A Project On

Value Added Tax (VAT)

By
Akash Agarwal

- 701 (speaker)

Sourabh Singh

- 703 (speaker)

20/08/2012

St. Xavier's College (Kolkata) Prof. Dr. P.P.Ghosh

Topics to be
discussed

Introduction to VAT

Characteristics of VAT
History of VAT
VAT Terminology
How does VAT work
Problems of implementation of VAT in INDIA
VAT Returns
Sales Tax v/s. VAT

Introduction to
Vat

Meaning

Value Added Tax is a multi point sales tax with set off for tax paid
on purchases. It is basically a tax on the value addition on the
product. The burden of tax is ultimately borne by the consumer of
goods. In many aspects it is equivalent to last point sales tax. It
can also be called as a multi point sales tax levied as a proportion
of Valued Added.
It is a general tax that applies, in principle, to all commercial
activities involving the production and distribution of goods and
the provision of services.
It is not a charge on companies. It is charged as a percentage of
price.

Characteristics of
VAT
The difference between retail sales tax and VAT is that while
retail sales tax is collected at one stage, VAT is collected in
installments at successive stages of production and
distribution. It is a multi - state tax rather than a single stage
one like the retail sales tax, and in its deal form, is to be
levied on all the states of production & distribution.
It is principle, comprehensive unlike selective excises.
It is collected in bits at each stage of production and
distribution which, when added, equal a tax on the retail sale
of the final product at the same rate as the VAT.

It falls on each input entering into the final products once and
only once.

History of VAT
The very system of Value Added Taxes or VAT was introduced for
the first time in the market by the modern French economist in
1954. Maurice Laur who was the joint director of the French tax
authority and the director general of the department of import, was
the first person to introduce VAT or the value Added Tax with effect
from 10th of April in the year 1954 in the cases of large businesses,
and which are extended over time to all business sectors. In France,
VAT became so important that it has became one of the most
important sources of the state finance and it is accounting for
almost 45% of state revenues.
Like all the other direct taxes in the market, the VAT is quite
different. This is actually an indirect tax because in this sort of tax
it is collected from someone other than the individual who actually
bears the cost of the tax who is known as the seller rather than the
consumer. The implementers of this tax also have taken certain
initiatives which help them in avoiding double taxation on final
consumption.

VAT ie. the Value added tax is relatively a new concept in our country and it
was practically introduced in the year 2005 in large no of states of the country
though initially it was introduced but taken back in mid 90s in the state of
Maharashtra. Further Haryana was the first state to introduce it successfully in
2003. The VAT introduction schedule in India can be seen as under;
No

States

Date of Imposition of Number of

VAT

States

Haryana

01-Apr-03

Andhra Pradesh, West Bengal,

01-Apr-05

20

Kerala, Karnataka, Orissa, NCT

Delhi, Tripura, Bihar, Arunachal
Pradesh, Sikkim, Punjab , Goa,
Mizoram, Nagaland, J & K,
Manipur, Maharashtra, Himachal
Pradesh, Assam and Meghalaya
3

Uttaranchal

01-Oct-05

Rajasthan, Gujarat, MP,

01-Apr-06

Still not decided

Chattisgarh and Jharkhand

5

Uttar Pradesh and Tamil Nadu

VAT Terminology
Output VAT

Amount received by a seller as a percentage

of the gross sale price of goods or services

Input VAT

Amount paid by a buyer as a percentage of the

gross purchase price for goods or services
used in production.

Zero Rated

Transactions in which the seller collects no

output tax and the corresponding input tax is
fully refundable. Exports are zero rated

Exempt

Transactions in which the seller collects no

output tax but the corresponding input tax is
non-refundable and absorbed by the seller.
Financial services are commonly exempt.

How VAT (Value Added Tax)

Works
A trader registered for VAT effectively pays VAT only at one stage
when he sells his goods.
This tax is the only amount, which has an effect on his selling
price which includes VAT.
The VAT that he has paid as a part of his purchase price is charged
on him by his suppliers.
This is not a cost to him because he gets it back by deducting it
from tax on his sales (Output Tax).
Therefore, VAT should have a minimum impact on his selling
prices.

