PROJECT REPORT ON

MVAT & GST

MASTER OF COMMERCE
ACCOUNTANCY
SEMESTER IV
2016-2017

SUBMITTED BY
AASHISH GAUD
Roll No. : 37
UNDER THE GUIDANCE OF
ASST PROF. ANURADHA PARMAR.

NANJI BHAI KHIMJI BHAI THAKKAR THANE COLLEGE

AFFILIATED TO UNIVERSITY OF MUMBAI
SHETH J.T.T.COLLEGE OF ARTS, THANE (W)

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 Sheth T.J. Education Societys,
SHETH N.K.T.T. COLLEGE OF COMMERCE & SHETH J.T.T.
COLLEGE OF ARTS, THANE (W)
CERTIFICATE
OF
PROJECT WORK
This is to certify that,
Kumar. Aashish Gaud M.Com (Accountancy) Semester-IV Roll No:37 has undertaken &
completed the project titled MVAT & GST during the academic year 2016-17 under the
guidance of Asst Prof. ANURADHA PARMAR submitted on / / 2017 to this college in
fulfillment of the curriculum of

MASTER OF COMMERCE

UNIVERSITY OF MUMBAI.

This is a bonafide project work & the information presented is true & original to the best
of our knowledge & belief.

(ASST.PROF. ANURADHA PARMAR)

PROJECT GUIDE EXTERNAL EXAMINER

(DR.P.M.KARKHELE) (PROF.ANIL KHADSE)

PRINCIPAL COURSE COORDINATOR

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 ACKNOWLEDGEMEMT

This project bears all those who directly or indirectly helped and extended their
kind support in completing this project.

At the time of making this report I express my sincere gratitude to ASST PROF.
ANURADHA PARMAR (internal project guide) for providing streamed guidelines since
inception till the completion of project.

I met during the course of this project, for their support and for providing valuable
information which help me to complete this project successfully.

At this moment I also almighty God for the blessing showed upon me, my parents
for their support and care and also my friends for their valuable Suggestions.

This project report is a collective effort of all and I sincerely remember and
acknowledge all of them for their excellent help and assistance throughout the project.

Course name: M.Com (Semester-IV)

College name: Sheth N.K.T.T. College of Commerce & Sheth J.T.T. College of Arts,
Thane.

University: Mumbai University

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 DECLARATION

I, AASHISH GAUD hereby declare that the project report entitle MVAT & GST under
guidance of ASST PROF. ANURADHA PARMAR submitted in partial fulfillment of the
Degree of M.Com(Accountancy) to Mumbai University is my original work.

Signature:

Date: / / 2017

Place: Thane

INDEX OF CONTENT

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 Sr. No. Title Page
No.

1. What is VAT? 06

2. Difference between VAT&CST 08

3. VAT effect on inflation 11

4. VAT effect on Economic Growth 14

5. Advantages 16

6. Vat in Maharashtra 18

7. Registration in under VAT 22

8. Explaining VAT 27

9. Calculating Tax Liability 33

10. Section-2 Expecting Summary 36

11. Review of Literature 37

12. Value added Tax 40

13. Goods & Services Tax model for 52

India

14. Conclusion 58

15. References 60

WHAT IS Value Added Tax?

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Value Added Tax is a broad-based commodity tax that is levied at multiple stages of
production. The concept is akin to excise duty paid by the manufacturer who, in turn,
claims a credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale
and both work in the same manner, according to the white paper on VAT released by
finance minister Chidambaram. The document was drawn up after all states, barring UP,
were prepared to implement VAT from April. It is usually intended to be a tax on
consumption, hence the provision of a mechanism enabling producers to offset the tax
they have paid on their inputs against that charged on their sales of goods and services.
Under VAT revenue is collected throughout the production process without distorting
any production decisions.

WHY VAT IS PREFERRED OVER SALES TAX?

While theoretically the amount of revenue collected through VAT is equivalent to sales
tax collections at a similar rate, in practice VAT is likely to generate more revenue for
government than sales tax since it is administered on various stages on the production
distribution chain. With sales tax, if final sales are not covered by the tax system e.g.
due to difficulty of covering all the retailers, particular commodities may not yield any
tax. However, with VAT some revenue would have been collected through taxation of
earlier transactions, even if final retailers evade the tax net.

There is also in-built pressure for compliance and auditing under VAT since it will be in
the interest of all who pay taxes to ensure that their eligibility for tax credits can be
demonstrated. VAT is also a fairer tax than sales tax as it minimizes or eliminates the
problem of tax cascading, which often occurs with sales tax. These are facilitated by
the fact that VAT operates through a credit system so that tax is only applied on value
added at each stage in the production distribution chain. At each intermediate stage
credit will be given for taxes paid on purchases to set against taxes due on sales. Only
at consumption stage where there are no further transactions will there be no tax

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credits. Lack of input credit facility in sales tax often results in tax on inputs becoming a
cost to businesses which are often passed on to consumers. Sales tax is often applied
again to the sales tax element of the cost, thus there is a problem of tax on tax. This is
not the case with VAT, which makes it a neutral tax as it provides the least disturbance
to patterns of production and the generation and use of income.

In addition, the audit trail that exists under the VAT system makes it a more effective tax
in administration terms than sales tax as it helps with the verification of VAT amounts
declared as due. This is made possible by the fact that one persons output is anothers
input. As with sales tax imports are treated the same way as local goods while exports
are zero- rated to avoid anti-export bias.

Notwithstanding the advantages mentioned above, it is worth noting that VAT is a

considerably complex tax to administer compared with sales tax. It may be difficult to
apply to small companies due to difficulties of record keeping and its coverage in
agriculture and the services sector may be limited. To cover the high administration
costs, VAT rates of 10-20 per cent are generally recommended. The equity impact of the
relatively high rates have been a cause for concern as it is possible that the poor spend
relatively high proportions of their incomes on goods subject to VAT. Thus the concept
of zero VAT rate on some items has been introduced.

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DIFFERENCE BETWEEN VAT AND CST

Under the CST Act, the tax is collected at one stage of purchase or sale of goods.
Therefore, the burden of the full tax bond is borne by only one dealer, either the first or
the last dealer. However, under the VAT system, the tax burden would be shared by all
the dealers from first to last. Then, such tax would be passed upon the final consumers.
Under the CST Act, the tax is levied at a single point. Under the VAT system, the
retailers are not subject to tax except for the retail tax.

Under the CST Act, general and specific exemptions are granted on certain goods while
VAT does not permit such exemptions. Under the CST law, concessional rates are
provided on certain taxes. The VAT regime will do away with such concessions as it
would provide the full credit on the tax that has been paid earlier.

Under VAT law, first, the dealer pays tax on the sale or purchase of goods. The
subsequent dealer pays tax on the portion of the value added upon such goods. Thus,
the tax burden is shared equally by the last dealer. To illustrate the whole procedure of
VAT, an example is as follows:

At the first point of sale, the value of goods is Rs.100. The tax on this is 12.5%.
Therefore, the net VAT would be 12.5%. At the second change of sale, the sale value is
Rs.120 and the tax thereon is 15%. The tax that is to be paid at every point is 15%. The
input tax is 15%. The dealer will get a credit for first change in sale of 2.5%-- i.e. 15%
-12.5%. Therefore, 2.5% will be the net rate. At the third change of sale, the sale value
is Rs.150 and the tax on this is 18.75%. At the last stage, the tax paid is 18.75%. The
Input Tax is 18.75%. Dealers get a credit for second change in sale? i.e. 18.75% -15%
= 3.75%. Therefore, 3.75% would be the net VAT. This means that VAT is paid in the last
point tax under the sale tax regime.

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WHO GAINS?

State and Central governments gain in terms of revenue. VAT has in-built incentives for
tax compliance only by collecting taxes and remitting them to the government can a
seller claim the offset that is due to him on his purchases. Everyone has an incentive to
buy only from registered dealers purchases from others will not provide the benefit of
credit for the taxes paid at the time of purchase. This transparency and in-built incentive
for compliance would increase revenues. Industry and trade gain from transparency and
reduced need to interact with the tax personnel. For those who have been complying
with taxes, VAT would be a boon that reduces the cost of the product to the consumer
and boosts competitiveness. VAT would be major blow for tax evaders, both
manufacturers who evade excise duty payments and traders who evade sales-tax.

WHATLL BE THE TAX BURDEN?

The overall tax burden will be rationalized as itll be shared by all dealers, and prices, in
general, will fall. Moreover, VAT will replace the existing system of inspection by a
system of built-in self-assessment by traders and manufacturers. The tax structure will
become simple and more transparent and tax compliance will improve significantly. It
will also be simpler and offer easy computation and easy compliance. VAT will prevent
cascading effect through input rebate and help avoid distortions in trade and economy
by ensuring uniform tax rates.

WHO PAYS?

