VAT - Ipcc

Value Added Tax
For CA - IPCC
May & Nov 2013
[Tharun Raj]
A common mans plight about Taxes in India

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Tharun Raj
CONTENTS
Value Added Tax (VAT) .................................................................................................................................................. 3
Introduction to VAT: ........................................................................................................................... 5
VAT CHART (With Uniform Rate): ....................................................................................................... 6
VAT CHART (With Varying Rates): ....................................................................................................... 7
When Sales Tax is levied? ................................................................................................................... 9
Unutilized Input credit: ................................................................................................................. 11
Issues in utilization of Input tax credit: ............................................................................................. 14
Variants of VAT ................................................................................................................................. 15
Methods of Value added................................................................................................................... 17
Tax rates Under VAT: ........................................................................................................................ 20
Tax treatment under VAT for Stock transfer: ................................................................................... 20
Impact of VAT on Imports: ................................................................................................................ 20
Procedures under VAT ...................................................................................................................... 21
Composition Scheme under VAT: ................................................................................................. 22
Consequences of Non-registration: .............................................................................................. 24
Cancellation of Registration: ......................................................................................................... 24
Tax Payers Identification Number (TIN):........................................................................................... 24
Maintenance of Records: .................................................................................................................. 24
VAT INVOICE: .................................................................................................................................... 24
Format of VAT Invoice:.................................................................................................................. 25
System of cross checking under VAT: ........................................................................................... 25
Returns and Assessment under VAT: ................................................................................................ 26
Accounting Entries for VAT: .............................................................................................................. 26
Merits and Demerits of VAT: ............................................................................................................ 27
VAT Audit: ......................................................................................................................................... 27
Unsolved questions:.......................................................................................................................... 28
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Tharun Raj
VALUE ADDED TAX (VAT )
Delhi, March 21, 2005: VEXATIOUS ALTERNATIVE TAX?: Sections of trade are up in arms against the
proposal to introduce value added tax at the State level, unconvinced by the arguments of economists
and policymakers. What is VAT? And why traders opposed implementation of VAT? Analyse the
impact of VAT and we will discuss the issue at last!!!
A ROAD TO CST:
CST though called CENTRAL Sales tax, the state will collect and retain the tax.
CST shall be paid by the seller to that state where the movement of goods starts.
The state governments are entrusted with the authority to collect and administer CST
through the respective state commercial tax departments.
The rate of CST is as follows:
Sale to
Registered Dealers
Unregistered Dealers
2% or Local sales tax rate

whichever is lower
Local sales tax rate
Sec. 3 of CST Act, 1956: A sale or purchase of goods shall be deemed to take place in the
course of interstate trade or commerce if the sale or purchase
a) Occasions the movement of goods from one state to another or
b) Is effected by transfer of documents to title of the goods during their movement
from one state to another.
Documents of title to goods means a document which evidences that the person holding the
document has the title to goods. Lorry receipt, Railway receipt, Air way bill, bill of lading are
known as documents of title to goods.
CST is levied on all subsequent interstate sales made by a one person to another. The system
of tax credit is absent in CST. But this general rule has exceptions:
a) Interstate sale by transfer of documents of title
b) Penultimate sale
c) Special provision in case of declared goods
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Sec. 6(2) of CST Act, 1956 Subsequent sales by transfer of documents of title is exempt
provided the dealer selling goods issues a certificate in prescribed form (E-I/E-II) to the
purchasing dealer.
Sec. 5(3) of CST Act, 1956 Sale preceding the export sale is known as penultimate sale
which is exempted as it is deemed to be in the course of export. Such exemption is available
only if the sale is as per the following order of events.
Sec. 14 of CST Act, 1956 Special provision in case of Declared goods.

The following are the declared goods:
1) Cereals
2) Pulses
3) Coal including coak in all forms but excluding charcoal
4) Cotton
5) Cotton fabrics
6) Cotton yarn
7) Crude oil
8) Aviation Turbine Fuel
9) Hides and Skins
10) Iron and steel
11) Jute
12) LPG for Domestic use
13) Oil seeds
14) Man made fabrics
15) Sugar
16) Unmanufactured tobacco
17) Woven fabrics of wool
In case of the above goods, the buyer of such goods can avail the tax paid by the previous
persons as credit and can be set off for payment of tax on subsequent sales. But with a
precondition that the same goods must be sold subsequently without any processing.
Various Forms and its importance under CST
Form
Purpose
Form
Purpose
A
Application for registration
F
In case of Branch transfer
B
Certificate of Registration
G
Indemnity bond when C Form is lost
C
Declaration by purchasing dealer to
H
Certificate of Export In case of
obtain goods at concessional rate
penultimate sale
D
Not Applicable from 1-4-2007
I
Certificate by SEZ unit
E-I/E-II
Certificates for Sale in Transit
J
Certificate to be issued by Foreign
diplomatic mission
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INTRODUCTION TO VAT:
Power to Levy: seventh schedule to the constitution
List I (Union List) Entry No. 92A Taxes on sale and purchase of goods other than newspapers,
where such sale or purchase takes place in the course of Interstate trade or commerce.
List II (State List) Entry No. 54 Tax on sale or purchase of goods other than news papers, where
such sale or purchase takes place in the course of Intrastate trade or commerce
Meaning of Sale: Transfer of property in goods by one person (i.e. Seller) to another person (i.e.
Buyer)
- For Cash (i.e. Cash Sales) or
- For Deferred payment (i.e. Credit Sales) or
- For any other Valuable Consideration (i.e. Barter system)
Types of Sale
Inter State Sale
(Sale outside the State)
It arises when seller is in one state

and buyer is in another state
Central Sales Tax (CST) is
applicable
Intra State Sale

(Sale within the State)
It arises when both seller and

Buyer are in the same state
Value Added Tax (VAT) is
applicable
History of VAT:
1919
Dr. Wilhelm von Siemens, Germany proposed on improved turnover tax (which is in the
same lines of VAT)
1954
VAT was introduced in France and soon it spread to a large number of countries.
1986
India introduced VAT in a different way under the name of Modified Value Added Tax
(MODVAT), where it is restricted only to excise duty.
1994
A committee of state finance ministers headed by union finance minister was
constituted for the introduction of VAT
2001
MODVAT was renamed as CENVAT which covers services also
2002
Dr. Vijay Kelkar, advisor to union finance minister has submitted a report on
observations and recommendations for implementation of VAT
2005
State level VAT was introduced by majority of states
WHAT IS VAT?
It is the Indirect tax imposed on the value addition.

