Value Added Tax

An Insight
Praveen Nigam - Partner
Grant Thornton India

Not for further distribution without express written

permission of Grant Thornton India.

© Grant Thornton India: 2006

Contents

• Brief History
• Background
• Indirect Tax Structure in
India
• VAT - A Roadmap to GST
• VAT- Current scenario
• VAT- Applicability
• Rate of Tax
• Input Tax Credit
• Other procedural aspects
• Central Sales Tax
Brief History

•Introduced in Morocco in the year 1962

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

• Value Added Tax is a:

– Multi-point taxation
– Tax only on Value addition through Invoice
method
– A state subject
• VAT allows credits of tax paid on previous intra
state transactions
• VAT has successfully eliminated the cascading
impact of taxes
 Indirect Tax Structure in India

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

Duty+ CVD)
• Manufacture of goods – Excise (CENVAT)
• Sale of goods – VAT/ Sales Tax/ Central Sales Tax
• Entry of goods in the State / Territorial Limit - Entry Tax /
Octroi
• Rendering of taxable services - Service Tax
• Heavy cumulative burden of Indirect taxes
 VAT – A Roadmap to GST

Phase - I
• Single point tax with multiple rate of taxes without any provision of set
off
Phase - II
• Multipoint taxation with provision of set off known as VAT
Proposed
• Levy of service tax on specified services by the States
• Uniformity of rates across
• Balancing of total impact of taxes
• Abolishing CST in a phased manner
• Arriving at a consensus rate of Goods & services
• Implementation of GST ( Goods and Service Tax) by 1 April 2010
 VAT – Current scenario

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

other States joined later
• U.P. still not under the VAT
• Tax on inputs to be set-off against tax on final products
• Taxes abolished
– Turnover tax, Re-sale tax, Surcharge, Special
Additional Tax etc.
• Entry Tax
– Has been made Vatable
– Entry tax in lieu of Octroi - not Vatable
• Central Sales Tax
– To be charged @3% from 1 April 2007
– To be abolished by 2010
 VAT – Applicability

• VAT not levied on

– Inter-state sale / Inter-state branch transfer
– Imports
– Dealers below threshold level
• 0% VAT rate on Exports
• No specific rate of VAT on liquor, petrol, diesel,
aviation turbine fuel
 Rate of Tax cont…

• Uniformity in Rates
– Exempt Rate - 0% on 46 commodities consisting of
– natural and unprocessed products like-
Firewood, Plants, Garlic
– Items legally barred from taxation like - News
papers, Electricity energy
– items having social implications like- salt, life
saving drugs
– Special Rate - 1%
• Gold and silver ornaments
Rate of Tax cont…

• Uniformity in Rates
– Essential/Mass Consumption Rate - 4%
• 270 goods comprising basic necessities and
– Agricultural and industrial inputs;
– IT related goods
– medicines and drugs;
– capital goods;
– Iron, Aluminum, Copper, zinc etc.
– Revenue Neutral Rate - 12.5 %
Rate of Tax cont…

• Most statutory Forms under State Sales Tax

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

• Specific provisions related to tax on Works

Contract
– Bifurcation of goods and services
– Specific rate of deductions
Type of Contract Abatement under VAT Abatement under
Services tax
Installation & Errection 15% 67%

Civil Construction 25% 67&

– More complicated abatement schemes under

West Bengal
– Composition scheme for specified categories
INPUT TAX CREDIT

• Input tax credit available on:

– VAT paid on inputs
– VAT paid on Capital Goods
– Entry Tax (not in lieu of Octroi)
• Credit can be utilized towards
– VAT payable on Finished Goods
– CST payable on Inter State Sales
– Any interest or penalty under VAT
• Refund in case of exports
• Refund of unutilized credit at the end of specified period
INPUT TAX CREDIT

• VAT credit in case of Capital Goods

– Available but to be adjusted over a period of three years
or specified period
– Not available on Capital Goods specified in negative list
like Cars, Air Conditioners etc.
• VAT Credit refunded within three months in case of exports
where turnover is above Rs.5 Crore
• Unutilised Credit to be carried over till the end of the next
financial year & would be refunded if remains unutilised
INPUT TAX CREDIT
Restrictions

• VAT credit available only in case of :

– Taxable intra State sales
– Taxable inter-state sales
– Export out of India
– In case inter state stock transfer -VAT credit to
be reduced
• In case of goods specified in the IInd schedule – 100% ( 1%)
• In case of goods specified in the IIIrd schedule – 100% ( 4%)
• In case of goods specified in the Ivth schedule – 20% ( 20%)
INPUT TAX CREDIT
Restrictions

• VAT Credit not available in following cases:

– Inputs used in the manufacture of exempted goods
– Purchases for other than manufacture/ re-sale
– Purchases made inter State/ in-transit
– Purchases of goods of negative list
• Delhi - Fuel in the form of Petrol, Diesel and
Kerosene, LPG, CNG, Coal
• AP - Fuel, Coal and Natural Gas used for power
generation
• Jharkhand - Consumables
• Tripura – Credit available in excess of 4% on
petroleum products (other than petrol, ATF and
diesel) and other fuels
Procedural Issues

• Different rate of VAT on Petroleum products

– Delhi 20%, M.P. – 29%, Gujarat – 24% ~ 38%
• List of goods exigible to VAT @4% not uniform for all the
States for example Ornaments made of rolled gold and
imitation gold are exigible to VAT @4% in M.P. whereas
in Delhi chargeable to VAT @12.5%
• Applicability of VAT on Deemed Exports
– No specific exemption, methodology of payment of
tax and refund
Other Procedural aspects

• Goods sent for job-work

– States providing methodology similar to Excise Law
i.e. reversal of input tax credit on non receipt of goods
within 180 days
– Some States treating dispatch to job-workers as
branch transfers
• No uniform list of capital goods and utilization on input
tax credit thereon
Central Sales Tax – Concept cont…

• Tax on inter state sale of goods

• Tax collected by the State where movement of goods
commences
• No tax on
– Stock transfer/ branch transfer
– In transit sales
– Sale in the course of imports
– Export sale
Central Sales Tax – Concept cont…

• RATE Of CST
– Sale to registered dealer for manufacture, resale or
used Telecommunication network, Mining, electricity
generation/ distribution – 4% against Form - C
– Sale to Government – 4% against Form - D
– Others not covered by above
– Declared goods twice the rate applicable in the
State – 8%
– Others- higher of 10% or Sales Tax/ VAT
applicable
– No CST if goods generally exempt from VAT/ Sales
tax
Central Sales Tax - Importance

• CST never intended as a major revenue generating

legislation but mere a regulative legislation
• Today some States are reluctant to give up CST
revenues whereas for some States CST is irrelevant
• As per the budget announcement CST is likely to be
reduced to 3% from April 1, 2007
• Total phase out expected by 2010
Thank You