All dealers registered under VAT and all dealers with an annual turnover of more than
Rs 5 lakh will have to register. Dealers with turnovers less than Rs 5 lakh may register
voluntarily.

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HOW TO PAY?

VAT will be paid along with monthly returns. Credit will be given within the same month
for entire VAT paid within the state on purchase of inputs and goods. Credit thus
accumulated over any month will be utilized to deduct from the tax collected by the
dealer during that month. If the tax credit exceeds the tax collected during a month on
sale within the state, the excess credit will be carried forward to the next month.

WHICH GOODS WILL BE TAXABLE UNDER VAT?

All goods except those specifically exempt. In fact, over 550 items will be covered under
the new tax regime, of which 46 natural and unprocessed local products would be
exempt from VAT. About 270 items, including drugs and medicines, all agricultural and
industrial inputs, capital goods and declared goods would attract 4% VAT. But, following
opposition from some states, it was decided that states would have option to either levy
4% or totally exempt food grains from VAT but it would be reviewed after one year.
Three items sugar, textile, tobacco under additional excise duties will not be under
VAT regime for one year but existing arrangement would continue.

OTHER CONSIDERATIONS

It is imperative that policy makers in considering adoption of VAT should be interested in

the economy wide impact of this tax. Special emphasis is often placed on its effect on
equity, prices and economic growth. This is particularly important because of the
potential effects on consumption of certain commodities that have a direct or indirect
effect on labour productivity.

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VAT EFFECT ON INFLATION

In considering the introduction of VAT, countries are often concerned that it would cause
an inflationary spiral. However there is no evidence to suggest that this is true. A survey
of OECD countries that introduced VAT indicated that VAT had little or no effect on
prices. In cases where there was an effect it was a one time effect that simply shifted
the trend line of the consumer price index (CPI). To guard against any unforeseen price
effects the authorities may consider a tighter monetary policy stance at the introduction
of VAT.

DISTRIBUTION EFFECTS OF VAT

Value added tax is widely criticized as being regressive with respect to income that is its
burden falls heavily on the poor than on the rich. This emanates from the fact that
consumption as a share of income falls as income rises. Hence a uniform VAT rate falls
heavily on the poor than the rich. This criticism is valid when VAT payments are
expressed as a proportion of current income. However if, following the premise that
welfare is demonstrated by the level of consumption rather than income, consumption is
used as the denominator the impact of VAT would be proportional. A proportional
burden would also be demonstrated if lifetime income rather than current income is
used. A lifetime income concept considers the fact that many income recipients are only
temporarily at lower income brackets as their earnings increase. In order to address the
regressivity of VAT the following measures can be taken:

The VAT itself can be used to differentiate taxation of consumer items that are
consumed primarily by the poor such that they pay less or at zero rate or to tax luxury
goods at a higher than standard rate.

VAT exemptions may also be granted on goods and services that are consumed
mostly by the poor.

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 Equity concerns may also be addressed through other ways, outside the VAT
system, such as other tax and spending instruments of government. This could be in
the form of lower basic income tax rates on the poor or some pro-poor expenditures of
government. The use of multiple rates of VAT has however been widely discouraged for
various reasons. These include:

The fact that sometimes it is almost impossible to differentiate between

higher quality expensive products e.g. food, consumed by the rich and ordinary
products consumed by the poor. Thus any concessions extended may tend to benefit
the rich much more than the poor.

Increased costs of VAT administration as a differentiated rate structure

brings with it problems of delineating products and interpreting the rules on which
rate to use.

significantly increased costs of tax compliance for small firms, which are usually
unable to keep separate records/accounts for sales of differently taxed items. This
results in the use of presumptive methods of determining the tax liability, which
leads to more difficulties in monitoring the compliance. The higher compliance cost
resultant from differentiation of VAT rates may also be regressive with respect to income
since smaller firms with lower income tend to bear proportionately more of the burden
than do larger firms.

Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional
effects of tax through the effect on incomes. The effects of exemption may be as
follows:

falling of revenues exemptions break the VAT chain. If exemptions are granted
at prior to the final sale, it results in a loss of revenue since value added at the final
stage escapes tax.

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 Un-recovered taxation of some intermediate goods may lead to producers
substituting away from such inputs thus distorting the input choices of the said
producers.

Exemptions may create incentives to self supply i.e. tax avoidance by vertical
integration.

Exemptions tend to feed on each other giving rise to a phenomenon called

exemption creep. This arises from the fact that each exemption gives rise to
pressures on further exemption. For example creating an exemption to reduce the tax
burden on a particular commodity or goods may lead to increased pressure for
exemption or zero rating of inputs used for the production of such a commodity.

Based on the above, it is important that care is taken when introducing exemptions in
order to avoid distortions in the production process as well as to minimize revenue loss
resulting from such distortions.

Given the fact that the primary purpose of VAT is to raise government revenue in an
efficient manner and with as little distortions of economic activity as possible,
distribution effects are perhaps better addressed by other forms of tax and government
expenditure policies which can often be better targeted at these aims.

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VAT EFFECT ON ECONOMIC GROWTH

Economic growth can be facilitated through investment by both government and the
private sector. Savings by both parties are required in order to finance investment in a
non-inflationary manner. Compared to other broadly based taxes such as income tax
VAT is neutral with respect to choices on whether to consume now or save for
future consumption. Although VAT reduces the absolute return on saving it does not
reduce the net rate of return on saving. Income tax reduces the net rate of return as
both the amount saved as well as the return on that saving are subject to tax. In this
regard VAT may be said to be a superior tax in promoting economic growth than income
tax. Since VAT does not influence investment decisions on firms, by increasing their
costs, its effects on investment can be said to be neutral.

FEATURES OF VAT

1. Rate of Tax VAT proposes to impose two types of rate of tax mainly:
a. 4% on declared goods or the goods commonly used.
b. 10-12% on goods called Revenue Neutral Rates (RNR). There would be
no fall in such remaining goods.
c. Two special rates will be imposed-- 1% on silver or gold and 20% on
liquor. Tax on petrol, diesel or aviation turbine fuel are proposed to be kept
out from the VAT system as they would be continued to be taxed, as
presently applicable by the CST Act.
2. Uniform Rates in the VAT system, certain commodities are exempted from tax.
The taxable commodities are listed in the respective schedule with the rates. VAT
proposes to keep these rates uniform in all the states so the goods sold or
purchased across the country would suffer the same tax rate. Discretion has
been given to the states when it comes to finalizing the RNR along with the
restrictions. This rate must not be less than 10%. This will ensure By doing this
that there will be level playing fields to avoid the trade diversion in connection
with the different states, particularly in neighboring states

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 3. No concession to new industries Tax Concessions to new industries is done
away with in the new VAT system. This was done as it creates discrepancy in
investment decision. Under the new VAT system, the tax would be fair and
equitable to all.
4. Adjustment of the tax paid on the goods purchased from the tax payable on the
goods of sale All the tax, paid on the goods purchased within the state, would be
adjusted against the tax, payable on the sale, whether within the state or in the
course of interstate. In case of export, the tax, paid on purchase outside India,
would be refunded. In case of the branch transfer or consignment of sale outside
the state, no refund would be provided.
5. Collection of tax by seller/dealer at each stage. The seller/dealer would collect
the tax on the full price of the goods sold and shows separately in the sell invoice
issued by him
6. VAT is not cascading or additive though the tax on the goods sold is collected at
each stage, it is not cascading or additive because the net effect would be as
follows: - the tax, previously paid on the sale of goods, would be fully adjusted. It
will be like levying tax on goods, sold in the last state or at retail stage.

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WHATS THE BIGGEST ADVANTAGE?

The biggest benefit of VAT is that it could unite India into a large common market. This
will translate to better business policy. Companies can start optimizing purely on
logistics of their operations, and not on based on tax-minimization. Lorries need not wait
at check-points for days; they can zoom down the highways to their destinations.
Reduced transit times and lower inventory levels will boost corporate earnings.
Following are the some more advantage of VAT: -
1. Simplification Under the CST Act, there are 8 types of tax rates- 1%, 2%, 4%,
8%, 10%, 12%, 20% and 25%. However, under the present VAT system, there
would only be 2 types of taxes 4% on declared goods and 10-12% on RNR. This
will eliminate any disputes that relate to rates of tax and classification of goods as
this is the most usual cause of litigation. It also helps to determine the relevant
stage of the tax. This is necessary as the CST Act stipulates that the tax levies at
the first stage or the last stage differ. Consequently, the question of which stage
of tax it falls under becomes another reason for litigation. Under the VAT system,
tax would be levied at each stage of the goods of sale or purchase.
2. Adjustment of tax paid on purchased goods Under the present system, the
tax paid on the manufactured goods would be adjusted against the tax payable
on the manufactured goods. Such adjustment is conditional as such goods must
either be manufactured or sold. VAT is free from such conditions.