Value addition is measured by Sale Price (-) Purchase price
The tax paid on purchases is set off against tax paid on sales
It is introduced to avoid cascading effect of tax.
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VAT CHART (With Uniform Rate):

Raw material
Producer
Sale = Rs. 100

(VAT = Rs. 10)
Goods
Manufacturer
Sale = Rs. 150

Gross VAT = Rs. 15
Net VAT = Rs. 5
(Rs. 15 10)
Consumer
Sale = Rs. 200

Gross VAT = 20
Net VAT = Rs. 2
(Rs. 20 18)
Retailer
Input tax Credit

taken =Rs. 18
Observation (i)
The VAT paid by the

consumer (i.e. To retailer)
and revenue to the
government (i.e. VAT paid
by all to Government) is
same
Observation (ii)
The tax paid by the

consumer is routed to the
government by all the
players in their value added
ratio.
Sale = Rs. 180

Gross VAT = Rs. 18
Net VAT = Rs. 3
(Rs. 18 15)
Input tax
Credit taken
=Rs. 10
Wholesaler
Input tax Credit

taken =Rs. 15
Explanation
In the above chart VAT paid by
consumer to Retailer is Rs. 20.
Therefore the burden on
consumer is Rs. 20.
Transparency in a tax system can
be achieved when there are no
hidden taxes, which means the tax
borne by consumer should be the
revenue to the government.
From the above chart it is clear
that the revenue to the
government is Rs. 20 (10+5+3+2)
Explanation
The revenue to the government of
Rs. 20 is routed by Raw material
producer, goods manufacturer,
wholesaler, retailer in their value
added ration from consumer.
Value added ratio = 100:50:30:20
(Total sale price = 200)
Tax paid ratio = 10:5:3:2 (Total tax
paid to Government = 20)
Each person knows his VAT liability
which means that there is
certainty in VAT.
Advantage
TRANSPARENCY in VAT
Under a VAT system, the buyer
knows out of the total
consideration paid for
purchase, what is tax
component. This transparency
enables state govt. to know as
to what is the exact amount of
tax coming at each stage. Thus
it is a great aid to the govt.
while taking decisions with
regard to tax rate.
Advantage
CERTAINTY in VAT
The VAT is a system based
dimply on transactions. Thus
there is no need to go through
complicated definitions like
sales, sales price. The tax is also
broad based and applicable to
all sales in business leaving
little room for different
interpretations. Thus, this
system brings certainty to a
great extent.
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VAT CHART (With Varying Rates):

Raw material
Producer
Sale = Rs. 100

(VAT = Rs. 10)
Sale = Rs. 150

Gross VAT = Rs. 30
Net VAT = Rs. 20
(Rs. 30 10)
Consumer
Sale = Rs. 200

Gross VAT = 40
Net VAT = Rs. 4
(Rs. 40 36)
Goods
Manufacturer
Retailer
Input tax Credit

taken =Rs. 36
Observation (iii)
When VAT rates are not

uniform, the basic premise
on which VAT system was
built, is at risk. The players
wont pay VAT on the basis
of their Value added ratio.
It leads to tax evasion at a
stage and it does not
provide equality.
Sale = Rs. 180

Gross VAT = Rs. 36
Net VAT = Rs. 6
(Rs. 36 30)
Input tax
Credit taken
=Rs. 10
Wholesaler
Input tax Credit

taken =Rs. 30
Explanation
In the previous chart where VAT
rates are uniform, the tax paid by
consumer (Rs. 20) is shared by RM
producer, goods manufacturer,
wholesaler, retailer in their value
added ratio and accordingly their tax
burden is determined.
If the same continues in this chart
also, then the tax paid by consumer
(Rs. 40) shall be shared by the
players as follows:
Value
Tax
added liability
RM producer 100
20
Manufacturer 50
10
Wholesaler
30
6
Retailer
20
4
Tax paid by consumer
40
But as per the above chart the tax
payable is as follows:
RM producer 100
10
Manufacturer 50
20
Wholesaler
30
6
Retailer
20
4
Tax paid by consumer
40
Advantage
No uniformity in VAT rates
The merits accrue in full
measure only under a
situation where there is only
one rate of VAT and VAT
applies to all commodities
without any question of
exemptions whatsoever. Once
concessions like differential
rates of VAT, composition
schemes, exemption schemes
are built into the system,
distortions are bound to occur
and the fundamental principle
that VAT will totally eliminate
cascading effects of taxes will
also be subject to
qualifications.
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Illustration on Basic Concept:

Mr. S acquires goods from Mr. T for Rs. 1,000 on which tax is
10%, Mr. S adds Rs. 400 value of goods and sells at Rs. 100 profit. The
tax rate is 20%. What is the ultimate price for customer
(a) If VAT system is not present
(b) If VAT system is implemented
Without VAT
With VAT
Sale price of Mr. T
1000
Add: Tax @ 10%
100
Sale price of Mr. T

Add: Tax @ 10%
1000
100
Amount paid by Mr. S
1,100
Amount paid by Mr. S
1,100
Cost to Mr. S
1,100
Cost to Mr. S (1,100 100)
1,000
Add: Profit and Value of goods

Sale price of Mr. S
500
1,600
Add: Profit and Value of goods

Sale price of Mr. S
500
1,500
Add: Tax @ 20%
320
Add: Tax @ 20%
300
Cost to Customer
1,920
Cost to Customer
1800
Tax payable by Mr. S
320
Observation (iv)
Explanation
From the above illustration, the cost
to consumer when VAT system is
implemented is less compared to
without VAT system. The consumer
saves Rs. 120. The tax payable by Mr.
S to the government is decreased
when VAT system is implemented i.e.
Rs. 120.
Therefore the government loses its
revenue in order to contribute it to
consumer.
The cost saved by the

consumer and tax
revenue lost by the
government is one and
the same.
Tax payable by Mr. S (300 - 100)
200
Advantage
Avoids cascading effect of tax
A persistent criticism of VAT has
been that since the tax is
payable on the final sale price,
the VAT usually increases the
prices of goods. However, VAT
does not have any inflationary
impact. With the introduction of
VAT, tax impact on RM is totally
eliminated. Therefore, there will
be no increase in prices.
Why the VAT credit should not be considered in the cost and how it can be set
off with tax payable?
Logical Explanation
Accounting Explanation
The VAT paid on purchases is available as credit.
Whenever a portion of cost incurred is available
as credit, it should not be considered while
calculating the net cost incurred.
If it is considered then cost to consumer will
increase and leads to cascading effect of tax
which is against the VAT system.
The credit so available will be utilised for
payment of VAT liability.
For purchases:
Purchases A/C ----- Dr.
VAT credit Receivable A/C --- Dr.
To Cash/Creditors A/C
For Setoff:
VAT payable A/C --- Dr.
To VAT credit receivable A/C
To Cash (Bal. if any)
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WHEN SALES TAX IS LEVIED?

-
Whether at the time of First sale?

