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© Grant Thornton India: 2006

Value Added Tax An Insight Praveen Nigam - Partner Grant Thornton India Not for further distribution without express written permission of Grant Thornton India. . © Grant Thornton India: 2006. Contents. Brief History Background Indirect Tax Structure in India VAT - A Roadmap to GST

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© Grant Thornton India: 2006

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  1. Value Added TaxAn InsightPraveen Nigam - PartnerGrant Thornton IndiaNot for further distribution without express written permission of Grant Thornton India. © Grant Thornton India: 2006

  2. Contents • Brief History • Background • Indirect Tax Structure in India • VAT - A Roadmap to GST • VAT- Current scenario • VAT- Applicability • Rate of Tax • Input Tax Credit • Other procedural aspects • Central Sales Tax

  3. Brief History • Introduced in Morocco in the year 1962 • Followed by Brazil, Denmark, France and Germany during 1967-68 • Implemented in many countries during the 1980’s • Presently in more than 123 countries • US still working under the sales tax regime • Haryana introduced VAT, w.e.f. 1 April 2003, Most other States on 1 April 2005, U.P. still a non VAT State

  4. Background • Value Added Tax is a: • Multi-point taxation • Tax only on Value addition through Invoice method • A state subject • VAT allows credits of tax paid on previous intra state transactions • VAT has successfully eliminated the cascading impact of taxes

  5. Indirect Tax Structure in India • Import of goods – Duties of Custom (Basic Duty + Addl. Duty+ CVD) • Manufacture of goods – Excise (CENVAT) • Sale of goods – VAT/ Sales Tax/ Central Sales Tax • Entry of goods in the State / Territorial Limit - Entry Tax / Octroi • Rendering of taxable services - Service Tax • Heavy cumulative burden of Indirect taxes

  6. 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 across • Balancing of total impact of taxes • 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

  7. VAT – Current scenario • In most of the States Implemented from 1 April 2005, other States joined later • U.P. still not under the VAT • Tax on inputs to be set-off against tax on final products • Taxes abolished • Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc. • Entry Tax • Has been made Vatable • Entry tax in lieu of Octroi - not Vatable • Central Sales Tax • To be charged @3% from 1 April 2007 • To be abolished by 2010

  8. VAT – Applicability • VAT not levied on • Inter-state sale / Inter-state branch transfer • Imports • Dealers below threshold level • 0% VAT rate on Exports • No specific rate of VAT on liquor, petrol, diesel, aviation turbine fuel

  9. Rate of Tax cont… • Uniformity in Rates • Exempt Rate - 0% on 46 commodities consisting of • natural and unprocessed products like- Firewood, Plants, Garlic • Items legally barred from taxation like - News papers, Electricity energy • items having social implications like- salt, life saving drugs • Special Rate - 1% • Gold and silver ornaments

  10. Rate of Tax cont… • Uniformity in Rates • Essential/Mass Consumption Rate - 4% • 270 goods comprising basic necessities and • Agricultural and industrial inputs; • IT related goods • medicines and drugs; • capital goods; • Iron, Aluminum, Copper, zinc etc. • Revenue Neutral Rate - 12.5 %

  11. Rate of Tax cont… • Most statutory Forms under State Sales Tax laws for concessional rate abolished • Composition Schemes on the basis of turnover, e.g. in Delhi, dealers having turnover upto 50 Lac may opt to pay tax at a composite rate of 1% subject to specified conditions

  12. Rate of Tax cont… • Specific provisions related to tax on Works Contract • Bifurcation of goods and services • Specific rate of deductions • More complicated abatement schemes under West Bengal • Composition scheme for specified categories

  13. INPUT TAX CREDIT • Input tax credit available on: • VAT paid on inputs • VAT paid on Capital Goods • Entry Tax (not in lieu of Octroi) • Credit can be utilized towards • VAT payable on Finished Goods • CST payable on Inter State Sales • Any interest or penalty under VAT • Refund in case of exports • Refund of unutilized credit at the end of specified period

  14. INPUT TAX CREDIT • VAT credit in case of Capital Goods • Available but to be adjusted over a period of three years or specified period • Not available on Capital Goods specified in negative list like Cars, Air Conditioners etc. • VAT Credit refunded within three months in case of exports where turnover is above Rs.5 Crore • Unutilised Credit to be carried over till the end of the next financial year & would be refunded if remains unutilised

  15. INPUT TAX CREDITRestrictions • VAT credit available only in case of : • Taxable intra State sales • Taxable inter-state sales • Export out of India • In case inter state stock transfer -VAT credit to be reduced • In case of goods specified in the IInd schedule – 100% ( 1%) • In case of goods specified in the IIIrd schedule – 100% ( 4%) • In case of goods specified in the Ivth schedule – 20% ( 20%)

  16. INPUT TAX CREDITRestrictions • VAT Credit not available in following cases: • Inputs used in the manufacture of exempted goods • Purchases for other than manufacture/ re-sale • Purchases made inter State/ in-transit • Purchases of goods of negative list • Delhi - Fuel in the form of Petrol, Diesel and Kerosene, LPG, CNG, Coal • AP - Fuel, Coal and Natural Gas used for power generation • Jharkhand - Consumables • Tripura – Credit available in excess of 4% on petroleum products (other than petrol, ATF and diesel) and other fuels

  17. Procedural Issues • Different rate of VAT on Petroleum products • Delhi 20%, M.P. – 29%, Gujarat – 24% ~ 38% • List of goods exigible to VAT @4% not uniform for all the States for example Ornaments made of rolled gold and imitation gold are exigible 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

  18. Other Procedural aspects • Goods sent for job-work • States providing methodology similar to Excise Law i.e. reversal of input tax credit on non receipt of goods within 180 days • Some States treating dispatch to job-workers as branch transfers • No uniform list of capital goods and utilization on input tax credit thereon

  19. Central Sales Tax – Concept cont… • Tax on inter state sale of goods • Tax collected by the State where movement of goods commences • No tax on • Stock transfer/ branch transfer • In transit sales • Sale in the course of imports • Export sale

  20. Central Sales Tax – Concept cont… • RATE Of CST • Sale to registered dealer for manufacture, resale or used Telecommunication network, Mining, electricity generation/ distribution – 4% against Form - C • Sale to Government – 4% against Form - D • Others not covered by above • Declared goods twice the rate applicable in the State – 8% • Others- higher of 10% or Sales Tax/ VAT applicable • No CST if goods generally exempt from VAT/ Sales tax

  21. Central Sales Tax - Importance • CST never intended as a major revenue generating legislation but mere a regulative legislation • Today some States are reluctant to give up CST revenues whereas for some States CST is irrelevant • As per the budget announcement CST is likely to be reduced to 3% from April 1, 2007 • Total phase out expected by 2010

  22. Thank You

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