Changes Faces of Vat Tax

CHAPTER - 1
VALUE ADDED TAX
1.1 INTRODUCTION
Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and
services.
It is a general tax that applies, in principle, to all commercial activities involving the production
and distribution of goods and the provision of services. It is a consumption tax because it is
borne ultimately by the final consumer.
It is not a charge on companies. It is charged as a percentage of price, which means that the
actual tax burden is visible at each stage in the production and distribution chain.
It is collected fractionally, via a system of deductions whereby taxable persons can deduct from
their VAT liability the amount of tax they have paid to other taxable persons on purchases for
their business activities. This mechanism ensures that the tax is neutral regardless of how many
transactions are involved.
In other words, it is a multi-stage tax, lavied only on value added at each stage in the chain of
production of goods and services with the provision of a set-off for the tax paid at earlier stages
in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices.
It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked,
resulting in higher revenues to the government.
Over 130 countries worldwide have introduced VAT over the past three decades and India is
amongst the last few to introduce it.
India already has a system of sales tax collection wherein the tax is collected at one point
(first/last) from the transactions involving the sale of goods. VAT would, however, be collected
in stages (installments) from one stage to another.
Department of Commerce & Management, University of Kota, Kota (Raj.). 1

The mechanism of VAT is such that, for goods that are imported and consumed in a particular
state, the first seller pays the first point tax, and the next seller pays tax only on the value-
addition done - leading to a total tax burden exactly equal to the last point tax.
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.
1.2 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 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 person’s output is another’s 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.
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.

WHAT’LL BE THE TAX BURDEN?
The overall tax burden will be rationalized as it’ll 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.
1.3 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.
The transaction chain under VAT assuming that a profit of Rs 10 is retained during each
sale.
SALE 'A' OF CHENNAI 'B' OF BANGALORE SALE @ Rs. 'C' OF BANGALORE

@ Rs. 100/- »» »» 114/- »» »»
SALE @ Rs. 124/- 'D' OF BANGALORE SALE@ Rs. CONSUMER IN

»» »» 134/- »» BANGALORE
Tax implication under Value Added Tax Act
Seller Buyer Selling Price Tax Rate Invoice value Tax Tax Net
(Excluding Tax) (Incl Tax) Payable Credit TaxOutflow
A B 100 4% CST 104 4 0 4.00
B C 114 12.5% VAT 128.25 14.25 0* 14.25
C D 124 12.5% VAT 139.50 15.50 14.25 1.25
D Consumer 134 12.5% VAT 150.75 16.75 15.50 1.25
Total to Govt. VAT 16.75
CST 4.00
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.
1.4 States Welcoming VAT in India

Except the following 8 states (among them 5 BJP ruled states), all the 21 states have given a
welcome hug to VAT in India. Ramesh Chandra, secretary of the federal panel overseeing Indian
VAT implementation said that other states will join within a month-and-a-half.
 Uttar Pradesh
 Tamil Nadu (to join from July 1)
 Uttaranchal
BJP ruled states
 Madhya Pradesh
 Rajasthan
 Jharkhand
 Gujarat
 Chattisgarh
1.5 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.
TERMS COVERED IN INDIAN VAT
550 items covered 270 items of basic needs, like Rest 12.5% VAT. Gold &
medicine, drugs, agro & silver jewellery - 1%
industrial inputs, capital &
declared goods 4% VAT
Tea-producing states options Petrol, diesel, liquor, lottery Sugar, textile & tobacco
either percentage VAT not included * excluded for one year
Traders with turnover of less than 500,000 rupees are exempt from the new tax.
Notes :
 Some states like Delhi have imposed VAT on diesel at 20%, which is higher than the
12% sales tax charged earlier. Similarly, Delhi imposed VAT on LPG at 12.5%, which is
also higher than the previous sales tax rate of 8 percent.
 All business transactions carried on within a State by individuals, partnerships,
companies etc. will be covered by VAT.
 "More than 550 items would be covered under the new Indian VAT regime of which 46
natural and unprocessed local products would be exempt from VAT", a PTI report quoted
West Bengal Finance Minister and VAT panel chairman Asim Dasgupta as saying.
 About 270 items including drugs and medicines, all agricultural and industrial inputs,
capital goods and declared goods would attract four per cent VAT in India.
 The remaining items would attract 12.5 per cent VAT. Precious metals like gold and
bullion would be taxed at one per cent.
 Considering the difficulties faced by the tea industry, it was decided that tea-producing
states would be given an option to levy 12.5 per cent or four per cent subject to review in
2006.

 Petrol and diesel would be kept out of VAT regime in India, which covers only
marketable items.
 Dasgupta was quoted as saying that the panel was yet to take a view on CNG.
 Following opposition from some of the states, it was decided that states would have
option to either levy four per cent or totally exempt food grains but it would be reviewed
after one year.
 Three items - sugar, textile and tobacco - covered under Additional Excise Duties, will
not be under VAT regime for one year but the existing arrangement would continue.
 The Indian VAT panel relaxed the threshold limit for traders coming under VAT regime
from Rs 5-50 lakh of turnover from the previous stance of Rs 5-40 lakh.
 Traders within this limit can pay a composite VAT rate of one per cent but would not be
entitled to input tax credit.
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.
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.
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.
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.
1.6 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.
♦ 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.
♦ 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.
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.

1.7 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
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.
1.8 ADVANTAGES OF VAT

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.
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.

1.9 DISADVANTAGES OF VAT
The main disadvantages which have been identified in connection with the Value Added Tax are:
1) VAT is regressive.
It is claimed that the tax is regressive, i.e., its burden falls disproportionately on the poor since
the poor are likely to spend more of their income than the relatively rich person. There is merit in
this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive
rates. However, observation from around the world and even Guyana has shown that steep tax
rates lead to evasion, and in the case of income tax act as a disincentive to effort.
Further, there is now a tendency in most countries to reduce this progressivity of taxes as has
been done in Guyana where a flat rate of income tax has been introduced. In any case VAT
recognises and makes room for progressivity by applying no or low rates of tax on essential
items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury
items, although this can create problems for administration and open opportunities for evasion by
way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes
place extensively in the area of customs duties.
2) VAT is too difficult to operate from the position of both the administration and business.
(a) The administration

It is often argued that VAT places a special burden on tax administration. However, it is worth
noting that wherever VAT was introduced one of its effects was the rationalisation and
simplification of the previous indirect tax system and its administration. Each of the previous
indirect taxes such as customs duties, purchase tax and excise duties replaced by VAT had its
own rate structure as well as a different tax base and separate administrative procedure. The
consolidation and incorporation of numerous indirect taxes into the VAT would simplify the rate
structure, tax base, and administration of the indirect tax system, thereby eliminating the
overlapping auditing practices that had plagued those systems.

In addition, the abolition of a number of alternative indirect taxes releases experienced personnel
to focus on a single tax. It also means reduction in the number of forms used, legislation to be
applied and returns and accounts with which the business person has to contend.
(b) Business
It is true that the VAT is collected from a larger number of firms than under any form of income
tax or single state sales tax; to the typical smaller firms the complexities of the tax and the need
for more extensive records (for example, to justify deductions) are likely to prove serious.
However, it is often overlooked that businesses already function with considerable administrative
responsibility for a number of laws including the National Insurance Act and the Income Tax
Act.
Under the Income Tax (Accounts and Records) Regulations of 1980 every person, without
exception is required to maintain detailed and extensive records of all its transactions.
Compliance with this will certainly ensure compliance with VAT regulations, and since there is
an actual benefit to be derived from accounting for VAT paid on input there is an incentive for
proper record-keeping.
As we have noted before, VAT also allows for the exemption of small businesses from the
system.
Under any form of sales taxation, small businesses have to be granted special treatment because
of their inability to cope with the requirements of keeping adequate records which larger
enterprises can handle at a reasonable cost. The intent of the special treatment is to reduce the
administrative burden on small enterprises, but not the taxes that normally would be charged on
the goods and services they supply. The revenue loss at the final link in the commercial cycle is
limited only to the value added at that stage ,whereas in the case of income tax or sales tax the
entire tax is lost. To recover the loss from exemptions, a flat tax on turnover may be applied.
In the larger businesses with proper staff and computers, the task is really one of double entry
book-keeping and any additional work is hardly ever noticed.
3. VAT is inflationary
Some businessmen seize almost any opportunity to raise prices, and the introduction of VAT
certainly offers such an opportunity. However, temporary price controls, a careful setting of the

rate of VAT and the significance of the taxes they replace should generally ensure that there is
no increase if any in the cost of living. To the extent that they lead to a reduction in income tax,
any price increases may be offset by increases in take-home pay.
In any case, any price consequence is one time only and prices should stabilise thereafter.
4. VAT favours the capital intensive firm

It is also argued that VAT places a heavy direct impact of tax on the labour-intensive firm
compared to the capital- intensive competitor, since the ratio of value added to selling price is
greater for the former. This is a real problem for labour-intensive economies and industries.
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.
1.10 Registration under VAT
Value Added Tax rules may differ from country to country or state to state. But everywhere
some general basic rules are looked upon.
Value Added Tax Rules comprises of the following -
 Determination of total turnover and taxable turnover

 Registration process
 Cancellation of Registration
 Payment of security
 Obligation to provide Invoice for Tax
 Bills of sale
 Credit and Debit notes
 Keeping of Account records

 Returns
 Assessments
 Payments
 Process for Recovery of Tax
 Sale of Movable property
 Sale of immovable property
 Capital goods scheme
 Special Accounting Schemes
 Option to pay
 Returns and Payments
 Cancellation of Certificate
 Appeals and Revisions
 Inspection of Goods in Transit
 Rate of Tax
Apart from the other stated criteria there may be some other possible factors also to decide
whether a business should register for Value Added Tax (VAT) registration number.
If a dealer’s 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 or Fees payable on
Sales purchase of taxable registration
goods not less than
Importer 1,00,000 10,000 100
Others 5,00,000 10,000 100
If the dealer’s 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.
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 dealer’s 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.
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 dealer’s business for insolvency or liquidation;
 opening or closing of a bank account;

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.
If the Sales Tax Department cancels the dealer’s 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.
The obligations of a registered dealer

Following are the registration, which dealer’s 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 dealer’s business
premises and provide all assistance to them to discharge their duties.
1.11 METHODS OF COLLECTING AND CHARGING THE VAT
Generally, there are 2 methods that are followed while charging and collecting the VAT:
1. Invoice or tax credit method The tax is collected and charged separately on the basis of
the tax that is paid on the purchase and the tax that is payable on the sale, shown separately in
the invoice. Therefore, the difference between the tax paid on purchase and the tax payable
on sale as per the invoice is the VAT.
2. Subtraction Method Under this method, the tax is collected and charged on the aggregate
value of the tax payable on sale and purchase by applying the rate of tax, applicable to the
goods. Therefore, the difference between the sale price and purchase price would be VAT. It
means VAT is the tax which consumers ultimately face. It is collected at each stage. The tax
earlier paid can be allowed as set off or credit. Therefore, it is called as Last Point Tax
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.
(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 invoice 4000
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 packing 7,400
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
The VAT due on the value added through the chain, i.e., 4% on 9,000
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.
Since set-off of tax on purchases is given only on purchases from registered dealers where tax is
collected separately, dealer’s 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:
Schedule Rate of tax Illustrative Items

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)
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.
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.
Constitutional Framework Which Deals With The Levy Of Sale Tax
The states are empowered to impose sale tax on the goods that are subject to purchase or sale by
enacting laws. The Parliament has enacted the CST Act and the states are in the process of
enacting laws. The sale of goods or purchase includes:
a. The sale of goods, defined under the Sale of Goods Act.

b. Transfer of goods used as otherwise in pursuance of the contract.
c. Transfer of goods used otherwise in Works Contracts.
d. Delivery of goods in pursuance to Hire Purchase Agreement or on installment.
e. Transfer of right to use to goods on lease or otherwise.
f. Supply of food by the club or body to its members.
g. Supply of food articles or drinks for consumption.
The transaction referred above from (c) to (g) are considered to be deemed sale and power can be
exercised to impose tax on such sale by the states. States are also empowered to provide levy,
creating a liability to pay tax and other payment assessment and certain procedural formalities
like maintenance of accounts, records, appeals and issue of declaration of Tax Invoice, Input Tax
Credit, etc.
To determine the cost of tax on certain commodities, the VAT law may be classified as
prescribed goods and classified goods and computation of tax on the turnover of sale and the
taxable turnover and assessment. Under VAT laws, tax is imposed on the sale or purchase of the
goods. The states levy the rate of tax at the point of levy upon such goods. They are also
empowered to prescribe modes and manners of set-off.

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.
1.12 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.
 Dealer’s administrative costs relating to labour and services and any other similar
expenses.
 Any profit element that relates to the supply of labour and services.
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.
Sales and purchases not liable to tax under VAT

The VAT law specifically excludes from value added tax all imports, exports and inter-state
transactions. These transactions are covered by the CST Act. Similarly, transactions that take
place outside Maharashtra are not within the scope of MVAT Act.
1.13 POINT OF LEVY IN CERTAIN CASES :-

Hire purchase
Where there is a hire purchase agreement or an agreement for sale by installments, the date of the
sale is deemed to be the date of the delivery of goods. This is despite the fact that legal
ownership of the goods only passes to the buyer after payment of the final installment.
If the hire-purchase agreement specifies the interest component then in calculating the sales
price, dealer should disregard the interest component included in the agreement.
Calculating the amount of VAT due on sales

Dealer should also make some adjustments to the total turnover of sales to arrive at the amount
on which tax is due.
From the total sales one should deduct
 the total of exports and inter-State sales.
 the total of sales of goods that are tax free, and
 branch / consignment transfers to locations in Maharashtra as well as other States.
 the tax collected.
To calculate the tax due, dealer should start allocating their turnover of sales in the return period
(net of the above deductions) to the rates of tax they have been charged. They should also ensure
that the correct tax rates are applied. The information should be readily available from their
records. This gives the total of sales tax due.
Calculating the turnover of purchases

Records will provide the total figure, but they may not have paid VAT on all their purchases.
They must now deduct the total value of
 Imports from out of India.
 Inter-State purchases.
 Purchases of tax free goods.
 Direct purchases from exempted units under the Package Scheme of Incentives.
 consignment transfers, and
 Local purchased from unregistered dealers.
 Local purchases from registered dealers not supported by tax invoice.

The resulting figure represents purchases against tax invoices from registered dealers.
Calculating the amount of set off due (VAT paid on purchases)

This is the next stage of tax calculation. At this stage VAT is charged on total purchases. Dealer
must, however, make some adjustments to this amount for, in certain cases, the full set off of the
VAT paid on purchases is not available.
Adjustments to tax available for set off
 If dealer’s purchases include goods, used
o as fuel, or
o for the manufacture of any tax-free goods, or
o As packaging for tax-free goods, this goods should be sold.
Then a dealer must calculate the value of those items and deduct tax @ 4% of the corresponding
purchase price from the amount otherwise available for set off. (Not applicable to PSI dealers
other than the New Package Scheme of Incentives for Tourism Projects, 1999 and also to
manufacturers of tax-free sugar or fabrics covered by Entry A 45 and where such goods are sold
in the course of export falling under section 5 of the CST Act, 1956).
Similarly, if the goods are stock transferred by way of branch / consignment transfer to a
place outside the State, deduct tax @ 4% (1 % in respect of goods covered by Schedule B) of the
corresponding purchase price from the amount otherwise available for set off.
Dealer must also make further adjustments as follows: -

 If they have been used any goods (other than capital assets) as part of a works contract
for which they have been opted for payment composition @ 8% on the total contract
value, they must also deduct 36% of the amount from the set off otherwise available (4%
of purchase price in respect of construction contracts for which they have been opted for
payment of composition @ 5% on total contract value).
 Where a dealer’s sales are less than 50 % of their gross receipts, then they can claim set
off only on those purchases of goods or packing materials effected in that year where the
corresponding goods are sold within six months of the date of purchase or consigned
within the said period to another State by way of stock transfers.

 In respect of office equipment, furniture or fixtures which have been treated as capital
assets, a dealer should reduce set-off otherwise entitled by an amount equal to 4% of the
purchase price.
 If a dealer is the retailer of liquor vendor and its actual sale prices are less than the
Maximum Retail Price, there is a special formula for calculating the amount of the
adjustment. Effectively this means that, if a dealer sells at 75% of the MRP then they can
claim set off only to the extent of 75% of the tax paid.
 A dealer cannot claim any set off for the tax paid on any purchases that remain unsold on
the date when business discontinues.
All this information should be available from their records, including tax invoices and bills or
cash memorandum they have issued, and the tax invoices they have received.
Set off not available

There are various items on which set-off is not available such as, goods of incorporeal or
intangible character other than those specified, passenger motor vehicles, motor spirits, crude oil,
building material used for construction etc.
Conditions for claiming set off

A dealer can claim set off only for VAT paid on purchase if they have a valid tax invoice for that
transaction and they had maintain account of purchases showing the specified details.
Tax payable
The amount of set-off admissible can be adjusted against tax payable. The amount of net tax
payable is the total of sales tax collected on sales less the set-off available.