Whether at the time of Last sale?
Whether at any other time?
Single point sales

tax at the time of
First sale
Single point sales

tax at the time of
last sale
Government loses
tax on value
addition made on
subsequent sale
i.e. when goods are

sold to Ultimate
Customers
Theoretically easy but
very difficult coming
to practicality as small
retailers in our
country do not
maintain accounts
Multi point sales tax

on total Sales price
(i.e. on full price)
Tax is levied on
every sale of a
product, on the full
amount of its sale
price whether there
is value addition or
not
It leads to cascading
effect of tax
Multi point sales tax

on value addition
Tax is levied at the
time of every sale
on the amount of
value addition
It prevents
cascading effect and
helps in better tax
administration and
collection
Scope for tax

evasion
Observation (v)
The history of levy of

sales tax starts from the
phase of single point
sales tax at the time of
first sale and now ends
with a phase called
multipoint sales tax on
value addition.
Explanation
As government loses its revenue on
further transactions, it shifted from
single point sales tax at the time of
first sale to single point sales tax at
the time of last sale.
But when tax is levied on the last
sale, the government doesnt have
any say except to rely on the
information provided by retailer,
which makes the retailer to evade
tax.
So the levy of sales tax shifted to
multi point sales tax on the total
sale price. But it is not free from
any limitations. It leads to
cascading effect of tax and as a
result the sale price or cost to
consumer will increase
Advantage
Removal of anomaly of single point
taxation
VAT eliminates single point sales tax
at the time of first sale and last sale.
In case of last point tax system,
1. Temptation to evade tax is high
2. Quantum of tax at one point is
high
3. Exemption is available against
statutory forms, possibility of misuse
of forms cannot be ruled out.
In case of first point tax system, tax
was avoided by way of selling the
goods at first point to their sister
concerns at lower rates and
thereafter increasing the price.
All the above anomalies are taken
care under VAT.
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Illustration on imposition of Sales tax:

A manufacturer sells a product for Rs. 1,000 to the
wholesaler. The wholesaler adds Rs. 300 as his margin and sells the
same to retailer. The retailer adds Rs. 500 as his margin and sells
the same to ultimate consumer. VAT rate is 4%.
1) Single point sales tax at the time of first sale
Sales tax = Rs. 1,000 X 4% = Rs. 40.
2) Single point sales tax at the time of last sale
Sales tax = Rs. 1,800 X 4% = Rs. 72
3) Multipoint sale tax on total sale price
Sale price of manufacturer
Add: Sales tax @ 4%
Cost to wholesaler
Add: Margin
Sale price of Wholesaler
Add: Sales tax @ 4%
Cost to Retailer
Add: Margin
1,000
40
1040
300
1340
53.60
1393.6
500
Sale price of Retailer
1893.6
Add: Sales tax @ 4%
75.74
Cost to Consumer
1969.34
4) Multipoint sales tax on value addition

Sale price of manufacturer
Add: Sales tax @ 4%
Gross Cost to wholesaler
Less: VAT credit Available
Net Cost to Wholesaler
40
1040
40
1,000
Add: Wholesalers Margin
300
Sale price of Wholesaler
1300
Add: Sales tax @ 4%

Gross Cost to Retailer
Less: VAT Credit available
Net cost to Retailer
52
1352
52
1300
Add: Retailers Margin
500
Sale price of Retailer
1800
Add: Sales tax @ 4%
72
Cost to Consumer
10
1,000
1872
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VALUE ADDED TAX (VAT)
Input Tax
Output Tax
Raw Material
Trading
goods
Consumables
Sale of Finished goods

(or) Trading goods
Capital Goods
VAT paid by registered dealer on purchase of
inputs, Capital goods, Consumables for business
to produce finished goods.
(or)
VAT paid by registered dealer on purchase of
trading goods which are subsequently sold for a
margin.
VAT payable or charged by the

registered dealer on sale made to
consumers
NET VAT PAYABLE BY REGISTERED DEALER = OUTPUT TAX (-) INPUT TAX
Illustration on availment and utilization of Input tax credit:
Ram purchased Inputs worth Rs. 1,00,000 and made sales of
Rs. 2,00,000 in the month of January. The input tax rate and output
tax rate are 4% and 12.5% respectively. Calculate the Net VAT
payable by Ram for the month of January? (Assume purchases and
sales are exclusive of tax)
Net VAT payable = Output tax Input tax
Output tax = 2,00,000 X 12.5% = 25,000
Input tax = 1,00,000 X 4% = 4,000
Net VAT payable for the month of January = Rs. 21,000
UNUTILIZED INPUT CREDIT:

When the Input tax is more than the output tax, there will be excess credit. The excess
credit available after meeting the VAT liability can be utilized for the payment of CST on
interstate sales, if any.
Even after paying CST if there is balance of tax credit, it will be carried over till the end of
succeeding financial year and if it remains unutilized, will be REFUNDED.
However in some states the refund will be granted after the end of first financial year
itself.
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Illustration on utilization of Input tax credit for payment of CST:

Tax paid on purchases made in the state
within a month (Input tax)
10,000
Tax charged for sales in the state
within a month
4,500
CST paid for Inter-state purchases- 3,500
CST charged for Inter-state sales within a month - 5,000
Input tax credit available = 10,000
Net VAT payable = Nil (i.e. 4,500 10,000)
Excess credit available = 5,500
The excess credit of Rs. 5,500 can be utilized for payment of CST liability, if any i.e.
5,000 and balance of Rs. 500 can be carried forward and can be utilized for payment of output
tax.
CONDITIONS FOR AVAILING INPUT TAX AS CREDIT:
1) The goods should be purchased for any one of the following purposes.
a) For Intra-state sales/ Inter-state sales
b)
Goods, Used as
Raw materials
Containers or packing materials
Consumable Stores
For the manufacture of taxable goods or goods used in the packing of such
manufactured goods intended for Intra-state/ Inter-state Sales.
c)
Goods, Used as
Raw materials
Capital goods
Consumable Stores
Packing materials/
Containers
For manufacturing or packing goods intended for export

d) For use in the execution of works contract
e) For making zero-rated sales.
2) Purchases to be made within the state. Credit on interstate purchases is not
available.
3) Purchases to be made only from another VAT registered dealer against a valid
Invoice.
4) Tax credit on capital goods is available but to be adjusted over a period of 36 months
Note: The states may reduce the period and In Maharashtra the credit on capital
goods can be claimed immediately on purchase.
5) Input tax credit on capital goods specified in negative list is not available.
Note: The states have taken their own decisions to provide negative list
6) The Input tax credit on purchases made within a month can only be utilized to pay
output tax payable on sales made during that month.
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INPUT TAX CREDIT IS NOT AVAILABLE IN THE FOLLOWING CASES:
1) Purchases from unregistered dealers

2) Purchases from other states (i.e. Interstate purchases)
A of Tamil Nadu
B of Andhra Pradesh
C of Andhra Pradesh
Pays CST to Government of