3. Further such adjustment of the purchased goods would depend on the amount
of tax that is payable. VAT would not have such restrictions. CST would not have
the provisions on refund or carry over upon such goods except in case of export
goods or goods, manufactured out of the country or sale to registered dealer.
Similarly, on interstate sale on tax-paid goods, no refund would be admissible.

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 4. Transparency The tax that is levied at the first stage on the goods or sale or
purchase is not transparent. This is because the amount of tax, which the goods
have suffered, is not known at the subsequent stage. In the VAT system, the
amount of tax would be known at each and every stage of goods of sale or
purchase.

5. Fair and Equitable VAT introduces the uniform tax rates across the state so that
unfair advantages cannot be taken while levying the tax.

6. Procedure of simplification Procedures, relating to filing of returns, payment of

tax, furnishing declaration and assessment are simplified under the VAT system
so as to minimize any interface between the tax payer and the tax collector.

7. Minimize the Discretion the VAT system proposes to minimize the discretion
with the assessing officer so that every person is treated alike. For example,
there would be no discretion involved in the imposition of penalty, late filing of
returns, non-filing of returns, late payment of tax or non payment of tax or in case
of tax evasion. Such system would be free from all these harassment

8. Computerization the VAT proposes computerization which would focus on the

tax evaders by generating Exception Report. In a large number of cases, no
processing or scrutiny of returns would be required as it would free the tax
compliant dealers from all the harassment which is so much a part of
assessment. The management information system, which would form a part of
integral computerization, would make the tax department more efficient and
responsive.

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 VALUE ADDED TAX IN MAHARASHTRA

Quick Flash Back

Sales tax was first introduced in India in the then Bombay Province as early as March
1938 where a tax was imposed on sale of tobacco within certain urban and suburban
areas. In the year 1946, a general sales tax was introduced levying sales tax at the last
stage of sale of goods.
The Bombay Sales Tax Act, 1959 introduced in 1959 underwent many changes
thereafter and in July 1981, first point tax was introduced wherein goods were classified
into three main schedules, broadly covering tax free goods, intermediate products and
finished goods. The BST Act was repealed and Maharashtra Value Added Tax Act, 2002
came into force w.e.f. 1st April, 2005 to usher in the progressive value added tax system
in place of the old sales tax system.
VAT is a progressive and transparent system of taxation which eliminates the cascading
impact of multiple taxation through a multipoint taxation and set-off principle. It promotes
transparency, compliance and equity and therefore, is both dealer friendly and
consumer friendly.
VAT being a multi point tax, envisages an increase in the number of dealers and is
based on the concept of self-assessment and self-compliance. It is therefore, inevitable
that the Sales Tax Department transforms itself into a dealer friendly, focused and
dynamic department to cater to the ever increasing expectations of both the
Government and the Trade & Industry.
Sales Tax Department has taken up the challenge to transform their selves and be
available for assisting the dealers in complying with the provisions of the law. They are
in the process of installing a state-wide networked IT system to computerise entire tax
administration and hope to provide online service to the dealers in due course. They are
also realigning their organisational structure to meet the challenges of the new system
and stakeholders' expectations.

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Part1 - Introduction

Background

Maharashtra is one of the 21 States which have introduced the Value Added Tax (VAT)
system of taxation from 1st April 2005. With the introduction of VAT, the Sales Tax
Department has moved to a globally recognized sales taxation system that has been
adopted by more than 130 countries.

The design of Maharashtra State VAT is generally guided by the best international
practices with regard to legal framework, as well as operating procedures. Another key
factor in preparation of the design of State level VAT is the national consensus on
certain issues. The consensus has been arrived at through the discussions in the
Empowered Committee of State Finance Ministers on implementation of State level
VAT.

On 1st April 2005, VAT replaced the single point sales tax. Single point sales tax had a
number of disadvantages, primarily that of double taxation. VAT is a modern and
progressive taxation system that avoids double taxation. In addition to offering the
possibility of a set-off of tax paid on purchases, VAT has other advantages for both
business and government.

It eliminates cascading impact of double taxation and promotes economic

efficiency.
It is primarily a self-policing, self-assessment system with more trust put on
dealers.
It provides the potential for a stronger manufacturing base and more competitive
export pricing.
It is invoice based, and as a result it offers a better financial system with less
scope for error.
It has an improved control, mechanism resulting in better compliance.

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 It widens the, tax base and promotes equity.

VAT in Maharashtra is levied under a legislation known as the Maharashtra Value Added
Tax Act (MVAT Act), supported by Maharashtra Value Added Tax Rules (MVAT Rules).
VAT is levied on sale of goods including intangible goods.

The meaning of goods for VAT purposes

Goods means every kind of moveable property including goods of incorporeal and
intangible nature but there are some exclusion, such as newspapers, actionable claims,
money, shares and securities and lottery tickets.

Businesses engaged in. the buying and selling of goods within the scope of the VAT law
are referred to as dealers.

The meaning of 'sale' for VAT purposes

A transaction of sale can be a:

normal sale of goods;
sale of goods under hire-purchase system;
deemed sale of goods used I supplied in the course of execution of works
contract;
deemed sale of goods given on lease.

The rate of tax applicable to the goods sold under various classes of sales is uniform.
However, in respect of normal sales of goods and deemed sales of goods under works
contract and specified deemed sale of goods given on lease, the Act provides for an
optional method for discharging tax liability by way of composition. Being so, the tax
liability has to be determined with reference to the option exercised by the dealer for
discharging tax liability.

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Businesses covered by VAT

The VAT system embraces all businesses in the production and supply chain, from
manufacture through to retail. VAT is collected at each stage in the chain when value is
added to goods. 1t applies to al1 businesses, including importers, exporters,
manufacturers, distributors, wholesalers, retailers, works contractors and lessors.

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Part 2 - Registration under VAT

Rules for registration

If a dealers annual turnover exceeds the below mentioned threshold, then it must
register with the local office of the Sales Tax Department.
All Figures in Rs.
Category Annual Turnover of Turnover of sales Fees payable on
Sales or purchase of registration
taxable goods not
less than
Importer 1,00,000 10,000 100
Others 5,00,000 10,000 100

If the dealers turnover is less than the above threshold, then they are not liable to
collect and pay VAT. However, if a dealer wishes to avail the benefits of being a
registered dealer, then they may apply for voluntary registration by paying a fee of
Rs.5,000/ -.

Benefits of being a registered dealer

As a registered dealer, they are entitled to:

collect VAT on the sales;
claim set-off of tax (input tax credit) paid on purchases;
Issue tax invoices and, be competitive.

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Effective date of registration

The effective date of registration, that is, the date front which a dealer may charge VAT
on sales; will depend on the date they first become liable to pay VAT. This date will be
determined as follows:
a) New businesses:
If a dealer is not registered because their annual turnover is less than the threshold;
their liability to account for VAT starts from the date they cross the threshold.
b) Existing businesses:
If a dealer took over an existing business that is registered for VAT, then they will be
liable to pay tax on sales from the date they took over the business.
c) Voluntary registration:
If a dealer is registered on a voluntary basis, then he will be liable to account for VAT
from the date shown on the certificate of registration.
d) Late registration:
If a dealers turnover has exceeded the appropriate threshold but they have applied late
for registration, then he can charge VAT on his sales only after they are registered, i.e.,
from the date shown on the certificate of registration.

Further, having crossed the threshold, it is an offence to be engaged in business as a

dealer without a certificate of registration

Certificate of registration

A dealer should prominently display the certificate and hologram, or a copy of the
certificate and hologram, at each place where they carry can on their business.

If a dealer has more than one place of business, then Sales Tax Office will provide
them, upon their request, one copy of the certificate of registration and hologram for
each additional place of business.

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If a dealer loses his / her certificate of registration or hologram, or it is accidentally
destroyed or defaced, then they may obtain a duplicate copy of the certificate of
hologram from their sales tax office.

The certificate of registration and hologram is personal to the dealer to whom it is issued
and is non-transferable.

Changes to business circumstances

If, following dealer register, there are any amendments to the details they can be
reported while applying for registration, it must done within 60 days of the change,
inform us in writing.
Where the amendment involves a:
change in the name of the business;
change in the constitution of the business without dissolution of the firm;
change in the trustees of a Trust;
change in the guardianship of a ward;
change in the Karta of a Hindu Undivided Family;
conversion of Private limited Company to a Public limited Company;
change in the place of business;
addition of new place of business;
formation of a partnership with regard to the business,
an application made by a dealer for insolvency or liquidation of their
business;
an application made against dealers business for insolvency or liquidation;
opening or closing of a bank account;

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A dealer will not need to make a fresh application for registration. However, the
communication to the Registering Authority concerned should be made within sixty days
of the change or occurrence of the event.