1.14 VALUE ADDED TAX RECOVERY:
Value Added Tax as some form of other taxes can be refunded or compensated. The entire
process to get the Value Added Tax refunded is quite complex in nature and varies from country
to country. Thus it requires technical and functional expertise to acquire the refund. AT times the
organizations are not even aware of that they can ask for Value Added Tax refunds also.
Organization may apply for Value Added Tax refunds for different instances such as service fees
travel related expenses business operation costs and many others. Depending on the size of
organization the Value Added Tax refunds may vary from a fewer thousand of currency of a
country to millions of it and can highly impact the funds flowing in an organization or business.
For this purpose there are different Value Added Tax recovery group across countries to recover
Value Added Tax refunds for a business. These recovery groups are responsible for handling the
entire Value Added Tax refund process right from identifying what amount can be recovered to
the application form and finally acquiring Value Added Tax refunds. Their fees are based on the
amount of Value Added Tax recovered that means they generally charge a small percentage of
the amount recovered from Value Added Tax and does not have affixed fees apart from this
amount. Generally Value Added Tax is refunded 3 to 12 months after the application for same
has been given.
Refund cases
If the amount of set-off admissible during the period is more than the amount of tax payable,
then dealer’s return would reflect a balance refundable to the dealer. The amount of set-off can
be more than the tax payable for a variety of reasons, such as
 Inputs are taxable at higher rate as compared with the rate of tax on output.
 Outputs are tax-free goods while inputs carry tax.
 Outputs are export sales.

 Outputs are CST sales which are taxable at the concessional rate of CST.
 Manufactured goods or trading goods are transferred to branches outside the State or are
sent on consignment transfers.
Apart from part of the admissible set-off which can remain unutilized, excess credit can be on
account of:
 unutilised portion of tax deducted at source or
 refund payment order or
 ad-hoc payment made is more than tax payable.
Whatever may be the reason for credit in excess of tax due and payable during a tax period,
dealers are eligible to claim refund of such excess credit. For the purpose of granting refund,
dealers have been classified under two categories viz. a) specified class of dealers and b) other
dealers
Refund to specified class of dealers

Specified classes of dealers are : -
 Exporters exporting out of the country or dealers selling to an exporter against form H.
 A unit set-up in SEZ or STP or EHTP or a 100% EOU unit. These units have to be
certified by the Commissioner of Sales Tax.
 An Entitlement Certificate holder availing of the benefit of incentives under the Package
Scheme of Incentives (PSI).
Specified class of dealers and the dealers who have made a sale in the course of inter-State trade
or commerce and in the return he has shown any amount to be refundable are eligible to claim
refund in each of the returns filed by them. Full amount of excess credit can be claimed as refund
due for the return period.
The dealer eligible to claim refund has to file refund application in Form 501. The application
has to be filed with the Refund Branch. The Refund Branch may ask for Bank Guarantee and any
relevant information for checking correctness of refund claimed. Normally, refund would be
granted within one month from the receipt of Bank Guarantee or within three months from the
date of receipt of refund application in Form 501, or as the case may be, the date of receipt of the
additional information, whichever is later.

Refund to other dealers
Other dealers are not eligible to get refund in each of the return filed. They are required to carry
forward excess credit to the next return within the same financial year and claim refund of excess
credit in the return for the period ending March.
The dealer claiming refund in March return has to make refund application in Form 501. The
application has to be filed with the Refund Section. Normally, refund would be granted within
six months of the end of the year to which the return relates. However, refund would be granted
within six months to the new dealer’s at the end of the year succeeding the said year.
Audit of refund claims

The refund granted to dealer would be subject to audit by the Refund Audit Section. The audit
may be taken up before granting the refund or after the refund is granted. Normally, refunds
made against Bank Guarantee would be taken up for audit after the refund has been granted.
During the course of the audit, the audit team will check dealer’s eligibility to claim refund and
the correctness of the amount of refund claimed by them.
CHAPTER- 2
REPORTS OF AMENDED POLICIES OF VAT
VAT (VALUE ADDED TAX) 2010 (INDIA)
1. Taxes on Tobacco Products

New Delhi, May 07, 2010 (PIB) :As per the report, Tobacco Control in India, 2004, about 8-9
lakh persons die annually due to diseases attributable to tobacco use. The health cost of only

three tobacco attributable diseases, viz. cancers, lung disorder and cardio vascular ailment was
estimated in that expenditure at Rs. 30,833 Cr. (2002-03). Currently, the incidence of Central
Excise duty on major brands of cigarettes calculated on the MRP of the product ranges from 28%
to 69%. The incidence would be even higher when calculated on factory gate prices. In addition,
cigarettes bear state taxes such as VAT, Octroi etc.
In the 2010-11 budget, the Government has increased the basic excise duty on all tobacco
products, except beedis, by around 20%. Chewing tobacco, unmanufactured tobacco and Jarda
scented tobacco have been brought under the purview of compounded levy scheme wherein the
excise duty is paid based on the number of machines installed in the factory of production.
Gutkha is already under the compounded levy scheme since July 2008. In addition, some States
also levy VAT on tobacco products.
This information was given by Minister of State for Health & Family Welfare, Shri
S.Gandhiselvan in written reply to a question raised in Lok Sabha today.

2. Higher VAT squeezes cola, ice-cream cos margins
NEW DELHI, May 5, 2010: For a change, soft drink and ice-cream makers are feeling the heat
this summer. Higher value-added tax (VAT) rates and raw material costs have hit the margins
even as sales failed to match the rising temperature, partly because prolonged power cuts
discourage retailers from stocking ice-cream. "Sales are not growing in sync with the
temperatures," said Kapil Agarwal, CEO of Cream Bell ice-cream. So, instead of sitting back
and enjoying record sales as North India suffered the hottest April in 52 years, makers of ice-
creams and soft drinks are out in the scorching sun, lobbying for VAT rollbacks or blaming
power cuts.
Delhi, one of the key summer markets, recently increased VAT on soft drinks from 12.5% to
20%. This has squeezed the margins of PepsiCo and Coca-Cola, which were already under
pressure due to high sugar prices. Soft drink makers have increased prices by more than 20%
earlier this year and they don’t want to do it again for fear of impacting demand, which has been
growing at 20-30%. They are now trying to persuade the state government to roll back the VAT
hike. Source: The Economic Times.
3. Reforms in tax structure mooted

NEW DELHI, May 3, 2010 (PTI): Finance ministry advisors have called for reforms in the tax
structure for services like shipping, aviation and telecom to make them competitive, as well as
put the economy on a higher growth path.A working paper authored by finance ministry senior
economic advisor H A C Prasad and additional economic advisor R Sathish asked for
rationalising the tax structure in the shipping industry, which pays 12 direct and indirect taxes
currently.
Taxes like corporate tax, minimum alternate tax, dividend distribution tax, withholding tax on
interest paid to foreign lenders, wealth tax, VAT, lease tax and service tax raise the effective tax
rate of around 2% under the tonnage regime to around 9%, said the paper, titled Policy for
India’s Services Sector. As per the tonnage tax system imposed on shipping a few years back,
levies were to be based on assets rather than on revenue. The paper clarified that these are the
views of the authors and not the finance ministry.
4. CPI leader demanded reduce VAT on food items in Andhra Pradesh.

Hyderabad , April 27, 2010: The day-long shutdown called by opposition parties against price
rise evoked partial response in Andhra Pradesh affecting transport services. The Telugu Desam
Party (TDP), Communist Party of India (CPI), Communist Party of India-Marxist (CPI-M),
Forward Block and Revolutionary Socialist Party (RSP) called for the shutdown to protest price
rise. Blaming the policies of the central and state governments for the price rise, CPI leader
Narayana demanded that the government immediately reduce VAT on food items in Andhra
Pradesh.
5. Online payment of service tax of over Rs 10 lakh made mandatory

Mumbai April 19, 2010: The Central Board of Excise and Customs (CBEC) has made it
mandatory for assessees who have paid Rs 10 lakh or more as service tax for 2008-09 to file
returns electronically through internet banking from this year. Notifications issued by the
government also specify the same for central excise duty paid to mandatorily file returns
electronically. In both cases, Rs 10 lakh or more include the amount paid by utilisation of Cenvat
credit. While returns for central excise cannot be revised once filed, contents of service tax could
be amended once within 90 days of filing returns.

6. Traders to observe May 1 as Anti-VAT day
April 17, 2010: Traders across the country have decided to observe May 1 as Anti-VAT day
(VAT Virodh Diwas) to protest against the Value Added Tax (VAT) Act, Confederation of All
India Traders (CAIT) secretary general Praveen Khandelwal said today.
At a recent meeting in Nagpur, trade leaders from 26 states decided to fight against the
Government for back stabbing them on VAT, he said. He also alleged, ''In VAT white paper, it
was agreed and promised to the traders that VAT slabs will never be changed but the entire
concept of VAT has been moulded single handedly by the Government.'' Also, around 500 trade
leaders from all over the country will meet here on May 25 and 26 to decide the further course of
action.

7. Fuel traders threaten indefinite strike over diesel VAT
Delhi, April 09 , 2010 (IANS) : Petrol pump owners in Delhi called off their day-long strike for
Friday but threatened to observe an indefinite shutdown if the state government does not bring
down the value added tax (VAT) on diesel in the next 15 days. They will meet Delhi Chief
Minister Sheila Dikshit and Delhi Finance Minister A.K. Walia Monday. They said the sale of
diesel had gone down drastically after the Delhi government raised VAT on it from 12.5 percent
to 20 percent. The fuel traders Thursday night called off their day-long strike planned for Friday
after Dikshit assured them that the government would look into their demand within 15 days.
"We have called off the strike for now. If the matter is not given consideration, we would be
definitely going in for an indefinite strike," Ajay Bansal, general secretary of the Federation of
All-India Petroleum Traders (FAIPT), told IANS."Even Petroleum Minister Murli Deora said
our grievances are genuine," said Bansal.
8. CAIT to decide action on Goods and Services Tax

Nagpur, April 05, 2010: Confederation of All India Traders (CAIT) will meet in Nagpur from
April 9-10 to discuss its further course of action on Goods and Services Tax (GST), CAIT
Secretary General Praveen Khandelwal said. ‘The National Governing Board of CAIT,
comprising of leading trade leaders of different states, will meet from April 9-10 in Nagpur to

take stock of the current situation and decide whether or not to support implementation of GST,’
he said.
When Value Added Tax (VAT) was levied, the Central Government said there will be one tax
throughout the country but the state governments have taken a complete U-turn on the issue, he
claimed. All states have moulded VAT slabs according to their whims without consulting the
traders which has put a question mark on the proposed GST likely to be introduced shortly, he
added.
‘The recent hikes in VAT slabs by large number of states, including Delhi, is a clear deviation
from the established fundamentals of VAT as guaranteed by the Central Government and the
Empowered Committee of state finance ministers in their VAT White Paper released in January,
2005,’ he said. Besides, CAIT national president B C Bhartia said, ‘As per an estimate, there are
more than six crore enterprises engaged in unorganised sector which are the real carriers of any
indirect taxation system in the country, as they only collect VAT taxes from the consumers and
deposit the same to Government treasury.’ ‘Instead of giving them a smooth passage which may
promote voluntary compliance, the Central and state governments are making taxation laws with
a mindset that traders are tax evaders,’ Mr Bhartia added. Source: UNI
9. Delhi govt decided to withdraw the value-added tax (VAT) on LPG

New Delhi, March 29, 2010: Bowing to mounting pressure from the opposition parties as well
as the people, the Delhi government on Monday partially rolled back the prices of LPG gas
cylinders meant for domestic consumption as well as the CNG. The Delhi government, in its
2010-2011 Budget announced recently, had withdrawn the Rs 40 subsidy extended to LPG gas
cylinders. However, in the wake of increasing public pressure, it has decided to withdraw the
value-added tax (VAT) imposed on the LPG. The prices of LPG cylinders in the national capital
are now likely to come down by Rs 12-15, meaning the effective hike for domestic consumers
would be somewhere between Rs 25 to 28.
10. Delhi Traders carried out a ``VAT Shav Yatra”

New Delhi, March 26, 2010: In an unusual protest, a large number of traders in the national
capital of Delhi carried out a ``VAT Shav Yatra” and burnt the effigy of Value Added Tax
system to register their resentment and anguish over the Delhi government’s move to hike the

VAT rates on a large number of commodities in the 2010-11 budget proposals.
The agitating traders gathered at Bara Tooti Chowk, Sadar Bazar in walled city area of Delhi
and criticised Delhi government’s contention that VAT slabs and diesel prices have been raised
to mobilise funds for the Commonwealth Games. The Confederation of All India Traders
(CAIT), which organized the protest, has also announced that the traders in Delhi will be
observing a bandh till 1 pm on Saturday.
11. Tea prices to go up from April in Maharashtra

Mumbai, March 25, 2010: With the recent hike in value added tax (VAT) on tea and other food
items by the Maharashtra government from 4 per cent to 5 per cent, tea prices will rise further
from April 1 this year.
“If 12.5 per cent VAT comes into effect from April 1 this year, tea prices would rise by Rs 20-
30 per kg. It would be too harsh for the common man at large at a time when the central
government is struggling to bring down food inflation. The lower and medium quality tea priced
at Rs 180-200 per kg at present would shoot up to Rs 200-220 per kg,” said Harendra Shah,
president of Federation of Tea Traders Association of Maharashtra and chairman of Federation
of All India Tea Traders Association.
12. Higher VAT to increase smuggling of diesel

NEW DELHI, March 23, 2010: Increased VAT on diesel will impact the drive against pollution
by increasing the smuggling of inferior quality of the fuel from neighbouring states Haryana and
UP — where it will be cheaper due to lower state levy — and reduce sales at petrol pumps in the
capital. The revised VAT will make diesel in Delhi cost Rs 3.37 a litre more than what it sells for
in Haryana and approximately Rs 2 a litre more than UP, according to Ajay Bansal, general
secretary of Federation of All India Petroleum Traders. The dealers are considering downing
shutters as a mark of protest and will take a call at a meeting on Tuesday.
‘‘VAT means death knell for Delhi dealers who have lost 70% of sales to the neighbouring
states in the last two years. With the new rate, the price difference with Haryana has jumped
three times from Re 1. What is the alternative for us... At this rate, we will go out of business
soon,’’ Bansal said. At present, some 1,200kl (kilolitres) of diesel is sold daily through 408
petrol pumps in the city. Bansal fears that this quantity will fall sharply now as business will get

diverted to neighbouring states and make petrol pumps in Delhi unviable. ‘‘Trucks and vehicles
will top up in these states, where inferior quality fuel is sold, before entering the city. This will
severely impact efforts to check pollution. You will also see cheaper and lower grade of diesel
being smuggled into the city, which will increase once Euro-IV fuel is introduced in Delhi from
April 1,’’ Bansal said. Source: The Times of India
13. Chavan justifies one per cent hike in VAT

Mumbai, March 17, 2010 (PTI) : Maharashtra Chief Minister Ashok Chavan today justified the
hike of 1 per cent in existing VAT saying the state government had the right to decide on
taxation to augment its resources. "There is nothing wrong with it," Chavan said while
addressing a press conference after hosting the customary tea party on the eve of the first budget
session of the state legislature beginning here tomorrow.The government hiked the Value Added
Tax (VAT) from 4 per cent to 5 per cent last week.
Chavan criticised opposition Shiv Sena-BJP and MNS for boycotting the tea party hosted by
him. "It is customary for them to do so. My government is ready to discuss any issue raised by
them during the session," he said.The Chief Minister said the government has already taken steps
to ease the hardships of the common man due to price rise.
14. Traders Up in Arms Against the hike in VAT Rates

Bangalore, March 16, 2010: Traders across the country are up in arms against State
Governments for gross deviations in the Value Added Tax (VAT) regime and have threatened to
move the Supreme Court to seek justice. Confederation of All India Traders (CAIT) General
Secretary Praveen Khandelwal has decried the tendency of a large number of State Governments
over what he termed as their complete U-turn on the 21 points of list of convergence mutually
agreed by all State Finance Ministers.
In a press release, he criticised the Centre’s offer to hold talks with State Governments at this
stage as ``totally meaningless” as they have not kept their promises. Instead, they broke the
agreement. `We have no alternative but to take legal recourse and force the state governments to
reverse the wrong decisions taken by them,” he said. VAT was agreed by traders when all the
States gave them a clear formula of how it will be implemented and their solemn promise that
the taxation slabs will be changed only after holding consultations with all the traders. But these
promises have not been kept, he explained.