T.N
Recovers CST from B of A.P
Pays VAT to Government of

A.P
Recovers VAT from C of A.P
Pays VAT to Government of
A.P
Recovers VAT from
subsequent buyer
The Government of A.P allows the VAT paid by B as credit to C, only because again C
will pay VAT on subsequent sale (Either Intra-state or Inter-state). But the
Government of T.N will not grant credit of duty paid by A to B, as it is a revenue loss
to the state of T.N
3) Import of goods
4) Purchase of goods specified in the negative list by the respective state governments.
Following are the goods not covered under Vat.
a) Petrol, diesel, Aviation Turbine Fuel (ATF) or other motor spirit
b) Liquor and
c) Lottery tickets
Note: The states may or may not bring these commodities under VAT laws
5) Purchases from registered dealer who opts for composition scheme (i.e. Dealers who
pay lower rate of duty)
6) Purchase of goods without Invoice
7) Purchase of goods which are being utilized in the manufacture of exempted goods.
In some states, partial input tax credit is available in respect of inputs used for
manufacture of exempted goods
8) Goods in stock, which have suffered tax under an earlier Act, but under VAT Act they
are covered under exempted items
9) Purchase of goods dispatched to other states as branch transfer.
10) Purchases from registered dealer who does not show tax amount separately in
invoice.
11) Purchased goods used for personal use/Consumption or provided free of charge as
gifts.
12) Purchase of goods for use as fuel in generation of power
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ISSUES IN UTILIZATION OF INPUT TAX CREDIT:

ISSUE-1: Common inputs used for Exempted and taxable sale
Option (i)
Option (ii)
Maintain separate records for

inputs used in exempted sale and
taxable sale.
Credit of inputs used in
exempted sale is not available
Proportionate input tax credit

on inputs used in taxable
service
Step 1: Calculate the ratio of Taxable
sales in total sales.
Step 2: Calculate the input tax credit
on total inputs
Credit Available = Step 1 X Step 2
ISSUE-2: Goods are purchased and used in the manufacture of finished goods which are then
exported. The Input tax credit on those goods remains unutilized. What is the treatment
available?
When goods are exported, the exporter will get REFUND of the Input tax credit paid by him.
The refund will be allowed within a period of 3 months from the end of the month in which goods
were exported.
ISSUE-3 : Units located in Special Economic Zone (SEZ) and Export Oriented Units (EOU) purchases
raw materials by paying VAT and uses these raw materials for manufacture of finished goods. Is
there any incentive in respect of Input tax credit on purchases as they are engaged only in export
of goods?
The incentive is available in the following manner
Option (i)
Exemption from payment of tax on purchases
Option (ii)
Refund of Input tax credit on purchases within 3

months from the date of purchase
Note: States may reduce the time period of 3 months.
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VARIANTS OF VAT
Variants of VAT (i.e. Different modes of allowing input tax credit)
Gross product variant
VAT is levied on all sales

(Multipoint tax) and deduction
is allowed only for tax paid on
inputs excluding capital goods
MERIT
Avoids cascading effect as VAT
credit available
DEMERITS
- Heavier tax burden as
double taxation on capital
goods
- Delay in modernization
and upgradation
Income Variant

(Multipoint tax) and deduction
is allowed for tax paid on
inputs and depreciation on
capital goods
MERITS
- Avoids cascading effect
- Helps in modernization
and upgradation
DEMERIT
No specific method of
computation of
Depreciation
Consumption Variant

(Multipoint tax) and
deduction is allowed for
tax paid on inputs and
capital goods
MERITS
- Avoids cascading effect
- Helps in modernization
and upgradation
- Simple and Easy method
- Tax administration is
convenient
DEMERIT
Deferment of credit to
Government
How the Gross product variant leads to delay in modernization and

upgradation and how income variant and consumption variant helps in
modernization and upgradation?
The gross product variant distinguishes between capital intensive industries and labour
intensive industries by disallowing tax credit on capital goods.
When credit on capital goods is not available, the company will usually decide not to buy capital
goods (like machinery, equipment etc.,) and divert the funds as expenditure on human resource.
Due to this reason the modernization and upgradation in the industry will be delayed.
The income variant and consumption variant makes no distinction between capital intensive and
labour intensive activities. Tax avoidance by classifying capital goods purchases as revenue
purchase is avoided. This simplifies tax administration.
Secondly, when credit not available on capital goods, the VAT paid on capital goods will be
added and it forms the cost of purchase. As a result depreciation will increase, due to which
money at disposal (profit after tax and depreciation) will decrease. Otherwise this amount
would have been invested for other purpose.
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Illustration on Variants of VAT:

Mr. A has purchased Cloth worth Rs. 50,000 (i.e. 100 meters)
inclusive of 4% VAT and stitching machine for Rs. 1,00,000 inclusive of
10% VAT. Labor and Overheads excluding depreciation is 25,000. The sale
price is fixed at 50% above cost. Stitching machine has life of 2 years.
Compute the amount of VAT payable in cash, as per
(a) Gross product Variant
b) Income Variant c) Consumption Variant
Gross Product variant:
Computation of sale value:
Value of Cloth (50,000 X 100/104)
48,077
Labor and Overheads
25,000
Depreciation (1,00,000/2)
50,000
Total Cost
1,23,077
Add: Profit @ 50% of cost
61,538
Sales Value
1,84,615
Computation of VAT payable:

Output tax (1,84,615 X 4%)
7,385
Less: Input tax (50,000 X 4/104) only on cloth
1,923
VAT payable in cash
5,462
Income Variant:
Value of Cloth (50,000 X 100/104)
48,077
Labor and Overheads
25,000
Depreciation (1,00,000/2) X 100/110
45,455
Total Cost
1,18,532
59,266
Sales Value
1,77,797

Output tax (1,77,797 X 4%)
7,112
1,923
Less: Input tax (1,00,00/2) X 10/110
4,545
VAT payable in cash
644
Consumption Variant:
Value of Cloth (50,000 X 100/104)
48,077
Labor and Overheads
25,000
Depreciation (1,00,000/2) X 100/110
45,455
Total Cost
1,18,532
59,266
Sales Value
1,77,797

Output tax (1,77,797 X 4%)
7,112
1,923
Less: Input tax 1,00,00 X 10/110 = 9,090
5,189
VAT payable in cash
Unutilized Credit = 9,090 5,189 = 3901, to be carried forward.
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METHODS OF VALUE ADDED

Methods of computation of Value added to the goods
Addition Method
Invoice Method
Subtraction Method
Aggregate of all Factor payments

and profit
Deducting tax on inputs from

tax on sales
Factor payments mean all

payments made to factors of
production.
Tax is imposed at each stage

of sales and on entire sales
value. Tax paid at earlier
stages are allowed as set off
Eg: Rent, Hire charges,

Depreciation, Int. on capital,
Wages etc.,
Most common and popular

method
Mainly used in Income variant
As it does not facilitate matching

of sales invoices with purchase
invoices, it is difficult to detect tax
evasion
Deducting the value of

Purchases from value of
sales
Used mostly when tax is not

charged separately in
invoice i.e. Sales is inclusive
of Sales tax
VAT liability at each stage =

Value added X Rate/ (100+Rate)
It provides an opportunity
for dishonest traders to
acquire Bogus bills
Direct
subtraction
Intermediate
Subtraction
Indirect
Subtraction
Sales (Excl. of tax)