Cancellation of registration

A dealer will be liable to pay VAT while their registration is effective. If however, their
turnover falls below the threshold, he may choose to apply for cancellation of his
registration. However, he should continue to collect and pay VAT in the normal way until
his registration is formally cancelled. Alternatively, they may be allowed the registration
to continue.

If a dealer:
discontinue the business;
dispose of or sell or transfer the business;

A dealer must inform the Sales Tax Department within 30 days of the event. In case of
disposal or sale of business, their successor will need to apply for a fresh registration
certificate.

For cancellation of registration a dealer should submit form 103 which is available with
the local sales tax office. It can also be downloaded from the website
www.vat.maharashtra.gov.in

If the Sales Tax Department cancels the dealers registration, they must return the
Certificate of Registration

The cancellation of their certificate does not affect their liability to pay any tax, interest
or penalties in respect of any period prior to the date of cancellation of their registration.

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The obligations of a registered dealer

Following are the registration, which dealers are obliged to:

display prominently their certificate of registration and hologram in their place of
business, and a copy of the certificate and hologram in each of the other places
where they carry on their business;
inform their sales tax office of any changes in the details previously reported to
the sales tax office;
collect VAT on all sales at appropriate rates;
calculate the tax due and submit correct, complete and self consistent returns
and pay the amount of tax due on or before the due dates;
issue tax invoice / bill or cash memorandum to all customers;
maintain adequate records and retain them for a period of five years from the end
of the tax year to which they relate;
extend co-operation to the officers of the Sales Tax Department at dealers
business premises and provide all assistance to them to discharge their duties.

26 | P a g e
Part 3 - Explaining VAT

How VAT works

When a dealer sell goods, the sale price is made up of two elements; the selling price of
the goods and the tax on the sale. The tax is payable to the State Government.

The tax payable on sales is to be calculated on the selling price. The tax paid on
purchases supported by a, valid tax invoice is generally available as set-off (input, tax
credit) while discharging the tax liability on sales.

Example

The following example shows how the VAT works through the chain from manufacturer
to retailer.

Company A buys iron ore and other consumables and manufactures stainless steel
utensils; Partnership firm B buys the utensils in bulk from Company A and polishes
them; shopkeeper C buys some of the utensils and purchases packing, material from
vendor D, packages them and sells the packed utensils for the public.

27 | P a g e
(The sale and purchase figures shown in the example are excluding tax)
Particulars Amount VAT @
(Rs.) 4% (Rs.)
Company A
Cost of iron are and consumables 50,000 2000
Sales of unpolished stainless steel utensils 1,50,000
Value added 1,00,000

Company A is liable to pay VAT on Rs.1,50,000/- @ 4% 6000

Less Set Off (2000)
Net VAT amount to pay with the Return (Note: Tax 4000
invoice issued by Company A will show sale price as
Rs.1,50,000/- tax as Rs.6,000/-. Therefore, the total
invoice value will be Rs.1,56,000/-)

Partnership B
Purchases unpolished stainless steel utensils. 1,50,000
Sales polished stainless steel utensils 1,80,000
Value added 30,000

Partnership B is liable to pay V AT on Rs.1,80,000 at 4% 7,200

But can claim set off of tax paid on purchases (6,000)
Net VAT amount to pay with the Return 1200

Shopkeeper C
Purchases polished stainless steel utensils 1,80,000
Packing material 5,000
Total Purchases 1,85,000
Sales 2,25,000
Value added 40,000
Shopkeeper C is liable to pay V AT on Rs.2,25,000 @ 4% 9,000
Set off of tax paid on purchases (Rs.7,200 + Rs.200 of 7,400
packing material)
Net VAT amount to pay with the Return 1,600

Vendor D
Tax paid costs Nil
Sales 5,000
Value Added 5,000

Vendor D is liable to pay VAT on Rs.5,000 @ 4% 200

28 | P a g e
 The VAT due on the value added through the chain, i.e., 9,000
4% on Rs.2,25,000 is :

The State Government received the tax in stages. The payments of tax were as follows:
Particulars Amount (Rs.)
Suppliers of Company A 2,000
Company A 4,000
Partnership B 1,200
Shopkeeper C 1,600
Vendor D 200
Total 9,000

Thus, through a chain of tax on sale price and set off on purchase price, the cascading
impact of tax is totally eliminated.

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Since set-off of tax on purchases is given only on purchases from registered dealers
where tax is collected separately, dealers purchases from unregistered dealers,
imports, inter-state purchases and purchases from registered dealers without separate
tax collection are not entitled to set-off.

In practice, the tax is finally borne by the ultimate consumer, who is not a registered
dealer, in this case, people who buy utensils from the shopkeeper C.

Rates of value added tax

There are two main rates of VAT 4% and 12.5%. The goods are grouped into five
schedules as under:

Schedul Rate of Illustrative Items

e tax
A 0% Vegetables, milk, eggs, bread
B 1% Precious metals and precious stones and their jewellery
C 4% Raw materials, notified industrial inputs, notified information
technology products and a few essential items
D 20% and Liquor, petrol, diesel etc
above
E 12.5% Other than items specified in schedules A, B, C & D.

(The list is illustrative and not exhaustive. Please refer to the schedules for details)

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Difference between tax free goods and exempt sales

It is sometimes confusing to have goods that are tax free and sales that are exempt.
Both result in no VAT being charged, so what is the difference?

Tax free goods do not attract tax at any stage of sale or in any type of transaction,
whereas, exempted sales are certain types of transactions, viz., export sales which are
exempt from tax.

Composition schemes

Certain dealers may find it difficult to keep detailed records for claiming set-off. For such
dealers, a simpler and optional method of accounting for VAT has been introduced. This
method is the composition scheme. It may be noted that composition scheme is not
meant to be a tax concession scheme but only a simplification of tax calculation and
payment system.

Tax payable by dealers opting for composition in lieu of VAT

The following classes of dealers are eligible for option to pay tax under composition:
Resellers selling at retail, i.e., to consumers,
Restaurants, eating houses, hotel (excluding hotels having gradation of 'Four
Star and above), refreshment rooms, boarding establishments, clubs and
caterers,
Bakers,
Dealers in second-hand passenger motor vehicles and
Works contractors
Dealers engaged in the business of providing mandap, pandal, shamiana.

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Accordingly, if the dealer has opted for payment of tax liability under composition, the
tax liability has to be determined in terms of the guidelines given in the relevant
Notification in this regard. Apart from the terms and conditions governing each of the
composition schemes, the Notification explains the methodology for computation of
turnover liable to tax and the rate of composition payable.

A dealer can opt for the composition option at the beginning of the financial year and
has to continue to be a composition dealer at least till the end of that financial year. If
dealer wishes to switch, over to normal VAT, he can do so only at the beginning of the
next financial year. However, a new dealer can opt for composition at the time of
registration.

In respect of works contract, the contractor can choose to discharge tax liability under
composition option. Moreover, such an option can be exercised by the contractor on
contract to contract basis.

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Part 4 - Calculating tax liability

In, order to calculate how much tax a dealer has to pay, he must, first determine his
turnover of sales and turnover of purchases. The second stage is to ascertain the
amount of tax due for payment.

Calculating turnover of sales and purchases

The turnover of sales is the total of the amounts received or receivable (excluding VAT
charged separately) in respect, of the sale of goods, less the amount refunded to a
purchaser in respect of goods returned, within six months of the date of the sale.

Similarly, the turnover of purchases is the total of the amounts paid or payable
(excluding VAT charged separately) in respect of the purchase of goods less (the
amounts repaid to dealer in respect of goods they return, within six months of the date
of purchase.

Credit notes and debit notes.

If the sale price, or the purchase price, of any goods is varied and either a credit note or
a debit note is issued, then the credit note or the debit note, as the case may be, should
show separately, the tax and the price.
be accounted for in the period in which the appropriate entries are made in their
books of accounts.

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Special cases

Auctioneers
If dealer is an auctioneer, then they must include in their turnover, the price of the goods
they auction for their principal
Hotels
There are special rules for hotels and other establishments that provide boarding and
lodging for an inclusive amount.
The rules provide a formula to enable them to calculate their turnover of sales for meals
(food and beverages) which they provide.
The supply of food in a restaurant also includes an element of service. But the full
amount charged is the sale price for the purposes of calculating turnover and tax.
Works contracts
VAT applies only to the sale of goods. Supply of services is not liable to VAT. Works
contracts are deemed sales where both, goods and services are provided in a
transaction and cannot be separated.
A works contract may involve the creation of immoveable property, e.g. a house, a
factory or a bridge. Some other examples of works contracts are photography, repairs &
maintenance etc.
To calculate the amount a dealer should include it in their turnover of sales, so that they
may deduct it from the total contract price, the
costs of labour and service charges.
amount paid to sub-contractors.
charges for planning and designing, and any architect's fees.
hiring charges for machinery and tools.
cost of consumables, such as, water, gas and electricity.
Dealers administrative costs relating to labour and services and any other
similar expenses.
any profit element that relates to the supply of labour and services.