"The increase in floor rates of VAT from 4% to 5% and 12.5% to 15% by various States was a
big betrayal. They levy of a surcharge on VAT by the Haryana government was the last nail in
the coffin,” he said pointing out that it had sent a wave of resentment and protest amongst the
traders of the Country.
"It is an established fact that VAT and surcharge cannot go hand in hand,” he said wondering
how the traders can trust the Centre and the States on the Goods and Services Tax (GST) system
to be adopted soon in India.” Khandelwal warned that the traders have been forced to give a
rethink on GST as well and neither the Centre nor the State Governments have kept their
promise.When the VAT system was introduced in the country in 2005, the Centre and the
Empowered Committee of State Finance Ministers had assured the Country about simpler
taxation system based on certain basic fundamentals.
The White Paper on VAT released by the then Finance Minister P Chidambaram had
specifically assured that with the introduction of VAT, there would be uniform rate of taxes on
different commodities in all States across the Country and floor rate of tax will not be amended
or altered by any State and all other taxes like surcharge, turnover tax and additional tax will go
away, Khandelwal said.Source: Daijiworld Media Network
15. CAG recommends VAT on fabric, sugar in MP

March 13, 2010: The comptroller and auditor general (CAG) of India has said the Madhya
Pradesh (MP) government should levy the value added tax (VAT) on fabric, sugar and tobacco.
In its report for the year ending March 31, 2009, tabled today in the state Assembly, CAG said,
"Fabric, sugar and tobacco products are tax-free goods, unless additional excise duty is levied on
them under the Central Excise And Tariff Act 1985. Since the central government has exempted
these goods from the additional excise duty from March 2006, they are now eligible to be taxed
at the rate of 4 per cent." The report has also recommended to make amendments in the VAT
provisions of the act to check losses in revenue. The CAG has said in its pre-VAT (2003-2006)
and post-VAT (2006-2009) audit, that there was a loss of revenue due to lack of certain
provisions — name of commodities, in the form prescribed for filing return, has been observed
as missing. "As most of the cases under the VAT regime are to be covered under self-
assessment, it is not understood how the department plans to scrutinise returns in absence of such
details," said the report. Source: Business Standard
16. Rajasthan govt says new VAT not applicable on essential food items

Jaipur, March 10, 2010 (PTI): A day after hiking value added tax by one per cent in the Budget,
the Rajasthan government today announced that the new VAT rate would not be imposed on
essential food commodities such as wheat, rice and sugar. The state government had yesterday
in the Budget 2011 proposed to hike VAT rate to 5% from 4% that would come into effect from
April.In an official statement issued here, the state government said that the higher VAT rate of
5% would not be imposed on essential food commodities, including wheat, rice, husk, sorgham,
sugar and oilseeds such as mustard, ground nut, seasame, soyabean etc. It added that the new
VAT rate would also not levied on cotton, coal, iron, steel, cotton thread, leather, and jute.On
these items 4% VAT would continue as per the Rajasthan VAT Act's Schedule 4, the release
said.
17. Rajasthan budget raising the lower VAT rate of 4% to 5%

JAIPUR, March 10, 2010: Chief minister Ashok Gehlot had something to offer everyone in
Tuesday's state budget, but it is the economically weaker section and those in rural areas that got
a chunk of his largesse. Those hoping for some relief in fuel prices will also be disappointed.
Gehlot tinkered with the VAT rates, raising the lower rate of 4% to 5% while leaving the higher
rate of 14% unchanged. He, however, moved some goods and services — like CFL bulbs,
marble powder, chips, water tankers and food itmes in restaurants and hotels below three star
categories — from the 14% slab to 5%. He also exempted cinemas which have a maximum
admission rate of Rs 50 from entertainment tax and removed VAT from cinema reels.

18. Jharkhand budget diesel VAT rolled back
Ranchi, March 7, 2010: It was a budget aimed at sweetening the bitter price rise pill. From
cutting down VAT on diesel, sweets and ice- cream to making foodgrains available at Re 1 per
kg for the poor, deputy chief minister Raghubar Das today presented an annual budget which
focused on rural development, food security and social welfare. Das brought smiles on the faces
of children and adults alike by reducing VAT on ice cream and sweets to 4 per cent from the
existing 12.5 per cent.

The minister partially rolled back VAT on diesel to 18 per cent from 20, leaving petroleum
dealers unhappy. They threatened to continue their agitation till the government brought it down
to 14.5 per cent. Source: The Telegraph
19. Houses to cost more after service tax

Mumbai, March 4, 2010: Now home buyers will bear a 10% service tax on properties under
construction. This, even before the title transfers from the developer to the consumer. Union
Budget 2010 may have put more money into the hands of consumers. But that promise does not
hold true for home buyers. A 10.3% service tax is now applicable on all under-construction
properties. So far, till the title in a property was passed to the buyer from the developer and the
occupation certificate was handed out, it was understood that there is no "service" that was being
provided to customers.
However, now the proposed change in the law defines "service" as any receipt of money from
the buyer to the developer."Service tax was imposed on developers in 2005. In 2009, the
government issued a clarification note based on which we sought legal opinion. And, we were
advised that developers did not have to pay service tax," said JC Sharma, MD, Sobha
Developers. Source: IBNLive
20. Orissa to offer VAT exemption to IT SMEs

Bhubaneswar March 02, 2010:As part of its endeavour to promote SMEs (Small and Medium
Enterprises) in the IT sector in Orissa, the state IT department plans to offer a rent subsidy of Rs
10 per sq ft to these units. Sources close to the state IT department said, plans are also afoot to
offer other enabling measures like exemption of electricity duties and value added tax (VAT) for
IT SMEs.
These measures would be included in the new ICT (Information and Communication
Technologies) policy of the state government. Earlier, SMEs had sought complete exemption
from VAT on hardware procurement by the units, investment subsidy and employment subsidy
as well as “plug and play” office space for upcoming units. VAT on IT hardware currently
ranges from 4 per cent to 12.5 per cent.
21. Goods and Services Tax delayed, now from April 1, 2011

NEW DELHI, February 26, 2010 (IANS): Finance minister Pranab Mukherjee Friday said he
would introduce major reforms for indirect taxes in the form of Goods and Services Tax (GST)
from April 1 next year. The government was earlier scheduled to introduce GST by April 1 this
year. "I am confident that the government will be in a position to implement DTC (direct tax
code) from April 1, 2011. It will be my earnest endeavour to implement GST along with DTC
from April 1, 2011," Finance Minister Pranab Mukherjee said during his annual budget speech in
the Lok Sabha.
GST is India's most ambitious indirect tax reform, which seeks to bring together a common
market and reduce costs to replace the current fragmented tax regime at central and states levels
like service tax, excise duty, VAT, cesses, surcharges and local levies.
22. Auto cos wants govt to retain 8% excise duty

February 19, 2010: IIFL has mentioned auto sector expectations from the budget in its research
report India Strategy dated 17th February, 2010. Last year, excise duty on small cars, two-
wheelers and was cut to 8% from 14%, as part of fiscal stimulus.
Large cars and UVs attract an excise duty of 20% + an additional surcharge of Rs 15,000 or Rs
20,000 per vehicle, depending on engine capacity. Automobiles attract 8% excise, 12.5% VAT,
2% CST and 1% natural calamity cess.
This, together with the cascading effect takes total taxation to 23-25%. Industry demand -
Maintain 8% excise duty on small cars and two-wheelers. Reduce excise duty on MUVs
designed for transportation of 7 to 12 persons to 8% (70% of these vehicles are used in rural
areas). Remove excise duty element of Rs 15,000 on passenger cars other than small cars.
Remove 1% National Calamity Contingent Duty (NCCD) on cars, UVs and two wheelers. GST
rate of 16-17% for goods and a closer time limit for GST implementation. source: Moneycontrol

23. VAT on goods up in Haryana
Chandigarh, February 16, 2010: The Haryana government has increased the rate of Value
Added Tax (VAT) on goods included from Sr. 1 to 101 of Schedule “C” of Haryana Value
Added Tax Act, 2003, from 4 per cent to 5 per cent with immediate effect. However, tax on entry
in serial No. 102 of Schedule “C” of the Act and on the declared goods covered in Section 14 of

the CST Act would continue to be levied at 4 per cent. A notification to this effect has been
issued by the Excise and Taxation Department, Haryana. Source: The Tribune
24. The sale of cotton exempted from the VAT

CHENNAI, February 14, 2010: The State government will soon announce an attractive textile
policy, which will further promote investment and employment in the sector, according to Chief
Minister M. Karunanidhi. Giving away export awards for 2008-2009 at a function organised by
the Cotton Textiles Export Promotion Council (TEXPROCIL) here on Saturday, he called upon
investors from other States and other countries to invest in the State textile industrial units and
assured them of all necessary assistance from the government.
The textile sector in the State provided employment to 4 million people, the Chief Minister said
his government would do its utmost to protect the industry. The approval for setting up five
integrated textile parks at Kumarapalayam, Cuddalore, Vadipatti (Madurai district), Andipatti
(Theni district) and Karur had boosted textile investment in the State. Giving an exhaustive
account of various initiatives he announced in the Assembly a marine discharge project. The sale
of cotton in the State by the Cotton Corporation of India had been exempted from the Value
Added Tax (VAT). The sales tax on hank yarn was abolished, helping six lakh handloom
weavers. Source: The Hindu

25. No impact of VAT reduction on mutilated rags
New Delhi/ Chandigarh February 08, 2010 (BS): The decision of the Haryana government to
reduce VAT on mutilated rags under the Haryana Value Added Tax Act, 2003, would virtually
have no major impact on the woolen and shoddy mills in Haryana, even as the government
claims otherwise. The members of Woolen and Shoddy Yarn Mill Association maintained, apart
from simplifying the process of refund for woolen and shoddy yarn manufacturers, the decision
would have no major impact.
Panipat district in Haryana is one of the biggest producers of shoddy yarn with around 300
shoddy units. Mutilated rags imported from overseas are used by the industry in Panipat to
produce shoddy yarn. In its cabinet meeting held recently, the state government had announced
its decision to reduce the rate of tax on mutilated rags under Haryana Value Added Tax Act,
2003 from 12.5 per cent to four per cent.

According to the government, to boost the woolen and shoddy yarn industry, which was under
pressure due to recession, the decision was taken.President of All India Woolen and Shoddy
Mills’ association Pawan Kumar Garg said earlier mutilated rags were not categorised under
specified goods category but with their inclusion under specified goods category, VAT had been
fixed at 4 per cent.
26. Liquor becomes dearer from April 1

CHANDIGARH, February 5, 2010: Haryana may witness an upward trend in liquor rates from
April 1, when increase in licence fee of vends in the state comes into effect. The hike may go up
by 10% in Gurgaon, Faridabad, Panchkula and other parts of the state. Announcing the excise
policy for 2010-11 after the state cabinet meeting on Thursday, chief minister Bhupinder Singh
Hooda admitted “mahangai ka asar hota hai (inflation has an impact),” while replying to a query
on the likelihood of liquor rates heading northwards. The state government has decided to renew
vends of both country liquor and Indian made foreign liquor (IMFL) at a “reasonable” increase
of 5 to 10%.
The cabinet has also decided to raise value added tax (VAT) on select commodities from 4% to
5% to generate additional revenue mobilisation of about Rs 300 crore per annum. The rate of tax
on industrial inputs and packing materials, cereals, coal, cotton, cotton yarn, iron and steel and
oil seeds will remain unchanged. Tobacco products, including cigarettes, will also be dearer as
the tax on them has been increased from 12.5% to 20%. The raise would not be applicable on
tobacco products used in ‘bidi’ and ‘hukka’. Source: The Times of India
27. GST will not be introduced from April 1, 2010

NEW DELHI, January 30, 2010: After many doubts and much speculation, it’s now official.
The proposed Goods and Services Tax (GST) which is to replace most of the indirect taxes
levied by the Centre and the States will not be introduced from April 1, 2010. A fresh date for its
implementation will be announced in April after a meeting between the States and the Union
Government.
Speaking to the media after a meeting with Union Finance Minister Pranab Mukherjee here on

Thursday, Empowered Committee of State Finance Ministers chairman Asim Dasgupta said:
“Because of the difficulties connected with the passing of the required constitutional amendment
Bill in the Budget session, it will not be practical to introduce GST on April 1, 2010. The new
date for [its] introduction, the Union Finance Minister suggested, would be settled in April.”
As per the original schedule of implementation, the GST was to be launched from April 1 this
year to bring about uniformity in the indirect taxation structure throughout the country by doing
away with Central levies such as excise duty and excise tax along with the value added tax
(VAT) and octroi at the State level. Source: The Hindu
28. Rajasthan govt has announced VAT exemption on imported sugar

JAIPUR, January 29, 2010 (PTI): The Rajasthan government has announced VAT exemption on
imported sugar in the state till June 30, in a bid to control the spiralling sweetener prices. "The
decision to exempt four per cent VAT was taken by Chief Minister Ashok Gehlot yesterday,
following which sugar price will decrease by Rs 1.6 to 1.8," an official said. Sugar prices are
ruling between Rs 41-43 a kg in the state.
"The government has exempted the tax in view of rising prices. After June, further decision
will be taken accordingly after a review of situation," the official added.
India, the world's largest consumer of sugar, is estimated to produce nearly 16 million tonnes of
sugar against the annual demand of 23 million tonnes. The gap of 7 lakh tonnes is being met
through imports.

29. Centre, states differ on GST rate structure
New Delhi, January 27, 2010 (PTI) :The Centre on Monday opposed two rates suggested by
states for goods under the proposed goods Good and Services Tax (GST). "There should be a
single rate of SGST (state GST). A two rate structure of goods would pose problems," the Union
Finance Ministry said in its comments on the discussion paper on GST mooted by the
Empowered Committee of State Finance Ministers. The empowered panel has proposed to adopt
a two-rate structure -–a lower rate for items and goods of basic importance and a standard rate
for goods in general. It also suggested a special rate for precious metals and a list of exempted
items. However, the Revenue Department said that a two-rate structure for goods would lead to
more taxes on raw material and less taxes on finished goods. The structure would also lead to

demand of two rates on services which are currently taxed at a single rate.
The empowered panel has proposed a single rate for services under the GST. The Revenue
Department said that different rates for goods and services would imply that the distinction
between goods and services should continue. The department also differed with the empowered
panel proposal on keeping alcoholic beverages and some petroleum products out of GST.

30. ASSOCHAM opposes hike in VAT by three states
January 22, 2010: The Associated Chambers of Commerce and Industry of India has sought
immediate intervention of Centre as well as Empowered Committee on VAT to persuade State’s
like Delhi, Karnataka and Assam not to deviate from VAT rate fixed by the Empowered
Committee on VAT in the interest of consumers. Mr DS Rawat secretary general of
ASSOCHAM said that it was unfortunate that State government like Delhi, Karnataka and
Assam have increased VAT rate on many products by 1%.
Other states will follow the suit, warned Mr Rawat as result consumers that are already reeling
under severe heat of price rise of essential commodities would face utter inconveniences with
increased VAT rate. He said that Indian industry, mostly in manufacturing segment will not be
affected with increased VAT rate as these will drop the burden of increased taxation on
consumers which will ultimately be worst sufferers. Mr Rawat appealed to empowered
committee on VAT as well as the finance minister to intervene and persuade state’s that has
deviated from fixed VAT rate to withdraw it at rates already fixed by the committee. If VAT
rates are not brought to original slabs, other states will follow the suit and that would be a very
bad precedent in the history of Indian taxation. Source: Steel Guru
31. Pawar mulling removal of value-added tax (VAT) on sugar imports

January 18, 2010: Prices of sugar, which have more than doubled in the past year, are set to
soften in 10 to 15 days, Agriculture Minister Sharad Pawar has said. The sugar crisis took a
political twist when Uttar Pradesh Chief Minister Mayawati recently blamed the Centre’s
policies for the shortage. The state of UP is a major sugar producer and Mayawati said the
central government allowing exports in a year of lean output was the chief reason behind the
shortage, a move she said intended to benefit mill owners.