(-) Purchases
(Excl. of tax)
Sales (Excl. of tax)

(-) Purchases
(Incl. of tax)
Sales (Incl. of tax)

(-) Purchases
(Incl. of tax)
Value added
Value added
Value added
Illustration on Methods of computation of VAT:

Mr. X, who has printing works purchased paper worth Rs.
1,04,000 (inclusive of VAT @ 4%) and incurred the following expenses
Wages to workmen
= 25,000
Rent of building
= 15,000
Depreciation on machinery
= 10,000
Other consumables
= 5,000
And sold at a profit on the works with 15,000
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Compute the VAT payable under

a) Addition method
b) Invoice method
Addition Method:
Value added = Sum of all factor payments
Wages to workmen
= 25,000
Rent of building
= 15,000
Depreciation on machinery
= 10,000
Other consumables
= 5,000
Profit
= 15,000
Total
c)Subtraction method
VAT = Tax @ 4% on value

added = 70,000 X 4% = 2,800
= 70,000
Invoice method:
VAT = Output tax (-) Input tax

Computation of sales value:
Raw material (1,04,000 X 100/104)
(+) Factor payments
Sale Value
= 1,00,000
= 70,000
= 1,70,000
Output tax = 1,70,000 X 4%
= 6,800
(-) Input tax = 1,00,000 X 4/104 = 4,000
Subtraction method:
(i)
Direct Subtraction:
Sales (Exclusive of VAT)
(-) Purchases (Exclusive of VAT)
Value added
VAT
= 2,800
= 1,70,000
= 1,00,000
= 70,000
VAT = 70,000 X 4% = 2,800

(ii)
Intermediate subtraction:
Sales (Exclusive of VAT)
= 1,70,000
(-) Purchases (Inclusive of VAT)= 1,04,000
Value added
= 66,000
VAT = 66,000 X 4% = 2,640
(iii)
Indirect subtraction:
Sales (Inclusive of VAT)
= 1,76,800
(-) Purchases (Inclusive of VAT)= 1,04,000
Value added
= 72,800
VAT = 72,800 X 4/104 = 2,800
VAT payable under Addition method, Invoice method, direct subtraction, indirect subtraction is
same
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Invoice method V. Subtraction method:
If VAT rate on inputs and outputs are

uniform
If VAT rate on inputs and outputs are not

uniform
No conflict between the methods and

VAT payable will be same
The VAT payable will be different

under two methods
Manufacturer A extracted raw produce X and Y from mines and sold the
same to Manufacturer B for Rs. 40,000 and Rs. 60,000 respectively.
Manufacturer B used X and Y as raw material and sold the resultant
product to Wholesaler C for Rs. 3,00,000. Wholesaler sold the same to
retailer D for Rs. 4,50,000. The retailer sold the same to a consumer
for Rs. 5,00,000.
Compute VAT payable under
(a) Invoice method
(b) Subtraction method, if
(i)
Manufacturer A sells produce X for Rs. 40,000 (VAT 4%)
and produce Y for Rs. 60,000 (VAT 12.5%)
(ii)
All other sales are liable to VAT @ 4%. All prices quoted are
exclusive of VAT.
Invoice method:
VAT on sales
VAT credit
Net VAT payable
Manufacturer A (Note 1)
9,100
9,100
Manufacturer B (Note 2)
12,000
9,100
2,900
Wholesaler C (Note 3)
18,000
12,000
6,000
Retailer D (Note 4)
20,000
18,000
2,000
20,000
Note 1: 40,000 X 4% + 60,000 X 12.5% = 1,600 + 7,500 = 9,100

Note 2: 3,00,000 X 4% = 12,000
Note 3: 4,50,000 X 4% = 18,000
Note 4: 5,00,000 X 4% = 20,000
Subtraction method:
Sale price
Purchase price
Value added
VAT on value
(inclusive of
(inclusive of
(inclusive of
added
VAT)
VAT)
VAT)
Manufacturer A (Note 1)
1,09,100 *
1,09,100
9,100
Manufacturer B (Note 2)
3,12,000
1,09,100
2,02,900
7,804 **
Wholesaler C (Note 3)
4,68,000
3,12,000
1,56,000
6,000
Retailer D (Note 4)
5,20,000
4,68,000
52,000
2,000
24,904
* 40,000 X 104% + 60,000 X 112.5% = 41,600 + 67,500 = 1,09,100

** 2,02,900 X 4/104 = 7,804
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TAX RATES UNDER VAT:

Exempted category
4% VAT category
12.5% VAT category

1% VAT category
Non VAT goods
About 50 commodities comprising of

Natural and unprocessed products in unorganized
sector
Items which are legally barred from taxation
Items which have social implication
This category also includes a maximum of 10 commodities
flexibly chosen by the states from a list of goods (finalized by
empowered committee of state finance ministers) which are of
local importance for the individual states without having any
inter-state implication.
A large number of goods are covered under this category which
will be common for all the states.
Basic necessities such as medicines and drugs
Agricultural and industrial Inputs
Capital goods and
Declared goods
The schedule of goods applicable for this category will be in the
respective state laws.
This is a residuary category and all the commodities which are
not covered in the other categories falls under this category.
For precious stones, bullion, gold and silver ornaments
Petrol, Diesel, Aviation turbine fuel
Other motor spirit
Lottery tickets
Note: The states may or may not bring these commodities
under VAT laws.
The empowered committee agreed that all these commodities
are subjected to 20% tax rate.
TAX TREATMENT UNDER VAT FOR STOCK TRANSFER:
Stock transfer is not a sale and there is no VAT liability

The Input tax credit with respect to
i)
Inputs used in manufacture of finished goods which are then transfer
ii)
Goods purchased which are then transferred
Is available after retention of 2% of such tax by the state governments.
IMPACT OF VAT ON IMPORTS:
20
The states do not have power to impose tax on Imports as it is covered under
Union list. So, No VAT on imports
If imports are brought into VAT chain, the cascading effect of tax can be reduced
and tax compliance can also be improved.
The Empowered committee is discussing this issue with the Government of India.
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PROCEDURES UNDER VAT

HIERARCHY UNDER VAT:
The state VAT law is administered by various authorities. The responsibilities of such authorities are
specified in the Act or rules or notifications issued there under.
Commissioner of Commercial Taxes
Joint Commissioner of Commercial Taxes
Assistant Commissioner/Deputy Commissioner of Commercial Taxes
Commercial Tax Officer
Assistant/ Deputy Commercial Tax officer
Tax Collectors
Further, for administrative and appellate purposes, tax law board, appellate Tribunal and other
authorities have also been constituted.
REGISTRATION UNDER VAT:
Registration is the process of obtaining certificate of registration (RC) from the authorities under the
VAT Acts. A dealer registered under the VAT Acts is called a registered dealer. Any dealer, who
intends to carry on the business of purchase and sale of goods in the State and is liable to pay tax,
cannot carry on the business unless he is registered and holds a valid registration certificate under
the Act.
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1. Compulsory registration: If an assessee fails to obtain registration under the VAT Act, he may be
registered compulsorily by the Commissioner. The Commissioner may assess the tax due from such
person on the basis of evidence available with him. In this event the assessee shall have to forthwith
pay such amount of tax. Further, failure to get registered shall result in attracting default penalty
and forfeiture of eligibility to set off all input tax credit related to the period prior to the compulsory
registration.
2. Voluntary registration: A dealer otherwise not eligible for registration may also obtain
registration if the Commissioner is satisfied that the business of the applicant requires registration.
The Commissioner may also impose any terms or conditions that he thinks fit.
Dealer means any person, who consequent to (or)
In connection with (or)
Incidental to (or)
In the course of his business,
Buys or sells goods for a consideration (or) otherwise.
COMPOSITION SCHEME UNDER VAT:

