Taxation refers to the process of an authority levying certain charges on goods, services and transactions. It is one of the foremost powers held by the government of any country. Various types of taxes are applicable at various stages of sale of goods and services; VAT is one such tax.
What is Value Added Tax or VAT?
VAT is a kind of tax levied on sale of goods and services when these commodities are ultimately sold to the consumer. VAT is an integral part of the GDP of any country.While VAT is levied on sale of goods and services and paid by producers to the government, the actual tax is levied from customers or end users who purchase these. Thus, it is an indirect form of tax which is paid to the government by customers but via producers of goods and services.
VAT is a multi-stage tax which is levied at each step of production of goods and services which involves sale/purchase. Any person earning an annual turnover of more than Rs.5 lacs by supplying goods and services is liable to register for VAT payment. Value added tax or VAT is levied both on local as well as imported goods.
Features of Value Added Tax in India:
- Similar goods and services are taxed equally. So a similar television from all brands will be taxed the same
- VAT is levied at each stage of production and hence makes the taxation process easier and more transparent
- VAT reduces chances of tax evasion and fosters compliance
- Encourages transparency in sale of goods and services at the tiniest level
Calculation of VAT:
VAT is actually calculated as the difference between input tax and output tax.
VAT = Output Tax – Input Tax
Where output tax is the tax received by the seller for sale of his goods and services and input tax is the tax paid by the seller for raw materials required to manufacture his goods and services.
Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials. Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000
Now after selling the food made by using the purchased raw materials, Ram was able to make Rs.1,00,000. Supposing 10% output tax, output tax becomes Rs.10,000
So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000
Why is VAT required and How is it useful?
India was one of the last few countries to introduce VAT as a form of tax. Taxation process in India was believed to be exploited the most by businessmen and enterprises which had found loopholes for evading taxes. VAT was introduced to minimize this evasion and render transparency and uniformity to the tax payment process.
Value Added Tax is levied in multiple stages of production of goods and services and comes under the purview of various state governments. Hence, VAT in India might slightly differ from one state to another.
- No exemptions under the VAT system. Levying tax at each stage of the production process ensures better compliance and less loopholes to be exploited
- VAT, when enforced properly forms an important instrument for tax consolidation of the country and as such helps towards solving the fiscal deficit issue to some extent
- Since, VAT is a globally accepted taxation system, it will help India integrate better into global trade practices
VAT Implementation In Various State of India:
Since enforcement of VAT and collection of it comes under the purview of state governments, different states have different VAT rules and implementation guidelines. Hence, the procedure for tax implementation, rates of VAT, timelines for VAT payment and VAT return filing, all differ from one state to another.
Despite state-specific implementations, VAT in India can be divided into four main subheads.
- NIL VAT Rate:
In a lot of states items that are very basic in nature are sold without levying any VAT on them. These items are mostly those sold by the unorganized sector in their most basic or natural form. Examples of this type of items are salt, khadi, condoms etc.
- 1% VAT Rate:
For items which tend to be highly expensive, the percentage of VAT applicable needs to be kept low since otherwise the VAT levied could be too high an amount. For such items, VAT is kept as low as 1%. Gold, silver and other precious stones as well as precious jewelry fall under this category of goods. Most Indian states have fixed VAT for these items at 1% of the amount.
- 4-5% VAT Rate:
A large number of daily consumption goods have been put by several state governments under this category of VAT. So VAT charged on goods like oil, coffee, medicines etc. is around 4-5% for most states in India.
- General VAT Rate:
General VAT rates apply to goods which cannot be segregated and put under any of the above listed VAT categories. For goods like liquor, cigarettes etc. many governments charge high VAT rates of 12.5% or 14-15%. Also, many state governments follow a general rate of VAT for goods which cannot be categorized to suit the above classification. Such goods are taxed at 12%, 13% or even 15% in different states.
Value Added Tax in different states across India
Process of VAT Registration:
VAT registration is mandatory for enterprises that make a turnover of more than Rs.5 lakh by selling goods and services. All such enterprises are required to register in their respective states of operation. Registering for VAT is necessary for enterprises in order to start paying VAT. On registration, each trader is given a unique 11-didgit registration number which is used to for all communication regarding VAT and its filing.
- Who should register for VAT?
Any firm making a turnover of more than Rs.5 lakh per annum is required to register for VAT payment.
- Documents required for VAT registration:
Following is the list of documents that needs to be submitted while registering for VAT.
- Copy of PAN card
- Address proof of business
- Proof of identity of promoters
- Additional security deposit or surety
- How much time does it take to register for VAT?
Generally, state governments take around 15-20 days to complete the process of registration. This time may differ from one state to another.
Process of VAT Collection:
The process of collection of VAT can be safely categorized into two broad heads based on the method of collection of value added tax.
- Account-based collection of VAT
Under the account based method of collection, sale receipts are not used, instead tax is calculated on the value added. Value added is calculated as the difference between revenues and allowable purchases. Most countries do not use this method of computing and collecting VAT, however, Japan still uses this way for tax collection.
