FUNDAMENTALS OF

VALUE ADDED TAX (VAT)

AN INTRODUCTION

by
Sanjeev Malhotra, FCA,FCS,ACMA, LL.B
casanjeevmalhotra@gmail.com

Powerpoint Templates
Page 1
 WHAT IS VAT
Value means Economic Value
Economic Cycle means

NATURAL MANUFACT WHOLESELL RETAILER

PRODUCT URER ER Rs. 4000
(Mining or Rs. 2000 Rs. 3000
Agriculture Value CUSTO
Value Value added added Rs. MER
Rs. 1000 added Rs. Rs. 1000 1000 COST
1000 IS Rs.
5000

Powerpoint Templates
Page 2
 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.
Powerpoint Templates
Page 3
 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, HaryanaPowerpoint
Started from 01.04.03.
Templates
Page 4
 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. Powerpoint Templates
Page 5
 How VAT works
Sale Value Rs. 2000 Sale Value Rs. 3000
Gross VAT @ 10%=Rs. 200 Gross VAT @ 10%=Rs. 300
VAT paid to Govt=Rs. 200-100=100 VAT paid to Govt=Rs. 300-200=100

B C
Manufacturer Wholesaler

A D
Raw Mtls. Producer Retailer

Sale Value Rs. 1000 Sale Value Rs. 4000

VAT @ 10%=Rs. 100 Gross VAT @ 10%=Rs. 400
VAT paid to Govt= Rs. 100 VAT paid to Govt=Rs. 400-300=100

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

Powerpoint Templates
Page 6
 VAT VS SALES TAX
VAT
SALE TAX
Natural Product tax Rs. 1000
Tax thereon Rs. 100
Natural Product Rs. 1000
Manufacturer Value addition Rs. 1000
Tax thereon Rs. 100
Manufacturer Rs. 2000
Whole seller Value addition Rs. 1000 tax
thereon Rs. 100

Whole seller Rs. 3000

Retailer Value addition Rs. 1000 Tax thereon Rs. 100

Retailer Rs. 4000
Tax @10% Rs. 400

Customer Cost Rs. 4000 Tax thereon Rs. 400 with no credit
Customer Cost Rs. 4400
including tax
Powerpoint Templates
Page 7
 VAT IMPACT - TRADING
Particulars S. Tax at Add. Cost Reduced Reduced
present to margin for margin for
Ist Stage consumer distributor 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

Powerpoint Templates
l. Impact on Manufacturer 2.73 Page 8
 VAT VS SALES TAX
Eliminates 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

Powerpoint Templates
Page 9
 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.

Powerpoint Templates
Page 10
 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.
Powerpoint Templates
Page 11
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.

Powerpoint Templates
Page 12
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.

Powerpoint Templates
Page 13
BENEFITS OF TAX CREDIT
METHOD
Flexibility 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.

Powerpoint Templates
Page 14
 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.

Powerpoint Templates
Page 15
 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.
Powerpoint Templates
Page 16
TAX CREDIT ON CAPITAL
GOODS
Definition 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.
Powerpoint Templates
Page 17
 METHOD OF SET OFF
A 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

Powerpoint Templates
Page 18
Treatment of Exports and
Stock Transfers out of State
For 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%)

Powerpoint Templates
Page 19
 REGISTRATION UNDER VAT
Compulsory for Existing dealers and dealers
having turnover above threshold limit.
TIN will be PAN Based.

Powerpoint Templates
Page 20
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.
Powerpoint Templates
Page 21
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.
Powerpoint Templates
Page 22
 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.
Powerpoint Templates
Page 23
 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.
Powerpoint Templates
Page 24
SALE & SALES PRICE
Transfer 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.
Powerpoint Templates
Page 25
 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.
Powerpoint Templates
Page 26
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.

Powerpoint Templates
Page 27
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.
Powerpoint Templates
Page 28
 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.

Powerpoint Templates
Page 29
 Thank You

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

casanjeevmalhotra@gmail.com
Powerpoint Templates
Page 30