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Alternatively, in lieu of the deductions as above, a dealer may choose to discharge the
liability arising on works contracts by referring to the table prescribed in the rules.
If the dealer finds that it is too complicated to calculate the deductions, then they may
opt for a composition scheme for any works contract.

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Section-2 Executive Summary

Chanakyas economic wisdom of granting states the right to tax its people just as a shepherd
shears his flock or as a bee gets nectar from the flower we have died with him. The modern
Indian state taxes its people just like the French use the flower for extracting perfume in such a
way that by the time they are through, nothing much of the flower remains. Over the years, this
suffocating system of taxation has spawned a black economy that is by many estimates half as
big as the white counterpart. Moreover the revenue collection system of the states was a totally
corrupt one and many efforts since the economy actually liberalized itself have brought only
limited results with lot more remaining to be done. A new system of taxation base on the
principles of value addition took effect from April 2005.

The basic objective of this project is to gain knowledge of the current indirect tax regime i.e.
Value Added Tax, this report will help one to know what are the prerequisites for registering
under the Vat regime & what are the benefits of VAT over the previous Sales Tax regime.

When we talk about contemporary about VAT immediately Goods & Services Tax regime comes
to the picture which is now scheduled to be implemented in 2011. This was the other objective,
to understand the concept of GST.

36 | P a g e
 Review of Literature

Dasgupta, A., 20051, This White Paper on State-level Value Added Tax (VAT) is presented in
three parts. 1) The justification of VAT and its background In Part 2, the main design of VAT, as
evolved on the basis of a consensus among the States through repeated discussions in the
Empowered Committee, has been elaborated. While doing so, it was recognized that this VAT
was a State subject and therefore the States had freedom for appropriate variations consistent
with the basic design as agreed upon at the Empowered Committee. Finally, in Part 3, .what was
the steps taken by the various states.

Rao, K, 2008,2 This paper attempts to identify some of the potential contours of the tax. One of
the key issues that need to be resolved is the treatment of inter-state transactions in goods and
services. The related issue concerns taxation of services which span more than one tax
jurisdiction. International experience points towards self-assessment in the case of registered
taxpayers and taxation in the jurisdiction of the supplier in other cases, with some revenue
sharing among the member states. Some of the details need to be worked out before the tax on
services can be implemented at the state level. A second concern relates to the need to integrate
tax administration at the two levels in order to maximize on the efficiency of administration.

1
Dasgupta, A., 2005,A White Paper On State-Level Value Added Tax,
2
Rao, K, 2008, Goods and Services Tax for India, National Institute of Public Finance and
Policy New Delhi, http://www.nipfp.org.in

37 | P a g e
D T TI3,2009, The Survey results demonstrate an almost unanimous consensus that GST will be
beneficial to the Indian economy. But the suitability of Dual GST which seems to be the only
practical alternative in the short-term is not favored by a majority of the respondents. In addition,
the possibility that a few states may not join the GST bandwagon presents as area of concern.
The respondents were divided over extension of GST to products of conspicuous consumption
which attract high tax rate or the manner of availability of tax credit on capital goods. The most
significant point to note out of the Survey, not entirely unexpected, is the view that the
appropriate date for GST introduction is April 2011. It is also interesting to note that; Easier
compliance, efficient administration and increased tax collection are ranked in that order as
critical success factors. Clearly there is a message to the Government where the implementation
efforts should be aimed at. The results of the Survey reveal the expectations, apprehensions and
concerns of the trade & industry and provide an insight to the policymakers to address the same
for a successful implementation of the GST.

3
DTTI,2009, The pre GST Survey, Deloitte Touche Tohmatsu India Private Limited,
http://www.amchamindia.com/Deloitte-Pre%20GST%20Survey%202009.pdf

38 | P a g e
 Need, Scope & Objective of Study

Need
In the current scenario when our economy is to implement its new indirect tax regime Goods &
Services Tax which is extension to VAT model. The study aims to compare the VAT with sales
tax regime & then to have insight about registering under VAT.

Scope
The scope of study covers VAT the current regime & the new GST regime.

Objective
To Understand the concept of VAT

To Compare VAT with Sales tax regime

To know how to register under VAT

To Procedure for Declaration & Payment of VAT

To know Impact of VAT on Economy & Inflation

To know features of Goods & Services TAX

39 | P a g e
 Value Added Tax
History4
Maurice Laur, Joint Director of the French Tax Authority, was first to introduce VAT on April
10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918.
Initially directed at large businesses, it was extended over time to include all business sectors. In
France, it is the most important source of state finance, accounting for 52% of state revenues.

VAT in India
Finally after 14 years vat was implemented. Let us have a glance on the history of vat up till
April 2005 and reasons why it could not be implemented before. Economic reforms were on a
priority by the government since 1991. But it is to be noted that, VAT was introduced in India in
the year 1976, in respect of Central Excise. However, it was restricted only up to the Excise
Duties, and was known as Modvat (modified value added tax). The coverage of Modvat
gradually increased and covered various other chapters. The importance & need of VAT in the
sales tax structure of India was recognized by the taxation authorities. But the reason why the
proposal of VAT took a long time is because VAT in its simplest form cannot be adopted in India
where there are various authorities who can levy the taxes (e.g.: State/ Central/ Municipality)
There are various reasons why the implementation can take time. It is the policies, the
framework, the commodities, the taxation rate, changing from a multiple point tax to a single
point tax, etc and all such details had to be worked upon. Moreover, in the then existing sales tax
regime, it is the states that collect the taxes, that too at different rates.

4
^ "Les recettes fiscales" (in french). Le budget et les comptes de ltat. Minister of the
Economy, Industry and Employment (France). 23 February 2009. http://www.performance-
publique.gouv.fr/le-budget-et-les-comptes-de-letat/approfondir/les-recettes/les-recettes-
fiscales.html. "la TVA reprsente 130,2 milliards deuros, soit 52,0 % des recettes fiscales
nettes de ltat." Accessed from : http://en.wikipedia.org/wiki/VAT#cite_note-0

40 | P a g e
What is Value Added Tax (VAT)?5
VAT is a simple transparent tax collected on sales of goods. The states and union territories of
India have decided to implement VAT in place of sales tax and a number of other state taxes.
VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to
allow Input Tax Credit (ITC) on tax paid at an earlier stage, which can be appropriated against
the VAT liability on subsequent sale. VAT is intended to tax every stage of sale where some value
is added to raw materials, but taxpayers will receive credit for tax already paid on procurement
stages. Thus, VAT will be without the problem of double taxation as prevalent in the present tax
laws. Presently VAT is followed in over 120 countries. One of the many reasons underlying the
shift to VAT is to do away with the distortions in our existing tax structure that carve up the
country into a large number of small markets rather than one big common market. In the present
sales tax structure tax is not levied on all the stages of value addition or sales and distribution
channel which means the margins of distributors/ dealers/ retailers et al are not subject to sales
tax at present. Thus, the present pricing structure needs to factor only the single point levy
component of sales tax and the margins of manufacturers and dealers/ retailers etc, are worked
out accordingly. Under the VAT regime, due to multi-point levy on the price including value
additions at each and every resale, the margins of either the reseller or the manufacturer would be
reduced unless the ultimate price is increased.

Cascading effects of taxation

Sales Tax

Dasgupta, A.(2009), A White Paper On State-Level Value Added Tax, The

Empowered Committee Of State Finance Ministers, New Delhi,pp 6-8

41 | P a g e
The basic principle of VAT
The Value Added Tax system has its origin in the West European countries. Generally, taxes are
levied on the selling price of the product. Today raw material passes through a number of stages
and processes until it reaches the ultimate stage. For instance, steel ingots are made in a steel
mill, which are then rolled into plates in a rerolling unit and after this a third manufacturer will
make furniture from these plates. Thus, output of the first manufacturer becomes the input of the
second manufacturer, who carries out further processing and supplies it to the third manufacturer.
This process continues till the final product emerges. The product then goes to the wholesaler
who in turn will sell it to the retailer and he will finally turn it to the consumer. Thus, if tax is
levied on the selling price of a product, the incidence of tax goes on increasing as the raw
material and final product pass from one stage to another, as shown in the table below

Why a New Tax System?

There are seven significant reasons to reform the tax system.

1) The then existing system was too complex. That tax code has evolved over many years
creating thousands of conflicting definitions and exemptions. It required numerous
complex forms that take an enormous amount of time and money to complete. It also led
to difficulty in enforcement and collection, and created hundreds of loopholes that are
used to reduce or evade taxes.

2) It was too easily exploited for political reasons. Tax rates, incentives, and exemptions
were altered continuously for political reasons. There was ongoing political pressure to
alter tax laws to benefit or exclude special interest groups.

