VAT is tax that is levied on services and goods and is paid to the government by producers although the actual tax is levied from the end user or consumers who purchase the services and goods. This is important for GDP.
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 goods and services. 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 lakh 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.
VAT Rates in India
The implementation guidelines and rules of Value Added Tax vary from state to state as the tax is collected by state governments. VAT in India is categorised under 4 heads which are as follows:
- Nil: Goods and services that fall under this category are exempt from VAT. These are mainly items that are basic in nature and sold in the unorganised sector. Examples of such items include khadi, salt, etc.
- 1%: VAT is charged at 1% for the items under this category. 1% VAT is usually charged on items that are relatively expensive in nature. The reason why VAT is charged at 1% on expensive goods is because increasing the rate of VAT will considerably increase the prices of the items that fall under this category. Some of the examples of products that fall under this category include gold, silver, precious stones, etc.
- 4-5%: VAT is charged at 4% to 5% on certain items that are used on a daily basis. Examples of items that attract VAT at 4-5% include cooking oil, tea, medicines, etc.
- General: Items that fall under the general category attract VAT at 12% to 15. The items that fall under this category are mainly luxury items such as cigarettes, alcohol, etc.
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 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.
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
- Invoice-based collection of VAT
- Accrual-based collection of VAT
- Cash-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.
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 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 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.
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.
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 these 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
Why pay VAT when sales tax is already being levied by government?
VAT and sales tax have different purposes and hence are kept separate. While sales tax calculation is an easy process, VAT is a multi-level process 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 levied only 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 the 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
Features of VAT 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 lowest level
FAQ's On VAT
- Does the VAT that I pay as part of any purchase reach the government?
- Why does VAT on my television set vary in Uttar Pradesh as compared to that in Karnataka?
- Is VAT levied on certain basic necessities such as salt and oil too?
- Is the compliance rate of VAT better than sales tax?
- Does VAT enhance the cascading effect in taxation process?
Yes. Respective state governments are responsible for collection of VAT which is then passed on to the central government.
VAT is subject to the rules and guidelines of the state government and as such may vary slightly from one state to another, even for similar goods and services.
No. Many state governments in India have done away with the concept of VAT for certain necessary goods.
Yes. Since VAT is levied at every stage of production, it 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 easy to fiddle with.
No. Rather it minimizes the chances of cascading effect by levying the required tax amount at each and every stage of production.