The government extended the deadline for importing refined sugar and said it was mulling
removal of value-added tax (VAT) on imports. The Home Ministry would also crack down on
smuggling of sugarcane and sugar in the country, the government promised.
Those measures may have now borne fruit now as wholesale sugar prices have come down by
about 10% — from Rs 4,280 per quintal to Rs 3,980 per quintal — in the last two days, Pawar
said. He added retail prices were expected to come down soon as well.
32. ICAI wants GST rollout to be delayed by a year

NEW DELH, January 16, 2010I: The Institute of Chartered Accountants of India (ICAI) has
asked the government to defer the implementation of Goods and Services Tax (GST) from April
1, 2010 by an year to allow for a smoother transition to the new indirect tax framework. “For
smoother transition, it is imperative that GST be implemented from the first day of a financial
year. Since there is very little time for the slated implementation date of April 1, 2010, it is
recommended that GST be implemented from April 1, 2011,” the ICAI said in its submission to
the government.
The ICAI had constituted an expert committee to look into the implementation of the GST
structure at the instance of the finance ministry. While favouring a dual- GST structure, the ICAI
want the tax to be administered by a common authority. As part of transition measures, the ICAI
has suggested that the indirect tax on on-going works contracts/turnkey contracts and lease
transactions be discharged on similar basis as like prior to introduction of GST. This it says will
safeguard against an increase in liability for suppliers involved in such contracts from an
adverse impact of higher taxation rates under GST. Source: The Economic Times
33. Delhi shifted to a 5% Value Added Tax (VAT) slab from 4%.
NEW DELHI, January 15, 2009: Starting Thursday, Delhi shifted to a 5% Value Added Tax
(VAT) slab from 4%. The shift to the 5% slab will impact the prices of medicines, surgical and
medical equipment, IT and electronic products like computers and software, and industrial
inputs, among other things. The five percent slab will cover 170-odd items. The draft
amendment bill proposing a hike in VAT had been met with much opposition by the trader
lobby. The Confederation of All India Traders had earlier raised concerns over the proposed

increase in the VAT slab, saying it would lead to a hike in the prices of
necessities and affect the common man.
But the government moved to pass the amendment Bill in the Delhi assembly in December, and
on Wednesday notified the scrapping of the 4% slab and its replacement with the 5% slab. But
Delhi Fianance Minister AK Walia is clear the shift to the 5% slab is in keeping with the Central
Government's directions on the VAT regime."All items under the 4% slab in the VAT Act are
now under the 5% slab. The shift to a 5% slab will lead to an escalation in revenue collections,"
Walia said. Source: The Times of India
34. States have been asked to remove VAT and other taxes on imported sugar.
New Delhi, January 14, 2010: PRIME Minister Manmohan Singh, who chaired a meeting of
Cabinet Committee on Prices (CCP) on Wednesday, approved a host of measures aimed at
taming the food inflation. The measures include: The Cabinet approved the sale of 5 lakh tonne
of wheat and 2 lakh tonne of rice through state-run agencies such as the National Agricultural
Cooperative Marketing Federation of India Ltd and National Cooperative Consumers’ Federation
of India Limited. Also, 2-3 million tonne of wheat and rice should be released in the open market
over the next two months.The CCP has approved extending the deadline for refined sugar
imports to December 31. There will be no quantitative cap on imports. The import of raw sugar
at zero duty is already permitted up to 31 December 2010. Sugar prices have hit the roof on
account of drought in India and flood in Brazil, the two major sugar producing countries. The
Cabinet also changed a rule to help millers in Uttar Pradesh, to process nine lakh tonne of
imported raw sugar lying at Mundra and Kandla ports, skirting a ban on supplies of imported raw
sugar imposed by the Mayawati government in November to quell farmers’ protest.
States have been asked to follow Delhi to remove VAT and other taxes on imported sugar. The
CCP has also instructed the Home Ministry to crack down on smuggling of sugarcane and sugar
from India to Nepal.
35. Pranab to meet state FMs on Jan 13; govt to miss GST deadline
NEW DELHI, January 10, 2010: Finance Minister Pranab Mukherjee may meet state finance
ministers this week to discuss their requirements and implementation of proposed Goods and
Services Tax, speculated to be delayed by over six months, is likely to be discussed during the
meeting. "Finance Minister will meet state finance Ministers on January 13 as a pre-budget
exercise," an official said. Among other things, the meeting is also likely to discuss issues

pertaining to implementation of GST, which is likely to be delayed by at least seven to eight
months, he said.
The government had proposed to introduce GST from April 1, 2010, but it would not be
possible as the constitutional amendments, necessary for introduction of the new tax structure
which will subsume levies like excise, VAT and service tax, would take seven to eight
months.The government, the official said, may not introduce the amendment bills in the
forthcoming Budget session as there is no consensus among the states on rates and modalities of
the new tax regime.States, which have been clamouring for more funds to tide over the financial
difficulties following the economic crisis which had hit revenue collections, will also raise the
issue of compensation on account of phasing out of the Central Sales Tax (CST).
Source: The Economic Times
36. Low VAT/GST be imposed on processed food: Sahai

Kolkata, January 8, 2010 (PTI): The Union Minister for Food Processing Subodh Kant Sahai
today said Value Added Tax rates or Goods and Services Tax rates (when it will be in place)on
processed food should be between zero to four per cent.Speaking at the North-East summit
organised by the Indian Chamber of Commerce, he said that if processed food were taxed at
higher rates, then the food processing industry would not be viable for investors. Sahai said that
he had urged Asim Dasgupta, chairman of the empowered committee of state finance ministers
on GST, to keep these products in the above mentioned taxation bracket. Once the production
level of processed food increases to 50 per cent from the present level of 10 per cent, tax rates
could then be increased.
37. GST launch set to be delayed

NEW DELHI, January 8, 2010 : By all indications, the proposed Goods and Services Tax
(GST) — much-awaited by India Inc. for nationwide uniformity in indirect taxes — is set to miss
the April 1, 2010, deadline that was slated for its introduction. A decision on fixing a fresh date
for its launch is likely on Friday. A day before the Empowered Committee of State Finance
Ministers’ meeting with Finance Minister Pranab Mukherjee, panel Chairman and West Bengal
Finance Minister Asim Dasgupta said: “Tomorrow, we will discuss the new date for introduction
[of GST] and compensation formula to the States with the Union Finance Minister .. Together,
we will announce a new date.”

Dr. Dasgupta was talking to the media here after a meeting of the State finance ministers on
arriving at a revenue neutral rate for the GST which is envisaged to subsume a host of indirect
taxes such as excise duty and service tax at the Central level and VAT (value added tax) at the
State level, apart from surcharges, cesses and other local taxes.
Initially, the government had proposed to replace all these levies with GST from April 1, 2010.
However, no consensus has been arrived at thus far, either on the mechanism of revenue sharing
between the Centre and the States or on the date of its countrywide launch. Besides, the other
reason for its delay is the need for Constitutional amendments for rolling out the new tax regime,
apart from the preparedness and of all the 32 States and Union territories. Source: The Hindu

38. Industry favours early implementation of GST
New Delhi January 5, 2010 9PTI): India Inc today asked Finance Minister Pranab Mukherjee to
introduce Goods and Services Tax (GST) "as early as possible", amid speculations that the
indirect tax reform may not be implemented from the scheduled date of April 1. "We want that
the GST deadline should not be missed," Ficci President Harsh Pati Singhania told reporters after
a pre-budget meeting with Finance Minister Pranab Mukherjee along with other industrialists
here today.
CII President Venu Srinivasan said: "Our view is that even if there are lacunae and flaws in
GST, we will correct it as we move along, GST should be implemented as early as possible."
"We want GST implementation as soon as possible," Assocham President Swati Piramal said.
Some states, including Madhya Pradesh, Rajashtan, and Tamil Nadu, want the GST
implementation to be delayed as there are issues relating to preparedness. In fact, Mukherjee had
also said that it might not be possible to introduce GST from April 1. Singhania said in case GST
could not be implemented from April 1, Central Sales Tax (CST) should be reduced to one per
cent from the current 2 per cent. CST is a levy imposed on inter-state movement of goods and
has been cut from earlier 4 per cent to 2 per cent in phases, after VAT was introduced. CST does
not conform to the idea behind VAT or GST, as the indirect tax reforms aim at a common market
across the country.
CHAPTER - 3
MODIFIED VAT (MODVAT)
3.1 INTRODUCTION

Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief to final
manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by
them. eg ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use
in manufacture. POR Ltd would have paid excise duty on components manufactured by it and it
would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to
pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier,
PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take credit
for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd.
The scheme was first introduced with effect from 1 March 1986. Under this scheme, a
manufacturer can take credit of excise duty paid on raw materials and components used by him
in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise
element on raw materials and components used by him in his manufacture. Since it amounts to
excise duty only on additions in value by each manufacturer at each stage, it is called value-
added-tax (VAT)
The modvat credit can be utilized towards payment of excise duty on the final product.
When the scheme was first introduced, it covered only some excisable goods. Gradually, the
scope of the modvat scheme has been enlarged from time to time under various notifications.
From 16 March 1995, all excisable goods can take the benefit of the scheme except those
mentioned below:-
In case of inputs
» Tobacco and Manufactured Tobacco Products

» Matches other than pyrotechnics articles of heading number 36.04 of CETA
» Cinematograph Films
» Motor Spirits, Special Boiling Spirits, High Speed Diesel
» In case of final products
» Tobacco and Manufactured Tobacco Products
» Matches other than pyrotechnics articles of heading number 36.04 of CETA
» Cinematograph Films
» Woven fabrics classified under chapter 52,54 & 55 of CETA other than cotton fabrics,
manmade fibre fabrics and filament yarn fabrics

3.2 ADVANTAGES OF MODVAT
» It reduces the effects of taxation at multiple stages of manufacture.
» It facilitates duty free exports.
» It increases the tax base.
3.3 DISADVANTAGES OF MODVAT

» It increases paper work and leads to multiplicity of records.
» It leads to corruption.
» It leads to litigation.
3.4 The MODVAT scheme is regulated by Rules 57A and 57U of the Central
Excise Rules and the notifications issued there under.
Rule 57A
This rule specifies the scope and applicability of the modvat. The modvat scheme applies to all
finished excisable goods which have been notified by the Central Government in the Official
Gazette for this purpose. The modvat scheme may be made applicable in respect of certain goods
or classes of goods with restrictions and conditions.
For the purposes of the modvat scheme, input includes:-
» Inputs which are manufactured and used within the factory of production in or in relation to
manufacture of the final product.
» Paints and packing material
» Inputs used as fuel
» Inputs used for the generation of electricity, used within the factory of production for
manufacturing of final products or for any other purpose, but does not include:-
A. Machines, machinery, plant, equipments, apparatus, tools or appliances which are used for
production or processing of any goods or for bringing about any change in any substance in or in
relation to the manufacture of the final products. However, on and from 1994-95, the benefit of
modvat has been extended to excise duty paid on several capital goods like plant, machinery,

equipments, etc which are used for the manufacture of the finished product.
As long as the capital goods are used in the factory of production, credit of modvat will be
allowed. No modvat is available in respect of capital goods not used within the factory of
production.
» Packing Material in respect of which any exemption to the extent of excise duty payable on
the value of packing material is being availed of for packaging of final products.
» Packing materials of the cost of which is not included or had not been included during the
preceding financial year in the assessable value of the final products.
» The manufacturer can avail of the benefit of modvat credit on the final product to the extent
of specified duties paid on the inputs. The benefit of modvat will be available only if the final
product is an excisable goods. Modvat credit will not be available if the final good is not an
excisable goods or is exempt from duty or is chargeable at nil rate of duty. However, benefit of
modvat will be available to the final goods manufactured by a unit in a Free Trade Zone or in an
100 per cent EOU where no excise duty is payable on final goods which are exported.
For example ABC Ltd purchased raw materials of Rs9,900 inclusive of excise duty @ nine per
cent and sales tax @ 10 per cent. Modvat credit available will be Rs743 (Cost excluding sales tax
will be Rs9,000 out of which excise duty will be Rs743 ie 9000/109*9)
Rule 57D
Modvat credit will not be denied or varied just because some of the raw materials and other
inputs in respect of which excise has been paid become waste or scrap in the course of the
manufacturing process.
Similarly, modvat credit will not be denied or varied just because in the course of the
manufacturing process of an excisable final product, an intermediate product which is non-
excisable or which is chargeable to excise at nil rate of duty or which is exempt from excise duty
is created.
Intermediate products are those products which get produced in the course of manufacture of the
final product. eg in the manufacture of alcohol from sugarcane, first molasses are produced from

which alcohol is produced. In such a situation, molasses are an intermediate product, which are
charged to excise duty. The benefit of modvat will not be withdrawn if the intermediate product
created is non-excisable or is chargeable to excise at nil rate of duty or is exempt from excise
duty. Whether a product is an intermediate product or a final product depends on the facts and
circumstances of each case. The product may be intermediate so far as a particular process of
manufacturing is concerned but may be a final product for another manufacturing process.
Rule 57E
If the excise duty paid on modvatable inputs is subsequently increased or refunded, the modvat
claimed on the basis of those inputs will also be increased or reduced, as the case may be. If any
amount is found due as a result of such increase, it shall be recovered from the manufacturer
either from the balance maintained by him with the excise authorities or in cash.
Rule 57F
The modvatable inputs must be used in or in relation to the manufacture of final products for
which they have been brought into the factory. However, the inputs may be removed from the
factory for home consumption or for export under bond but only after intimating the Assistant
Collector having jurisdiction over the factory and obtaining a dated acknowledgement of the
same. Where the inputs are removed for home consumption, excise duty must be paid, at least of
an amount equal to the modvat credit claimed in respect of such inputs.
The modvatable inputs can also be removed from the factory to a place outside either, as such or
after they have been partially processed in the course of manufacture but only after intimating
the Assistant Collector having jurisdiction over the factory and obtaining a dated
acknowledgement of the same for any of the following purposes:-
» For testing, repairs, refining, reconditioning or carrying out any other operation required for
the manufacture of final product provided that after such work, the inputs are returned to the
factory to be further used in the manufacture of final product. The waste generated in such
operation must also be returned to the factory.
» For export of inputs under bond without payment of excise duty
» For home consumption of inputs on payment of excise duty

» For manufacture of intermediate products necessary for the manufacture of final products
provided that after such manufacture, the intermediate product is brought back to the factory
to be further used in the manufacture of final product. The waste generated in such operation
must also be returned to the factory.
» For export of the intermediate products under bond without payment of excise duty
» For home consumption of the intermediate products on payment of excise duty
However waste is not required to be returned in case appropriate excise duty is paid on the
waste.
» The main manufacturer as well as job worker are required to maintain register giving details
of materials sent, challan number, etc. similar to a stock register showing goods lying with
the job worker, goods returned by the job worker, etc. Generally, the goods sent must be
returned to the main manufacturer within 60 days. If the job is not completed within 60 days,
the period may be extended for another 60 days.
» The benefit of this rule is available only if the main manufacturer does a certain amount of
processing or value addition to make the final product. There must not be complete
manufacturing outside the factory by the job worker.
» Modvat credit can be utilised for the following purposes:-
» Towards payment of excise duty on the final product
» Towards payment of excise duty on waste arising in the course of manufacture of final
product
» Towards payment of excise duty on inputs themselves where they are cleared for home
consumption.
» Modvat credit in respect of finished products exported without payment of duty (like goods
manufactured by units in a Free Trade Zone or by 100 per cent EOUs or by units in an
Electronic Hardware Technology Park or by units in a Software Technology Park) may be
utilized for discharging duty liability on similar final products cleared for home consumption.
If the manufacturer does not have any excise liability, the modvat credit may be refunded to
him provided he has not availed claimed drawback of duty under the Central Excise Rules.
Any waste arising from processing of modvatable inputs in respect of which credit has been
availed may:-
» Be removed by payment of duty if such waste is produced in the factory.

» Be removed without payment of duty where permitted by order of the government.
» Be destroyed in the presence of a proper officer on application made by the manufacturer and
if found unfit for further use or not worth the duty payable thereon provided the manufacturer
informs the appropriate authorities at least 7 days in advance in writing as regards the
quantity of waste and the date on which it is supposed to be destroyed and after complying
with all the conditions as may be prescribed by the Collector of Central Excise in this behalf.
The manufacturer may transfer or utilise modvat credit from one of his factories to another
with approval from the Collector of Central Excise provided application is made by him in
this behalf and all conditions imposed by the Collector are satisfied.
Rule 57G
For availing the benefit of modvat, the manufacturer must carry out certain procedures. He must
file a declaration with the Assistant Collector of Central Excise having jurisdiction over his
factory indicating the description of final product manufactured in the factory giving details of
the inputs used for such purpose.in each of the said products. He must also give detailed
information required by the Assistant Collector of Central Excise and must obtain dated
acknowledgement for such declaration.
The manufacturer may avail of modvat credit only after the above declaration is filed by him.
However, he cannot take credit unless the inputs are accompanied with an invoice prepared as
per Central Excise Rules, Form AR-1. In case of imported goods it must be accompanied with
triplicate copy of Bill of Entry or Certificate of Appraisal by Custom posted in a foreign post
office. In other words, the goods must be accompanied with proof that duty has been paid on
them.
The Central Government has the power to direct that modvat credit on specified inputs may be
allowed at such rate and subject to such conditions as it may direct without production of
documents evidencing the payment of duty.
Where copy of invoice meant for the purpose of claiming modvat is lost or misplaced, the
manufacturer can claim modvat credit on the basis of or misplaced, the manufacturer may claim
modvat credit on the basis of the original invoice subject to the satisfaction of central excise
authorities.
A manufacturer of final products shall maintain:-

» An account in form of RG 23A - Part I and Part II in respect of duty payable on final
product. Part I is a record of inputs and subsequent utilisation in the manufacturing process.
Part II is a record of modvat credit pertaining to such inputs.
» An account current to cover the excise duty payable on the final product cleared at any time.
» A manufacturer of final products must submit within five days after the close of each month
to the Superintendent of Central Excise, the following documents:-
» Original documents evidencing payment of duty
» Extract of RG 23A Part I and Part II
After verifying their genuineness, the Superintendent shall deface the documents and return
them to the manufacturer. The Collector may, having regard to the nature, variety and
extent of production or frequency of removal provide for a period shorter than 1 month for
submission of such return in respect of any assessee or class of assessees. He may also
permit filing of the aforesaid return by an assessee within a period not exceeding 21 days
after the close of each month. He may also permit filing of the aforesaid return by an
assessee within a period not exceeding 21 days after the close of each quarter where the
assessee is availing of an exemption based on the quantity of clearances during a financial
year.
In case the manufacturer is not in a position to file the aforesaid return on time for
sufficient cause, the Assistant Collector may allow the manufacture to take credit of duty
paid on inputs, condoning the delay and giving reasons in writing for such condonation.
The Assistant Collector must see that the following conditions are satisfied before giving
allowing such modvat credit:-
 Input in respect of which credit of duty is allowed are received in the factory not before
six months from the date of filing declaration and not before date of eligibility for modvat
credit.
 Amount of duty for which credit is sought has been actually paid on these inputs.
 Inputs have actually been used or are to be used in manufacture of final products.
 The persons issuing invoices for modvatable inputs must follow certain procedures and
must get registered with the Central Excise authorities. He must maintain stock account

in the RG 23D. He shall make entries in RG 23D at the end of the day of receipt and
issue of excisable good and:-
 Shall enter the date of entry
 Correctly keep such book, account or register in the manner required
 Shall not cancel, obliterate or alter any entry therein except for correction of errors
 Keep such book, account or register open for inspection by the concerned authorities and
allow such inspection
 Allow the concerned officer to take copies or extracts or send the records to the
concerned officer.
Such person shall issue serial-wise invoice containing details as prescribed by the Central
Board of Excise and Customs or by the Collector of Central Excise in quaduplicate as
follows:-
 Original copy is for the buyer.
 Second copy is for the transporter.
 Third copy is for the excise department
 Fourth copy is to be retained by the issuer.
The invoice contains the following details:-

