WHITE PAPER ON STATE LEVEL

VALUE ADDED TAX

ISSUED ON JANUARY 17, 2005

BY

THE EMPOWERED COMMITTEEOF STATE FINANCE MINISTERS

(CONSTITUTED BY MINISTRY OF FINANCE)

ANALYSIS OF

OBJECTIVEOBJECTIVE

• Set-off available on input tax as well as tax Set-off available on input tax as well as tax paid on previous purchasespaid on previous purchases

• Deletion of related taxes on act of sale, such Deletion of related taxes on act of sale, such as turnover tax, surcharge, additional as turnover tax, surcharge, additional surcharge, entry tax etc.surcharge, entry tax etc.

• Rationalization on tax burdenRationalization on tax burden• With elimination of cascading effect, With elimination of cascading effect,

consumer prices expected to fall in generalconsumer prices expected to fall in general• Self-assessment by dealersSelf-assessment by dealers• Higher revenue growth for statesHigher revenue growth for states

ESSENCE OF VAT - SET OFFESSENCE OF VAT - SET OFF

• The essence of Value Added Tax (VAT) is in The essence of Value Added Tax (VAT) is in providing set-off for the tax paid earlier on providing set-off for the tax paid earlier on purchases (input tax credit) and eliminate the purchases (input tax credit) and eliminate the cascading effect. This input tax credit in cascading effect. This input tax credit in relation to any period means setting off the relation to any period means setting off the amount of input tax against the amount of tax amount of input tax against the amount of tax paid on his sales (output tax). VAT is based paid on his sales (output tax). VAT is based on the value addition to the goods & the on the value addition to the goods & the related VAT liability is calculated by deducting related VAT liability is calculated by deducting input tax credit from output tax collected on input tax credit from output tax collected on sales during the payment period.sales during the payment period.

INPUT TAX CREDITINPUT TAX CREDIT

• Registered dealer shall be entitled to a tax credit Registered dealer shall be entitled to a tax credit in respect of the turnover of purchases occurring in respect of the turnover of purchases occurring during a tax period where the purchases arises during a tax period where the purchases arises in the course of his activities as a dealer and the in the course of his activities as a dealer and the goods are to be used directly or indirectly by him goods are to be used directly or indirectly by him for the purposes of making sales.for the purposes of making sales.

• Input tax credit will be available to both Input tax credit will be available to both manufacturers and traders for purchase of manufacturers and traders for purchase of inputs/supplies meant for both sale within the inputs/supplies meant for both sale within the State as well as to other States. State as well as to other States.

INPUT TAX CREDITINPUT TAX CREDIT

• No input tax credit shall be allowed for No input tax credit shall be allowed for purchase of goods from dealer availing purchase of goods from dealer availing benefit provided under composite tax benefit provided under composite tax scheme, that is those dealers whose total scheme, that is those dealers whose total turnover is less than Rs. 50 lakh provided turnover is less than Rs. 50 lakh provided they avail benefit under composite tax they avail benefit under composite tax scheme.scheme.

INPUT TAX CREDITINPUT TAX CREDIT

• Tax paid on inputs procured from other Tax paid on inputs procured from other States through inter-State sale will not States through inter-State sale will not be eligible for input tax credit. be eligible for input tax credit. (Discussed in greater details later)(Discussed in greater details later)

UTILIZATION OF INPUT TAX UTILIZATION OF INPUT TAX CREDITCREDIT

• Input tax credit can be utilised to set-off tax Input tax credit can be utilised to set-off tax payable on any sale of goods when such sale payable on any sale of goods when such sale takes place in the course of inter-state trade or takes place in the course of inter-state trade or commerce or in the course of export of the commerce or in the course of export of the goods out of the territory of India or within that goods out of the territory of India or within that state.state.

• Credit arising on input tax paid for goods used in Credit arising on input tax paid for goods used in producing output which is under exempted producing output which is under exempted category will not be available for setoff in category will not be available for setoff in principle. principle. (Though this issue was left untouched in the white (Though this issue was left untouched in the white paper but the draft VAT bills by some of the states provided for this paper but the draft VAT bills by some of the states provided for this reservation.)reservation.)

