liable to VAT subject to certain
provisions contained in VAT legislation.
While the intention of VAT system is to create an environment for free movement of goods across the
country, the existence of Central Sales Tax (CST) and the NON-VATABLE Entry Tax / Octroi is a
serious impediment to that intention.
VAT is one of the most progressive taxation systems. Around 130 countries across the world have
adopted it over the last few decades. The high point of VAT is its potential to reduce the prices. It is a
multipoint levy under which manufactures pay tax on the raw materials and make a product (add value)
using them. The value addition ranges from manufacturing, processing and packing. The tax on the
finished product is arrived at after deducting the tax paid on the raw material. It is however, applicable
only on purchases made within the respective states. Further, down the value chain, traders selling the
finished product pay tax under VAT after deducting the tax paid on the price of the goods purchased by
them. There are only four tax categories under VAT. It includes the exempted (nil tax) products, and
those that attract one, four and 12.5% tax. There are, however, some products, including petrol, and
diesel on which special and higher rates apply.
Carrying over of Tax credit:- If the tax credit exceeds the tax collection in a month on sales within the
state or inter-state sale, the excess credit will be carried over to the next month. Tax credit will be
carried up to the end of the next financial year. Excess unadjusted, if any, will be eligible for refund. Tax
paid on capital goods will be eligible for tax credit.
Export:- For all export made out of the country, tax paid within the state will be refunded in full within
three months from the date on which they pay the new levy. Units located in Special Economic
Zones(SEZ) and Export Oriented Units would be exempted from VAT. In case exemption is not
possible, refund would be provided in three months.