Fundamentals of VAT conducted on 06.05.2016

Powerpoint Templates

FUNDAMENTALS OF VALUE ADDED TAX (VAT)

AN INTRODUCTION

bySanjeev Malhotra, FCA,FCS,ACMA, LL.B

[email protected]


WHAT IS VAT “Value” means Economic Value

Economic Cycle means


WHAT IS VAT.. Contd. Consideration other than cash would need to be

converted in money figures. Value Added means Sales price of goods minus

Cost of bought outs (components and services) Method of taxing trade. Multi stage tax as against single stage in Sales

tax. Sum of VAT at multi stage equals single stage tax

on last stage. Truncated Vat implemented in India presently.


VALUE ADDED TAX IN INDIA Indirect Taxation Enquiry Committee in1976 under Chairmanship of

Sh. L.K.Jha. Committee noted it is very difficult to administer VAT Scheme in toto

because of • Small retail and Wholesale dealers maintaining primitive

accounts.• Numerous products carrying different rates.• Federal Structure of the country, Union and States need to have

an agreement. Committee therefore recommended MANVAT ie VAT at

manufacturing level.• MODVAT now CENVAT got introduced in 1986 initially with 37

chapters.• List of items covered slowly expanded to more than 80.

Conference of Chief Ministers of States in 1999 agreed to implement Sales Tax VAT in all states.• First Proposal was to introduce w.e.f 1.04.2002.• Consensus among states, New date of implementation is

1.04.2003, Haryana Started from 01.04.03.


VAT IN INDIA …. CONTD. Empowered Committee(EC) of State Finance

ministers of Nine states constituted on 17.07.2000. EC decided to rationalize rates to 5 rates ie Nil, 1%,

4%, 20% and RNR of 12.5%. Central Govt. agreed to compensate states by 100%

to 50% in 3rd year. CST was amended to reduce rates from 4% to 2%

to 0% in 3rd year. Haryana implemented the VAT in State from

1.04.2003. Most of the other states implemented from

01.04.05.


BManufacturer

ARaw Mtls. Producer

CWholesaler

DRetailer

Sale Value Rs. 2000Gross VAT @ 10%=Rs. 200VAT paid to Govt=Rs. 200-100=100


Sale Value Rs. 1000VAT @ 10%=Rs. 100VAT paid to Govt= Rs. 100


• Total VAT collected = Rs.100+100+100+100= Rs. 400

How VAT works


VAT VS SALES TAX


VAT IMPACT - TRADINGParticulars S. Tax at

presentIst Stage

Add. Cost to consumer

Reduced margin for distributor

Reduced margin for manufacturer

a.Selling Price of Manufacturer 100 100 100 97.27

b.Sales Tax/ VAT @ 10% of a. 10 10 10 9.73

c.Gross Purchase Price (a+b) 110 110 110 107

d.Value addition by Distributor 30 30 27.27 30

e.Gross Selling Price (a+d) 140 130 127.27 127.27

f.VAT @ 10% 13 12.73 12.73

g.Input Tax Credit (b) 10 10 9.73

h.Additional Net tax paid by Distributor

3 2.73 3

i.Sales Price of Distributor 140 143 140 140

j. Impact on ultimate Buyer 3

k. Impact on Distributor 2.73

l. Impact on Manufacturer 2.73


VAT VS SALES TAXEliminates cascading effect of taxes.Computation of exact tax content possible.No variation in tax burden depending on

number of stages of sale. Instrument to tax consumption as against Sale, Simpler and Improves Compliance.Self - Policing Mechanism by providing audit

trial. Increased tax base.Buoyant Revenue


TYPES OF VAT

Income Type• Sales minus Raw material purchase and

Depreciation.Product Type

• Sales minus RM purchase price. No deduction for Capital Expenditure.

Consumption Type• Sales minus RM and Capital Goods Purchases.


PRINCIPLES OF VAT Origin Principle - Taxes the value added domestically. - Results in exempting imports and taxing exports. - Considers origin as base for taxing.

Destination Principle - Taxes all additions in value either domestically or abroad. - Results in taxing imports and exempting exports. - Goods consumed by consumers of State to be taxed by that state.


BENEFITS OF CONSUMPTION TYPE VAT Easy Administration control due to Credit method. No distinction between Capital intensive and labour

intensive. Tax evasion by classifying capital as revenue is avoided. Harmony with the Destination Principal.

• Tax burden at last stage ie consumption stage.• Becomes easier to discriminate ie Heavy tax on luxury and

concession to items of common use.


METHOD OF VAT IMPLEMENTATI0N

Subtraction Method • Tax on value added by deducting Purchases

from Sales.

Tax Credit Method• Tax levied on full sales price but credit is given of

tax paid on purchases.


BENEFITS OF TAX CREDIT METHODFlexibility in applying varying rates to

different commodities.Self Policing mechanism, Audit control is

much easier.Useful in giving tax benefits on exports.Tried and Tested, Adopted by most of the

countries in the world.