3) The then existing structure created a poor economic impact. The tax code was often
altered to provide economic stimulus for various business segments, with dubious
results. It neglected the overall health of the economy. It often discourages economic
growth by creating a negative incentive to work and to earn more. An ideal system would
tax spending to create a positive incentive to earn more, and save and invest more.

42 | P a g e
 4) It was a bureaucratic control. The Income tax Revenue Survey requires a huge operating
budget and over 114,000 employees to manage this huge bureaucracy. This was non-
productive labour that does not contribute directly to the economy. In fact, it is a
measurable drain on the economy both in direct and indirect costs, estimated at over $600
billion annually. These educated and talented people could contribute greatly in
productive jobs in the private sector.

5) It requires a large number of professionals in the private sector, like tax accountants,
lawyers, and even entire corporate departments, to advise, interpret and prepare tax
returns. This process wastes valuable resources on non-productive labour that could
otherwise be used to build businesses and strengthen the economy.

6) It forces business managers to make decisions based on tax implications rather than good
business. For example, a company decides not to build a new assembly plant because of
negative capital investment tax policies, and thereby deprives a community from new
jobs and the company from growth.

7) It is inefficient. It just costs too much to collect taxes this way. If we are ever going to
reduce the national deficit without breaking the back of the tax payer, this is the first
place to reduce waste.

Who have to register as a Taxpayer?

All legal and natural persons who provide goods, works or services and have an annual sales
turnover exceeding the threshold limit should register as taxpayer. All importers are required to
register irrespective of their annual turnover. If the dealer supplies only exempt goods and
services he must still notify the local VAT office if his turnover exceeds the threshold limit.
Totally exempt businesses will not however be registered as taxpayers but still be subjected to
later visits by VAT officials to confirm their exempt status.

It is the person, NOT the enterprise, who is registered for VAT. The person is only registered
once for all enterprises/branches/divisions carried on unless permission is granted to register
them separately.

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The person to be registered

Sole proprietor (individual)

Incorporated/unincorporated body of persons
Corporation / company
Association not for gain
Welfare organization / trust
Local authority and certain public authorities

Registration for VAT:- (Procedure)

Download or buy forms; FORM 1, FORM 2, FORM 3,

Fill the Application in duplicate and affix photograph.
Attach the following documents to the application
a. Copy of the constitution document e.g. Partnership deed for partnership firm,
Memorandum and Articles of Association for a company.
b. Board Resolution authorizing the signatory to sign the application in case of
company.
c. Proof of identification of the authorized signatory e.g. voter identity card,
passport, driving license.
d. Proof of principal place of business e.g. rent receipt, lease agreement, electricity
bill.
e. Submit the forms to the jurisdictional Central Excise Office
Submit the above in the nearest Commercial Tax Office.
On submission, the Commercial Tax Officer would verify if the submission is complete
and desirable.
He would make a field inspection of your premises.
The Office of Commercial Tax Officer would send you the VAT CERTIFICATE
Once registered, you will have to account for output tax that is attributable to your
taxable sales. You will also have to submit VAT returns monthly to the Commercial Taxes
Department and keep proper books of accounts.
Type of registration:

44 | P a g e
VAT (Obligatory):

All those businesses having

Annual turnover equal to or more than 5 lacks

Carries out Inter State transactions (Irrespective to annual sales)

VAT (Voluntary)

Any one not fulfilling the above conditions may register himself under VAT voluntarily keeping
future in consideration.

TOT

Turnover Tax also called Composition scheme or Lump Sum Payment Schemes. Small
retailers may not be in a position to maintain detail record of tax paid on inputs and tax payable
on final products. In such case, they will pay tax at flat rate based on their turnover. Naturally,
they cannot issue a VAT invoice and cannot show sales tax separately in their invoice. The
empowered committee has agreed that dealers with turnover up to Rs. 40 lakhs p.a. can be
eligible to the composition scheme, by just paying 1 % which is now 0.25% of their turnover as
composition tax. This option is available only for the businesses like Brick Kilens & Dhabas
(that does not include restaurants).

Declaration & Payment of Tax

One must complete a VAT declaration form monthly as per directions of the VAT office for
instance on the 16th day of each month. On the form you will show the amount of VAT you have
paid to your suppliers and the amount you have charged your customers. The difference between
the two figures is either the amount of tax due to be paid to the VAT office or the amount of
credit to be carried forward to the next months declaration.

Credit for purchases can only be claimed if you are in possession of an official tax invoice which
shows the amount of VAT you have paid on the transaction. If you calculate that you owe tax to
the VAT office it should be paid at the same time as you submit your declaration form. If you are

45 | P a g e
owed tax it will be carried forward and you will deduct it from the tax you owe the following
month. You will also need to show other information on your declaration.

In case of Annual turnover more than 1 crore

Monthly declaration & payment of Output tax using FORM 16

o This is annexure less return

On the end of every quarter through FORM 15

o Annexures FORM 18, 19, 23, 24

o FORM 23 & 24 includes the Total Purchases, input tax, Total Sales & input taxes

In case of Annual turnover less than 1 crore

Filing of Quarterly return using FORM 15 with FORM 18, 19, 23, 24 as annexure

Comparison of VAT and Sales tax

Under Sales Tax Under VAT
Tax levied at the stage of the first sale (only for Tax levied and collected at every point of sale.
cotton, leather and natural gas at the final stage). Tax levied and collected at every point of sale
Tax collected at every point of sale and the tax
already paid by the dealer at the time of purchase
Successive sales (resale) of goods on which tax is of goods will be deducted from the amount of tax
already paid do not attract tax. paid at the next sale.
Dealers reselling goods on which tax has already Dealers reselling tax-paid goods will have to
been paid do not collect any tax on resale and file collect VAT and file returns and pay VAT at every
nil returns stage of sale (value addition).
The manufacturer will pay VAT on the goods
On 19 goods used as raw materials there is no purchased as raw materials but the VAT paid on
input tax credit on the tax paid on such goods and raw materials will be deducted on the sale of
2% tax is levied on other goods used as raw goods manufactured. Thus duplication of tax
materials for manufacture. burden on raw materials will be avoided.
Computation of tax liability is complex. It is transparent and easier.
Huge number of forms required in procedure. Six
taxation rates. At the most a few forms required. Only two rates.

Tax only on goods. Tax on goods and services both.

Assessment done by the department. Self-assessments by dealers.

46 | P a g e
Advantages of application of VAT
In its purest form, VAT is a tax that is levied on the value added along different stages of
production and distribution of a commodity or service. Therefore, it is a tax on the sum total of
value added, i.e., equal to the value of a commodity or service. In this sense, it should be
equivalent to a retail sales tax that is collected only at the retail stage. But the retail sales tax is
difficult to collect because there are too many retailers of various sizes. The VAT, instead, can be
collected at earlier stages of production in fragments and can end at the retail stage. But the total
collected from the VAT should be exactly the same as if collected only from the retailers of the
commodity concerned.

(i) Eliminates cascading effects :-

The VAT is preferred because the VAT minimizes distortions. The simple excises or the turnover
taxes results in the unintended effect of (i) taxing an output (together with its input content) more
than once; as well as (ii) applying a tax on the earlier paid input tax leading to cascading. It
causes producers to move their capital or resources away from the production of one output to
another one which does not suffer from cascading. The VAT, because it gives credit for input tax
earlier paid, avoid the distortion as represented by misallocation or redirection of resources from
one economic activity to another. Therefore, it does not alter producers decisions to produce
particular commodities which, in general, should reflect the demands from consumers. However,
for this benefit to occur, the VAT must give credit for raw materials and capital goods.

(ii) Eases administration:-

Although there are feasible options limiting the impact of cascading, the utility of multipoint
VAT goes much beyond that. Arresting cascading could be considered important to a regime of
VAT. Nevertheless, the institution of VAT in fact should be conceived also as an instrument of tax
administration an administration that checks evasion through a self monitoring feature, and an
account based audit system that is regarded as superior to the system of physical verification.
The latter already having fallen into disrepute for causing distress to tax filers needs to be
eventually abandoned as its positive impact on revenue yield remains questionable. An account-
based audit should not only tighten the tax net but raise revenues through a wider acceptability of
a tax administration in the public eye.

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 (iii) Improves International competitiveness:-

Since VAT has the potential for eliminating cascading, it is possible to design the VAT in a
manner that will ensure that exports are free from any tax burden (zero-rating). Further, such
adjustments under the VAT structure are also WTO consistent. As a result the competitiveness of
exports in international markets is enhanced. Even though exports are generally exempt from
sales tax and the burden of input tax embedded in the exports is sought to be eliminated through
the duty drawback mechanism, nevertheless, the process is cumbersome and the effect is not
fully realised. As export competitiveness can be adversely influenced by then tax factor, the
capacity to zero rate easily and accurately is an important aspect of the VAT.