Why Composition
Scheme?
Who can opt for

Composition scheme?
Who are not eligible to
opt for composition
scheme?
Is this Composition
scheme compulsory?
Every dealer will opt for
composition scheme
instead of paying
normal duties. What is
the disadvantage in
opting for composition
scheme?
How the option for
Composition scheme
can be opted?
What are the other
22
The dealer who avails composition scheme shall be required to pay a

composite amount of tax.
Composite tax = Gross annual turnover X Composite rate of tax
prescribed by the state government.
The rate may be reduced upto 0.25% and the states may levy
composite tax on taxable turnover instead of gross annual
turnover.
It saves a lot of labour and effort in keeping records.
Any dealer whose turnover is between 5 lakhs (or Rs. 10 lakhs) and 50
lakhs in the last financial year.
a) Dealers having Inter-state sales
b) For Importers and exporters
c) Dealer transferring goods outside the state otherwise than by
way of sale or for execution of works contract.
d) Dealers who stock transfer outside the state
No, it is optional. A dealer whose turnover is between the above limit
can either opt for composition scheme or pay normal duties
A dealer who opts for composition scheme has the following
disadvantages as compared to a dealer who opts to pay normal duty.
a) The Input tax credit on Inputs as well as capital goods is not
available
b) Issuance of VAT invoice by the dealer is not possible as a
result the person who buys goods from such dealer cannot
avail Input tax credit.
The option can be exercised by intimating in writing to the
commissioner under whose jurisdiction his business is located.
The option is available for a year or a part of the year in which he gets
himself registered.
(i) Simple return form to cover longer return period
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advantages of
composition scheme?
What are the other
consequences of
composition scheme?
(ii) No need to maintain any statutory records as prescribed under the

Act except records for purchase, sales, inventory.
1) On the date of exercise of option, the dealer should not have
the stock of goods which were brought outside the state
2) Once the option is exercised, the dealer should not have
interstate purchases
3) The Input tax credit on the stock lying with the dealer as on
the date of exercising the option has to be reversed
4) If the Input tax credit is not availed, it wont be deducted
from the cost. As a result the cost to the consumer will
increase. The VAT chain gets affected because of composition
scheme.
Observation (vi)
Composition scheme is
neither a win- loss nor winwin situation to buyer and
seller but it is a loss-loss
situation.
Explanation
The seller cannot avail input tax
credit in respect of input tax
paid as a result he will be losing
the input tax credit on
purchases made by him. The
seller will not be able to pass on
the benefit of input tax credit,
which will add to the cost of the
goods
Disadvantage
Breakage of VAT chain
The buyer shall not get any tax
credit for the purchases made by
him from the composition
scheme dealer. Therefore as
soon as the dealer opts for the
composition scheme, the VAT
chain will be broken and the
benefit of tax paid earlier will
not be passed on to the
subsequent buyer.
Mr. A, a retailer who keeps no inventories, presents the following

expected information for the year
1) Purchase of goods = Rs. 20,00,000 (VAT @ 4%)
2) Sales (at fixed selling price inclusive of all taxes) = Rs.
30,00,000 (VAT on sales @ 4%)
Discuss whether he should for composition scheme if composite tax is 1%
of turnover.
Expenses of keeping detailed statutory records required under the VAT
laws will be Rs. 50,000 p.a which shall get reduced to Rs. 20,000 if
composition scheme is opted for. Other expenses are Rs. 3,00,000 p.a
Option (i) Mr. A can take the input tax credit available and may not opt for composition scheme.
Option (ii) Mr. A can opt for composition scheme but the input tax credit not available.
Computation of Net VAT payable under both the options:
Normal VAT
Composition scheme
Gross Turnover (Incl. of all taxes)
30,00,000
30,00,000
VAT payable
30,00,000 X 4/104
= 1,15,385
30,00,000 X 1%
= 30,000
Less: Input tax credit availed (20,00,000 X 4%)
(80,000)
N.A
Net VAT payable
35,385
30,000
Cost Benefit Analysis of Composition Scheme:
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Costs of opting for Composition scheme
Benefits of opting for Composition scheme

1. Saving in Net VAT payable
= 5,385
2. Saving in administration cost
= 30,000
Conclusion: As the Benefits are more than cost, it is advisable for Mr. A to opt for composition
scheme. The decision will change if he has a huge balance of Input tax credit.
CONSEQUENCES OF NON-REGISTRATION:
A dealer cannot carry on the business unless he is registered and olds a valid registration
certificate
Attracts default penalty
Forfeiture of eligibility to set off all input tax credit related to the period prior to the
registration
The dealer will be compulsorily registered by the commissioner and the tax due shall be
assessed on the basis of evidence available with the commissioner.
CANCELLATION OF REGISTRATION:
When business is discontinued

When business is disposed off
When business is transferred to new location
When annual turnover of the dealer falls below the specified limit
In all the above situations dealer has to surrender original registration certificate, pay the tax up to
date.
TAX PAYERS IDENTIFICATION NUMBER (TIN):
11 digit numerical code

Every registered dealer will obtain this
First 2 digits: State code as used by the Union ministry of company affairs
Next 9 digits: Code allotted by each state.
MAINTENANCE OF RECORDS:
Value and quantity of Purchases, Sales, Goods manufactured, goods disposed of otherwise
by sale, Inventory, Exempted sales
Copies of all Invoices, Debit or credit notes in serial number
Details of amount of tax charged on each sale
Details of Output tax, Input tax.
Details of availement and utilization of Input tax credit, balance carried forward.
All such records shall be maintained for the period prescribed under the state laws and failure to
keep these records attracts penalty.
VAT INVOICE:
24
Every registered dealer whose turnover exceeds the specified amount should issue a serially
numbered tax invoice to the purchaser.
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The dealer should keep a counterfoil (or) duplicate of such tax invoice duly signed and dated.
Invoice is a crucial document which needs to be preserved carefully by the purchasing
dealer. In case the original invoice is lost (or misplaced, a duplicate authenticated copy must
be obtained from the issuing dealer. It is so because of the following reasons
a) Tax credit can be availed only on the basis of Invoice
b) The Invoice assists in performing audit and investigation activities effectively
c) With the help of invoices, tax evasion can be easily traced out.
d) The VAT chain mainly depends on the availment and utilization of VAT credit. If there is
no VAT invoice, the cascading effect on taxes cannot be prevented.
FORMAT OF VAT INVOICE:
SYSTEM OF CROSS CHECKING UNDER VAT:

