Value Added TaxAn Insight

Praveen Nigam - PartnerGrant Thornton India

Not for further distribution without express written permission of Grant Thornton India.

© Grant Thornton India: 2006

Contents

• Brief History• Background• Indirect Tax Structure in

India• VAT - A Roadmap to GST• VAT- Current scenario• VAT- Applicability• Rate of Tax• Input Tax Credit• Other procedural aspects• Central Sales Tax

Brief History

•Introduced in Morocco in the year 1962•Followed by Brazil, Denmark, France and Germany during 1967-68•Implemented in many countries during the 1980’s•Presently in more than 123 countries•US still working under the sales tax regime•Haryana introduced VAT, w.e.f. 1 April 2003, Most other States on 1 April 2005, U.P. still a non VAT State

Background

• Value Added Tax is a:– Multi-point taxation– Tax only on Value addition through Invoice

method– A state subject

• VAT allows credits of tax paid on previous intra state transactions

• VAT has successfully eliminated the cascading impact of taxes

Indirect Tax Structure in India

• Import of goods – Duties of Custom (Basic Duty + Addl. Duty+ CVD)

• Manufacture of goods – Excise (CENVAT) • Sale of goods – VAT/ Sales Tax/ Central Sales Tax• Entry of goods in the State / Territorial Limit - Entry Tax /

Octroi• Rendering of taxable services - Service Tax• Heavy cumulative burden of Indirect taxes

VAT – A Roadmap to GST

Phase - I• Single point tax with multiple rate of taxes without any provision of set

offPhase - II• Multipoint taxation with provision of set off known as VATProposed• Levy of service tax on specified services by the States• Uniformity of rates across• Balancing of total impact of taxes• Abolishing CST in a phased manner• Arriving at a consensus rate of Goods & services• Implementation of GST ( Goods and Service Tax) by 1 April 2010

VAT – Current scenario

• In most of the States Implemented from 1 April 2005, other States joined later

• U.P. still not under the VAT • Tax on inputs to be set-off against tax on final products• Taxes abolished

– Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc.

• Entry Tax – Has been made Vatable – Entry tax in lieu of Octroi - not Vatable

• Central Sales Tax– To be charged @3% from 1 April 2007– To be abolished by 2010

VAT – Applicability

• VAT not levied on– Inter-state sale / Inter-state branch transfer– Imports– Dealers below threshold level

• 0% VAT rate on Exports• No specific rate of VAT on liquor, petrol, diesel,

aviation turbine fuel

Rate of Tax cont…

• Uniformity in Rates– Exempt Rate - 0% on 46 commodities consisting of

– natural and unprocessed products like- Firewood, Plants, Garlic

– Items legally barred from taxation like - News papers, Electricity energy

– items having social implications like- salt, life saving drugs

– Special Rate - 1%• Gold and silver ornaments

Rate of Tax cont…

• Uniformity in Rates– Essential/Mass Consumption Rate - 4%

• 270 goods comprising basic necessities and–Agricultural and industrial inputs;–IT related goods –medicines and drugs;–capital goods; –Iron, Aluminum, Copper, zinc etc.

– Revenue Neutral Rate - 12.5 %

Rate of Tax cont…

• Most statutory Forms under State Sales Tax laws for concessional rate abolished

• Composition Schemes on the basis of turnover, e.g. in Delhi, dealers having turnover upto 50 Lac may opt to pay tax at a composite rate of 1% subject to specified conditions

Rate of Tax cont…

• Specific provisions related to tax on Works Contract– Bifurcation of goods and services– Specific rate of deductions

– More complicated abatement schemes under West Bengal

– Composition scheme for specified categories

Type of Contract Abatement under VAT Abatement under Services tax

Installation & Errection 15% 67%

Civil Construction 25% 67&

INPUT TAX CREDIT

• Input tax credit available on: – VAT paid on inputs– VAT paid on Capital Goods– Entry Tax (not in lieu of Octroi)

• Credit can be utilized towards – VAT payable on Finished Goods– CST payable on Inter State Sales– Any interest or penalty under VAT

• Refund in case of exports• Refund of unutilized credit at the end of specified period

INPUT TAX CREDIT

• VAT credit in case of Capital Goods – Available but to be adjusted over a period of three years

or specified period– Not available on Capital Goods specified in negative list

like Cars, Air Conditioners etc. • VAT Credit refunded within three months in case of exports

where turnover is above Rs.5 Crore• Unutilised Credit to be carried over till the end of the next

financial year & would be refunded if remains unutilised

INPUT TAX CREDITRestrictions

• VAT credit available only in case of :– Taxable intra State sales– Taxable inter-state sales– Export out of India– In case inter state stock transfer -VAT credit

to be reduced • In case of goods specified in the IInd schedule – 100% ( 1%)• In case of goods specified in the IIIrd schedule – 100% ( 4%)• In case of goods specified in the Ivth schedule – 20% ( 20%)

INPUT TAX CREDITRestrictions

• VAT Credit not available in following cases: – Inputs used in the manufacture of exempted goods– Purchases for other than manufacture/ re-sale– Purchases made inter State/ in-transit – Purchases of goods of negative list

• Delhi - Fuel in the form of Petrol, Diesel and Kerosene, LPG, CNG, Coal

• AP - Fuel, Coal and Natural Gas used for power generation

• Jharkhand - Consumables• Tripura – Credit available in excess of 4% on

petroleum products (other than petrol, ATF and diesel) and other fuels

Procedural Issues

• Different rate of VAT on Petroleum products – Delhi 20%, M.P. – 29%, Gujarat – 24% ~ 38%

• List of goods exigible to VAT @4% not uniform for all the States for example Ornaments made of rolled gold and imitation gold are exigible to VAT @4% in M.P. whereas in Delhi chargeable to VAT @12.5%

• Applicability of VAT on Deemed Exports– No specific exemption, methodology of payment of

tax and refund

Other Procedural aspects

• Goods sent for job-work– States providing methodology similar to Excise Law

i.e. reversal of input tax credit on non receipt of goods within 180 days

– Some States treating dispatch to job-workers as branch transfers

• No uniform list of capital goods and utilization on input tax credit thereon

Central Sales Tax – Concept cont…

• Tax on inter state sale of goods • Tax collected by the State where movement of goods

commences • No tax on

– Stock transfer/ branch transfer – In transit sales– Sale in the course of imports– Export sale

Central Sales Tax – Concept cont…

• RATE Of CST– Sale to registered dealer for manufacture, resale or

used Telecommunication network, Mining, electricity generation/ distribution – 4% against Form - C

– Sale to Government – 4% against Form - D– Others not covered by above

– Declared goods twice the rate applicable in the State – 8%

– Others- higher of 10% or Sales Tax/ VAT applicable

– No CST if goods generally exempt from VAT/ Sales tax

Central Sales Tax - Importance

• CST never intended as a major revenue generating legislation but mere a regulative legislation

• Today some States are reluctant to give up CST revenues whereas for some States CST is irrelevant

• As per the budget announcement CST is likely to be reduced to 3% from April 1, 2007

• Total phase out expected by 2010

Thank You