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Tax should be levied on the value added at the various manufacturing and distribution stages that a product moves through rather than the gross sales priceShift from production to consumptionValue added is difference between selling price and purchase priceProvision for setoff subject to certain conditions

VAT – What is it ?

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Change the way we do business,It will not only impact the pricing

policy, but also

procurement, manufacturing,

distribution, costing and accounting

The VAT Challenge

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Rationale for VAT – Broadbasing of tax

Larger basket of GoodsSpread the tax burden over a larger number of dealersWiden the coverage of commercial organisationsLower the rate of tax for better tax complianceEliminate the cascading effectUniform tax rates across StatesSimple to operateMore revenue to Govt

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Widening the Tax BaseComponent of Price Pre VAT Post VAT

Basic Purchase Price 100 100Sales Tax/VAT @ 10% 10 10Gross Purchase Price 110 110Value Addition by distributor 30% 30%Value Addition in Rs 30 30Gross Sales Price 140 130VAT@10% 13Input Tax credit 10Net Tax paid by distributor 3Selling Price 140 143Impact on customer 3Impact on distributorImpact on Govt 10 13

More revenue to Government hence tax base is widened

HOW VAT OPERATES---

Raw Material Producer

Sales Value Rs. 100Gross VAT 10% = Rs 10

Less:Input Tax credit = Rs 0Net VAT = Rs 10

Wholesaler

Sales Value Rs. 300Gross VAT 10%= Rs 30

Less:Input Tax credit=Rs 20Net VAT = Rs 10

Manufacturer

Sales Value Rs. 200Gross VAT 10%, Rs 20

Less:Input Tax Credit=Rs 10Net VAT = Rs 10

Retailer

Sales Value Rs. 400Gross VAT 10% = Rs 40

Less:Input Tax credit=Rs30Net VAT = Rs 10.00

Total VAT Collected at four points Rs 10+10+10+10 = 40

Final Cost = Rs. 400

Tax @ 10% = Rs. 40

Total Tax Collected =

Rs. 10+10+10+10=Rs. 40

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Registration Provisions

Threshold Limit for registration Rs 5 lakhs per annum

Dealers upto 40 lakhs offered composition scheme 1% of turnoverLump sum dealers opting composition schemeVAT Dealer

Tax to be paid by dealers under composition scheme is likely to be around 4% which is not VAT-able

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National VAT Design2-Slab structure

4% rate on items of mass consumption12% Revenue Neutral Rate (RNR)

(on all other items)

Exceptional RatesNil rate (exempted goods)1% rate for Bullion & Jewellery20% for specified items (liquor etc.)

Zero Rating for ExportsPetrol & Diesel to be kept outside VAT

Current indications are it may be 8% but

final decision awaited

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National VAT DesignInput Tax Credit To:

Local taxable salesExports

Input Tax Credit Restricted/not available to:CST salesBranch TransfersConsignment sales

Taxes Abolished Turnover Tax, Resale Tax, Surcharge etc

Taxes To continueOctroi and Entry tax

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Central Sales Tax vis a vis VAT

Not Available for setoff

Phase-out

2% in the first year

1% in the second year

0% in third year

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Example

VAT Rate taken as 10%

Full input tax credit

usedOnly partial input tax credit used as

tax paid is less than incurred

Input tax credit nil as purchase on CST is not VAT-

able

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Business Impact - CST

In a phased removal of CST, the locations of suppliers and consumers could have significant impact

Total tax payable at LST & CST

Input tax credit

available only on

local purchase

The above example clearly shows how it is desirable to maximize local purchase and

local sale to benefit from input tax credit to maximum

Total tax payable

calculated on the

basis of 10% local sales and

90% interstate sales @ tax rates shown

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Business Impact

Rebating Model

Stock of inputs including business inputs and capital goods held at registration – rebatable

Transitional Stock of goods for manufacture and resale – rebatable

Inputs procured on Leasing- eligible for normal rebating

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Business ImpactIncentivesPresent

Exemption (Holiday) / Deferment

Under VAT

VAT chain - Dealers buying from units availing exemption cannot claim input tax creditUnavailed balances eligible under exemptions may be converted into deferments Input tax credit allowed on deferments

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InvoicesTax Invoice

Issued by VAT Dealer only for local sales to other VAT dealers (TIN)

Retail Sale InvoiceIssued by VAT dealers, casual traders or lump sum dealers for sales to consumer or unregistered dealer

Sale InvoiceIssued when tax or retail invoice cannot be issued such as inter state sales

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Returns to be filedReturn Form Period of Filing

Quarterly return

VAT-R1 On or before the last date of the month following the quarter

Annual Return

VAT-R2 31st October

Annual Commodity Tax Return

VAT-R3 31st October

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Accounts

Separate account of sales & purchases made

In the StateInterstateImportsExports

Separate account of sales & purchases in respect of the different classes of goods liable to tax at different rates All VAT dealer accounts to be audited

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Issues of Concern -Traders

CST not VAT-ableMaintenance of detailed recordsOpening stock of goods as on changeover date

Input tax credit on full value of local purchases @ local tax as per experience of Haryana who have implemented VAT

already

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Issues of Concern – State Govt

Compensation of loss of revenueInadequate preparedness of States and poor IT support

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National ConsensusChanges (being effected) in the CST Act, and to phase out CST gradually Uniform VAT structure for all StatesConstitution to be amended to enable Centre to levy and both State and Centre to collect tax on services Works Contracts, Leasing and Hire purchase transactions within the ambit of ‘Sale’ under Central Sales Tax Harmonised classification and coding across the country

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Thefts of pre-printed invoices to inflate input tax credit

Please be careful with the invoices in your computer system

VAT Frauds

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VAT Control System Greater use of Computer Auditing

Tax Identification Number

Scrutiny of VAT declarations within 3 years

5% of dealers selected for audit with 4 month notice

Survey to detect dealers liable to pay tax

A Fundamental Revision is neededHigh level of co-operation from business

Appropriate Penalties for fraud

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Emerging Issues – Self Enforcing

Deemed Assessment Correct & complete returnsAcknowledgement of annual return is deemed to be copy of assessment orderAssessment by way of scrutiny