 Evidence showing proof of payment of excise duty
 Rate of duty paid, amount of duty, duty debit entry in the PLA, date and number of such
entry.
 Postal address, range and division of the excise officer under which the manufacturer
falls, name and address and code number, excise registration number of the factory and
also the name and address of the consignee, description and certification of goods,
number of packages, total quantity of goods, total price of goods, total assessable value,
rate of duty, total duty paid, serial number of debit entry in the personal ledger account,
date and time of removal of goods, mode of transport, motor vehicles registration number
and certificate duly signed by authorised person stating that what is stated above is true.
 Each invoice book must be authenticated by a working partner or managing director or
secretary.
» Each invoice shall bear a printed serial number running for the whole financial year

beginning on the 1St. April each year. Only one invoice book of each type shall be used
by the registered person for removal of excisable goods at any one time unless otherwise
specially permitted by the collector in writing.
 Each foil of the invoice book shall be authenticated by the owner or the working partner
or the managing director or the company secretary, as the case may be, before being
brought into use by the registered person. The serial number of the invoice before being
brought into use shall be intimated to the Assistant Collector of Central Excise and dated
acknowledgement of receipt of such intimation shall be retained by the registered person.
When the invoice is generated through computer, serial number serial number likely to be
used in the forth-coming quarter shall be intimated to the Assistant Collector of Central
Excise and as soon as the same is exhausted, a revised intimation must be send. Records
and invoices generated through computer are also recognised. Such registered dealer shall
send details in software used including the format for information to the Assistant
Collector of Central Excise.
Rule 57I
The excise authority may disallow modvat credit which has been wrongly availed or incorrectly
utilised. In case modvat credit has been taken on account of error or misconstruction, the proper
officer may send notice to the manufacturer within 6 months from the date of filing of return to
show cause why such modvat credit should not be disallowed. In such cases, where modvat
credit has already been utilised, show cause notice must state the utlised amount must not be
recovered from the assessee.
In case such wrong modvat credit is on account of willful mis-statement, collusion or
suppression of facts on the part of manufacturer, instead of the aforesaid period of 6 months,
notices may be sent for a period within 5 years from date of availment of modvat credit. The
period of stay by court order will not be considered while determining the aforesaid period.
The proper officer must consider the representation of the manufacture with regard to the show
cause notice and thereafter to determine the amount of disallowance, if any.
CHAPTER - 4
CENTRAL VALUE ADDED TAX (CENVAT)
4.1 INTRODUCTION

Modified Value Added Tax (MODVAT) scheme has been replaced by Central Value Added Tax
(CENVAT) Scheme with effect from 1.4.2000. The same is contained in newly inserted Rules
57AA to 57AK. CENVAT Scheme, in essence, is the same as MODVAT Scheme except that it
is simpler in that, the erstwhile separate schemes for inputs and capital goods are merged into
one under CENVAT Scheme. The scope of the Scheme is also expanded in that all inputs
(except High Speed Diesel Oil and Petrol) and specified capital goods (except equipments or
appliances used in office) are covered in the Scheme.
4.2 RULE 1 – RULE 33
Rule 1. Short title, extent and commencement.-

(1) These rules may be called the Central Excise Rules, 2002.
(2) They extend to the whole of India.
(3) They shall come into force on the 1st day of March, 2002.
Rule 2. Definitions.- In these rules, unless the context otherwise requires, –

(a) “Act” means the Central Excise Act, 1944 ( 1 of 1944);
(b) “assessment” includes self-assessment of duty made by the assessee and provisional
assessment under rule 7;
(c) “assessee” means any person who is liable for payment of duty assessed or a producer
or manufacturer of excisable goods or a registered person of a private warehouse in
which excisable goods are stored and includes an authorized agent of such person;
(d) “Board” means the Central Board of Excise and Customs constituted under the Central
Board of Revenue Act, 1963 (54 of 1963);
(e) “duty” means the duty payable under section 3 of the Act;
(f) “notification” means the notification published in the Official Gazette;
(g) “Tariff Act” means the Central Excise Tariff Act, 1985 (5 of 1986);
(h) “warehouse” means any place or premises registered under rule 9; and
(i) words and expressions used herein but not defined and defined in the Act shall have
the meanings respectively assigned to them in the Act.
Rule 3. Appointment and jurisdiction of Central Excise Officers.-

(1) The Board may, by notification, appoint such person as it thinks fit to be Central
Excise Officer to exercise all or any of the powers conferred by or under the Act and
these rules.
(2) The Board may, by notification, specify the jurisdiction of a Chief Commissioner of
Central Excise, Commissioner of Central Excise or Commissioner of Central Excise
(Appeals) for the purposes of the Act and the rules made thereunder.
(3) Any Central Excise Officer may exercise the powers and discharge the duties
conferred or imposed by or under the Act or these rules on any other Central Excise
Officer who is subordinate to him.
Rule 4. Duty payable on removal.-

(1) Every person who produces or manufactures any excisable goods, or who stores such
goods in a warehouse, shall pay the duty leviable on such goods in the manner
provided in rule 8 or under any other law, and no excisable goods, on which any duty
is payable, shall be removed without payment of duty from any place, where they are
produced or manufactured, or from a warehouse, unless otherwise provided:
Provided that the goods falling under Chapter 61 or 62 of the First Schedule to the
Tariff Act, produced or manufactured by a job worker may be removed without
payment of duty leviable thereon and the duty of excise leviable on such goods shall
be paid by the person referred to in sub-rule (3), as if such goods have been produced
or manufactured by him, on the date of removal of such goods from his premises
registered under rule 9.
Explanation.- It is hereby clarified that where such person has authorised the job
worker to pay the duty leviable on such goods under sub-rule (3), such duty shall be
paid by the job worker on the date of removal of such goods from his registered
premises.
(2) Notwithstanding anything contained in sub-rule (1), where molasses are produced in a
khandsari sugar factory, the person who procures such molasses, whether directly from
such factory or otherwise, for use in the manufacture of any commodity, whether or
not excisable, shall pay the duty leviable on such molasses, in the same manner as if
such molasses have been produced by the procurer.
(3) Notwithstanding anything contained in sub-rule (1), every person who gets the goods,
falling under Chapter 61or 62 of the First Schedule to the Tariff Act, produced or

manufactured on his account on job work, shall pay the duty leviable on such goods,
at such time and in such manner as may be specified under these rules, whether the
payment of such duty be secured by bond or otherwise, as if such goods have been
manufactured by such person:
Provided that such person may authorise the job worker to pay the duty leviable on
such goods on his behalf and the job worker so authorised undertakes to discharge all
liabilities and comply with all the provisions of these rules.
Explanation I.- For the purposes of this rule, the expression “job worker” shall be
deemed to mean the person who undertakes the process or processes that brings into
existence the finished goods, complete in all respects, falling under Chapter 61 or 62
of the said First Schedule, in his factory. For the removal of doubt, it is further
clarified that the job-worker may also get part of the processing required for the
manufacture of the said goods done by another person but should bring back the same
for the completion of the manufacturing process in his factory.
Explanation II.- For the purposes of this rule, excisable goods manufactured in a
factory and utilised, as such or after subjecting to any process, for the manufacture of
any other commodity, in such factory shall be deemed to have been removed from
such factory immediately before such utilisation.
(4) Notwithstanding anything contained in sub-rule (1), Commissioner may, in
exceptional circumstances having regard to the nature of the goods and shortage of
storage space at the premises of the manufacturer where the goods are made, permit a
manufacturer to store his goods in any other place outside such premises, without
payment of duty subject to such conditions as he may specify.
Rule 5. Date for determination of duty and tariff valuation.-

(1) The rate of duty or tariff value applicable to any excisable goods , other than
khandsari molasses, shall be the rate or value in force on the date when such goods
are removed from a factory or a warehouse, as the case may be.
(2) The rate of duty in the case of khandsari molasses, shall be the rate in force on the date
of receipt of such molasses in the factory of the procurer of such molasses.
Explanation.- If any excisable goods are used within the factory, ‘the date of removal
of such goods’ shall mean the date on which the goods are issued for such use.

(3) The rate of duty in the case of goods falling under Chapter 61 or 62 of the First
Schedule to the Tariff Act, produced or manufactured on job work, shall be the rate in
force on the date of removal of such goods by the person referred to in sub-rule (3) of
rule 4 from his premises registered under rule 9.
Rule 6. Assessment of duty.- The assessee shall himself assess the duty payable on any
excisable goods:
Provided that in case of cigarettes, the Superintendent or Inspector of Central Excise
shall assess the duty payable before removal by the assessee.
Rule 7. Provisional assessment.-

(1) Where the assessee is unable to determine the value of excisable goods or determine
the rate of duty applicable thereto, he may request the Assistant Commissioner of
Central Excise or the Deputy Commissioner of Central Excise, as the case may be, in
writing giving reasons for payment of duty on provisional basis and the Assistant
Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the
case may be, may order allowing payment of duty on provisional basis at such rate or
on such value as may be specified by him.
(2) The payment of duty on provisional basis may be allowed, if the assessee executes a
bond in the form prescribed by notification by the Board with such surety or security
in such amount as the Assistant Commissioner of Central Excise or the Deputy
Commissioner of Central Excise, as the case may be, deem fit, binding the assessee for
payment of difference between the amount of duty as may be finally assessed and the
amount of duty provisionally assessed.
(3) The Assistant Commissioner of Central Excise or the Deputy Commissioner of Central
Excise, as the case may be, shall pass order for final assessment, as soon as may be,
after the relevant information, as may be required for finalizing the assessment, is
available, but within a period not exceeding six months from the date of the
communication of the order issued under sub-rule (1):
Provided that the period specified in this sub-rule may, on sufficient cause being
shown and the reasons to be recorded in writing, be extended by the Commissioner of
Central Excise for a further period not exceeding six months and by the Chief
Commissioner of Central Excise for such further period as he may deem fit.

(4) The assessee shall be liable to pay interest on any amount payable to Central
Government, consequent to order for final assessment under sub-rule (3), at the rate
specified by the Central Government by notification issued under section 11AA or
section 11 AB of the Act from the first day of the month succeeding the month for
which such amount is determined, till the date of payment thereof.
(5) Where the assessee is entitled to a refund consequent to order for final assessment
under sub-rule (3), subject to sub-rule (6), there shall be paid an interest on such
refund at the rate specified by the Central Government by notification issued under
section 11 BB of the Act from the first day of the month succeeding the month for
which such refund is determined, till the date of refund.
(6) Any amount of refund determined under sub-rule (3) shall be credited to the Fund:
Provided that the amount of refund, instead of being credited to the Fund, be paid to
the applicant, if such amount is relatable to-
(a) the duty of excise paid by the manufacturer, if he had not passed on the incidence of
such duty to any other person; or
(b) the duty of excise borne by the buyer, if he had not passed on the incidence of such
duty to any other person.
Rule 8. Manner of payment.-

(1) The duty on the goods removed from the factory or the warehouse during the first
fortnight of the month shall be paid by the 20th of that month and the duty on the goods
removed from the factory or the warehouse during the second fortnight of the month
shall be paid by the 5th of the following month:
Provided that in the case of goods removed during the second fortnight of the month
of March, the duty shall be paid by the 31st day of March:
Provided further that where an assessee is availing of the exemption under a
notification based on the value of clearances in a financial year, the duty on goods
cleared during a calendar month shall be paid by the 15th day of the following month.
Explanation.- For removal of doubts, it is hereby clarified that the duty liability shall
be deemed to have been discharged only if the amount payable is credited to the
account of the Central Government by the specified date.

(2) The duty of excise shall be deemed to have been paid for the purposes of these rules
on the excisable goods removed in the manner provided under sub-rule (1) and the
credit of such duty allowed, as provided by or under any rule.
(3) If the assessee fails to pay the amount of duty by due date, he shall be liable to pay the
outstanding amount alongwith interest at the rate specified by the Central Government
vide notification under section 11 AB of the Act on the outstanding amount, for the
period starting with the first day after due date till the date of actual payment of the
outstanding amount.
(4) If the assessee defaults,-
(i) in payment of any one instalment and the same is discharged beyond a period of thirty
days from the date on which the instalment was due in a financial year, or
(ii) in payment of instalment by the due date for the third time in a financial year, whether
in succession or otherwise,
then, the assessee shall forfeit the facility to pay the dues in instalments under this rule
for a period of two months, starting from the date of communication of the order
passed by the Assistant Commissioner of Central Excise or the Deputy Commissioner
of Central Excise, as the case may be, in this regard or till such date on which all dues
are paid, whichever is later, and during this period the assessee shall be required to pay
excise duty for each consignment by debit to the account current and in the event of
any failure, it shall be deemed that such goods have been cleared without payment of
duty and the consequences and penalties as provided in these rules shall follow.
Rule 9. Registration.-
(1) Every person, who produces, manufactures, carries on trade, holds private store-room
or warehouse or otherwise uses excisable goods, shall get registered:
Provided that a registration obtained under rule 174 of the Central Excise Rules, 1944
or rule 9 of the Central Excise (No.2) Rules, 2001 shall be deemed to be as valid as the
registration made under this sub-rule for the purpose of these rules.
(2) The Board may by notification and subject to such conditions or limitations as may be
specified in such notification, specify person or class of persons who may not require
such registration.
(3) The registration under sub-rule (1) shall be subject to such conditions, safeguards and
procedure as may be specified by notification by the Board.

Rule 10. Daily stock account.-
(1) Every assessee shall maintain proper records, on a daily basis, in a legible manner
indicating the particulars regarding description of the goods produced or
manufactured, opening balance, quantity produced or manufactured, inventory of
goods, quantity removed, assessable value, the amount of duty payable and particulars
regarding amount of duty actually paid.
(2) The first page and the last page of each such account book shall be duly authenticated
by the producer or the manufacturer or his authorised agent.
(3) All such records shall be preserved for a period of five years immediately after the
financial year to which such records pertain.
Rule 11. Goods to be removed on invoice.-

(1) No excisable goods shall be removed from a factory or a warehouse except under an
invoice signed by the owner of the factory or his authorized agent and in the case of
cigarettes, each such invoice shall also be countersigned by the Inspector of Central
Excise or the Superintendent of Central Excise before the cigarettes are removed from
the factory.
(2) The invoice shall be serially numbered and shall contain the registration number,
description, classification, time and date of removal, rate of duty, quantity and value,
of goods and the duty payable thereon.
(3) The invoice shall be prepared in triplicate in the following manner, namely:-
the original copy being marked as ORIGINAL FOR BUYER;
(ii) the duplicate copy being marked as DUPLICATE FOR TRANSPORTER;
(iii) the triplicate copy being marked as TRIPLICATE FOR ASSESSEE.
(4) Only one copy of invoice book shall be in use at a time, unless otherwise allowed by
the Assistant Commissioner of Central Excise, or the Deputy Commissioner of Central
Excise, as the case may be, in the special facts and circumstances of each case.
(5) The owner or working partner or the Managing Director or the Company Secretary or
any person duly authorised for this purpose shall authenticate each foil of the invoice
book, before being brought into use.