(iv) Imparts Transparency:-

Another positive aspect of the VAT is its simplicity and transparency, which commodity taxes
usually lack. The VAT tends to collect the quantum of tax payable at every stage of transaction.
Both producers and consumers, who ultimately bear the tax burden, are fully aware of the tax
liability, which is not as easily ascertainable in other forms of commodity taxation.

(v) Buoyant Source of Revenue:-

When faced with chronic budget deficits and growing expenditures, governments have been
turning to tax reform as a way to raise revenues. Governments seek sources that are income
elastic and not sensitive to changes in prices of particular goods or income sources. Since the
VAT permits a relatively larger coverage in as much as it is possible to extend it to value addition
at all stages in the production-distribution chain, the potential for raising resources efficiently is
generally higher.

(vi) Goodbye to Tax on Tax:

VAT is the only tax that offers positive alternatives to the negative impact of indirect taxation. It
is an accepted fact that commodity taxes create severe cascading effect as the taxes levied at
earlier stages of production and distribution get taxed again and again at subsequent points.
Consequently, instead of paying taxes on the value addition by a manufacturer, wholesaler or
retailer, tax is paid on an inflated value, which includes taxes already paid at earlier stages. Such
anomalies escalate prices and encourage vertical integration, where the manufacturer himself

48 | P a g e
tries to wholesale and retail the goods. Vertical integration has been responsible for recession and
unemployment particularly in developing countries. VAT has an inbuilt device for reducing the
cascading effect by restricting the levy to actual value addition. It encourages growth by
confining tax burden to the net economic contribution of the taxpayer. Moreover, since the
Capital Investment also gets tax relief. VAT can accelerate economic growth by encouraging
modernization and replacement.

VAT Effect on Inflation

In considering the introduction of VAT, countries are often concerned that it would cause an
inflationary spiral. However there is no evidence to suggest that this is true. A survey of OECD
countries that introduced VAT indicated that VAT had little or no effect on prices. In cases where
there was an effect it was a one time effect that simply shifted the trend line of the consumer
price index (CPI). To guard against any unforeseen price effects the authorities may consider a
tighter monetary policy stance at the introduction of VAT.

Effects of VAT on Distribution

Value added tax is widely criticized as being regressive with respect to income that is its burden
falls heavily on the poor than on the rich. This emanates from the fact that consumption as a
share of income falls as income rises. Hence a uniform VAT rate falls heavily on the poor than
the rich. This criticism is valid when VAT payments are expressed as a proportion of current
income. However if, following the premise that welfare is demonstrated by the level of
consumption rather than income, consumption is used as the denominator the impact of VAT
would be proportional. A proportional burden would also be demonstrated if lifetime income
rather than current income is used. A lifetime income concept considers the fact that many
income recipients are only temporarily at lower income brackets as their earnings increase. In
order to address the regressivety of VAT the following measures can be taken:

The VAT itself can be used to differentiate taxation of consumer items that are consumed
primarily by the poor such that they pay less or at zero rate or to tax luxury goods at a
higher than standard rate.
VAT exemptions may also be granted on goods and services that are consumed mostly by
the poor.

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 Equity concerns may also be addressed through other ways, outside the VAT system, such
as other tax and spending instruments of government. This could be in the form of lower
basic income tax rates on the poor or some pro-poor expenditures of government. The use
of multiple rates of VAT has however been widely discouraged for various reasons. These
include:
o The fact that sometimes it is almost impossible to differentiate between higher
quality expensive products e.g. food, consumed by the rich and ordinary
products consumed by the poor. Thus any concessions extended may tend to
benefit the rich much more than the poor.
o Increased costs of VAT administration as a differentiated rate structure brings with
it problems of delineating products and interpreting the rules on which rate to use.
o Significantly increased costs of tax compliance for small firms, which are usually
unable to keep separate records/accounts for sales of differently taxed items. This
results in the use of presumptive methods of determining the tax liability, which
leads to more difficulties in monitoring the compliance. The higher compliance
cost resultant from differentiation of VAT rates may also be regressive with
respect to income since smaller firms with lower income tend to bear
proportionately more of the burden than do larger firms.
Exemptions refer to situations where output is not taxed but taxes paid on inputs are not
recoverable. The rationale behind exemptions is to reduce negative distributional effects of tax
through the effect on incomes. The effects of exemption may be as follows:

Falling of revenues exemptions break the VAT chain. If exemptions are granted at prior
to the final sale, it results in a loss of revenue since value added at the final stage escapes
tax.
Un-recovered taxation of some intermediate goods may lead to producers substituting
away from such inputs thus distorting the input choices of the said producers.
Exemptions may create incentives to self supply i.e. tax avoidance by vertical
integration.
Exemptions tend to feed on each other giving rise to a phenomenon called exemption
creep. This arises from the fact that each exemption gives rise to pressures on further

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 exemption. For example creating an exemption to reduce the tax burden on a particular
commodity or goods may lead to increased pressure for exemption or zero rating of
inputs used for the production of such a commodity.

Based on the above, it is important that care is taken when introducing exemptions in order to
avoid distortions in the production process as well as to minimize revenue loss resulting from
such distortions.
Given the fact that the primary purpose of VAT is to raise government revenue in an efficient
manner and with as little distortions of economic activity as possible, distribution effects are
perhaps better addressed by other forms of tax and government expenditure policies which can
often be better targeted at these aims.

VAT Effect on Economic Growth

Economic growth can be facilitated through investment by both government and the private
sector. Savings by both parties are required in order to finance investment in a non-inflationary
manner. Compared to other broadly based taxes such as income tax VAT is neutral with respect
to choices on whether to consume now or save for future consumption. Although VAT reduces
the absolute return on saving it does not reduce the net rate of return on saving. Income tax
reduces the net rate of return as both the amount saved as well as the return on that saving are
subject to tax. In this regard VAT may be said to be a superior tax in promoting economic growth
than income tax. Since VAT does not influence investment decisions on firms, by increasing their
costs, its effects on investment can be said to be neutral.

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 Goods & Services Tax Model for India

GST: The way ahead

If the Value Added Tax (VAT) is considered to be a major improvement over the pre-existing
Central excise duty at the national level and the sales tax system at the State level, then the
Goods and Services Tax (GST) will be a further significant breakthrough the next logical step -
towards a comprehensive indirect tax reform in the country.6
By P. Chidambram

Why GST?
In the existing State-level VAT structure there are also certain shortcomings as follows. There
are, for instance, even now, several taxes which are in the nature of indirect tax on goods and
services, such as luxury tax, entertainment tax, etc., and yet not subsumed in the VAT. In the
GST, both the cascading effects of CENVAT and service tax are removed with set-off, and a
continuous chain of set-off from the original producers point and service providers point upto
the retailers level is established which reduces the burden of all cascading effects. This is the
essence of GST, and this is why GST is not simply VAT plus service tax but an improvement
over the previous system of VAT and disjointed service tax. However, for this GST to be
introduced at the State level, it is essential that the States should be given the power of levy of
taxation of all services. This power of levy of service taxes has so long been only with the
Centre. A Constitutional Amendment will be made for giving this power also to the States.
Moreover, with the introduction of GST, burden of Central Sales Tax (CST) will also be
removed. The GST at the State-level is, therefore, justified for
(a) Additional power of levy of taxation of services for the States,
(b) System of comprehensive set-off relief, including set-off for cascading
burden of CENVAT and service taxes,
(c) Subsuming of several taxes in the GST and
(d) Removal of burden of CST. Because of the removal of cascading effect,
the burden of tax under GST on goods will, in general, fall.
6
Chidambram, P., (2009), First Discussion Paper On Goods and Services Tax In
India, The Empowered Committee Of State Finance Ministers, New Delhi, pp i.