- Invoice-based collection of VAT
Under the invoice-based VAT collection, sale receipts or invoice is used to compute the corresponding VAT. Traders when they sell their goods and services offer invoice containing separate details of VAT collected. Most countries in the world today use the invoice-based method of VAT collection.
Another way to categorize VAT collection is to classify it based on the timing of collection.
- Accrual-based collection of VAT
Accrual based collection matches the revenue with the time period during which it is earned and matches the cost of raw materials and expenses to the time period during which they were made. This method is extremely complicated as compared to the cash-based collection of VAT. However, it also throws substantial light on information about any business.
- Cash-based collection of VAT
Cash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash that is being handled instead of whether all the bills are paid. Whenever payment is received, that date is recorded as date of receipt of funds.
Why pay VAT when sales tax is already being levied by government?
VAT and sales tax work differently and hence are kept separate. While sales tax calculation is an easy process, VAT is a multi-level and a more complex form of tax. Sales tax is simply calculated as a percentage of the final selling price of goods and services and is levied from customers at the time of purchase of goods and services.
Some of the most striking points of differentiation between sales tax and VAT are listed below.
- VAT is levied from both producers of goods and services as well as consumers while sales tax is entirely levied from customers
- VAT is a complex taxation process because it is charged in multiple stages. Sales tax is a pretty straightforward and simple taxation procedure
- VAT is a multi-stage tax levied at each step of production while sales tax is charged from customers at final purchase of goods or services
- VAT places in a lot of checks and hence is more transparent and efficient while sales tax is easy to fiddle with
- VAT collection places more burden on producers of goods and services which they might ultimately charge from customers, leading to increased financial burden on customers
- VAT is more transparent and efficient as compared to sales tax and hence generates more revenue for the government than sales tax
VAT returns have to be filed by businesses that have an annual turnover that is Rs.5 lakhs or higher. VAT is payable on all goods and services that are domestic or imported. VAT returns can be filed traditionally by filling and submitting the requisite paperwork to the appropriate authorities. It can also be filed online if registered under VAT Act 2003 using the provided user id and password.
Frequently Asked Questions about VAT:
- Does the VAT that I pay as part of any purchase reach the government?
Yes. Respective state governments are responsible for collection of VAT which is then passed on to the central government.
- Why does VAT on my television set vary in Uttar Pradesh as compared to that in Karnataka?
VAT is subject to rules and guidelines of the state government and as such may slightly differ from one state to another, even for similar goods and services.
- Is VAT levied on certain basic necessities like salt, oil too?
No. Many state governments in India have done away with the concept of VAT for certain necessary goods.
- Is the compliance rate of VAT better than sales tax?
Yes. VAT since levied at every stage of production offers less chances of loopholes which can be exploited and as such is better in terms of compliance as compared to sales tax which is pretty easy to fiddle with.
- Does VAT enhance the cascading effect in taxation process?
No. Rather it minimizes the chances of cascading effect by levying the required tax amount at each and every stage of production.
News About VAT
Demonetization Did Not Impact VAT Collection in Delhi
The VAT collection from November 9 has not faced any impact of demonetization in Delhi. There were reports saying that liquor sale had decreased in the city by 40% on the first day after Rs.500 and Rs.1,000 notes were banned, but that has also picked up. The VAT collection as on November 16, 2016 was Rs.57 crores. One reason why VAT collection has not been affected is because the government has introduced strict measures to ensure tax collections. The government had already announced that anyone who failed to deposit their VAT on time would not be spared.
20th November 2016
Deadline to file VAT in J&K Extended
The state government of Jammu has postponed the last day to file VAT taxes in the region for the first and second quarter of the financial year 2016 – 17. An order issued by Navin K Choudhary, Commissioner Secretary to Government, Finance Department, sub-ruled Rule 28(2) of the Jammu and Kashmir Value Added Tax (VAT) Act, 2005. The last date to file Value Added Tax for the first quarter of the financial year 2016 – 17 is November 30th and for the second quarter of the financial year 2016 – 17 is December 31st, 2016.
14th November 2016
Excise Duty and VAT Collections Expected to Soar
There might be a rise in excise duty as well as Value Added Tax (VAT) collections, this month since several traders as well as retailers will try to have their unaccounted cash go into sales, as per many experts who deal with tax. As soon as the ban on the currency notes were announced last week, by PM Modi, several people started calling tax officers and lawyers to seek help.
