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VAT, a modern and progressive form of sales tax, is levied at each stage of production and distribution. Learn about its background, rates, commodities covered, and how it is calculated.
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What is VAT? Value added tax: It is a modern & progressive form of sales tax. It is a multi point tax system where tax is levied at each stage.
Background of VAT • A full-fledged Vat was initiated first in Brazil in mid 1960’s and then in European countries in 1970’s and subsequently introduced in about 130 countries, including several federal countries. • In Asia it has been introduced by a large number of countries from China to Sri Lanka. • In india, VAT is introduced from 1st April,2005.
Background of VAT • introduction of VAT, would help rationalize tax burden on Goods since other taxes like Sales tax would be abolished. • The Central Sales Tax is also proposed to be phased out eventually
What is there in the VAT? • VAT is a form of indirect tax which includes sale of goods. Sale of services is covered under service tax. • More than 550 commodities are covered under VAT. • Tax structure is simple, it is 4%,12.5%,1% • In order to charge the VAT on final customer, VAT is required to be shown separately in the bill.
Simple Classification • Under VAT regime 5 different rate structures are provided • Schedule A: Goods which carry 0% Rates ScA contains Agricultural & necessity products. • Schedule B: It covers precious metals & it carries 1% rate. • Schedule C: Industrial & IT products. Rate is 4% • Schedule D: Liquor & Petroleum products • Schedule E: It includes all the goods which are not covered from SCA to SCD(12.5%)
Why Vat was apposed • High production and high consumption - are the two types of states we have -like Gujarat and Maharashtra. ‘Producing State’ means those States who produce more than they consume i.e. goods sent outside the State will be more than goods brought into the State for consumption. ‘Consuming States’ are those which consume more than they produce. Since VAT is a consumption based tax, theoretically, “Consuming States’ will be benefited in the VAT tax regime while ‘Producing States’ will suffer loss of revenue.
Why Vat was apposed Continued… • Manufacturers, dealers, wholesalers, retailers, are required to show their margins separately in VAT return. • Documentation is required at each stage without which setoff is not allowed. • Customers feel that there is a tax burden on every consumption of goods whenever it is mentioned in tax invoice. • Some of the states apposed VAT because VAT is revenue for central Govt.
What are the commodities covered under VAT? • VAT is 4%for items consisting mainly raw material used in production process, IT products& some of the products of common consumption (Tea, hawai chappalss, plastic footwear, embroidery & jari items, computer parts) • Drugs & medicines would be charges at the rate of 4% given in the 3rd schedule of VAT.
Commodities not covered under VAT • Pulses, milk, vegetables & books • Rice, wheat • salt • Bangles (of all types) • Rakhi • Matches • Idols made by clay, clay lamps • Poha, murmura • Coconut in shell,
Special rates under VAT: • 1% for Gold, Silver & other precious &semi precious stones & their jewellery. • 20% for liquor. All types of businesses are covered under VAT including Manufacturers, Distributors, Retailers, Works Contractors.
VAT- how it is calculated? • VAT=output tax- input tax • Output tax is same as Tax collected from final consumers. Input tax is tax paid on the purchases. • The difference between the two is required to be paid to the government.
Example of VAT: • A= Supplier, B=Manufacturer, C=Wholesaler, D=Retailer A sells his produce at Rs.100 & pays tax at the rate of 4%. The sale price of Rs.100 would be the purchase price for B on which B is paying tax at the rate of 4%. B is a manufacturer who would use wages, salaries & other manufacturing expenses & after adding profit, sale the same for Rs.200 to C on which C is paying tax at the rate of 4%.
Example of VAT Continue….. • C is a wholesaler selling the goods at Rs.300 on which tax is paid by D at the rate of 4% • D is a retailer who sells the goods for Rs.400 to final consumer on which tax is paid by final consumer at the rate of 4%. The above illustration indicates that the VAT is collected at each stage of production & distribution process.
VAT vs. Sales Tax • In earlier tax structure, the tax was levied on the final selling price which was paid by the consumer. It means tax on commodity of Rs.400 is Rs. 16 by applying tax rate of say 4%. • Under the new tax system tax paid by the final consumer is same i.e Rs.16 which consist of Rs. 4 at each stage.( Rs.4 by Supplier, Rs.4 by Manufacturer, Rs.4 by wholesaler, Rs.4 by Retailer.)
Whether the VAT will result in decrease in prices? • Consider the following example: A&Co manufactures certain item which form the raw material for B& Co .B uses that for making the product which is sold to C&Co. C will sell the same to the final consumer, Suppose A’s cost of prod=Rs.90,Ex. Duty paid 10%,final price is Rs.110.It means profit added by A=110-99=Rs.11
Whether the VAT will result in decrease in prices? Continued…….. • Purchase price for B=Rs.110+manuf. Exp.Rs.50=160, Duty is 10%, It means cost is Rs.160+16=176 & if the good is sold to C for Rs.200, profit is added is Rs.24 • Purchase price of C=200+manu cost Rs.40=240 & duty charge10%i.e 24 & if the same product s sold in the market for Rs.300 so profit added by C is Rs 36/-. • Under the earlier system Duty paid is 9+16+24=49 which will be collected from final consumer in the form of sales tax. • However under VAT, duty paid by B will not Rs.16,but it will be equal to10% on Rs.24+50 i.e 7.4 It means S.P.=110+24+50+7.4=191.4(forB)
Whether the VAT will result in decrease in prices? Continued…….. • Now the purchase price of C=191.4 • Its cost of prod.Rs.40, profit Rs.36, It means value addition is 76 on which VAT is Rs.7.6, Therefore the final price of the product is Rs.191.4+40+36+7.6=Rs.275. • It means the price of the final product is Rs.300 under sales tax & it is Rs.275 under VAT.
Benefits of VAT • It is simple, transparent & progressive. • Business friendly system of taxation. • Reduction in the number of tax rates to only two main rates-4% & 12.5% • Reduction in the effective tax rate for many goods • Elimination of ‘Tax on Tax’ existing in sales tax system • Simplification of tax forms & procedures.
Benefits of VAT Continued… • VAT system is based on self assessment • Dealers , manufacturers , has to maintain the records of purchases & sales. Thus the documentation is minimum as far as VAT is concerned. • Dealers are required to be registered under VAT with sales tax department. (Form 101)
Benefits of VAT Continued… • Benefit to Manufactures. Manufactures will be benefited as they will be reimbursed fully for the tax paid on their purchases. Benefit to Traders / retailers=The distributors will have to pay tax on their profit margin, instead of resale tax- which is direct cost- as no input tax credit is allowed against resale Tax paid. However, under VAT every body will have tax credit and so over all tax burden will be minimized
Benefits of VAT Contiued… • Benefit to Consumers • There are no hidden taxes due to transparency. In view of standardization of VAT rates it is possible that price of maximum commodities will go down.
Composite scheme of VAT • There is no VAT for the dealers whose turnover is less than Rs.5,00,000 • If the turnover is between Rs.5,00,000 to Rs.50,00,000 the dealers can go for composite schemes. • This consolidated scheme is available to dealers only when there is no input credit & VAT is directly shown on sale price.
When the VAT return is filled? • If the tax liability is Rs.1,00,000 or more monthly tax return is required to be filed. • If tax liability is more than Rs.12000 but less than Rs.1,00,000 quarterly return is required to be filed • If tax liability is less than Rs.12,000 the return is required to be filed after every six months.
