Salient features of proposed VAT in the States

The salient features of VAT as presented by Dr.Asim  Dasgupta, Chairman of the empowered committee at a seminar organised by FICCI, New Delhi is presented.

VALUE ADDED TAX IN INDIA

Vat is proposed to be introduced primarily in replacement of the existing sales tax in many states of india with effect from 1.4.2002.

The Proposed vat structure has been evolved on the basis of a consensus among the states.  The basic features of vat will therefore be same throughout the country.

WHY VAT?

Vat structure is superior to the present sales tax system because of the following advances:

1.  It eliminates cascading effect of existing sales tax system by setting off the tax paid earlier at every stage of sale.

2.  The tax structure becomes simpler and it improves compliance.

3.  Competitive exports.

4.  Transparency.

THE BASIC FEATURES OF PROPOSED VAT

 Basic of vat calculation:

Vat has to be paid by a registered dealer on the value addition of the goods when sold by him.

Vat liability will be calculated by deducting input tax credit from tax collected by the dealer during the payment period.

Tax credit:

Credit will be given within the same month for entire vat paid within the state on purchase of inputs / supplies for both intrastate and inter-state sale, irrespective of when those will be utilised / sold.  This also reduces immediate tax liability.

Method of set-off:

The credit which thus accumulates over any month will be utilised to deduct from the tax collected by the dealer in that month under the vat act.

Carrying over of tax credit:

If the tax credit exceeds the tax collected in a month on sale within the state.  The excess credit will be carried over to the next month.  Tax credit will be carried upto the end of next financial year.  Excess unadjusted vat.  If any will be eligible for refund.

Tax credit on capital goods:

Tax paid on capital goods will be eligible for tax credit.  The same will be adjusted over a max. period of 36 equal monthly instalments.

Treatment of exports

For all exports made out of the country, tax paid within the state will be refunded in full immediately after the end of financial year.

For stock transfer of the output, input tax paid in excess of 4% will be eligible for tax credit.

Since inter-state sale carries CST @ 4% and this is not Vatable in the importing state.  Corresponding tax incidence has to be kept for inter-state stock transfers.

Input procured from other states

Tax paid on inputs procured fro other states through stock transfer or inter-state sale will not be eligible for credit.

Opening stocks on 01-04-2003

• All tax-paid goods purchased on or after 1-4-02 & still in stock will be eligible to receive input tax credit, subject to submission of requisite details.

• Proof of payment of tax will be needed.

• Resellers holding tax-paid goods on 1-4-03 will also be eligible.

• Input tax credit to be available over a period of 6 months after an interval of 3 months, to be used for verification.

Declaration Form:

There will be no need for any provision for concessional sale under the VAT Act since the provision for set-off makes the input zero rated.  No declaration form will be needed.  Hence declaration Forms will become redundant.

Registration:

• Registrations will be compulsory  for dealers having turnover above a threshold to be decided by each state.

• There will be provision for voluntary registration.

• Existing dealers will be automatically registered under the VAT Act.

• The registration number of each dealer will be with a 10 digit unique code for the whole country.

• Structure of proposed 10 digits registration number:

Commodity coverage

a. Non applicability of VAT:

A few items like petrol, diesel and aviation turbine fuel will be taxed under VAT but not eligible for input tax credit.  Other commodities used as fuel will however be eligible for tax credit.

b. Goods other than above:

All other goods including declared goods will be subjected to VAT and will get the benefit of input tax credit.

Incentives under the old scheme:

• Units enjoying remission or deferment will have to pay tax on procurement of inputs and collect tax on sale of goods at usual VAT rates

• Units enjoying remission will be converted into deferment with 30% extra period & amount.

• Units enjoying tax holiday will also be converted into deferment.

• VAT liability of the units enjoying deferment of tax will continue to be deferred.

• The benefit of deferment will be continued for the unexpired period subject to the unused portion of the monetary ceiling.

Procedure of assessment of vat liability:

• Vat liability will be self-assessed by the dealer in terms of submission of returns upon setting off the tax credit himself.  Return forms as well as other procedures will be simple and similar in all states.

• Deemed assessment, if no notice is issued.

• There will no longer be compulsory assessment

• At the end of each year as is existing now.

Audit:

• Correctness of self assessment will be checked through a system of department audit.

• A certain percentage of the dealers will be taken up for audit every year on a scientific basis

• More complying dealers will be audited less frequently 

• All dealers are expected to be auditor at least ones in five years

• If evasion is detected on audit, The dealer may be assessed for all the previous periods up to last five years.

• The audit wing will remain delinked from the tax collection and monitoring wing to remove any basis

• There will be simultaneous restructuring and computerisation in the sales tax directorates.

Small dealers

• Small dealers with gross turnover upto Rs.5 lakh per annum will not be liable to VAT.

• For small dealers and retailers, there will be an option for a composition scheme where he pays tax as a small, percentage of gross turnover.  All dealers with annual gross turnover upto Rs.25 lakh per annum will be eligible for composition scheme.

• Such dealers will not be eligible to issue tax invoice.

Rates of Vat

• A few items which are not taxed at present will also remain exempted from VAT 

• There will be only two basic rates of VAT

• Some of the essential commodities, declared goods and basic inputs will be taxed @ 4%.

• For all other goods there will be a general VAT Rate which will have a Floor of 10%.  Actual rate will be fixed by the respective state depending on the revenue neutral rate (RNR) of that particular stage which will not exceeds upper ceiling fined @ 12.5 percent as per consensus among the states.

There will be two exceptions

a.  Gold, Silver, precious and semi-precious stones will have a VAT rate of 1%.

b.  Liquor will have a higher VAT rate with a floor of 20%.

Proposed exempted goods:

1.  Natural and unprocessed produces - which are in un-organised sector (such as betel leaves.  Earthen Pot etc.

2.   Items which are legally barred from taxation on sale (such as Newspaper National Flag etc.)

3.   Items which have social implications (such as Books, Periodicals, Slate, Slate-Pencil etc.)

Goods proposed to be taxed @ 4%

1.  Goods of basic necessities (such as bread, butter, drugs, paper etc.)

2.  Industrial and Agriculture inputs (such a printing ink, coir, beedi leaves fibres, seeds etc.

3.  Declared goods (such as Iron & steel, hide & skin etc.)

4.  Capital goods