UTILIZATION OF INPUT TAX UTILIZATION OF INPUT TAX CREDITCREDIT

• Utilization of the Input tax credit shall be Utilization of the Input tax credit shall be as per CENVAT model, that is to say, as per CENVAT model, that is to say, credit can be taken instantly irrespective of credit can be taken instantly irrespective of the event of sale of the goods on which the event of sale of the goods on which input tax credit was paid. In other words, input tax credit was paid. In other words, input-output co-relation will not be pre-input-output co-relation will not be pre-condition for utilizing credit. condition for utilizing credit.

UTILIZATION OF INPUT TAX UTILIZATION OF INPUT TAX CREDITCREDIT

• In case where input tax paid on goods In case where input tax paid on goods used for producing output and such output used for producing output and such output goods is transferred under Stock transfer goods is transferred under Stock transfer mechanism or in cases where such input mechanism or in cases where such input goods are transferred as such under stock goods are transferred as such under stock transfer mechanism, credit arising on input transfer mechanism, credit arising on input tax paid in excess of 4% in either of the tax paid in excess of 4% in either of the above cases will be eligible for tax credit above cases will be eligible for tax credit for set off.for set off.

(In my view this proposal in particular is deviating from fundamental principle of perfect value added tax primarily (In my view this proposal in particular is deviating from fundamental principle of perfect value added tax primarily

because liability for output tax do not arise at the time of stock transfer)because liability for output tax do not arise at the time of stock transfer)

INPUT TAX CREDIT ON O/S AS INPUT TAX CREDIT ON O/S AS ON APRIL 2005ON APRIL 2005

• All tax-paid goods purchased on or after All tax-paid goods purchased on or after April 1, 2004 and still in stock as on April April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input 1, 2005 will be eligible to receive input tax credit and can be utilized for set-off tax credit and can be utilized for set-off against sale made after April 1, 2005. against sale made after April 1, 2005.   

C/F OF INPUT TAX CREDITC/F OF INPUT TAX CREDIT

• If the input tax credit exceeds the output tax If the input tax credit exceeds the output tax payable, then the excess input tax credit will be payable, then the excess input tax credit will be carried forward to the end of next year. If there carried forward to the end of next year. If there is any unutilized input tax credit at the end of is any unutilized input tax credit at the end of second year, then the same will be eligible for second year, then the same will be eligible for refund. refund. (Issue of unjustenrichment has been left (Issue of unjustenrichment has been left

untouched in the white paper)untouched in the white paper)

Input tax credit on capital goods shall be Input tax credit on capital goods shall be adjusted over a maximum of 36 equal monthly adjusted over a maximum of 36 equal monthly installments. installments.

EXPORTS & INPUT TAX EXPORTS & INPUT TAX CREDITCREDIT

• For all exports made out of the country, tax For all exports made out of the country, tax paid within the State will be refunded (believe paid within the State will be refunded (believe at discretion of states these sales can be at discretion of states these sales can be exempted in which case refund process can exempted in which case refund process can be done away with)be done away with)

• Similarly, units located in SEZ and EOU will Similarly, units located in SEZ and EOU will be granted either exemption from payment of be granted either exemption from payment of input tax or refund of the input tax paidinput tax or refund of the input tax paid

IMPACT ON OTHER TAXESIMPACT ON OTHER TAXES

• All other existing state taxes such as turnover All other existing state taxes such as turnover tax, surcharge, additional surcharge and tax, surcharge, additional surcharge and Special Additional Tax would be abolished. Special Additional Tax would be abolished. Existing entry tax would become vatable or Existing entry tax would become vatable or shall be abolished. shall be abolished.

• However, entry tax levied in lieu of octroi shall However, entry tax levied in lieu of octroi shall continue and may not be made vatable at continue and may not be made vatable at States discretionStates discretion..

COVERAGE OF GOODS COVERAGE OF GOODS UNDER VATUNDER VAT

• In general, all the goods, including declared In general, all the goods, including declared goods will be covered under VAT and will get goods will be covered under VAT and will get the benefit of input tax credit.the benefit of input tax credit.

