VAT is actually a state subject in India; states have the authority in making decisions. State governments ensure the levy of VAT in each state with the help of tax departments in their respective states. The Central government is influential in guiding the state government with respect to execution of VAT. The department of revenue under the Ministry of Finance is given the complete authority to have control with respect to direct and indirect taxes, through two statutory boards such as;
- Central Board OF Direct Taxes (CBDT)
- Central Board Of Customs and Central Excise (CBEC)
The sales tax division of revenue department is responsible for levying VAT. Previously India had a problem of double taxation. Goods were taxed two times, before manufacturing and again after manufacturing. This had a negative impact on the economy.Therefore, to avoid such double taxation, VAT has been introduced.
VAT Collection Methods:- Value Added tax (VAT) can be collected in two different methods:
In first method, tax is charged both on the basis of the tax which is paid on purchase and the tax that is payable on the sale(shown separately in the invoice).Finally the difference between the tax paid on purchase and the tax paid on sale as per the invoice is VAT.
VAT = Tax paid on Purchase - Tax paid on Sale
In the Second method tax is collected and charged on the cumulative value of the tax paid on sale and purchase, by applying the rate of tax applicable to the goods. Which means the difference between the sale price and purchase price is VAT.
VAT = Sales Price – Purchase Price
The value added tax is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say a month). The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/ rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.
For example; Input worth Rs. 10,00,000/- is purchased and sales are worth Rs. 20,00,000/- in a month, and input tax rate and output tax rate are 4% and 10% respectively, then input tax credit/set off and calculation of VAT will be as shown below:
- Input purchased within the month: Rs.10, 00,000/- courtesy
- Output sold in the month: Rs.20, 00,000/-
- Input tax paid: Rs.40, 000/-
- Output tax payable: Rs.2, 00,000/-
- VAT payable during the month after set-off /input tax credit [(d) - (c)]: Rs.1, 60,000/-
Benefits of VAT
The main benefit of VAT execution is:
- Reduces tax evasion.
- Put an end to multiple taxes such as turnover tax, surcharge on sales tax, additional surcharge etc.
- Advocated an internal system of self assessment for VAT liability.
- Tax structure becomes easier and more visible.
- Enhances tax compliance and results in higher revenue growth.
- Encourages competitiveness of exports.
State Value Added Tax
VAT and its implementation are confined only to the State. All the States are drafting their separate Value Added Tax Act and as per the present position, every State has their own VAT Act with different provision not parallel with each other. It is proposed that there would be Two tax rate slabs on which tax would be levied. The first one would be 4% and would cover all essential items. The second one is 10% and all luxury items would be covered. In addition special rate slabs are also proposed which are 1% for bullion and jewellery, 20% for Non Essential Goods and exemption to certain goods like agricultural produce etc. Petroleum products are not included in VAT rates. Separate rate would be notified for them.
Set off in VAT
At present the set off would be available on the goods locally purchased within the State only. No set off would be available to the goods purchased in the course of interstate trade and commerce. It is necessary to produce the tax invoice to claim set off. The tax should have been charged in the invoice.
Concerns Related to VAT
- Manufacturer
- Trader
- Issue of Invoice
- Declaration Form
- Accounting
- Stocks
- Capital Goods
- Export
- Registration
- Security Amount
- Penalties
- Works Contract and Leasing.
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