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VAT

Value Added Tax is a multi-point sales tax with set off for tax paid on purchases. A tax on the value addition on the product. Burden of tax is ultimately borne by the consumer.

HISTORY
German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. y Maurice Laur, Joint Director of the French Tax Authority, was first to introduce VAT on April 10, 1954. y 1968 reform : include all the sectors under VAT. y Over 120 countries worldwide have introduced VAT over the past three decades and India is among the last few to introduce it.
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IN INDIA
of the States have already implemented VAT from 1 April, 2005. Manmohan Singh introduced the idea. Credit goes to former Finance Minister Shri Jaswant Singh for implementing it. Haryana was the first state to introduce VAT (year 2003). The committee of finance minister and chief minister had suggested for it in 1995 and 98.
 Majority

No 1 2

States Haryana Andhra Pradesh, West Bengal, Kerala, Karnataka, Orissa, NCT Delhi, Tripura, Bihar, Arunachal Pradesh, Sikkim, Punjab , Goa, Mizoram, Nagaland, J & K, Manipur, Maharashtra, Himachal Pradesh, Assam and Meghalaya

Date of Imposition of Number of VAT States 01-Apr-03 01-Apr-05 1 20

3 4 5 6

Uttaranchal Rajasthan, Gujarat, MP, Chattisgarh and Jharkhand Tamil Nadu Uttar Pradesh

01-Oct-05 01-Apr-06 01- Jan- 07 01- Jan -08

1 5 1 1

VAT Terminology
Output VAT : Amount received by a seller as a percentage of the gross sale price of goods or services Amount paid by a buyer as a percentage of the gross purchase price for goods or services used in production. Transactions in which the seller collects no output tax and the corresponding input tax is fully refundable. Exports are zero rated Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller. Financial services are commonly exempt.

Input VAT

Zero Rated

Exempt

FEATURES OF VAT
Tax levied and collected at every point of sale. y Tax levied and collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale. y Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition).
y

Why VAT?....

Encourage people to pay taxes. Avoid double taxation(cascading effect). Bringing uniformity in taxes(state/central). Avoiding additional tax, surcharge, turnover tax.

APPLICABILITY OF VAT
 

VAT would be payable on the sale of goods within the State. Liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit will continue to be governed by State Sales Tax laws or by special provisions under the VAT laws. VAT will not be imposed for one year after the introduction of VAT on AED items relating to sugar, textile and tobacco. VAT on imports and service tax targeted to be integrated along with with AED items into VAT in the second year.

BEFORE VAT
The indirect taxes imposed in India before VAT was: y Commodity tax y Excise Duty y MODVAT y CENVAT
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Sales tax & VAT


Point Rate of tax Cascading effect Input credit Sales Tax SALES TAX Multiple tax Present No VAT VAT Rationalized Absent - input credit mech Tax credit if RMused for Manuf of exampled goods, not providing tax invoice. Wider tax bas (i) Compulsory registration and (ii) Voluntary registration Simple and fair Uniform treatment (i) Tax invoice (ii) Retail inv As it is a self policing system, lesser chance of evasion.

Tax base Registration

Narrow tax base Every dealer who deals in taxable gds and whose t/o has exceeded the threshold limit. complicated No uniformity Normal Invoice Maximum scope for the evasion

Simplicity Uniformity Invoice Tax evasion

VAT RATES
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Four specific rates of VAT as follows


Tax Exempt Goods 46 commodities comprising of natural and unprocessed products in unorganized sector, items legally barred from taxation and items having social implications 1% - Special VAT Rate applicable for gold and silver ornaments; 4% - about 270 goods comprising basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. 12.5% - General VAT Rate;

Who should pay Vat?


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An individual, partnership, corporation, HUF etc, who sells goods in the course of business and who is registered or is required to register for VAT should pay VAT.

KELKAR COMMITTEE ON VAT


Publicity awareness programme should be started y Uniformity of all state legislations & procedures. y Mutual acceptable mechanism y Discount in other local taxes. y Additional duty of excise may continue for textiles.
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How to compute VAT?


There are three methods : Subtraction Method Addition Method Tax Credit Method

SUBTRACTION METHOD
The Subtraction method: Under this method the tax rate is applied to the difference between the value of output and the cost of input;

Example of subtraction method ..


Price of finished goods is 2 lakhs price of inputs (raw materials) is Rs. 1.5 lakhs thus tax will be applied on difference = .5 lakhs

ADDITION METHOD
The Addition method: Under this method value added is computed by adding all the payments that are payable to the factors of production (viz., wages, salaries, interest payments, etc.);

Example of addition method


Add all the factor costs : wages :10000 interest 10000 other expenses 10000 profit 10000 total = 40000 to tax will be levied on 40000

TAX CREDIT METHOD


Tax Credit method: Under this method, it entails set-off of the tax paid on inputs from tax collected on sales. Indian States opted for tax credit method, which is similar to CENVAT.