Lets take an example

Manufacturer
The Manufacturing company Perfect Shoemaker Pvt. Ltd has
purchased raw material worth Rs. 50,000/- after paying state tax
of Rs. 2,000/- @ 4%. The Labour contents are Rs. 40,000/- and the
margin towards administrative and selling expenses and profit are
Rs.10000 hence the total sale price 100000/- .Suppose the tax is
rate 13.5% he will charge Rs 13500 as tax from the Wholesaler.
Since he has already paid Rs 2000/- on the raw materials hence his
net tax liability Rs 11500/- after getting a credit of Rs 2000/- tax
paid by him on raw Material. This is VAT for manufacturer

 Wholesaler
The wholesaler tough shoe seller has purchased goods worth
Rs 1,00,000/- after paying tax of Rs. 13,500/- as mentioned
above. Let us assume his margin for profit and expenses is Rs.
7,000/- then he will the goods for Rs. 1,07,000/- to the
retailer and also charge tax of Rs. 14,445/- from the retailer.
Since he has already paid the tax of Rs. 13,500/- on his
purchases hence his net tax liability will be Rs. 14,445/- (-)
13,500/- = Rs. 945/- We can Verify it as 13.5% of 7000 Since
the value added by the Wholesaler is 7000.

 Retailer
The retailer M/s. Bright shoe point has purchased
goods for Rs. 1,07,000/- after paying tax of Rs.
14,445/-. Suppose his margin for profit and expenses is
Rs. 10,000/- thus he will sell the goods to the
customer at Rs. 1,17,000/- and will charge tax of Rs.
15,795/-. His net tax liability will be Rs. 15,795/- (-)
Rs. 14,445 = Rs. 1,350/- we can verify it as 13.5% of
10,000/- since the value added by the retailer is Rs.
10,000/-

Problems in Implementation of
Value Added Tax in India
In this study it is found that there are number of
problems to introduce value added tax on commodities
in different states in India, but in this paper only major
problems have been taken which are facing by
different states for imposing of VAT, as follows

Billing

Lack of uniformity

Concession for New Industry

Number of Taxes impose by the

Government

Lack of infrastructure facilities

Dealing in Variety of Goods

VAT Returns
VAT Returns are filed every month or every quarter depending
on the amount of VAT you pay. The normal rule is that if you
pay less than Rs 15,000 for VAT every month, a VAT Return is to
be filed every quarter. It is all at the discretion of the VAT
officer. At monthly or quarterly intervals on your VAT Return,
you should subtract your Input Tax (attributable to taxable
supplies only) from your Output Tax and pay the difference to
the VAT Commissioner.
If your Input Tax is greater than your Output Tax you can carry
over the difference as a credit to your next VAT Return. In
certain circumstances, the Commissioner may pay you any
excess if he is satisfied that such an excess is a regular feature
of your business

Issuing Tax Bills and Invoices

According to VAT law, you cannot sell any goods without a sales
document. This document can be a small cash memo or a cash sale
or a bill for cash transactions issued at, or before, the time when
the cash is received. The prices mentioned on these sale documents
should include VAT and the words 'Price includes VAT' must be
printed on them. These documents are suitable for retailers such as
grocers and chemists. You must give the original to the customer
and keep a duplicate. At the end of each business day, you can total
the cash sales and enter it in your Sales Ledger.
For selling on credit, you are required to provide the purchaser with
a tax invoice at the time of supply in respect of that supply. When
you receive a deposit as advance payment for a booking, a tax
invoice should be issued at the time such deposit is received. All tax
invoices should be serially numbered and issued in serial number
order. They must include the following information:

MERITS OF VAT
It ensures that input is taxed only once.
It combines the advantage of being of general tax, without
the disadvantages of extended input taxation.

It is free of other economic demerits of cascade type

turnover or sales tax.
It does not change the relative prices of inputs and give
wrong signals to producers regarding factor combinations.

It does not raise costs through input taxation.

In developing countries, a mild bias could be built into the
system against capital intensive methods.
Economy in the use of scarce inputs could be promoted
through an additional non refundable duty.

DEMERITS OF VAT

VAT was to be applied in all states but it failed to do so.

Inflation rate has been increased due to VAT.

