Value added tax

Agenda

Sales Tax - An Overview Introduction to VAT VAT - What it means? Sales Tax and VAT - A Comparative Study Advantages of VAT Registration Schedules in VAT Act Implication on works contract (after VAT) Forms A Walkthrough Conclusion

Why VAT?
To have uniform rate of tax throughout the country To abolish deferral/waiver/incentives To abolish internal check posts To facilitate self assessment To reorganize commercial tax departments and enable computerization

VAT Implementation
Year 2005:22 states implemented Year 2006:6 states have implemented Year 2007:Remaining states have implemented Status in Tamil Nadu: July 22, 2006: Finance Minister of Tamil Nadu announced in the state assembly about the introduction of VAT system October 28, 2006: VAT Act was published in gazette from 1/1/2007

What is VAT?

VAT is a multi-point tax collected at every stage VAT is arrived at by deducing the tax paid on purchases from the tax payable on sales

Example
input purchased rs.1,00,000 tax paid 4% rs.4,000 Output sold within a month rs. 2,00,000 Output tax to be collected 12.5% 25,000 VAT Payable after setting off input

Concept of VAT
Essence of VAT is providing set-off for the tax paid earlier, given effect through the concept of input tax credit/rebate VAT is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month).

CONCEPT OF VAT Example

A - RAW MATERIAL PRODUCER Sales Value:Rs .100/Gross VAT @ 10%:Rs. 10/ Net VAT:Rs .10/ B - MANUFACTURER Sales Value:Rs .140/Gross VAT @ 10%:Rs. 14/ Net VAT:Rs.14 Rs. 10 = Rs. 4/C - WHOLESALER Sales Value:Rs .170/Gross VAT @ 10%:Rs. 17/ Net VAT:Rs.17 Rs. 14 = Rs. 3/D - RETAILER Sale Value: Rs. Sale Value: Rs.190/Gross VAT @ 10%: Rs.19/Net VAT: Rs.19 Rs. 17 = Rs. 2/

Advantages
Rationalized Tax Structure:1% , 4%, and 12.5% Simple:Minimum exemptions with lesser rate and refund procedures. Transparent:Being a consumption tax, more transparency is maintained Bigger Opportunities:By giving tax credits, the manufacturing cost will be less and even bigger enterprises will establish their presence in Tamil Nadu. Reduced Prices of Goods:Elimination of tax cascading and pyramiding effects Growth:Creates more job opportunities in the state. tax Compliance:Checks tax evasion

Schedules
VATable Goods) Part A - Bullion, Gold, Silver (taxable @ 1%) Part B - Taxable @ 4% (150 items) Part C Taxable @ 12.5% (69 items) W.E.F 12.07.2007 Non-VATable (12 items Compounding Schemes for Hotels, Restaurants & Sweet Stall Exempted Goods (Section 15 zero Rate Sale International Organization

Compounding Scheme
Applicable to Assesses, who effect second or subsequent sales, pay 0.5Tax as a percentage on Gross Turnover. Such dealer cannot collect tax from the customers. Limit: Rs. 50 Lakhs Per Annum VAT invoice cannot be issued

Implication on works contract

Section 5 provides for levy of tax on transfer of property in the goods involved in the execution of works contract.Rule 8 (5) prescribes methods of computing. ITC is permissible in this Section on goods mentioned in the first schedule

registration
Dealers having a turnover of 10,00,000 during any three months or having a turnover of 40,00,000 per annum should register as vat dealers Others should register as Turnover TAX dealers

ToT dealers
Dealers paying under this scheme are not entitled for ITC and cannot collect tax from customers Exempt vis--vis Zero Rated Dealer not entitled for input tax credit if the sales are not taxable and exempted Refund on input tax applicable to a dealer who pays no tax on his output eg exports

VAT & Stock Transfer

Due to existence of CST Act, stock transfers/consignment sales are exempted as at present When stock transfers are exempted, ITC is eligible in excess of 3% for rebate on the goods used to produce products

Treatment of Exports & Deemed Exports

Export will be zero-rated. Refund on ITC Penultimate sale is also treated as Export and eligible for ITC Sales to SEZs and International Organizations are zero-rated ITC available for both contractors as well as sub-contractors Refund of ITC to Exporters/Deemed Exporters will be made within 180 days from the date of claim. Beyond which period such credit lapse to Government.

Capital Goods
ITC eligible for purchase of capital goods used for the manufacture of taxable goods Eligibility: From the date of commencement of commercial production 50% can be adjusted in the first year, balance 50% in the second and third year

Returns
Every Dealer should file monthly return in Form I disclosing the input tax paid and output tax payable by 20thof the following month Details of TIN should be furnished on both purchase and sales Separate Forms J, K, L, M are meant for various categories of dealers

Input tax Credit

Section 19 and Rule 10 are relevant for ITC claim. ITC is available in respect of tax paid goods i.e. vatable goods. (4% & 12.5%

Accounting
Yarn purchased for 2,00,000 at 4 % vat Purchase a/c dr 2,00,000 Vat a/c dr 8000 To vendor a/c 2,08,000

sales
Then he sold them after converting into cloth At 12.5 for 3,37,500 Distributor a/c 337500 To Vat a/c 37500 To sales 3,00,000