Under this system, dealers may be asked to submit a list of sales/ purchases made by them. A
computerized system of cross-checking is being worked, which involve comparing the VAT returns/
documents submitted to the VAT authorities with the returns/ documents submitted to the other
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state level authorities as well as the central excise, customs, service tax and Income tax authorities
of the central government. This shall be possible only on the basis of coordination between the tax
authorities of state governments and that of central government.
RETURNS AND ASSESSMENT UNDER VAT:

ASSESSMENT
RETURNS
Returns are filed monthly/ quarterly/annually
as per the provisions of state laws
The returns will be accompanied with challans
evidencing payment of VAT and with requisite
details of input tax and output tax, inventory
details etc.,
Every return furnished shall be scrutinised
expeditiously. If any technical mistake is
detected on scrutinizing, the dealer shall be
required to pay the deficit appropriately.
Under VAT, there is no system of compulsory

assessment at the end of each year by the
VAT authorities. It is based on the
presumption that, unless otherwise proved,
every dealer is honest
1. Self Assessment, where the VAT liability is
computed by the dealer himself while
submitting returns
2. Deemed Assessment, where if no specific
notice is issued proposing departmental
audit of the books of account of the dealer
within the time limit specified, the dealer
would be deemed to have been self-assessed
on the basis of the returns submitted by him
3. Scrutiny Assessment, where scrutiny is
done in case doubt arises of under reporting
of transaction or evasion of tax.
ACCOUNTING ENTRIES FOR VAT:

For purchase of Raw material
For purchase of capital goods
On sale of Finished goods
On payment of VAT
26
Raw material A/C Dr.

Input tax credit A/C Dr.
To Bank A/C
Plant and Machinery A/C Dr.
Input tax credit A/C Dr.
To Bank A/C
Bank A/C Dr.
To Sales A/C
To VAT payable A/C
VAT payable A/C Dr.
To Input tax credit A/C
To Bank/Cash
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MERITS AND DEMERITS OF VAT:

Merits of VAT
1. Avoids cascading effect of tax
2. Reduction in prices to the consumers

3. Very simple and easy to calculate tax, as no
litigations are involved.
4. Transparency, as each of them knows what
they are paying and government also knows
the exact amount of tax collected at each
stage.
5. Self assessment which reduces corruption in
tax departments
6. Tax evasion is difficult
7. Stable revenue collection, as credit is given
only on production of evidence
8. Better accounting system
9. VAT system is neutral as to choice of seller.
Demerits of VAT
1. Regressive in nature, as it is imposed on
ultimate consumer and tax paid by poor will be
higher percentage than rich.
This can be avoided by taxing necessities at a
lower rate.
2. Higher administration cost due to increased
number of dealers
3. No matching of VAT rates between
purchases and sales due to varying VAT rates
4. No integration of state VAT with Central VAT
which makes no credit on interstate
purchases.
5. Detailed records even by small traders
VAT AUDIT:
Compulsory VAT audit or External audit: If the turnover of a dealer exceeds the specified limit fixed
by the state government, then the accounts of such dealer should be audited by a Chartered
Accountant (CA) and has to submit a report in prescribed form within specified period.
VAT audit is required due to
Ignorance about VAT

among trading community
No conflict between the

methods and VAT payable
will be same
Effective self
assessment by
dealer
A check over tax

evasion
Lack of resources with

department to educate
tax payers which can be
overcome by qualified
professionals.
VAT audit involves

minute
verification by
independent
auditor
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Departmental Audit or Selective audit: Audit by the authorities of the VAT department which is not
mandatory but is resorted to in selective cases. The departmental audit is provided with a view to
promote compliance with the provisions of VAT law.
If any tax evasion is detected in the course of audit, the previous records of the concerned dealer
may be taken up for audit. The audit is conducted in the following manner.
Authorised officers of the department will visit the business

place of the dealer to conduct the audit. The audit may also be
arranged in the office of the auditor.
The Information will be gathered form various agencies
such as suppliers, income tax department, excise and
customs department etc.,
Examining the true and fair view of the books of accounts
and the information available
UNSOLVED QUESTIONS:
1. From the following information calculate the Net VAT payable by every seller.
A is a trader selling raw materials to a manufacturer of finished products. He imports his
stock in trade as well as purchases the same in local markets. The rate of VAT is assumed to
be 12.5% ad valorem.
As Cost of Imported materials
10,000
Bs Cost of RM
40,000
Duty payable on the above
1,250
VAT on above is Rs. 5,000
Bs Cost of other
As Cost of local materials
20,000
materials:
VAT charged by local suppliers on
above Rs. 2,500 which is not
a) local purchases (VAT
20,000
includible in the cost as credit is
Rs. 2,500)
available
b) Inter state purchases
10,400
(CST paid Rs. 400)
Other expenditure incurred and
8,750
profit
Other expenses and profit 29,600
Sale price of goods
40,000
Sale price
1,00,000
2. Mr. Samyuk presents following details for March, 2011a) Opening Balance of Input VAT credit as on 1-3-2011 = Rs. 15,000
b) Inputs purchased during the month of March = Rs. 15,00,000
c) Within the state sales of manufactured goods = Rs. 20,00,000
d) Inter-state Sales = 4,00,000
CST rate is 2%. There was no inventory as on 1-1-2011 or 31-3-2011. The VAT laws governing
Mr. A provide for the refund of input-VAT credit after the end of the first financial year itself.
3. Mr. Krishna, a manufacturer of taxable as well as tax-free goods, furnishes the following
information for the month of March, 2011:
a) Sales of Product A (tax-free goods) = Rs. 50,00,000
b) Sales of product B (taxable goods) = 100,00,000 (VAT @ 12.5%)
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c) Purchases of Input X (Used in manufacture of product A only) = Rs. 30,00,000

