Value Added Tax (VAT)
A Gist of White Paper

The scheme of VAT, as evolved on the basis of a consensus among the States through discussion & deliberations in the Empowered Committee of State Finance Ministers was unveiled by the Union Finance Minister on 17/h January 2005. VAT is slated to come into effect from 1st April 2005. All States have agreed to amend their earlier VAT Bills so as to conform broadly to the common design as elaborated in the White Paper.

Concept

The value added tax 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). The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/ rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.

If, for example, input worth Rs. 1,00,000/- is purchased and sales are worth Rs. 2,00,000/- in a month, and input tax rate and output tax rate are 4% and 10% respectively, then input tax credit/set off and calculation of VAT will be as shown below:

(a)	Input purchased within the month	:	Rs.	1,00,000/-
(b)	Output sold in the month	:	Rs.	2,00,000/-
(c)	Input tax paid	:	Rs.	4,000/-
(d)	Output tax payable	:	Rs.	20,000/-
(e)	VAT payable during the month after set-off /input tax credit [(d) - (c)]	:	Rs.	16,000/-

 
Coverage of Set-off /Input Tax Credit

This input tax credit will be given for both manufacturers and traders for purchase of inputs/supplies meant for both sale within the State as well as to other States, irrespective of when these will be utilised/sold. This also reduces immediate tax liability.

Even for stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit.

Input Tax Credit on capital goods

Input Tax Credit on capital goods will also be available for manufacturers and traders. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments. There will be a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit. Tax credit on capital goods will essentially be available for those capital goods, which are required for keeping the goods in saleable condition.

Inputs procured from other States

Tax paid on inputs procured from other States through interstate sale and stock transfer will not be eligible for credit. However, a decision has been taken for duly phasing out of inter-state sales tax or central sales tax.

Treatment of Exports etc

For all exports made out of the country, tax paid within the State will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax paid within three months.

Carrying over of Tax Credit

If tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund.

Treatment of Opening Stock

All tax-paid goods purchased on or after April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input tax credit, subject to submission of requisite documents. Re-sellers holding tax paid goods on April 1, 2005 will also be eligible. VAT will be levied on the goods when sold on and after April 1, 2005 and input tax credit will be given for the sales tax already paid in the previous year. This tax credit will be available over a period of six months after an interval of three months needed for verification.

Registration, small Dealers and Composition Scheme

Registration of dealers with gross annual turnover above Rs. 5 lakh will be compulsory. All existing dealers will be automatically registered under the VAT Act. And, new dealer will be allowed 30 days time from the date of liability to get registered.

Small dealers with gross annual turnover not exceeding Rs. 5 lakh will not be liable to pay VAT. States will have flexibility to fix threshold limit within Rs. 5 lakh.

Small dealers with annual gross turnover not exceeding Rs. 50 lakh who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.

Compulsory Issue of Tax Invoice, Cash Memo or Bill

This entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice will be signed and dated by the dealer or his regular employee showing the required particulars. The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty.

Tax Payer's Identification Number (TIN)

Every taxpayer will have unique taxpayer's identification number consisting of 11 digit numerals throughout the country.

Return

Under VAT, simplified form of returns will be notified. Returns are to be filed monthly/quarterly as specified in the State Acts/Rules and will be accompanied with payment challans. Every return furnished by dealers will be scrutinized expeditiously within prescribed time limit from the date of filing the return. If any technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately.

Procedure of Self-Assessment of VAT Liability

The VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting off tax credit. There will no longer be compulsory assessment at the end of each year as is existing now. If no specific notice is issued proposing departmental audit of the books of account of the dealers within the time limit specified in the Act, the dealer will be deemed to be have been self-assessed on the basis of returns submitted by him.

Audit

Correctness of self-assessment will be checked through a system of departmental audit. A certain percentage of dealers will be taken up for audit every year on a scientific basis. If, however, evasion is detected on audit, the concerned dealer may be taken up for audit for previous periods. This Audit Wing will remain de-linked from Tax Collection Wing to remove any bias.

Simultaneously, a cross checking, computerized system is being worked out on the basis of co-ordination between the tax authorities of the State Governments and the authorities of Central Excise and Income Tax to compare constantly the tax returns and set-off documents of VAT system of States and those of Central Excise and Income Tax.

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. Hence, there will be no need for declaration form.

Incentives

Under the VAT system, the existing incentive schemes may be continued in the manner deemed appropriate by the States after ensuring that VAT chain is not affected.

Other Taxes

All other existing taxes such as Turnover Tax, Surcharge, Additional Surcharge and Special Additional Tax (SAT) would be abolished. The States that have already introduced Entry Tax and intend to continue with this tax should make it vatable. If not made vatable, Entry Tax will need to be, abolished. However, this will not apply to Entry Tax that may be levied in lieu of octroi.

Penal Provisions

Penal provisions in the VAT Bills should not be more stringent than in the existing Sales Tax Act.

Coverage of Goods under VAT

In general, all the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit. The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the Sales Tax Act or any other State Act or even by making special provisions in the VAT Act itself and with uniform floor rates decided by the Empowered Committee.

VAT Rates and classification of commodities

Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax -exempted goods and a special VAT rate of 1 % only for gold and silver ornaments, etc.

Under exempted category, there will be about 46 commodities comprising of natural and unprocessed products in unorganised sector, items which are legally barred from taxation and items which have social implications. Included in this exempted category is a set of maximum of 10 commodities flexibly chosen by individual States from a list of goods (finalised by the Empowered Committee) which are of local social importance for the individual States without having any inter-state implications. The rest of the commodities in the list will be common for all the States. Under 4% VAT rate category, there will be the largest number of goods (about 270), common for all the States comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods. The remaining commodities, common for all the States, will fall under the general VAT rate of 12.5%. The schedule of commodities will be attached to the VAT Bill of every State.

In terms of decision of the Empowered Committee, VAT on AED items relating to sugar, textile and tobacco, because of initial organisational difficulties will not be imposed for one year after the introduction of VAT, and till then the existing arrangement will continue.

Consultative Committees

The White Paper has recognized the role of trade and industry in the successful implementation of state-level VAT by making provision for setting up of a consultative committee with one representative from each of the national level trade organisations and national level Chambers of Commerce and Industry. This committee has already started interacting with the Empowered Committee. This process of interaction will continue regularly to discuss issues and sort out problems of implementation of VAT. Such consultative committees will also be set-up at the level of each State and interaction with the State Government will take place in a similarly regular manner. The important points relating to the ground-level implementation of VAT which have been raised by the representatives of trade and industry will be taken care of in the VAT rules of the States with changes where necessary.

Issues under discussion

The phasing out of Central Sales Tax (CST), bringing imports into VAT chain, decision on the question of collection and appropriation of Service Tax by the Centre and the States are some of the issues which require further interaction between the Empowered Committee and the Government of India and final decision on these issues will be taken in due course of time.