Value Added Tax collection is a process of levying certain charges on goods, services and transaction by a governing authority to provide the public services. It is one of the leading powers held by the government of India. Different types of taxes are applicable at various stages of the sale of goods and services VAT is one such tax.
|VAT Tax Registration||How to File VAT Return|
|How to Apply for TIN||VAT Calculation and Input Tax Credit|
What is VAT – Value Added Tax?
VAT is a kind of tax which levied on the sale of goods and services when these goods are ultimately sold to the consumer. VAT Tax is an integral part of the GDP (Gross Domestic Product) of any country. VAT is imposed on intrastate sale that is the sale of goods within the state. VAT is a tax on value addition on the goods.
While Value Added Tax is levied on the sale of goods, services paid by manufacturers to the government, the actual tax is levied on end users who purchase these goods. Hence, VAT is an indirect tax which is given to the government by consumers but via manufacturers of goods and services. It is a multi-stage tax which is levied at each step of production of goods and services which involve sale/purchase.
Features of VAT- Value Added Tax
VAT works on the principle that when a raw material passes through different manufacturing stages and manufactured product passes through various distribution stages; tax should be levied on the ‘Value Added’ at each stage and not on the gross sales price. This ensures that same commodity does not get taxed again and again, and there is no cascading effect. In simple terms, ‘Value Added’ means the difference between selling price & purchase price. VAT avoids cascading effect of tax. A Value Added Tax is like a sales tax in that ultimately only the end consumer is taxed. Let us take a look at some of the key features of VAT.
- The Homogeneous (similar) goods and services are taxed uniformly. So the similar product from all brands will be taxed the same.
- Value Added Tax reduces chances of tax evasion and support compliance.
- VAT is levied at each stage of production of a good to makes the taxation process easier and more transparent.
- Encourages transparency in the sale of goods and services at the small-scale level.
- VAT avoids Cascading Effect of Tax.
Advantages of VAT- Value Added Tax
VAT (Value Added Tax) is a tax on final consumption of goods and services. Let us take a look at Advantages of VAT below.
- The tax burden is only at the last i.e. consumption stage. This method is useful for taxation structure based on
- It becomes easier to give tax concessions to goods used by the common man or products used for the manufacture of capital assets or exported goods.
- Exports can be freed from domestic trade taxes.
- It provides an instrument of taxing consumption of goods and services.
- Interference in market forces is minimum.
- Simplicity and transparency.
- Aids tax enforcement by providing an audit trail through different stages of production and trade.
- Thus, it acts as a self-policing mechanism resulting in lower tax evasion.
- Tax rates can be lower as the tax is levied on the retail price and not at the wholesale price.
Goods on which VAT does not Apply
VAT does not apply to the products where price is determined by the government intervention such goods as follows.
- Petrol, Diesel or other motor spirits.
- Lottery Tickets.
Purchase Charge of VAT- Reverse charge
Normally, VAT is payable by the seller of goods. However, in some cases, the liability is cast on the purchaser of goods, known as ‘Reverse charge.’ In reverse charge, the service receiver also acts as the service provider. He pays tax on services received by him. He can avail Cenvat credit of tax paid by him since the service is his ‘input service’. There is a provision of ‘tax collection at source’ under section 206C of Income Tax Act. Here, the manufacturer or seller of liquor is liable to pay tax at source. The buyer has no liability. Tax deduction at source (TDS) under Income tax is not ‘reverse charge’ since the core responsibility of payment of income tax continues to be that of the person earning income. Mode of ‘reverse charge’ is used when it is administratively difficult to collect tax from the seller of goods or service provider or income earner.
VAT Rates – Goods Under VAT System
Since the imposition of Value Added Tax and collection comes under the influence of state governments. Hence different states have different VAT rules and implementation guidelines. Hence, the procedure for tax application, VAT rates, deadlines for VAT payment and VAT return e filing, all differ from one state to another state. Value Added Tax (VAT) in India can be divided into four main subheads.
|0% (NIL)||Natural and unprocessed produces in the unorganised sector, goods having social implications and items which are legally barred from taxation (e.g. newspapers, national flag). This will contain 46 commodities, out of which ten will be chosen by individual States which are of local or social importance. Certain specified life-saving medicines have been exempted from VAT.|
|1%||This special rate meant from Precious stones, and Semi-Precious Stones, gold, bullion, silver ornament, etc.|
|4%||This rate applied to the largest number of goods, common for all the States, comprising of items of necessities such as medicines and drugs all agriculture & Industrial inputs, capital goods.|
|5%||This rate covers declared goods.|
|12.5%||All goods other than goods specified by above category.|
- Policy about turnover tax, additional tax, surcharge, etc. Imposed by State Governments
Calculation of VAT
Value Added Tax is calculated as the difference between input tax (Purchase Price) and output tax(Sale Price). VAT is known as the tax on value added, or VAT Tax as it is imposed on the amount of value addition made.
VAT = Sale Price – Purchase Price.
Tax is paid on value addition since tax payed on purchases is allowed as set off against tax payable on sales.
Modes of operation of VAT System
- Both manufacturer and dealer must be registered.
- When the manufacturer purchases raw materials and capital goods from another dealer, then VAT paid on such raw material and equipment shall be included in purchase price.
- The manufacturer can avail credit on such VAT paid by VAT invoice only.
- However, no credit shall be allowed for Central sale tax paid on domestic purchases.
- Also, he will not get any credit for other taxes and duties like Custom duty, Excise duty, Service tax and Entry tax, etc.
- The manufacturer needs to file his returns quarterly as well as annually along with requisite documents.
Variants of VAT
Gross Product Varients
Tax is levied on all sales but credit or set off can be availed only of VAT payed on raw materials and inputs other than capital goods.
VAT is levied on all sales and credit, or set-off is allowed of VAT paid on all raw material and components. However in the case of capital goods, VAT credit is allowed in the proportion of depreciation allowed on them.
VAT is levied on all sales, and 100% credit or set-off is allowed of VAT payed on raw material on capital goods.
Taxpayer Identification Number is an 11 digit numerical code which represents registration number of the dealer and hence is used to Identify the taxpayer.