TAX CREDIT AND ADJUSTMENT

Credit of taxes paid in the respective states will be given in the month of purchase irrespective of when they will be used / sold.

No tax credit on inputs procured from other states through Stock Transfer or inter state sale.

Adjustment allowed for Intra state and inter state sale. Adjustment including refund of tax is not restrictive provided

manufactured goods are manufactured and sold. Excess unadjusted credit is eligible for carry forward and

refund.


EXCEPTION TO INPUT TAX CREDIT

Manufacture of exempted goods except when sold by way of export.

Goods as such or goods manufactured there from are branch transferred. Reversal of 5% credits

Tax paid on ATF, Petrol, HSD, LDO except when resold.

Goods disposed other than by way of sale.


TAX CREDIT ON CAPITAL GOODSDefinition of Capital Goods

• Only to manufacturers, processors and not to traders.

• Capitalisation of Capital Assets.• Manufacture of goods for taxable sale.• Capital Assets used for execution of works

contract not eligible.Adjustment of tax credit is available from

same month.


METHOD OF SET OFFA Inputs procured within the state in a month. Rs. 100000

B Capital Goods procured Rs. 1000000

C. Output sold in a month Rs. 500000

D Tax collected on C @ 12.5% Rs. 62500

E. Input tax paid on A @ 5% Rs. 5000

F. Input tax paid on B @ 5% Rs. 50000

G VAT payable during the month (D – E – F) Rs. 7500


Treatment of Exports and Stock Transfers out of StateFor all exports out of country, Input tax

paid within the state will be refunded in full.

For stock transfer out of state, input tax paid in excess of 5% will be eligible for tax credit. (since inter state sales carries tax @ 5%)


REGISTRATION UNDER VAT Compulsory for Existing dealers and dealers

having turnover above threshold limit. TIN will be PAN Based.


COMMODITY COVERAGE

Two main Tax Categories• 5% on all items of Industrial and Agriculture inputs,

Basic necessities, Declared goods and Capital Goods.

• RNR 12.5% on all other items except• 1% on Precious metals, Stones etc.• 20% / 12% on Petrol, ATF, diesel, liqour etc.• Provisions for exemption of items like Natural and

Unprocessed goods like earthen pots, Items legally barred from tax and items having social implication like books, slate, pencils.


INCENTIVES

Units enjoying exemption / remission will be converted into deferment cases with extra period and amount.

Such units will have to pay tax on procurement and collect tax on their sales.

No change is proposed in units enjoying benefits under Deferment Scheme.


ASSESSMENT OF VAT LIABILITY

Simple procedure and few returns.

Deemed Assessment, if no notice issued.

No compulsory annual assessment.

Detailed scrutiny only of selected cases (20 to 25% each year) in scientific manner.

Arithmetical computation to be computer checked in remaining cases.


COMPOSITION SCHEME FOR SMALL DEALERS

Small dealers making local purchases upto 50 lacs per annum will be eligible for composition scheme.

Will issue sales invoice, not eligible to issue tax invoice.

Not eligible to receive VAT invoice, Will not claim input tax credit.

Will not charge tax separately in their invoices.

Eligible for simplified system of registration, Book Keeping, Return filing.

Scheme continues for BKOs, Lottery dealers, Halawai and works contractors.


SALE & SALES PRICETransfer of property in goods for cash, deferred payment or valuable consideration and includes

Transfer, Delivery or Supply treated as deemed sale in following circumstances.

Transfer otherwise in pursuance of contract.

Transfer of property in goods involved in execution of works contract.

The delivery on hire purchase or instalments.

Transfer of right to use

Transfer by unincorporated association or body of persons.


SALE ….Contd.

Supply by way of or part of any service. Food or any other article for human consumption.

Sale price includes consideration for the sale minus cash or trade discount plus charges for anything done by dealer before delivery of goods.

Warranty charges recovered from all customers will be part of sale price.


Features of a Works Contract

Indivisible Contract.Work on the property of Contractee.Contractee becomes deemed owner during

construction itself.Property transfer by principle of accretion or

accession.


Taxation of works contract taxation as regular dealer.

Total of materials used + profit thereon. Sale – Labour and Service + profit thereon. Rate of tax as is applicable on goods.

Composition Scheme. 4% rate of tax on total OR 12.5% on reduced

value after taking abetment. Contractor eligible to use C forms. Contractor eligible to use D1 forms in HVAT. Will not issue tax invoice. Will not take input tax credit.


TDS provisions under VAT Individuals and HUF an exception under IT Act. Every person is liable under some VAT laws. Even labour contracts are covered by IT Act. Only works contracts are covered by VAT Acts. Exemption limit 20000 in IT Act, Rs. 1 lac under

VAT. Contractors doing job work for manufactured

goods an exception under VAT & not under IT.


Thank You

Sanjeev Malhotra, FCA,FCS,ACMA, LL.B

[email protected]

Fundamentals of VAT conducted on 06.05.2016

Documents

Transcript of Fundamentals of VAT conducted on 06.05.2016