14th November 2016
Delhi HC Seeks Response from Centre and Delhi Government on Irregular VAT Levied by Restaurants
The Delhi High Court solicited responses from both the Delhi government and the Centre on allegations that restaurants are overcharging customers on the Value Added Tax component in restaurant bills. A petition claimed that a large number of restaurants are charging the Delhi VAT on the entire bill. This comes even after the 2006 Service Tax Rules (Determination of Value) particularly classify aspects that have to be classified as a “service”. According to the petitioners, Rule 2C of the Service Tax Rules already designate 40% of the bill under the “service” component and that an additional VAT cannot be levied on that amount. The petitioners also argued that the practice of overcharging was rampantly employed by restaurants across the National Capital and in some cases, a whopping 140 percent of the bill amount levied as tax. Value Added Tax is a specific type of tax levied on goods and services by the state governments while service tax is imposed by the Central Government.
10th October 2016
VAT Reduction On Pulses Approved By Odisha Cabinet
A motion to reduce the Value Added Tax (VAT) on pulses from its current rate of five per cent to one per cent for the next three months was approved by the Odisha cabinet on Tuesday. The move was approved on an experimental basis, and was reduced on pulses and dals of all kinds under the OVAT Act, 2004. The ruling will come into effect on July 1st 2016, with the aim of restoring stability and parity in prices of these particular commodities in the market. Chief Secretary Aditya Prasad Padhi stated that the tax relaxation could be extended if the state government does not lose any revenue, which currently stands at Rs. 45 crore from these commodities every year.
4th July 2016
VAT Rollback Signature Campaign Launched By Delhi Congress
A three day campaign lasting from Monday to Wednesday commenced today at the behest of the Delhi Congress, who are looking to collect at least 10 lakhs signatures from consumers at around 300 fuel pumps in the country’s capital. Ajay Maken, Delhi Congress President, took part in the campaign on Monday along with other party workers at fuel pumps in Delhi to collect signatures in hopes of urging the government to rollback the recent increase in VAT as well as petrol and diesel excise duty. The first day of the campaign saw the party workers collect around 3.80 lakh signatures, with the final collection after three days to be presented to Prime Minister Narendra Modi and Chief Minister Arvind Kejriwal. Maken stated that if the central and Delhi governments pulled back the hikes, petrol and diesel could be sold in the capital for Rs 38 and Rs 30 per litre respectively. He also stressed on the fact that the hikes in petrol and diesel rates were unjustified in the face of falling international crude oil rates.
22nd June 2016
Lucky VAT to be Reintroduced by Government
a bid to increase the collection of sales tax, the State Government of Kerala is looking to reintroduce a lucky draw scheme wherein customers who pay value added tax (VAT) for every purchase they make, will earn certain rewards. This scheme hopes to imitate the initiative taken by the Aam Aadmi Party (AAP) in New Delhi, where incentives were provided to customers who demanded bills for their purchases, and for the prompt payment of VAT thereafter. The first version of this scheme was introduced in the state of Kerala in 2006 by Thomas Isaac. However, the Lucky VAT scheme was soon sidelined since it did not result in a significant improvement in the collection of sales tax across the state, Now, the first budget of the LDF government is planning on announcing the reintroduction of a similar scheme where VAT payers will receive prizes in the form of cash following a lucky draw. The LDF government has also targeted a growth rate of 20% in sales tax collection through this scheme.
15th June 2016
VAT Evasion Of Around Rs. 1,500 Crore Found
Large-scale evasion of Value Added Tax (VAT) in 2015-16 has been detected by the investigation division of the State Commercial Tax Department. The officials have found that traders have done illegal transactions of over Rs. 3,000 crore without paying VAT.
The maximum evasion was found on transactions of items such as cigarettes, pan masala and ceramics. The evasion is believed to run over Rs. 1,500 crore.
Items were shown as being sold to other states in order to avoid paying the 15% VAT, but the items were actually sold within Gujarat. The department also found 3,695 cases of bogus bills in 2015-16, which resulted in VAT evasion of Rs. 6.48 crore.
3rd June 2016
NVCC holds workshop on filing of VAT returns
Nag Vidarbha Chamber of Commerce or the NVCC held a workshop in Nagpur on how to file VAT returns. The Traders were given information about when and how to file their VAT returns. NVCC guided them that the returns were supposed to be filed before the payment of tax was to be made. Also, the returns field need to carry details of all transactions with their respective date and invoice numbers.
The department offers free platform for billing and has a network of more than 150 banks to enable smooth online payment of VAT. NVCC is confident that the new online system will help curb corruption since dealings with any department official has been reduced to zero.
20th May 2016
State Tax Violations should be punishable under PMLA
Vice-chairman of the Special Investigation Team (SIT) on black money, Justice (retd) Arijit Pasayat, has said that violation of state laws such as VAT should be brought under the Prevention of Money Laundering Act (PMLA).
Delivering the key-note address at an Enforcement Directorate event in New Delhi, Pasayat said investigation agencies were not slow but “meticulous”. He pointed out that over 97,000 individuals in the country were directors in boards of more than 20 companies each and around 2,000 persons were directors in over 100 companies each, in gross violation of the Company Law that states that a person cannot be a director in more than 20 companies.
He urged the government to include tax offences in the predicate offences list, and both attempt to evade tax should be treated at par with actual tax evasion.
12th May 2016