(6) Before making use of the invoice book, the serial numbers of the same shall be
intimated to the Superintendent of Central Excise having jurisdiction.
(7) The provisions of this rule shall apply mutatis mutandis to goods supplied by a first
stage dealer or a second stage dealer.
Explanation.- For the purposes of this rule, “first stage dealer” and “second stage
dealer” shall have the meanings assigned to them in CENVAT Credit Rules, 2002.
Rule 12. Filing of return.-

Every assessee shall submit to the Superintendent of Central Excise a monthly return
in the form specified by notification by the Board, of production and removal of goods
and other relevant particulars, within ten days after the close of the month to which the
return relates:
Provided that where an assessee is availing of the exemption under a notification
based on the value of clearances in a financial year, he shall file a quarterly return in
the form specified by notification by the Board , of production and removal of goods
and other relevant particulars, within twenty days after the close of the quarter to
which the return relates.
Rule 13. Duty on matches.-

The duty on matches shall be paid by affixing to each box or booklet a Government
Central Excise Stamp of a value appropriate to the rate of duty, and where such boxes
or booklets are issued in packages, each package shall be reckoned by the
manufacturer as his minimum unit of distribution and shall bear the manufacturer’s
trade label and a mark clearly showing the class of matches contained in the package.
Rule 14. Procedure for procurement of central excise stamps and maintenance of records
for production and removal of matches.-
The Board may, by notification, specify the procedure for procurement, accounting and
disposal of Central Excise Stamps and matters pertaining to production, storage,
control, removal and payment of duty on matches.
Rule 15. Special procedure for payment of duty.-

(1) The Central Government may, by notification, specify the goods in respect of which
an assessee shall have the option to pay the duty of excise on the basis of such factors
as may be relevant to production of such goods and at such rate as may be specified in
the said notification, subject to such limitations and conditions, including those
relating to interest or penalty, as may be specified in such notification.
(2) The Central Government may also specify by notification the manner of making an
application for availing of the special procedure for payment of duty, the abatement, if
any, that may be allowed on account of closure of a factory during any period, and any
other matter incidental thereto.
Rule 16. Credit of duty on goods brought to the factory. -

(1) Where any goods on which duty had been paid at the time of removal thereof are
brought to any factory for being re-made, refined, re-conditioned or for any other
reason, the assessee shall state the particulars of such receipt in his records and shall be
entitled to take CENVAT credit of the duty paid as if such goods are received as
inputs under the CENVAT Credit Rules, 2002 and utilise this credit according to the
said rules.
(2) If the process to which the goods are subjected before being removed does not amount
to manufacture, the manufacturer shall pay an amount equal to the CENVAT credit
taken under sub-rule (1) and in any other case the manufacturer shall pay duty on
goods received under sub-rule (1) at the rate applicable on the date of removal and on
the value determined under sub-section (2) of section 3 or section 4 or section 4A of
the Act, as the case may be.
(3) If there is any difficulty in following the provisions of sub-rule (1) and sub-rule (2),
the assessee may receive the goods for being re-made, refined, re-conditioned or for
any other reason and may remove the goods subsequently subject to such conditions as
may be specified by the Commissioner.
Rule 17. Removal of goods by a unit in the Free Trade Zone or by a Hundred per cent.
Export-Oriented undertaking or by a unit in the Special Economic Zone for
Domestic Tariff Area.-

(1) Where any goods are removed from a unit in a Free Trade Zone or a hundred per cent.
export-oriented unit or a unit in the Special Economic Zone, to domestic tariff area,
such removal shall be made under an invoice by following the procedure specified in
rule 11, and on payment of appropriate duty before removal of goods by debiting the
account current required to be maintained for this purpose.
(2) The unit shall maintain in the form specified by notification by the Board appropriate
account relating to production, description of goods, quantity removed, and the duty
paid.
(3) The unit shall submit a monthly return in the form specified by notification by the
Board to the Superintendent of Central Excise, within ten days from the close of the
month to which the return relates, in respect of the goods removed to domestic tariff
area.
Rule 18. Rebate of duty.-

Where any goods are exported, the Central Government may, by notification, grant
rebate of duty paid on such excisable goods or duty paid on materials used in the
manufacture or processing of such goods and the rebate shall be subject to such
conditions or limitations, if any, and fulfillment of such procedure, as may be specified
in the notification.
Explanation.-“Export” includes goods shipped as provision or stores for use on board a
ship proceeding to a foreign port or supplied to a foreign going aircraft.
Rule 19. Export without payment of duty .-

(1) Any excisable goods may be exported without payment of duty from a factory of the
producer or the manufacturer or the warehouse or any other premises, as may be
approved by the Commissioner.

(2) Any material may be removed without payment of duty from a factory of the producer
or the manufacturer or the warehouse or any other premises, for use in the manufacture
or processing of goods which are exported, as may be approved by the Commissioner.
(3) The export under sub-rule (1) or sub-rule (2) shall be subject to such conditions,
safeguards and procedure as may be specified by notification by the Board.
Rule 20. Warehousing provisions.-

(1) The Central Government may by notification, extend the facility of removal of any
excisable goods from the factory of production to a warehouse, or from one warehouse
to another warehouse without payment of duty.
(2) The facility under sub-rule (1) shall be available subject to such conditions, including
penalty and interest, limitations, including limitation with respect to the period for
which the goods may remain in the warehouse, and safeguards and procedure,
including in the matters relating to dispatch, movement, receipt, accountal and
disposal of such goods, as may be specified by the Board.
(3) The responsibility for payment of duty on the goods that are removed from the factory
of production to a warehouse or from one warehouse to another warehouse shall be
upon the consignee.
(4) If the goods dispatched for warehousing or re-warehousing are not received in the
warehouse, the responsibility for payment of duty shall be upon the consignor.
Rule 21. Remission of duty.-

Where it is shown to the satisfaction of the Commissioner that goods have been lost or
destroyed by natural causes or by unavoidable accident or are claimed by the
manufacturer as unfit for consumption or for marketing, at any time before removal,
he may remit the duty payable on such goods, subject to such conditions as may be
imposed by him by order in writing:
Provided that where such duty does not exceed one thousand rupees, the provisions of
this rule shall have effect as if for the expression “Commissioner” , the expression “
Superintendent of Central Excise” has been substituted:
Provided further that where such duty exceeds one thousand rupees but does not
exceed two thousand five hundred rupees, the provisions of this rule shall have effect

as if for the expression “Commissioner” , the expression “ Assistant Commissioner of
Central Excise or the Deputy Commissioner of Central Excise, as the case may be,”
has been substituted:
Provided also that where such duty exceeds two thousand five hundred rupees but does
not exceed five thousand rupees, the provisions of this rule shall have effect as if for
the expression “Commissioner”, the expression “ Joint Commissioner of Central
Excise or Additional Commissioner of Central Excise, as the case may be, ” has been
substituted.
Rule 22. Access to a registered premises.-

(1) An officer empowered by the Commissioner in this behalf shall have access to any
premises registered under these rules for the purpose of carrying out any scrutiny,
verification and checks as may be necessary to safeguard the interest of revenue.
(2) Every assessee shall furnish to the officer empowered under sub-rule (1), a list in
duplicate, of all the records prepared or maintained by the assessee for accounting of
transactions in regard to receipt, purchase, manufacture, storage, sales or delivery of
the goods including inputs and capital goods.
(3) Every assessee shall, on demand make available to the officer empowered under sub-
rule (1) or the audit party deputed by the Commissioner or the Comptroller and
Auditor General of India,-
(i) the records maintained or prepared by him in terms of sub-rule (2);
(ii) the cost audit reports, if any, under section 233B of the Companies Act, 1956 ( 1 of
1956); and
(iii) the Income-tax audit report, if any, under section 44AB of the Income-tax Act, 1961
( 43 of 1961), for the scrutiny of the officer or audit party, as the case may be.
Rule 23. Power to stop and search .-

Any Central Excise Officer, may search any conveyance carrying excisable goods in
respect of which he has reason to believe that the goods are being carried with the
intention of evading duty.
Rule 24. If a Central Excise Officer, has reason to believe that any goods, which are liable to
excise duty but no duty has been paid thereon or the said goods were removed with the
intention of evading the duty payable thereon, the Central Excise Officer may detain
or seize such goods.

Rule 25. (1) Subject to the provisions of section 11 AC of the Act, if any producer,
manufacturer, registered person of a warehouse or a registered dealer, —
(a) Removes any excisable goods in contravention of any of the provisions of these rules
or the notifications issued under these rules; or
(b) Does not account for any excisable goods produced or manufactured or stored by him;
or
(c) Engages in the manufacture, production or storage of any excisable goods without
having applied for the registration certificate required under section 6 of the Act; or
(d) Contravenes any of the provisions of these rules or the notifications issued under these
rules with intent to evade payment of duty,-
then, all such goods shall be liable to confiscation and the producer or manufacturer or
registered person of the warehouse or a registered dealer , as the case may be, shall be
liable to a penalty not exceeding the duty on the excisable goods in respect of which
any contravention of the nature referred to in clause (a) or clause (b) or clause (c) or
clause (d) has been committed, or rupees ten thousand, whichever is greater.
(2) An order under sub-rule (1) shall be issued by the Central Excise Officer, following
the principles of natural justice.
Rule 26. Penalty for certain offences.-

Any person who acquires possession of, or is in any way concerned in transporting,
removing, depositing, keeping, concealing, selling or purchasing, or in any other
manner deals with, any excisable goods which he knows or has reason to believe are
liable to confiscation under the Act or these rules, shall be liable to a penalty not
exceeding the duty on such goods or rupees ten thousand, whichever is greater.
Rule 27. General penalty.-

A breach of these rules shall, where no other penalty is provided herein or in the Act,
be punishable with a penalty which may extend to five thousand rupees and with
confiscation of the goods in respect of which the offence is committed.

Rule 28. Confiscated property to vest in Central Government.-
(1) When any goods are confiscated under these rules, such thing shall thereupon vest in
the Central Government.
(2) The Central Excise Officer adjudging confiscation shall take and hold possession of
the things confiscated, and every Officer of Police, on the requisition of such Central
Excise Officer, shall assist him in taking and holding such possession.
Rule 29. Disposal of confiscated goods

Confiscated goods in respect of which the option of paying a fine in lieu of
confiscation has not been exercised, shall be sold, destroyed or otherwise disposed of
in such manner as the Commissioner may direct.
Rule 30. Storage charges in respect of goods confiscated and redeemed.-

If the owner of the goods, the confiscation of which has been adjudged, exercises his
option to pay fine in lieu of confiscation, he may be required to pay such storage
charges as may be determined by the adjudicating officer.
Rule 31. Power to issue supplementary instructions.-

(1) The Board or the Chief Commissioner or the Commissioner, may issue written
instructions providing for any incidental or supplemental matters, consistent with the
provisions of the Act and these rules.
Rule 32. Restrictions on removal of goods.-;

(1) Notwithstanding anything contained in these rules, no goods shall be removed from a
factory or a warehouse between the time appointed for representation of the Annual
Budget or any Supplementary Budget of the Central Government in the House of the
People or for the introduction in the House of the People of any Finance Bill or any
Bill for imposition or increase of any other duty, as the case may be, and 24.00 hours
midnight on the day on which such Budget, Finance Bill or any other Bill, as the case
may be, is presented or introduced, unless,-
(i) The assessee has obtained permission of the Commissioner under sub-rule (2), and
(ii) An applicSation for such removal in the form prescribed by notification by the Board
has been presented by the assessee to the Central Excise Officer and such an

application has been acknowledged by him before 17.00 hours on the working day
immediately preceding such day:
Provided that no such application for the removal of goods which may come into
existence at any time after the appointed time shall be acknowledged unless the terms,
conditions and limitations imposed by the Commissioner in this behalf are complied
with.
Explanation.- For the purposes of this rule, “goods” include goods which may come
into existence at any time after the appointed time.
(2) Where an assessee intends to remove goods from a factory or a warehouse under sub-
rule (1), he may make an application in this behalf in writing to the Commissioner
undertaking to pay duty at the enhanced rate, if any, that may be applicable to such
goods with effect from the date immediately following the date on which the Budget,
Finance Bill or any other Bill, as the case may be, is presented or introduced, and to
comply with such conditions as the Commissioner may specify and thereupon the
Commissioner may, if he considers it necessary or expedient in the public interest so
to do, permit the removal of such goods.
Rule 33. Transitional provision.-

Any notification, circular, instruction, standing order, trade notice or other order issued
under the Central Excise (No. 2) Rules, 2001 by the Board, the Chief Commissioner or
the Commissioner of Central Excise, and in force as on the 28 th day of February, 2002,
shall, to the extent it is relevant and consistent with these rules, be deemed to be valid
and issued under the corresponding provisions of these rules.
CHAPTER - 5
GUIDANCE NOTE ON ACCOUNTING TREATMENT FOR

MODVAT/CENVAT (REVISED)

5.1 INTRODUCTION
1. The Guidance Note on Accounting Treatment for MODVAT was first issued in March 1988.
The Guidance Note was revised in July, 1995 in view of extension of MODVAT Credit Scheme
to capital goods. The Guidance Note is revised again with the issuance of revised Accounting
Standard (AS) 2 on "Valuation of Inventories", which has come into effect in respect of
accounting periods commencing on or after 1.4.1999 and is mandatory in nature. This revised
Guidance Note is issued in supersession of the earlier Guidance Note issued in July, 1995, and is
effective in respect of accounting for MODVAT for accounting periods beginning on or after
April 1, 1999. With the substitution of the MODVAT Credit Scheme with CENVAT Credit
Scheme w.e.f. 1.4.2000, this revised Guidance Note also deals with accounting treatment in
respect of the latter Scheme.
5.2 OBJECTIVE
2. The objective of this Guidance Note is to provide guidance in respect of accounting for
MODVAT/CENVAT credit. Salient features of MODVAT and CENVAT credit schemes are
briefly set out hereinafter. Reference may be made to Central Excise Act, 1944, Central Excise
Rules, 1944, Notifications and Circulars issued from time to time for details of the provisions of
MODVAT/CENVAT Schemes. Guidance for accounting for excise duty is provided in the
Guidance Note on Accounting Treatment for Excise Duty, which has been revised and issued
separately.
5.3 MODVAT CREDIT SCHEME (Upto 31.3.2000) – SALIENT FEATURES
3. Modified Value Added Tax (MODVAT) Scheme allows instant credit of specified duties paid
on specified inputs used in or in relation to manufacture of specified final excisable goods to be
utilised for payment of excise duties in respect of such goods. The Scheme covers imported
goods as also those acquired indigenously. Specified duty in relation to imported goods is
countervailing duty and in case of indigenous goods is excise duty, additional excise duty under
Additional Duties of Excise (Textile and Textile Articles) Act, 1978 as also additional excise
duty under Additional Duties of Excise (Goods of Special Importance) Act, 1957.

4. MODVAT Scheme was introduced in 1986, effective from 1.3.86, with a view to reduce the
cascading effect of duties. Initially, the Scheme was restrictive in its application in that
(i) it applied only to limited categories of inputs and final goods; and
(ii) use of inputs in or in relation to manufacture of final goods was essential for
utilisation of duty credit for payment of excise duties on clearance of such final goods. In
other words, correlation of inputs and final goods was essential though one to one
correlation of inputs was not essential.
5. Significant amendments have since been made to the MODVAT Scheme and the scope of the
Scheme has been expanded considerably. Salient features of the Scheme are summarised
hereinafter.
6. The Scheme applies to inputs ("Input Duty Credit Scheme") and capital goods ("Capital
Goods Duty Credit Scheme").
Input Duty Credit Scheme
7.Provisions in relation to this Scheme are contained in Rules 57A to 57J of the Central Excise
Rules, 1944. The Scheme covers inputs and final products classifiable under any of the headings
of the Chapters of the Central Excise Tariff Act, 1985. The salient features of the Input Duty
Credit Scheme are as follows:
(i) The Scheme is operative only when excise duty is payable on final goods. Thus,
MODVAT credit cannot be availed of if the final goods are exempted from duty or are
chargeable to nil rate of duty. However, the Scheme is operative in case the final goods
enjoy partial exemption from duty.
(ii) Correlation between inputs and final goods is not required, i.e., duty credit in respect
of any input brought into the factory can be utilised for payment of duty on any final
product manufactured in that factory even if that input is not used in or in relation to
manufacture of that final product.

(iii) A manufacturer is required to debit RG 23A or account current with an amount equal
to 10% of the value of inputs or partially processed inputs removed from his factory for
jobwork. The said amount is available as credit on return of processed/final goods to his
factory from jobworkers' premises or on clearance of such processed/final goods from
jobworkers' premises, if so permitted by the Commissioner, within specified time period.
The debited amount is also available for adjustment against duty payable on such inputs
or partially processed inputs not received back within specified time.
(iv) If common inputs are used in manufacture of final products which do not attract duty
liability as also those which are chargeable to duty, manufacturer (except in specified
cases) is required to pay an amount equal to 8% of the price of products not chargeable to
duty at the time of clearance of such products.
8. Supreme Court in a recent judgement in the case of CCE, Pune vs. Dai Ichi Karkaria Ltd.
[1999 (112) ELT 353; decided on 11.8.99] had occasion to summarise the Scheme. Relevant
extract from the decision is reproduced below:
"It is clear from these Rules, as we read them, that a manufacturer obtains credit for the excise
duty paid on raw material to be used by him in the production of an excisable product
immediately it makes the requisite declaration and obtains an acknowledgement thereof. It is
entitled to use the credit at any time thereafter when making payment of excise duty on the
excisable product. There is no provision in the Rules which provides for a reversal of the credit
by the excise authorities except where it has been illegally or irregularly taken, in which event it
stands cancelled or, if utilised, has to be paid for. We are here really concerned with credit that
has been validly taken, and its benefit is available to the manufacturer without any limitation in
time or otherwise unless the manufacturer itself chooses not to use the raw material in its
excisable product. The credit is, therefore, indefeasible. It should also be noted there is no co-
relation of the raw material and the final product; that is to say, it is not as if credit can be taken
only on a final product that is manufactured out of the particular raw material to which the
credit is related. The credit may be taken against the excise duty on a final product
manufactured on the very day that it becomes available."