Example of tax credit method


Sales tax on finished goods : Rs. 2 lakhs taxes paid on raw material purchased which were used in manufacture of the goods : Rs. 1 lakh net tax payable : (2-1) = 1 lakh

Sales Tax Structure


Raw Material = 1000 VAT @6% = Rs 60 Raw material cost = Rs. 1,060 Value add = Rs.1,000 Sales price =Rs. 2060 Vat @ 10% = 206

Input supplier

manufacturer

Dealer

Retailer

Rs 60 collected & paid by input supplier

Rs 206 Paid by maufacturer

To Government

To Government

Sales Tax Structure CONTD.....


Price to dealer = Rs.2,266 Value added = Rs.500 S.P of Dealer = Rs 2,766 Resale tax @ 1% = Rs. 28 Price to retailer = Rs.2,794 Value added = Rs.500 S.P of Retailer = Rs 3,294 Resale tax @ 1% = Rs. 33 S.P to Customer =Rs. 3,327

Input supplierr

manufacturer

Dealer

Retailer

Rs 28 collected & paid by dearler

Rs.33 collected & paid by retailer

To Government

To Government

Value Added Tax


Raw Material = 1000 VAT @6% = Rs 60 Raw material cost = Rs. 1,060 Raw material recorded = Rs. 1,000 Value add = Rs.1,000 Sales price =Rs. 2000 Vat @ 10% = 200

Input supplier

manufacturer

Dealer

Retailer

Rs 60 collected & paid by input supplier

Rs. 200 collected by manufacturer

Rs 200- 60 = 140 Paid by maufacturer

To Government

To Government

VAT CONTD.....
Price to Dealer = Rs.2,200 Recorded by dealer = Rs.2,000 Value added = Rs.500 S.P of Dealer = Rs.2,500 VAT @ 10% = Rs. 250 Price to Retailer = Rs.2,750 Recorded by Retailer= Rs.2,500 Value added = Rs.500 S.P of Dealer = Rs.3,000 VAT @ 10% = Rs. 300 S.P to customer = Rs.3,300 Dealer Retailer

Input supplier

manufacturer

Rs 250 collected by dealer Rs. 200 collected by manufacturer

Rs. 250 collected by retailer

Rs 300- 250 = 50 Paid by Retailer

To Government

To Government

Difference in tax collection


STAGES
Under Sales Tax Under VAT INPUT MANUFACTURE DEALER RETAILE SUPPLIER R R TOTAL TAX COLLECT ION 327 300

60 60

206 140

28 50

33 50

When is VAT chargeable?


VAT is chargeable if the sales of goodsy y y

are made by a VAT dealer in the state. are made in the course of or in furtherance of a business; and are not specifically exempt or Zero-rated.

Registration of dealers
dealers whose turnover is Rs. 5 lakhs or more will have to get registered. Then only they can get credit under VAT. Those with less than Rs. 5 lakh tunover are exempted, but they dont get credit also and they cant pass credit also. They will have to pay composition tax. The chain of VAT will break at that point.
All

When does VAT chain break?


There are many cases : 1. when goods passes to non-registered dealer 2. when goods are not sold but gifted 3. when goods are used in manufacture of exempted goods (the tax paid in inputs will be permitted as credits).

Problems in Implementation of Value Added Tax in India


     

Billing Lack of uniformity Concession for New Industry Number of Taxes impose by the Government Lack of infrastructure facilities Dealing in Variety of Goods

BENEFITS OF VAT
y y y y y

Reduction in tax evasion Spreading of tax burden over all parties Helps in boosting trade in particular state Simplicity and transparency Easy cross checking by Govt.

BENEFITS TO VARIOUS PARTIES


Manufacturer
1 Will be reimbursed fully for the tax paid on their purchases 2 No Retention , Tax on Tax and Surcharge etc. Distributor/Retailer 1 Will have to pay tax on their profit margin, instead of resale tax 2 VAT would reduce the tax burden of them Consumer 1 Bears the final burden. Would reduce and lower the price & consumer would benefit Government 1 Broaden tax base and finally increased in tax revenue

DISADVANTAGES OF VAT


VAT is regressive VAT is too difficult to operate from the position of both the administration and business. VAT is inflationary VAT favors the capital intensive firm

ECONOMIC IMPACT OF VAT


State revenues would not be effected severely. y Some products could actually become costlier depending upon that they suffered earlier y Increases the tax registration. y VAT and Inflation
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SOLUTION:1
Suggestions A change should be bought about in the mindset of the consumers, department officers and traders. y Customers should demand for invoices and bills and state must set up effective VAT monitoring cells. y At each stage the sale should carry an invoice which will help the manufacturers to monitor the selling price and can intervene if the traders inflate y This will help the consumer stands to benefit from the competition.
y y

Solution:2