VAT has complicated both tariff in customs and excise and

Overburdend with more exemptions

VAT is regressive :- Its burden falls disproportionately on

Poor people since the poor are likely to
spend more of their incomes

VAT is too difficult to operate from the position of both the

Administration and business

Monthly Return: The manufacturer is required to pay

CenVAT on a fortnightly basis and submit a monthly return
(ER1) to the Superintendent of Central Excise by the 10th of
the month

VAT RATES AND CLASSIFICATION OF COMMODITIES

For different commodities VAT rates are calculated as 1%, 4%, 12.5% and a
specific category is exempted from VAT

GOODS EXEMPTED FROM VAT

Agricultural implements manually operated or animal driven as

notified by the state government.

Aquatic feed, Cattle feed, Poultry feed, Animal feed supplements.

Books including almanacs, panchangs, timetables for passenger

transport services.

Cereals & Pulses (during period from 01/04/05 to 31/03/06) in whole

grain

Chalk stick, Charcoal & Badami Charcoal, Charkha implements used

in production of handspun yarn.

Firewood, Fishnet fabrics, Contraceptives of all types.

Sales Tax V/s VAT

Sales Tax

VAT

Sales Tax is a narrow concept

VAT is a wider concept

The value added tax system, unlike the
conventional sales tax system, efficiently
addresses the problems of cascading and

Sales tax, as compared to VAT is the

input tax credit that causes an automatic

percentage of revenue imposed on the

hike in the consumer price level. The

retail sale of goods.

incidence of cascading is avoided in VAT.

Sales tax is often considered a burden if the

percentage charged goes beyond 10% and is Although tax evasion is not possible in VAT,
subjected to evasion by the consumers who it is subjected to other fraudulent practices
engage in buying products through the

such as carousel fraud. This is one of the

internet and other activities such as buying prominent practices of theft of the value
at wholesale or through an employer.

added tax.

Changes in MVAT Act

2002 by the budget.
1.The exemption to wheat, rice, pulses and their flours, turmeric,
chillies, tamarind, gur, coconut, cumin seeds, coriander seeds,
fenugreek and parsley (Suva), papad, wet dates, solapuri chadders
and towels which was to expire on 31.03.2012 will be continued till
31.03.2013.

2. The exemption of fabrics except furnishing cloth mentioned in

Schedule A (list of tax-free goods) to continue. However, furnishing
cloth will be taxed @5% on last point.

3. Concessional rate of 5% to continue on tea till 31.03.2013.

4. Aviation Turbine Fuel (ATF) sold from Maharashtra except from
Mumbai and Pune which was hither to taxed @4% will be now taxed at
the rate of 5% w.e.f.01.04.2012.

 5. Levy of Purchase Tax is proposed on unregistered dealer (URD)

purchases of cotton and oil seeds @5% which will be eligible for setoff as per applicable rules.
6. Exemption from VAT on Biris removed. Biris will be taxed @12.5%.
Unmanufactured tobacco sold under brand name will also be taxed
@20%.
7. Exemption from VAT on LPG for domestic use is removed. It is
proposed to be taxed @3%.
8. The rate of tax on plaster of paris is proposed to be enhanced to
12.5% from 5%.
9. Rate of tax reduced on cotton yarn from 5% to 2%.
10. The rate of tax on dry fruits is made uniform. w.e.f. 01.04.2012
all dry fruits will be taxed @5%. Thus, exemption available to Raisins
and currants upto 31.03.2012 will stand withdrawn w.e.f. 01.04.2012.

 11. Entry Tax is proposed on Natural Gas @12.5% with full set-off in
case of resale and in other cases subject to retention @3%.
12. Tax rate on writing boards and pads, examination pads, black,
white or green boards, drawing boards, drawing charcoal, erasers,
foot rulers, staplers, glitter pen, sketch pen, envelopes, etc. is
proposed to be reduced to 5% from 12.5%.
13. Rate of tax on semi-processed and ready to cook vegetarian food
is proposed to be reduced to 5% from 12.5%.
14. Exemption from tax is proposed on oil and oilcake manufactured
and sold by Tel Ghani certified by KVIC provided the turnover does not
exceed Rs.20 Lakhs.
15. Purak Poshak Ahar supplied to Anganwadis under the Integrated
Child Development Scheme is made exempt from tax.

SET-OFF RULES:
The rate of retention in case of Branch Transfer outside the
State will be 4% instead of 2% effective from 01.04.2012.

Thank You