Capital Goods Duty Credit Scheme
9. Provisions in relation to this Scheme are contained in Rules 57Q to 57U of the Central Excise
Rules, 1944. The salient features of the Capital Goods Duty Credit Scheme are as follows:
(i) The Scheme covers specified capital goods used in the factory of the manufacturer in
relation to the production of specified final products;
(ii) A manufacturer would not be entitled to the MODVAT credit on capital goods until
the capital goods are installed or, as the case may be, used for manufacture of excisable
goods, in the factory of the manufacturer;
(iii) A manufacturer has option to:
(a) avail MODVAT credit in respect of duty paid on capital goods as per the
Rules;
or
(b) claim depreciation on duty element under Section 32 of the Income-tax Act,
1961 or claim deduction of duty element by way of revenue expenditure under
any section of the Income-tax Act, 1961, as the case may be;
(iv) A manufacturer can claim MODVAT credit of the duty element of capital goods
even if capital goods are acquired on lease, hire-purchase or loan agreement if specified
duty is paid by manufacturer either directly to capital goods supplier or to the finance
company before payment of first lease/hire-purchase or loan installment, as the case may
be.
GENERAL
10. The general salient features relevant to Input Duty Credit Scheme and Capital Goods Duty
Credit Scheme are as below:

(i) A manufacturer is required to comply with various procedural requirements, in
particular, filing of declaration, and maintenance of register of receipts, issues and
balance of inputs and capital goods in Form RG-23A Part I and RG-23C Part I,
respectively. It is also required to maintain registers related to MODVAT credit in respect
of inputs and capital goods in Form RG-23A Part II and RG-23C Part II, respectively.
(ii) There is no time limit for utilisation of MODVAT credit. Government is, however,
empowered to provide for lapsing of unutilised credit balances for specific products.
(iii) Cash refund of duty credit is not allowable except in case of export of goods if the
manufacturer is unable to utilise duty credit towards payment of excise duty on clearance
of final goods from his factory.
5.4 CENVAT SCHEME (EFFECTIVE FROM 1.4.2000) – SALIENT FEATURES
11. Modified Value Added Tax (MODVAT) scheme has been replaced by Central Value Added
Tax (CENVAT) Scheme with effect from 1.4.2000. The same is contained in newly inserted
Rules 57AA to 57AK. CENVAT Scheme, in essence, is the same as MODVAT Scheme except
that it is simpler in that, the erstwhile separate schemes for inputs and capital goods are merged
into one under CENVAT Scheme. The scope of the Scheme is also expanded in that all inputs
(except High Speed Diesel Oil and Petrol) and specified capital goods (except equipments or
appliances used in office) are covered in the Scheme.
12. Procedural simplifications have been introduced and requirement of filing declarations has
been dispensed with.
13. The major difference between MODVAT and CENVAT Schemes is in relation to capital
goods. The CENVAT credit in respect of capital goods received in a factory at any point of time
in a given financial year is allowed to be taken only for an amount not exceeding fifty percent of
the duty paid on such capital goods in the same financial year. The balance of CENVAT credit
can be taken in any financial year(s) subsequent to the financial year in which the capital goods
were received in the factory of the manufacturer provided capital goods are still in the possession
and use of the manufacturer of final products in such subsequent year(s). The condition of

possession and use is not applicable to components, spares and accessories, refactories and
refractory materials and goods falling under Tariff Heading 68.02 and sub-heading 6801.10 of
first Schedule of the Central Excise Tariff Act, 1985, if they are not removed without use.
14. Outstanding balances in MODVAT Credit accounts are allowed to be transferred to the
CENVAT Credit accounts and utilized as per the CENVAT Scheme.
5.5 ACCOUNTING TREATMENT IN CASE OF INPUTS USED IN OR IN RELATION

TO MANUFACTURE OF FINAL PRODUCTS
15. In the light of the basic features of 'MODVAT/CENVAT' discussed above, it may be stated
that MODVAT/CENVAT is a procedure whereby the manufacturer can utilise credit for
specified duty on inputs against duty payable on final products. Duty credit taken on inputs is of
the nature of set-off available against the payment of excise duty on the final products.
16. Specified duty paid on inputs may be debited to a separate account, e.g.,
MODVAT/CENVAT Credit Receivable (Inputs) Account. As and when MODVAT/CENVAT
credit is actually utilised against payment of excise duty on final products, appropriate
accounting entries will be required to adjust the excise duty paid out of MODVAT/CENVAT
Credit Receivable (Inputs) Account to the account maintained for payment/provision for excise
duty on final product. In this case, the purchase cost of the inputs would be net of the specified
duty on inputs. Therefore, the inputs consumed and the inventory of inputs would be valued on
the basis of purchase cost net of the specified duty on inputs. The debit balance in
MODVAT/CENVAT Credit Receivable (Inputs) Account should be shown on the assets side
under the head àdvances'.
An illustration of the above method is given in Example ‘A’.
17. It may be appropriate to quote the following paragraphs nos. 6 and 7, dealing with 'cost of
inventories' and 'costs of purchase', of Accounting Standard (AS) 2 (Revised) on Valuation of
Inventories, issued by the Institute of Chartered Accountants of India.

"6. The cost of inventories should comprise all costs of purchases, costs of conversion
and other costs incurred in bringing the inventories to their present location and
condition."
"7. The costs of purchase consist of the purchase price including duties and taxes (other
than those subsequently recoverable by the enterprise from the taxing authorities), freight
inwards and other expenditure directly attributable to the acquisition. Trade discounts,
rebates, duty drawbacks and other similar items are deducted in determining the costs of
purchase."
Particular attention is invited to the paragraph related to 'costs of purchase', according to

which, only those duties have to be included as costs of purchase which are not
subsequently recoverable by the enterprise from the taxing authorities. Since the specified
duty on inputs is available for set-off against the excise duty on final products, it is
considered of the nature of duty recoverable from taxing authorities.
18. A question may arise as to when the 'MODVAT/CENVAT' credit should be taken if
documents evidencing payment of specified duty on inputs are received later than the physical
receipt of the goods. According to the accrual concept of accounting, one may account for such
credit, provided one is reasonably certain of getting the said documents at a later date.
Change in Accounting Policy
19. In cases, where enterprises were accounting for MODVAT credit on inputs in accordance
with the erstwhile inclusive method, i.e., the second alternative recommended in the earlier
edition (1995) of the Guidance Note on Accounting Treatment for MODVAT, they will have to
change the method of accounting in accordance with paragraph 16 of this Guidance Note.
Accordingly, such an enterprise will have to adjust the amount of opening stock in respect of the
accounting periods commencing on or after April 1, 1999, in such a way so that the opening
stock should appear at the amount which would have been arrived at had the method suggested
in paragraph 16 of this Guidance Note been followed. This could be done by adjusting the
amount of opening stock in respect of the accounting periods commencing on or after April 1,
1999, by the amount of the balance lying in the MODVAT credit availed account. Further, an

amount equal to the balance of RG23A register, representing the MODVAT credit receivable in
respect of the inputs purchased in the earlier years should be transferred to MODVAT Credit
Receivable Account with a corresponding adjustment in the amount of opening stock. After the
aforesaid adjustments, the MODVAT Credit Receivable Account should also appear at the
amount which would have been arrived at had the method suggested in paragraph 16 of this
Guidance Note been followed. An example illustrating the change in accounting policy has been
given as Example ‘B’.
Appropriate disclosures as per Accounting Standard (AS) 5, Net Profit or Loss for the Period,
Prior Period Items and Changes in Accounting Policies, are also required to be made in the
financial statements for change in accounting policy.
Accounting Treatment – Job-work
Accounting treatment in case of inputs and/or partially processed inputs sent outside the factory
to job-worker for further processing
20. In a case where an enterprise removes inputs as such or in a partially processed form to a
place outside the factory for the purpose of testing, repairing, refining, reconditioning or carrying
out any other operations necessary for manufacture of final products, the enterprise is required to
debit MODVAT Credit Register (RG 23A) or account current with an amount equal to 10% of
the value of inputs or partially processed inputs, as the case may be. The said debit is in the
nature of deposit and is available for credit at the time of return of duly processed goods to the
factory within the prescribed time. The said deposit is also available for adjustment against duty
payment if the goods are not received back in the factory within the prescribed time limit. If this
amount is debited to MODVAT Credit Register (RG 23A), the same should be accounted for as
a deposit and should be debited to a separate account with appropriate nomenclature say,
"MODVAT at Credit Deposit (Jobwork) Account" and credited to "MODVAT Credit Receivable
Account". This deposit amount should be credited and "MODVAT Credit Receivable Account"
should be debited at the time of receipt of duly processed goods in the factory within the
prescribed time limit or for adjustment of duty if the goods are not received back in the factory

within the prescribed time limit. This requirement of debit has been dispensed with under
CENVAT Scheme.
Accounting treatment in case of inputs received by enterprise for further processing on job-work
basis
21. An enterprise may receive inputs from a principal for processing and/or converting to final
products on job work basis and may be required to avail MODVAT/CENVAT credit on such
inputs and discharge duty liability on clearance of final products on behalf of the principal; the
ownership of the inputs and final products continuing to be of the principal. In such cases, the
enterprise should, at the time of taking MOVDAT/CENVAT credit, debit an appropriate account
say, "MODVAT/CENVAT Credit Receivable Account" and the account to be credited would
depend upon the terms of jobwork with the principal. If the enterprise is required to bear excise
duty burden, "Excise Duty Account" should be credited. If, on the other hand, excise duty is to
be paid on the principal's account, "Principal Account" should be credited. Similarly, in former
case, excise duty paid on clearance of final products should be debited to "Excise Duty Account"
and in latter case to "Principal Account" and credited to "MODVAT/CENVAT Credit
Receivable Account".
5.6 ACCOUNTING TREATMENT FOR MODVAT CREDIT IN CASE OF CAPITAL

GOODS USED FOR MANUFACTURE OF SPECIFIED GOODS
22. In case an enterprise does not avail MODVAT credit on capital goods obviously no
accounting treatment would be necessary. The following paragraphs apply only to those
situations where an enterprise avails of MODVAT credit on capital goods.
23. Accounting Standard (AS) 10 on Àccounting for Fixed Assets', issued by the Institute of
Chartered Accountants of India, states, inter-alia, in para 9.1, as follows:
"The cost of an item of fixed asset comprises its purchase price, including import duties
and other non-refundable taxes or levies and any directly attributable cost of bringing the
asset to its working condition for its intended use; any trade discounts and rebates are
deducted in arriving at the purchase price."

MODVAT credit can be considered is of the nature of a refundable tax. Therefore, MODVAT
credit should be reduced from the purchase cost of capital goods concerned.
24. In view of the above, the specified duty on capital goods should be debited to separate
account, e.g., MODVAT Credit Receivable (Capital Goods) Account. On actual utilisation, the
account will be adjusted against excise duty on final products. Accordingly, the purchase cost of
the capital goods would be net of the specified duty on capital goods. The unadjusted balance
standing in the MODVAT Credit Receivable (Capital Goods) Account, if any, should be shown
on the assets side under the head àdvances'.
25. MODVAT credit in respect of capital goods should be recognised in the books of account
when the following conditions are satisfied: (i) The enterprise is entitled to the MODVAT credit
as per the Rules, and (ii) there is a reasonable certainty that the MODVAT credit would be
utilised.
5.7 ACCOUNTING TREATEMNT FOR CENVAT CREDIT IN CASE OF CAPITAL

GOODS
26. The nature of the CENVAT Credit in respect of capital goods is the same as that of
MODVAT Credit. However, the CENVAT Credit in respect of capital goods is allowed for an
amount not exceeding fifty percent of the duty paid on such capital goods in the financial year in
which the goods are received in factory and the balance will be allowed in the subsequent
year(s). In case the conditions specified in para 25 above are met and the enterprise decides to
take CENVAT credit, the entire amount of CENVAT Credit should be deducted from the cost of
capital goods. The amount of CENVAT credit taken in the financial year, in which goods are
received, should be debited to an appropriate account, say, "CENVAT Credit Receivable
(Capital Goods) Account" and balance may be debited to another appropriate account, say,
"CENVAT Credit Deferred Account". In the subsequent financial year(s), when balance
CENVAT credit is availed of, the appropriate adjustment for the same should be made, i.e.,
amount of CENVAT credit availed of should be credited to "CENVAT Credit Deferred
Account" with a corresponding debit to "CENVAT Credit Receivable (Capital Goods) Account".

5.8 ACCOUNTING TREATMENT WHERE CAPITAL GOODS ARE ACQUIRED ON
LEASE OR HIRE PURCHASE
27. MODVAT/CENVAT credit is available to the lessee or hirer where the capital goods have
been acquired on lease or hire purchase. The accounting treatment in this regard is described
hereinafter.
28. In the books of the lessor, where the financing arrangement also covers the specified duty on
capital goods, the asset given on lease should be shown at purchase cost net of the specified duty
on the capital goods. The specified duty on capital goods, which would be availed of as
MODVAT/CENVAT credit by the lessee, should be recorded and disclosed separately as the
duty recoverable from the lessee. This will not form part of `Minimum Lease Payments' in view
of the definition of the aforesaid term reproduced below from the Guidance Note on Accounting
for Leases, issued by the Institute of Chartered Accountants of India:
"Minimum Lease Payments: The payments over the lease term that the lessee is or can be
required to make (excluding costs for services and taxes to be paid by and be
reimbursable to the lessor) together with the residual value."
Where the specified duty on capital goods does not form part of the financing
arrangement and the lessee pays the duty directly to the supplier, obviously the same
need not be recorded in the books of the lessor.
In the books of the lessee, MODVAT/CENVAT credit receivable on the capital assets
acquired on lease should be treated in the same manner as recommended in paras 24 and
26 above, except that the cost of the relevant leased capital asset and depreciation is not
accounted in the books of the lessee.
29. Capital asset acquired on hire purchase should be recorded and disclosed at net cash value,
i.e., cash value net of MODVAT/CENVAT credit receivable in the books of the hirer. The other
accounting treatment in relation to MODVAT/CENVAT in the books of the hirer should be the
same as if the asset has been acquired on outright purchase basis. The aforesaid accounting
treatment, in the books of the hirer, should be made whether or not the specified duty on the

capital goods forms part of the financing arrangement. In the books of the vendor, in case the
specified duty on capital goods forms part of the hire purchase arrangement and the benefit of
MODVAT/CENVAT credit is available to the hirer, the vendor should book the sale in the
normal course inclusive of the specified duty on the capital goods. However, where the specified
duty on the capital goods does not form part of the financing arrangement and the hirer directly
assumes the liability in respect thereof, the same need not be recorded in the books of the vendor.
5.9 REVIEW OF BALANCES IN MODVAT/CENVAT CREDIT RECEIVABLE

ACCOUNTS
30. Balances in MODVAT/CENVAT Credit Receivable Accounts, pertaining to both inputs and
capital goods, should be reviewed at the end of the year and if it is found that the balances of the
MODVAT/CENVAT credit are not likely to be used in the normal course of business within a
reasonable time, then, notwithstanding the right to carry forward such excess credit in the Excise
Rules, the non-useable excess credit should be adjusted in the accounts. The consequence would
be that the balances of the MODVAT/CENVAT Credit Receivable Accounts in the financial
accounts may be lower than the credit available as per the MODVAT/CENVAT Credit registers.
In such a case, a reconciliation statement would have to be prepared indicating the amounts
adjusted so that a track is kept for the difference between the balances and the difference
between the financial accounts and the credit available as per the excise registers can be
explained in subsequent years also.
31. (a) The above adjustment related to input credit should be made to the raw material or input
purchase account. The effect of this would be to increase the cost of purchase and thereby to
increase the cost of inputs for the purpose of accounting for consumption and valuation of
closing stocks. Where it is not possible to debit or identify this excess credit to a particular lot or
lots of materials purchased, such excess credit may be apportioned over the entire purchases of
raw materials, components etc., entitled to MODVAT/CENVAT credit during the year on pro-
rata basis.
(b) The adjustment of excess credit related to capital goods should be made to the concerned
Capital Goods Account. The excess MODVAT/CENVAT credit, either availed or deferred,
which relates to fixed assets acquired, should be added to the cost of the relevant fixed asset. For
accounting purposes, depreciation on the revised unamortised depreciable amount should be
provided prospectively over the residual useful life of the asset. In case the fixed asset no longer

exists, the relevant amount should be written-off in the profit and loss account. To facilitate
aforesaid treatment, MODVAT/CENVAT credit record should be maintained fixed asset-wise in
the relevant RG Register. In relation to capital goods other than fixed assets, the accounting
treatment for the excess MODVAT/CENVAT credit would be the same as stated in para 31(a)
above. It is, therefore, advisable that MODVAT/CENVAT Credit Receivable (Capital Goods)
Account is maintained separately for fixed assets and other capital goods.
(c) For capital goods acquired on lease, the amount of excess MODVAT/CENVAT credit should
be written-off on a pro-rata basis along with the lease rentals.
32. Where, at any time during the year, it is revealed that the terms and conditions subject to
which the benefit of MODVAT/CENVAT credit is available, have not been complied with or are
not being capable of compliance, e.g., where the inputs are destroyed prior to the manufacture of
final product or the relevant plant and machinery cannot be put to use for the manufacture of
final product, appropriate adjustments should be made in the accounts to reverse such credit
which cannot be availed of, as recommended in para 31 (a) for inputs and 31 (b) and (c) for
capital goods.
5.10 ACCOUNTING TREATMENT FOR DUTY DEMANDS PAID BY DEBIT TO

MODVAT/CENVAT CREDIT BALANCE – INPUTS AND/OR CAPITAL GOODS
33. An enterprise may choose to discharge excise duty demands made by Central Excise
Department from time to time by way of debit to MODVAT/CENVAT credit balance pertaining
either to inputs or to capital goods. In that case, the duty demand so paid out of the
MODVAT/CENVAT credit balance should be debited to appropriate account, depending upon
the nature of demand and credit should be given to MODVAT/CENVAT Credit Receivable
Account. For example, if the duty demand pertains to excise duty on finished goods, the same
should be debited to excise duty account. If, on the other hand, it pertains to disallowance of
MODVAT/CENVAT credit taken on purchase of raw materials during the year, the same should
be added to the cost of inputs. Appropriate adjustment in that case would have to be made while
valuing inventory of inputs. If the duty demand pertains to disallowance of MODVAT/CENVAT
credit in respect of purchases effected in earlier years, the accounting treatment would depend on
whether the said inputs are consumed or are available in stock. If they are consumed, the
disallowance should be debited to excise duty account and treated as expense of the current year.

