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Introduction to VAT
Characteristics of VAT History of VAT VAT Terminology How does VAT work Problems of implementation of VAT in INDIA VAT Returns Sales Tax v/s. VAT
Topics to be discussed
Meaning
Introduction to Vat
Value Added Tax is a multi point sales tax with set off for tax paid on purchases. It is basically a tax on the value addition on the product. The burden of tax is ultimately borne by the consumer of goods. In many aspects it is equivalent to last point sales tax. It can also be called as a multi point sales tax levied as a proportion of Valued Added. 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 not a charge on companies. It is charged as a percentage of price.
Characteristics of VAT
The difference between retail sales tax and VAT is that while retail sales tax is collected at one stage, VAT is collected in installments at successive stages of production and distribution. It is a multi - state tax rather than a single stage one like the retail sales tax, and in its deal form, is to be levied on all the states of production & distribution. It is principle, comprehensive unlike selective excises. It is collected in bits at each stage of production and distribution which, when added, equal a tax on the retail sale of the final product at the same rate as the VAT.
It falls on each input entering into the final products once and only once.
History of VAT
The very system of Value Added Taxes or VAT was introduced for the first time in the market by the modern French economist in 1954. Maurice Laur who was the joint director of the French tax authority and the director general of the department of import, was the first person to introduce VAT or the value Added Tax with effect from 10th of April in the year 1954 in the cases of large businesses, and which are extended over time to all business sectors. In France, VAT became so important that it has became one of the most important sources of the state finance and it is accounting for almost 45% of state revenues. Like all the other direct taxes in the market, the VAT is quite different. This is actually an indirect tax because in this sort of tax it is collected from someone other than the individual who actually bears the cost of the tax who is known as the seller rather than the consumer. The implementers of this tax also have taken certain initiatives which help them in avoiding double taxation on final consumption.
VAT ie. the Value added tax is relatively a new concept in our country and it was practically introduced in the year 2005 in large no of states of the country though initially it was introduced but taken back in mid 90s in the state of Maharashtra. Further Haryana was the first state to introduce it successfully in 2003. The VAT introduction schedule in India can be seen as under;
No 1 2 Haryana Andhra Pradesh, West Bengal, Kerala, Karnataka, Orissa, NCT Delhi, Tripura, Bihar, Arunachal Pradesh, Sikkim, Punjab , Goa, Mizoram, Nagaland, J & K, Manipur, Maharashtra, Himachal Pradesh, Assam and Meghalaya 3 4 5 Uttaranchal Rajasthan, Gujarat, MP, Chattisgarh and Jharkhand Uttar Pradesh and Tamil Nadu Still not decided 2 01-Oct-05 01-Apr-06 1 5 States Date of Imposition of Number of VAT 01-Apr-03 01-Apr-05 States 1 20
VAT Terminology
Output VAT Input VAT : : Amount received by a seller as a percentage of the gross sale price of goods or services Amount paid by a buyer as a percentage of the gross purchase price for goods or services used in production. Transactions in which the seller collects no output tax and the corresponding input tax is fully refundable. Exports are zero rated
Zero Rated
Exempt
Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller. Financial services are commonly exempt.
Wholesaler
The wholesaler tough shoe seller has purchased goods worth Rs 1,00,000/- after paying tax of Rs. 12,500/- as mentioned above. Let us assume his margin for profit and expenses is Rs. 7,000/- then he will the goods for Rs. 1,07,000/- to the retailer and also charge tax of Rs. 13,375/- from the retailer. Since he has already paid the tax of Rs. 12,500/- on his purchases hence his net tax liability will be Rs. 13,375/- (-) 12,500/- = Rs. 875/- We can Verify it as 12.5% of 7000 Since the value added by the Wholesaler is 7000.
Retailer
The retailer M/s. Bright shoe point has purchased goods for Rs. 1,07,000/- after paying tax of Rs. 13,375/-. Suppose his margin for profit and expenses is Rs. 10,000/- thus he will sell the goods to the customer at Rs. 1,17,000/- and will charge tax of Rs. 14,625/-. His net tax liability will be Rs. 14,625/- (-) Rs. 13,375 = Rs. 1,250/- we can verify it as 12.5% of 10,000/- since the value added by the retailer is Rs. 10,000/-
Billing
Lack of uniformity
Concession for New Industry Number of Taxes impose by the Government Lack of infrastructure facilities Dealing in Variety of Goods
VAT Returns
VAT Returns are filed every month or every quarter depending on the amount of VAT you pay. The normal rule is that if you pay less than Rs 15,000 for VAT every month, a VAT Return is to be filed every quarter. It is all at the discretion of the VAT officer. At monthly or quarterly intervals on your VAT Return, you should subtract your Input Tax (attributable to taxable supplies only) from your Output Tax and pay the difference to the VAT Commissioner.
If your Input Tax is greater than your Output Tax you can carry over the difference as a credit to your next VAT Return. In certain circumstances, the Commissioner may pay you any excess if he is satisfied that such an excess is a regular feature of your business
MERITS OF VAT
It ensures that input is taxed only once. It combines the advantage of being of general tax, without the disadvantages of extended input taxation.
DEMERITS OF VAT
VAT was to be applied in all states but it failed to do so. Inflation rate has been increased due to VAT. VAT has complicated both tariff in customs and excise and Overburdend with more exemptions VAT is regressive :- Its burden falls disproportionately on Poor people since the poor are likely to spend more of their incomes VAT is too difficult to operate from the position of both the Administration and business
Monthly Return: The manufacturer is required to pay CenVAT on a fortnightly basis and submit a monthly return (ER1) to the Superintendent of Central Excise by the 10th of the month
GOODS EXEMPTED FROM VAT Agricultural implements manually operated or animal driven notified by the state government.
Chalk stick, Charcoal & Badami Charcoal, Charkha implement in production of handspun yarn. Firewood, Fishnet fabrics, Contraceptives of all types.
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