(VAT@4%)
d) Purchase of Input Y (used in the manufacture of product B only) = Rs. 75,00,000 (VAT @
4%)
e) Purchases of Input Z (used in the manufacture of product A&B) = Rs. 15,00,000 (VAT @
20%)
There was no inventory as on 1-3-2011 as well as on 31-3-2011.
Compute the amount of VAT payable in cash for the month assuming that Input Z is used in
product A and B in the ratio of 1:2.
4. Calculate the VAT liability for the period Jan. 1, 2007 to Jan. 31, 2007 from the following
particulars:
Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth of finished
goods were sold within the State and Rs. 1,00,000 worth of goods were sold in the course of
inter-State trade. VAT paid on procurement of capital goods worth Rs. 1,00,000 during the
month was at 12.5%. If the input and output tax rate in the State are 12.5% and 4%
respectively and the central sales tax rate is 3%, show the total tax liability under the State
VAT law and under the Central Sales Tax Act.
5. Calculate the total tax liability under the State VAT law and under the Central Sales Tax Act
for the month of October 2008 from the following particulars:
Particulars
Rupees
Inputs purchased within the state
1,70,0000
*Capital goods used in the manufacture of the taxable goods
50,000
Inputs purchased from a registered dealer who opts for
Composition scheme under the provisions of the Act
10,000
High seas purchases of inputs
1,00,000
Finished goods sold:(a) Within the state
2,00,000
(b) In the course of inter-State trade
2,50,000
Applicable tax rates are as follows:(a) VAT rate on capital goods 12.5%
Input tax rate within the state 12.5%
Output tax rate within the state 4%
Central sales tax rate 2%
(b) VAT rate on capital goods 4%
Input tax rate within the state 4%
Output tax rate within the state 12.5%
Central sales tax rate 2%
*Note The capital goods are not the goods included in the negative list.
(RTP Final)
6. Purchases by S & Co. for the month of December are as follows:

(1) Rs. 1,00,000 at 4% VAT
(2) Rs. 5,00,000 at 12.5% VAT.
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Sales of S & Co. for the month of December are as follows:

(1) Sales of Rs. 3,00,000 at 4% VAT
(2) Sales of Rs. 3,00,000 at 12.5% VAT.
Compute the eligible input tax credit and VAT payable for the month.
(June 09)
7. The particulars regarding sale, purchase etc. of Shubham Udyog for the last quarter of the
year 2009 -10 are as under:
Particulars
Amount
1.
Purchases of raw material within the State
(i)
taxable @ 1%
40,00,000
(ii)
taxable @ 4%
60,00,000
(iii)
taxable @ 12.5%
10,00,000
2.
Sale of goods manufactured from raw material purchased
@ 4% tax rate
(i)
Taxable sale within the State (tax rate 4%)
20,00,000
(ii)
Exempted sale within the State
10,00,000
(iii)
Sale in the course of Inter-State trade or commerce
10,00,000
(tax rate 4%)
3.
Sale of raw material purchased @ 1% tax rate
44,00,000
4.
Goods manufactured from the raw material purchased @
12.5% tax rate was given on lease. The deemed sale price
of such goods is Rs. 12,00,000, taxable @ 12.5%.
You may assume that input tax credit of tax on raw material used in manufacture of leased
goods is available immediately. Compute the amount of Value Added Tax (VAT) payable by
M/s Shubham Udyog for the relevant quarter. There was no opening or closing inventory.
How can he utilise the balance of input tax credit available, if any?
(May 2010)
8. From the following particulars compute net VAT payable by M/s. TAB & Co. for the period
ending March 31, 2011.
Particulars
Amount
Inputs procured :
(i) Raw material at Nil VAT
10,00,000
(ii) Raw material at 4% VAT
40,00,000
(iii) Raw material at 12% VAT
20,00,000
Output
(i) Intra state sale of finished goods at 4% VAT (these goods were
15,00,000
produced entirely from raw material at NIL VAT rate procured
as inputs)
(ii) Exempted sales (these goods were procured from raw material
20,00,000
procured at 4% VAT to the extent of 50%)
(iii) Sale of finished goods intrastate at 12% VAT
20,00,000
(iv) Intrastate sale of raw material purchased at 4%
10,00,000
(v) 50% of the raw material produced at 12% VAT has been
15,00,000
utilised to produce capital goods for the manufacturing process
in TAB & Cos factory
Provide explanations where necessary.
(May 2011)
9. Mr. Ram, a dealer in Tamil Nadu dealing in consumer goods, submits the following
information pertaining to the month of October, 2011:
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Details of purchases of goods:Particulars (raw material purchased from within the

State)
Goods A
Goods B
Goods C
Amount (`)
Rate of VAT
10,00,000
20,00,000
30,00,000
Exempt
1%
12.5%
Details of sales of goods:Particulars (Sale of finished

goods)
Produced from Goods A
State in which goods Amount (`)

Rate of VAT
are sold
Tamil Nadu
5,00,000
12.5%
Gujarat
7,00,000
1%
Produced from Goods B
Tamil Nadu
24,00,000
Exempt
Produced from Goods C
Tamil Nadu
35,00,000
4%
Compute the amount of Value Added Tax (VAT) payable by Mr. Ram for the relevant month.
There was no opening or closing inventory.
(RTP Nov 2011)
10. Mr. X a dealer in Mumbai, dealing in consumer goods, submits the following information
pertaining to the month of March, 2012:
(i) Exempt goods 'A' purchased for ` 2,00,000 and sold for ` 2,50,000.
(ii) Goods 'B' purchased for ` 2,25,000 (including VAT) and sold at a margin of 10% profit on
purchases (VAT rate 12.5%)
(iii) Goods 'C' purchased for `1,00,000 (excluding VAT) and sold for ` 1,50,000 (VAT rate 4%);
(iv) His unutilized balance of VAT input credit on 1.3.2012 was ` 1,500. Compute the
turnover, Input VAT, Output VAT and Net VAT payable by Mr. X.
31

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Value Added Tax

A common mans plight about Taxes in India

VALUE ADDED TAX (VAT )

2% or Local sales tax rate

Local sales tax rate

Sec. 14 of CST Act, 1956 Special provision in case of Declared goods.

It arises when seller is in one state

Intra State Sale

It arises when both seller and

It is the Indirect tax imposed on the value addition.

VAT CHART (With Uniform Rate):

Sale = Rs. 100

Sale = Rs. 150

Sale = Rs. 200

Input tax Credit

The VAT paid by the

The tax paid by the

Sale = Rs. 180

Input tax Credit

VAT CHART (With Varying Rates):

Sale = Rs. 100

Sale = Rs. 150

Sale = Rs. 200

Input tax Credit

When VAT rates are not

Sale = Rs. 180

Input tax Credit

Illustration on Basic Concept:

Sale price of Mr. T

Add: Tax @ 10%

Sale price of Mr. T

Amount paid by Mr. S

Amount paid by Mr. S

Cost to Mr. S (1,100 100)

Add: Profit and Value of goods

Add: Profit and Value of goods

Add: Tax @ 20%

Add: Tax @ 20%

Tax payable by Mr. S

The cost saved by the

Tax payable by Mr. S (300 - 100)

WHEN SALES TAX IS LEVIED?

Whether at the time of First sale?

Single point sales

Single point sales

i.e. when goods are

Multi point sales tax

Multi point sales tax

Scope for tax

The history of levy of

Illustration on imposition of Sales tax:

Sale price of Retailer

Add: Sales tax @ 4%

4) Multipoint sales tax on value addition

Add: Wholesalers Margin

Sale price of Wholesaler

Add: Sales tax @ 4%

Add: Retailers Margin

Sale price of Retailer

Add: Sales tax @ 4%

VALUE ADDED TAX (VAT)

Sale of Finished goods

VAT payable or charged by the