• liquor, lottery tickets, petrol, diesel, aviation liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit shall be turbine fuel and other motor spirit shall be outside VAT but continue to be taxed under outside VAT but continue to be taxed under the Sales Tax Act or any other State Actthe Sales Tax Act or any other State Act

VAT RATESVAT RATES

• only two basic VAT rates of 4% and 12.5%.only two basic VAT rates of 4% and 12.5%.• 4% category comprises items of basic 4% category comprises items of basic

necessities such as medicines and drugs, all necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods agricultural and industrial inputs, capital goods and declared goodsand declared goods

• special VAT rate of 1% only for gold and silver special VAT rate of 1% only for gold and silver ornaments etc.ornaments etc.

VAT RATESVAT RATES

• Certain goods shall be under tax-exempted Certain goods shall be under tax-exempted goods category and there will be 46 goods category and there will be 46 commodities under this comprising of natural commodities under this comprising of natural & un-processed products, goods of local & un-processed products, goods of local social importance, items which are barred social importance, items which are barred from taxation and items which have social from taxation and items which have social implications.implications.

• The remaining commodities, common for all The remaining commodities, common for all the States will fall under the general VAT rate the States will fall under the general VAT rate of 12.5%.of 12.5%.

EXEMPTIONSEXEMPTIONS

• Dealers having turnover upto Rs 5. Lakh will be Dealers having turnover upto Rs 5. Lakh will be exempt from VAT. No registration required for exempt from VAT. No registration required for such dealers.such dealers.

• Small dealers with annual gross turnover not Small dealers with annual gross turnover not exceeding Rs.50 lakh who are otherwise liable exceeding Rs.50 lakh who are otherwise liable to pay VAT, shall however, have the option for to pay VAT, shall however, have the option for a composition scheme with payment of tax at a a composition scheme with payment of tax at a small percentage of gross turnover to be small percentage of gross turnover to be decided by State. The dealers opting for this decided by State. The dealers opting for this composition scheme will not be entitled to input composition scheme will not be entitled to input tax credit.tax credit.

INTROSPECTION ON INTER-STATE SALES

SELLER’S PROSPECTIVE

BUYER’S PROSPECTIVE

SET-OFF OF INPUT TAX CREDIT

AVAILABLE ON CENTRAL SALES TAX PAID AT THE

TIME OF INTERSTATE SALES

INPUT TAX PAID AT THE TIME OF INTER STATE PURCHASE CANNOT

BE TAKEN AS INPUT TAX CREDIT AND AS SUCH NO SET OFF AVAILABLE FROM OUTPUT TAX PAYABLE AT

THE TIME OF SALE.

INTROSPECTION ON STOCK TRANSFER

STOCK TRANSFEROR’ s PROSPECTIVE

BUYER’S PROSPECTIVE (BUYER BEING IN THE STATE WHERE STOCK WAS TRANSFERRED

INPUT TAX PAID BY BUYER CAN BE TAKEN AS TAX

CREDIT AND AVAILABLE FOR SET-OFF WITH

BUYER’s OUTPUT TAX .

SET-OFF OF INPUT TAX CREDIT AVAILABLE ON STOCK TRANSFER TO THE TUNE OF INPUT TAX PAID IN EXCESS

OF 4%

WRAPPING UP

The New Tax Regime on concept is no different from the CENVAT credit scheme prevailing under Central Excise, the difference being Central Excise is the duty imposed on manufacturing activity whereas VAT is imposable on point of sale. Conceptually the proposals are simple.

Easier said then done, bottlenecks/hassles limiting vatability on procedural grounds cannot be ignored. Bureaucracy and Judiciary is yet to iron out creases on CENVAT credits even after more than a decade of its existence in the Indian tax system. Interpretation limiting utilization of CENVAT credits in Excise have given sleepless night to most. Firmly believe the new tax regime will be no exception.

THANK YOU

DEOKI NANDAN MUCHHAL