If raw materials are still lying in stock, duty demand should be added to the cost of stock of
inputs.
5.11 VALUATION OF INVENTORIES OF INPUTS
34. The inventory of inputs should be valued at net of input duty. In other words, the specified
duty paid on inputs will not form part of the cost of inventories. Balance in MODVAT/CENVAT
Credit Receivable (Inputs) Account should be shown in the Balance Sheet under the head
àdvances' on the assets side.
35. In some cases ìnputs' may be exempted from excise duty in the hands of the supplier, e.g.,
job charges are exempt from excise duty provided the prescribed procedures are observed.
Small-scale suppliers who are in the exempted category may also supply the inputs free from the
levy of excise duty. In such circumstances normal valuation rules in determining the cost of
inventories are to be applied as these are not subject to the specified duty on inputs relief. Where
purchases are made from the dealers who are not eligible under the Central Excise Rules to pass
MODVAT/CENVAT credit and, therefore, cannot issue an invoice in accordance with the
aforesaid Rules, the valuation should be made at the actual cost inclusive of excise duty.
36. In some cases, the same item of input can be obtained from different sources, some of them
may be able to provide the required documents evidencing payment of duty while others may not
be able to provide the required documents. In such cases where it is not possible for the buyer to
take advantage of the MODVAT/CENVAT credit, the closing stock of inputs of such items
should be valued inclusive of the specified duty on inputs.
37. If any input is used for the production of more than one final product, some of which are
excisable while others are either not chargeable to excise duty or chargeable at nil rate of duty,
and separate inventory of the input is not maintained, the entire inventory of inputs should be
valued at net of input duty. However, if separate inventory is being maintained, the inventory of
inputs useable for final products chargeable to excise duty should be valued at net of input duty
and the inventory of inputs useable for final products not chargeable to duty should be valued at
the actual cost inclusive of excise duty.

38. While valuing inventories of final products, the value of inputs should be net of the duty on
inputs, that is, the purchase cost as reduced by the MODVAT/CENVAT credit.
5.12 VALUATION OF INVENTORY OF CAPITAL GOODS
39. Inventories of capital goods should be valued net of MODVAT/CENVAT credit taken on
capital goods. In other words, specified duties paid on such capital goods will not form part of
their cost.
5.13 EXAMPLE ‘A’
Illustration of Accounting for MODVAT/CENVAT Credit on Inputs
The illustration is based on the following assumptions:
(i) There is an opening stock of 10 units purchased at Rs. 10/- per unit (Excise duty paid
on these units was @ Rs. 2/- per unit).
(ii) 100 units of raw materials are purchased at Rs. 10/- per unit, plus Rs. 2/-for excise duty,
aggregating to Rs. 12/-.
(iii) 70 units of raw material are consumed in a process involving manufacture of a

component. All the 70 units are sold in the year. The balance 40 units are manufactured and
sold in the subsequent year.
(iv) The manufactured components are sold at a price of Rs. 15/- per unit (including excise
duty Rs.3/- per unit).
(v) MODVAT/CENVAT credit is available on the raw material purchased and can be set-off
against the excise duty payable on the final product.
(vi) Conversion costs are ignored.
The accounting treatment as per para 16 will be as below:

Profit & Loss Account
Particular Units Rate Amoun Particular Units Rate Amount

s t s
To By Sales 70 15 1,050
Opening
Stock of
Raw 10 10 100
Materials
To 100 10 1,000
Purchases
of Raw 110 10 1,100
Materials
Less: Stock 40 10 400 700
of Raw
Materials
To Excise 70 3 210
Duty
To Gross 140
Profit
1,050 1,050
NOTE:
1. Opening balance of the MODVAT/CENVAT Credit Receivable Account is Rs. 20/-.

2. Besides showing stock of raw materials at Rs. 400, the Balance Sheet would also reflect,
"MODVAT/CENVAT Credit Receivable Account" at Rs. 10/-, arising out of the following
entries:
(a) Purchase A/c Dr. 1,000

MODVAT/CENVAT Credit Receivable A/c Dr. 200
To Sundry Creditors 1,200

(Being the purchase of 100 units at Rs. 10/- plus Rs. 2/- for excise duty in respect of which the
company is eligible to claim MODVAT/CENVAT credit)
(b) Excise Duty A/c Dr. 210

To MODVAT/CENVAT Credit Receivable A/c 210
(Being the payment of excise duty out of MODVAT/CENVAT credit available to the company)
Balance Sheet
Liabilities Amount Assets Amount

Current Assets, Loans and Advances
(A)Current Assets 400
Inventory of raw materials
(B)Loans and Advances 10
MODVAT/CENVAT Receivable A/c
The opening balances of inventories of raw materials and MODVAT/CENVAT Receivable

Account, for the next year, would be Rs. 400 and Rs. 10, respectively.
5.14 EXAMPLE ‘B’
Illustration of Change in Accounting Policy
(See paragraph 19 of the Guidance Note)
Continuing the illustration given in Example ‘A’ and supposing that an enterprise followed the
erstwhile inclusive method for accounting for MODVAT credit, the accounting treatment as per
this method would be as follows:
Profit & Loss Account
Particular Units Rate Amoun Particular Units Rate Amount

s t s
To By Sales 70 15 1050
Opening

Stock
of Raw 10 12 120
Materials
To 100 12 1200
Purchase of
110 12 1320
Raw
Materials
Less: Stock 40 12 480
of Raw
Materials
Raw 70 12 840
Materials
consumed
Less: 70 2 140
MODVAT
Credit 70 10 700
To Excise 70 3 210
Duty
To Gross 140
Profit
1050 1050
Note:
(1) Opening Balance of MODVAT Credit Availed A/C was Nil.

(2) Besides showing stock of raw material at Rs.480, the balance of "MODVAT Credit
Availed Account" would be Rs.70, arising out of the following entries.
(a) At the time when credit is availed of and adjusted against the excise duty which becomes
payable:

Excise Duty A/c Dr. Rs. 210
To MODVAT Credit Availed A/c Rs. 210
(Being the payment of excise duty from the MODVAT Credit available to the company)
(b) At the year end, to the extent raw material items have been consumed in the production:
MODVAT Credit Availed A/c Dr. Rs. 140

To Material Consumed Rs. 140
(Being the set off the MODVAT credit availed against materials consumed)
Balance Sheet
Liabilities Amount Assets Amount

Current Assets, Loans and
Advances
(A) Current Assets
Inventory of Raw Material 480
Less: MODVAT Credit Availed A/c 410
70
In the above example, the RG 23A register would show a balance of Rs.10 representing the
MODVAT credit receivable in respect of inputs purchased.
Now the enterprise changes the accounting policy to that recommended in para 16 the Guidance
Note. In that case, the following journal entries will be passed (See para 19):
I MODVAT Credit Availed A/c Dr. Rs. 70

To Opening Stock Rs. 70
(Being the opening stock adjusted by the balance of MODVAT Credit Availed Account).
II MODVAT Credit Receivable A/c Dr Rs. 10

To Opening Stock Rs. 10
(Being an amount equal to the balance of RG 23A register, representing the MODVAT credit
receivable in respect of inputs purchased transferred to MODVAT Credit Receivable Account)
As a result of above entries, the figures of opening stock and MODVAT Credit Receivable A/c
would appear at Rs. 400 (i.e. Rs.480-70-10) and Rs.10 respectively. It may be noted that these
figures are the same had the method suggested in para 16 of the Guidance Note been followed
CHAPTER - 6
VAT, CST & CENVAT
6.1 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 spoint 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%. Dealer’s 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.

6.2 DIFFERENCE BETWEEN VAT AND CENVAT

VAT- Value Added Tax
VAT is a sales tax collected by the government (of the state in which the final consumer is
located) – which is the government of destination state on consumer expenditure.
Over 120 countries worldwide have introduced VAT over the past three decades and India is
amongst the last few to introduce it.
India already has a system of sales tax collection wherein the tax is collected at one point
(first/last) from the transactions involving the sale of goods. VAT would, however, be collected
in stages (installments) from one stage to another.
The mechanism of VAT is such that, for goods that are imported and consumed in a particular
state, the first seller pays the first point tax, and the next seller pays tax only on the value-
addition done – leading to a total tax burden exactly equal to the last point tax.
CENVAT - Central Value Added Tax

CENVAT is the new name for MODVAT. Basically they are the same. These are related to
central excise.
CENVAT means, Tax on Value Addition on the goods manufactured according to Central
Excise & Customs Act Difinition. Here the value addition means the Additional
Services/Activities etc. which converts the Input in to Output, and the output is newly recognised
as per the this act as Exciseble goods. Like this the discussionis goes on for definition.
CHAPTER - 7
QUOTES & UNQUOTES FOR VAT IN INDIA

India, always a land of 'YES' and 'NO'. The introduction of VAT in India also reciprocated with
different views for different people. Each and everyone carried their own say. Few quoted VAT
in India as something very wonderful and needful for the existing tax system. Others quoted the
opposite. Many were neutral and waited the system to speak the truth. Let me bring for you few
of the Indian VAT quotations.
Chidambaram to state governments

"On behalf of the Centre, I promise to fully cooperate with you, compensate you and help in
building a computer network system and resolve all problems."
Ramesh Chandra, secretary of the federal panel

VAT will be launched tomorrow (April 1) and there is absolutely no question of deferring it."
Praveen Khandelwal, secretary-general of the Confederation of All India Traders

"We will step up our protest come what may. It is a do or die situation for us."
Former finance minister Yashwant Sinha

"The central government must also spell out a clear roadmap on how and when it intends to
phase out central excise."
Onkar S Kanwar, president, FICCI

"We urge the BJP to reconsider their decision and work with their states governments on internal
mechanisms aggressively while coordinating with the Centre to iron out the genuine difficulties."
Bengal finance minister Asim Dasgupta, Kajaria

"The FM is sacrificing the interest of all sections for the gain of none."
World Bank country director Michael Carter

"A comprehensive VAT widens tax net, as it makes tax evasion difficult. Going by the
experience of other countries, VAT has proved beneficial and leads to revenue buoyancy."
Ramesh Chand, a protestor

"Traders want to give tax but they want it through a system which makes it easier and fair for
them and not VAT. All the traders are protesting against it. We want the government to revoke
VAT."
Raja Chelliah, the architect of the VAT system

"India can be globally competitive as a fully integrated market if all states adopt the Value
Added Tax regime."
Sushil Kumar Gupta, a shopkeeper in the upmarket Defence Colony shopping complex in
south Delhi
"We are totally against VAT."
Vijay Goel, president of the Confederation of All India Traders and a member of the BJP
"We are from the very beginning against this tax which will co-exist with central sales tax and
several others. We demand that the extra taxes be abolished before VAT is implemented."
CHAPTER – 8

CONCLUSION
India, particularly the trading community, has believed in accepting and adopting loopholes in
any system administered by the state or the Centre. If a well-administered system comes in, it
will close avenues for traders and businessmen to evade paying taxes. They will also be
compelled to keep proper records of their sales and purchases.
Many sections hold the view that the trading community has been amongst the biggest offenders
when it comes to evading taxes.
Under the VAT system, no exemptions will be given and a tax will be levied at each stage of
manufacture of a product. At each stage of value-addition, the tax levied on the inputs can be
claimed back from the tax authorities.
At a macro level, there are two issues, which make the introduction of VAT critical for India.
Industry watchers say that the VAT system, if enforced properly, forms part of the fiscal
consolidation strategy for the country. It could, in fact, help address the fiscal deficit problem
and the revenues estimated to be collected could actually mean lowering of the fiscal deficit
burden for the government.
The International Monetary Fund (IMF), in its semi-annual World Economic Outlook released
on April 9, expressed its concern over India's large fiscal deficit - at 10 per cent of the GDP.
Further any globally accepted tax administrative system, will only help India integrate better in
the World Trade Organisation regime.
The Empowered Committee of state Finance Ministers have already submitted their suggestions
to the Central Government so that appropriate VAT legislation can be enacted and rules and
regulations framed well before April 1, 2003. Integral to the adoption of VAT is the withdrawal
of central sales tax (CST), which hitherto was sending goods to importing states laden with tax.
The imported tax was taxed again under first point general sales tax in the importing state
resulting in “tax on tax”, or cascading, a practice that should not be admissible under the VAT.
Similarly, the Committee of Commercial Tax Commissioners that was formed must have
decided on the various administrative issues relating to VAT like registration, establishing an
efficient information system, collection, audit, taxpayer education, a system of penalties and
appeal, training and computerization.
CHAPTER – 9

SUGGESTIONS
1. The vat tax is simple in nature of calculating. 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.
2. The vat tax is fair and equitable for all. VAT introduces the uniform tax rates
across the state so that unfair advantages cannot be taken while levying the tax.
3. The vat tax has transparency nature because 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.
4. The vat tax has regressive nature because its burden falls disproportionately on
the poor since the poor are likely to spend more of their income than the relatively
rich person.
5. The vat tax favors the capital intensive firm. VAT places a heavy direct impact
of tax on the labour-intensive firm compared to the capital- intensive competitor,
since the ratio of value added to selling price is greater for the former. This is a
real problem for labour-intensive economies and industries.

BIBLEOGRAPHY
1. http://www.economywatch.com
2. http://www.indiamart.com
3. http://www.worldjute.com/index.htm
4. http://www.altiusdirectory.com/
5. http://www.tax4india.com/
6. http://www.scribd.com

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CHAPTER - 1

VALUE ADDED TAX

Department of Commerce & Management, University of Kota, Kota (Raj.). 1

1.2 WHY VAT IS PREFERRED OVER SALES TAX?

Department of Commerce & Management, University of Kota, Kota (Raj.). 2

Department of Commerce & Management, University of Kota, Kota (Raj.). 3

1.3 WHO PAYS?

SALE 'A' OF CHENNAI 'B' OF BANGALORE SALE @ Rs. 'C' OF BANGALORE

SALE @ Rs. 124/- 'D' OF BANGALORE SALE@ Rs. CONSUMER IN

Tax implication under Value Added Tax Act

Department of Commerce & Management, University of Kota, Kota (Raj.). 4

1.4 States Welcoming VAT in India

BJP ruled states

1.5 WHICH GOODS WILL BE TAXABLE UNDER VAT?

Department of Commerce & Management, University of Kota, Kota (Raj.). 5

TERMS COVERED IN INDIAN VAT

Department of Commerce & Management, University of Kota, Kota (Raj.). 6

The meaning of “goods” for VAT purposes

The meaning of 'sale' for VAT purposes

Department of Commerce & Management, University of Kota, Kota (Raj.). 7

Difference between tax free goods and exempt sales

VAT EFFECT ON INFLATION

1.6 DISTRIBUTION EFFECTS OF VAT

Department of Commerce & Management, University of Kota, Kota (Raj.). 8

Department of Commerce & Management, University of Kota, Kota (Raj.). 9

VAT EFFECT ON ECONOMIC GROWTH

Department of Commerce & Management, University of Kota, Kota (Raj.). 10

Department of Commerce & Management, University of Kota, Kota (Raj.). 11

1.8 ADVANTAGES OF VAT

Department of Commerce & Management, University of Kota, Kota (Raj.). 12

Department of Commerce & Management, University of Kota, Kota (Raj.). 13

(a) The administration

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4. VAT favours the capital intensive firm

Businesses covered by VAT

1.10 Registration under VAT

Value Added Tax Rules comprises of the following -

 Determination of total turnover and taxable turnover

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Effective date of registration

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Changes to business circumstances

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The obligations of a registered dealer

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1.11 METHODS OF COLLECTING AND CHARGING THE VAT

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

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

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

Particulars Amount (Rs.)

Rates of value added tax

Schedule Rate of tax Illustrative Items

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Tax payable by dealers opting for composition in lieu of VAT

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Constitutional Framework Which Deals With The Levy Of Sale Tax

a. The sale of goods, defined under the Sale of Goods Act.

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