PRESENTATION ON

VALUE ADDED TAX

Presented By:Puneet SrivastavHimanshu KumarShahnawaz AnsariAnkit Vashishth

Presented To:Neetu Purohit

Meaning of VATValue Added Tax (VAT) is nothing but a general

consumption tax that is assessed on the value added to goods & services.

It is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers.

It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.

Basic concept of VATVAT is not a new mode of tax but only a different

method of sales tax.VAT is basically a tax on sale of good.VAT is payable by seller who is termed as a ‘dealer’.

Background of VAT in IndiaTax on sale within the state is a State Subject.Over the period, many distortions had come in taxation

due to unhealthy competition among State by giving sales tax incentives and ‘tax rate war’ stated to attract more revenue to state.

Many steps were taken to remove the distortions and rationalize tax structure since 1999.

It was decided to introduce uniform State Level VAT.After lot of persuasion by Central Government, all

States ultimately agreed to introduce State Level sales tax Vat at the conference of Chief Ministers all States at Delhi in November,1999.

State-wise position of VATHaryana was the only State to introduce VAT on 1-4-

2003.20 States introduced VAT 1-4-2005. these includes

Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka, Kerala, Maharashtra, Punjab and West Bengal.

State ruled by BJP like Gujarat, Chhatisgarh, Jharkhand, Madhya Pradesh and Rajasthan introduced VAT on 1-4-2006.

Tamilnadu introduced VAT on 1-1-2007. Uttar Pradesh introduced VAT 0n 1-1-2008.

Uttarakhand has not introduced VAT so far. J&K is out of picture of VAT due to constitutional limitations.

VAT RatesThere are three main rates for Input and

Output Vat tax. 0% for Agriculture products.1% for Jewellery4% for Pharma, Computers, Soaps etc.12.5% for FMCG, Automobile

Compromised VATThe VAT system as being introduced is result of

deliberations of committee of representatives from 29 states.Each state has its own views and peculiarities.Hence, having uniform nationwide VAT is very difficult and

some compromises/ adjustments are inevitable.This has happened while introducing state VAT also.VAT works best when there in uniformity in rate and

variation in rates are minimum. However, in State VAT, the variations in rates is much

higher.Many products (like petroleum products) are kept out of

VAT regime. This is incorrect as per VAT principles.

Basic concept of VATVAT works on the principle that when raw material

passes through various manufacturing stages and manufactured product passes through various distribution stages, tax should be levied on the ‘Value Added’ at each stage and not on the gross sales price.

This ensures that same commodity does not get taxed again and there is no cascading effect.

In simple term, ‘Value Added’ means difference between selling price and purchase price. VAT avoids cascading effect of a tax.

Cont….Basically, VAT is multi-point tax with provision for

granting set off(credit) of the tax paid at the earlier stage.

Thus, tax burden is passed on when goods are sold.This process continues till goods are finally

consumed.VAT is termed as consumption type tax with

distinction principle.VAT works on the principle of tax credit system.

Consumption types of VAT

In consumption type of VAT, ‘ Value Added is

considered by deducting all purchases, raw materials

and capital items.

Consumption type VAT is popular and it is adopted by

most of the countries.

Advantages of consumption type VAT

The tax burden is only at the last i.e. consumption state.It becomes easier to give concessions to goods used by

common man or goods used for manufacturer of capital goods or exported goods and charge heavy duty on luxury goods.

Administration control is easy due to ‘credit method’ that can be adopted.

It makes no distinction between capital intensive and labour incentive activities.

It is in harmony with the ‘destination principle’

Disadvantage of consumption type of VAT

VAT in India is that all tax is collected in the state in which

goods are finally consumed.

State in which goods are actually produced do not get any

tax, while the State Government has to provide

infrastructure and other facilities for production for which it

has to spend huge amounts.

Nature of VATInternational VAT/GST guidelines issued by OECD

(organization for Economic Corporation and Development).

‘Value Added tax systems are designed to tax final consumptions and as such, in most cases it is only consumer who should actually bear the tax burden.

Indeed, the levied ultimately, on consumption and not on intermediate transactions between firms, as tax charged on these purchases is, in principle fully deductable.

Value added taxes are taxes on consumption paid ultimately by the final consumers.

Disadvantages and pitfalls in VATOne major disadvantage of VAT is tremendous paper

work and record keeping.

VAT system can work only if record keeping is proper

and reliable.

The elaborate a record keeping is not possible to small

business.

In case of small businesses, a composition scheme is

provided where tax is paid on gross value of sales at a

fixed rate.

Highlights of State Sales Tax/Vat

Tax Credit:

Manufacturer will be entitled to credit of tax paid on inputs used

by him in manufacture. A Trader will be entitled to get credit of

tax on goods which he has purchased for re-sale.

Input Tax Credit:

Credit will be available of tax paid on inputs purchased within

the state. Credit will not be available of certain goods purchased

like petroleum products,liquor,petrol,disesel,motor spirit.

Contd….

Credit of tax paid on capital goods:

Credit will be available of tax paid on capital goods purchased

within the state. Credit will be available only in respect of capital

goods used in the manufacture or processing.

Instant Credit:

Credit of Central Sales Tax(CST) paid on inputs and capital

goods purchased from other states will not be available.

Contd…

Very few sales tax forms:

Most of present sales tax forms will disappear.

However,

forms relating to EOU/SEZ may continue. Forms under CST Act

will continue.

One to one correlation not required:

VAT does not require one to one i.e. Bill to Bill correlation

between input and output. Credit is available as soon as inputs/

capital goods are purchased. The credit can be utilized for

payment of VAT on any final products

Other provisions of State VATRefund of input tax:

Entire input tax will be refundable within three months, when

final product is exported.Inrespect of sale to EOU/ SEZ, there

will be either exemption of input tax or tax paid will be refunded

within three months.

Check posts and transit passes:

Government can set up check posts. The invoice will have to

be produced at the check posts. System, of transit pass may be

introduced. This is bound to increase harassment of transporters

and is bound to increase corruption to unprecedented.

Contd….

Exemptions and incentives to new industries already granted

to continue:

All State Governments were offering sales tax incentives to

new industries set ups in the State. The incentives were broadly

of three types.

Exemption: Don’t charge tax and don’t pay

Deferral: Charges sales tax in invoice but pay after long period

Remission: Charge in the invoice but retain and do not pay to

Government.

Contd…

Entry tax/ Octroi will continue:

There is no proposal to extend VAT to entry tax or Octroi

levied by local authorities

Purchase tax:

Though white paper makes no mention of purchase tax, some

States like Keral and Andhra Pradesh have made provision for

imposition of purchase tax when purchase it from unregistered

Dealers. Its credit will be available where VAT credit on

purchases available.

Accounting Treatment of VAT

As per AS-2,cost of purchase for purpose of inventory

valuation should not include tax, if credit of tax paid is

available.

For purpose of income tax, inventory valuation should be

inclusive of taxes, even if its credit is available, as per section

145A of Income Tax Act.

Purchase a/c should be debited with net amount.VAT credit

receivable on purchases should go to “VAT credit receivable

Account.”

Contd…

Account of each rate i.e,4%,12.5% etc,is required to be kept

separately.

In case of capital goods, as per AS-10,cost of fixed assets

should include only non-refundable duties or taxes.

In case of sales, the sales account should be credited only with

net amount. Tax payable should be credited to separate account

“VAT Payable Account”.

If any VAT is payable at the end of period,the balance is to be

shown as “current liability”.

THANK YOU