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Salient features of the GST model7
Keeping in view the report of the Joint Working Group on Goods and Services Tax, the views
received from the States and Government of India, a dual GST structure with defined functions
and responsibilities of the Centre and the States is recommended. An appropriate mechanism that
will be binding on both the Centre and the States would be worked out whereby the harmonious
rate structure along with the need for further modification could be upheld, if necessary with a
collectively agreed Constitutional Amendment. Salient features of the proposed model are as
follows:
The GST shall have two components: one levied by the Centre (hereinafter referred to as
Central GST), and the other levied by the States (hereinafter referred to as State GST).
Rates for Central GST and State GST would be prescribed appropriately, reflecting
revenue considerations and acceptability. This dual GST model would be implemented
through multiple statutes (one for CGST and SGST statute for every State). However, the
basic features of law such as chargeability, definition of taxable event and taxable person,
measure of levy including valuation provisions, basis of classification etc. would be
uniform across these statutes as far as practicable.
The Central GST and the State GST would be applicable to all transactions of goods and
services made for a consideration except the exempted goods and services, goods which
are outside the purview of GST and the transactions which are below the prescribed
threshold limits.
The Central GST and State GST are to be paid to the accounts of the Centre and the
States separately. It would have to be ensured that account-heads for all services and
goods would have indication whether it relates to Central GST or State GST (with
identification of the State to whom the tax is to be credited).
Since the Central GST and State GST are to be treated separately, taxes paid against the
Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST
and could be utilized only against the payment of Central GST. The same principle will
be applicable for the State GST. A taxpayer or exporter would have to maintain separate
7
Dasgupta, A.(2009), First Discussion Paper On Goods and Services Tax In India,
The Empowered Committee Of State Finance Ministers, New Delhi,pp 37-38

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 details in books of account for utilization or refund of credit. Further, the rules for taking
and utilization of credit for the Central GST and the State GST would be aligned.
Cross utilization of ITC between the Central GST and the State GST would not be
allowed except in the case of inter-State supply of goods and services under the IGST
model which is explained later.
The Central GST and State GST are to be paid to the accounts of the Centre and the
States separately.
Since the Central GST and State GST are to be treated separately, in general, taxes
paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for
the Central GST and could be utilized only against the payment of Central GST. The
same principle will be applicable for the State GST.
To the extent feasible, uniform procedure for collection of both Central GST and State
GST would be prescribed in the respective legislation for Central GST and State GST.
The administration of the Central GST would be with the Centre and for State GST with
the States.
The taxpayer would need to submit periodical returns to both the Central GST
authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN linked taxpayer identification number with a
total of 13/15 digits. This would bring the GST PAN-linked system in line with the
prevailing PAN-based system for Income tax facilitating data exchange and taxpayer
compliance. The exact design would be worked out in consultation with the Income-
Tax Department.
Keeping in mind the need of tax payers convenience, functions such as assessment,
enforcement, scrutiny and audit would be undertaken by the authority which is
collecting the tax, with information sharing between the Centre and the States.

Taxes subsumed by GST8

The various Central, State and Local levies were examined to identify their possibility of being
subsumed under GST. While identifying, the following principles were kept in mind:
8
Dasgupta, A.(2009), First Discussion Paper On Goods and Services Tax In India,
The Empowered Committee Of State Finance Ministers, New Delhi,pp 19

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 Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either
on the supply of goods or on the supply of services.
Taxes or levies to be subsumed should be part of the transaction chain which commences
with import/manufacture/ production of goods or provision of services at one end and the
consumption of goods and services at the other.
The subjugation should result in free flow of tax credit in intra and inter-State levels.
The taxes, levies and fees that are not specifically related to supply of goods & services
should not be subsumed under GST.
Revenue fairness for both the Union and the States individually would need to be
attempted.

On application of the above principles, the following Central Taxes would be, to begin with,
subsumed under the Goods and Services Tax:
Central Excise Duty
Additional Excise Duties
The Excise Duty levied under the Medicinal and Toiletries Preparation Act
Service Tax
Additional Customs Duty, commonly known as Countervailing Duty (CVD)
Special Additional Duty of Customs - 4% (SAD)
Surcharges, and
Cesses.
Following State taxes and levies would be, to begin with, subsumed under GST:
VAT / Sales tax
Entertainment tax (unless it is levied by the local bodies).
Luxury tax
Taxes on lottery, betting and gambling.
State Cesses and Surcharges in so far as they relate to supply of goods and services.
Entry tax not in lieu of Octroi.

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The illustration shown below indicates, in terms of a hypothetical example with a manufacturer,
one wholesaler and one retailer, how GST will work. Let us suppose that GST rate is 10%, with
the manufacturer making value addition of Rs.30 on his purchases worth Rs.100 of input of
goods and services used in the manufacturing process. The manufacturer will then pay net GST
of Rs. 3 after setting-off Rs. 10 as GST paid on his inputs (i.e. Input Tax Credit) from gross GST
of Rs. 13. The manufacturer sells the goods to the wholesaler. When the wholesaler sells the
same goods after making value addition of (say), Rs. 20, he pays net GST of only Rs. 2, after
setting-off of Input Tax Credit of Rs. 13 from the gross GST of Rs. 15 to the manufacturer.
Similarly, when a retailer sells the same goods after a value addition of (say) Rs. 10, he pays net
GST of only Re.1, after setting-off Rs.15 from his gross GST of Rs. 16 paid to wholesaler. Thus,
the manufacturer, wholesaler and retailer have to pay only Rs. 6 (= Rs. 3+Rs. 2+Re. 1) as GST
on the value addition along the entire value chain from the producer to the retailer, after setting-
off GST paid at the earlier stages. The overall burden of GST on the goods is thus much less.
This is shown in the table below. The same illustration will hold in the case of final service
provider as well.

GSTs benefit to the small entrepreneurs and small traders

The present threshold prescribed in different State VAT Acts below which VAT is not applicable
varies from State to State. The existing threshold of goods under State VAT is Rs. 5 lakhs for a
majority of bigger States and a lower threshold for North Eastern States and Special Category
States. A uniform State GST threshold across States is desirable and, therefore, the Empowered

56 | P a g e
Committee has recommended that a threshold of gross annual turnover of Rs. 10 lakh both for
goods and services for all the States and Union Territories may be adopted with adequate
compensation for the States (particularly, the States in North-Eastern Region and Special
Category States) where lower threshold had prevailed in the VAT regime. Keeping in view the
interest of small traders and small scale industries and to avoid dual control, the States
considered that the threshold for Central GST for goods may be kept at Rs.1.5 crore and the
threshold for services should also be appropriately high. This raising of threshold will protect the
interest of small traders.

Conclusion

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List of Sales Tax Offices in the State of Maharashtra

There are
total 40 Sales
Tax Office
located all over
the

Maharashtra. Out which some of

them are in: Mumbai (Head Quarters), Bandra,
Raigad (Division), Thane (Division), Kalyan,
Nalasopara, Palghar, Pune (Division), Solapur, Kolhapur
(Division), Satara, Sangli, Ratnagiri, Nasik (Division),
Ahmednagar, Aurangabad (Division), Nagpur (Division), Wardha,
Amaravati (Division), Akola, and many more

Bringing about an integration of all taxes levied on goods and services in a federal polity with
sharp distribution of legislative powers is a Herculean task to say the least. The Constitution of
India, 1950 demarcates taxing powers in a two-tier structure wherein levies on production and
international imports are with the Union and post- production levies rest with the states. The
Centre levies duties of excise on manufactures and import/countervailing duties on international
imports apart from levying a tax on services under various taxing and the residuary entry in the
Union List. The states levy VAT on goods sold or entering in the state under various entries of the
state list. Even if all Union-level levies are integrated into a single levy and all state level levies
culminate in a single State level levy; this may still have two levies and the resultant cascading

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and administrative burdens may nevertheless remain to an extent, though this may go a long way
in harmonizing levies. A harmonized, integrated and fully fledged GST calls for the following:
1. Implementation of GST calls for effecting widespread amendments in the Constitution
and the various constitutional entries relating to taxation.
2. Services have to be appropriately integrated in the tax network; and
3. Apart from all these, there has to be a robust and integrated MIS dedicated to the task of
tracking flow of goods and services across the country and rendering accurate accounting
of levies associated with such flow of goods and service.

References

1. Value Added Tax By Sales Tax Department.

2. www.google.com

3. www.tax4india.com

4. www.vat.maharashtra.gov.in

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Dasgupta, A., 2005,A White Paper On State-Level Value Added Tax, The Empowered Committee Of
State Finance Ministers, New Delhi,pp 6-8 Available at:
www.finmin.nic.in/downloads/reports/whitepapervat.pdf

5
Dasgupta, A.(2009), A White Paper On State-Level Value Added Tax, The Empowered Committee Of
State Finance Ministers, New Delhi,pp 6-8 Available at:
www.finmin.nic.in/downloads/reports/whitepapervat.pdf

6
Dasgupta, A.(2009), First Discussion Paper On Goods and Services Tax In India, The Empowered
Committee Of State Finance Ministers, New Delhi,pp 19

7
Dasgupta, A.(2009), First Discussion Paper On Goods and Services Tax In India, The Empowered Committee Of
State Finance Ministers, New Delhi,pp 37-38

8
Dasgupta, A.(2009), First Discussion Paper On Goods and Services Tax In India, The Empowered
Committee Of State Finance Ministers, New Delhi,pp 19

3
DTTI,2009, The pre GST Survey, Deloitte Touche Tohmatsu India Private Limited, Available at
http://www.amchamindia.com/Deloitte-Pre%20GST%20Survey%202009.pdf

2
Rao, K, 2008, Goods and Services Tax for India, National Institute of Public Finance and Policy New
Delhi, http://www.nipfp.org.in

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