Value added tax (VAT)

Value added tax (VAT) Introduction :

The value added tax was introduced as an indirect tax into the Indian taxation system from 1 April 2005. The existing general sales tax laws were replaced with new Value Added Tax Acts and the VAT rules for proper  administration. Haryana became the fi rst state in the country that had adopted the VAT.

VAT Concept:

VAT is a form of sales tax i.e. it is a tax on the sale of goods. It is imposed on intra-state sale i.e. sale of goods within the state. Since it is imposed only on the amount of value addition made it is known as Value Added Tax. VAT is imposed by only on the amount of value addition measured by deducting the purchase price from the sale price. This is done by providing set-off tax paid on purchases against the tax payable on sales.

Need of VAT:

VAT prevents cascading effect of taxation by providing set-off/ input credit of tax paid at earlier stage. Cascading effect means imposition of tax on tax.

Goods covered under VAT:

Generally, all goods including declared goods are covered under the VAT laws of respective states & thus get the benefi t of inputtax credit. However the following goods are outside the VAT are-
• Petrol,diesel,aviation turbine fuel or other motor spirit.
• Liquor &
• Lottery tickets.

Input & Output Tax:

Input tax means the tax paid or payable by a dealer of a state on purchases-
• of any goods (including raw-materials , capital goods i.e.plant & machinery etc.)
• made in the course of his business
• from a registered dealer within the state.
Output tax is the tax charged or chargeable by a registered dealer on sale of goods made by him in the course of his business. The output tax for a seller becomes the input tax for the purchaser.
E.g. A sells goods valuing Rs 1 lakh to B. The VAT rate is 4%. In this case A will collect Rs 8,000 (4% of Rs 2 lakh) from B. This sum of Rs 8,000 is output tax for A. B will pay Rs 1,08,000 (Rs 1 lakh towards the price of the goods & Rs 8,000 towards the tax). Tax of Rs 8,000 paid by B is input tax for him.

Scope of Input Tax Credit:

• It is allowed only to a registered dealer.
• The purchasing dealer may be trader or a manufacturer purchasing the goods as raw material.
• It is also allowed in respect of VAT paid on purchase of capital goods.
• It is allowed only if the purchase is made from a registered dealer.
• It is allowed to be set-off against VAT payable on intrastate sale or CST payable on inter-state sale.
• The credit of VAT on capital goods is allowed as under-
• Some states like Maharashtra have provided 100 % credit in respect of capital goods in the month of purchase of capital goods. However if the capital goods is sold within 36 months then proportionate input-credit thereon withdrawn.
• Some other states have opted for allowing the credit of VAT paid on capital goods in monthly instalments (maximum no of instalments being 36 months).

Registration under VAT:

Obligatory Registration: Registration means obtaining certificate of registration from the VAT authorities. A registered dealer means a dealer registered under the VAT Act of the respective state.
Every dealer of goods (i.e. a person dealing in purchase and sale of goods in the course of his business in the state for a consideration) who is liable to pay tax under the VAT Act is liable to get himself registered under the said VAT Act.

Requirement/Eligibility for Registration: Dealers having turnover upto Rs 5 lakh (or increased limit of Rs 10 lakhs) need not obtain registration while for others registration is mandatory. All existing dealers under the state level sales-tax laws have been deemed to be registered under the VAT Act.

Application for Registration: An application for registration is required to be made in prescribed form along with prescribed security to the Commissioner or any other prescribed authority within prescribed time period.

Voluntary Registration: A dealer for whom it is not obligatory to obtain registration may also obtain registration if the Commissioner is satisfi ed that the business of the applicant requires registration.

Cancellation of Registration: The registration is liable for cancellation in any of the following cases-
• Permanent discontinuance of business
• Disposal of business
• Transfer of business to a new location
• annual turnover of a manufacturer or a trader dealing in registered goods or services falling below the specified
• dealer has failed to furnish security or has committed fraud/misrepresentation of facts.

VAT Invoice:

Input tax credit can be availed of only on the basis of VAT invoice therefore if the original invoice is lost or misplaced a duplicate authenticated copy must be obtained from the issuing dealer.

Record to be maintained: Every dealer liable to pay VAT should maintain the following records-
• Value & quantity of purchases, goods manufactured, sales, goods disposed of otherwise than by way of sale, Inventory/stock & exempt sale.
• Copies of all invoices, credit and debit notes issued.
• Details of the amount of tax charged on each sale or purchase.
• VAT account and total of the output tax and the input tax in each period and a net total of the tax payable or the excess carried forward as the case may be at the end of
each month.

Period of Records: All these records should be preserved for the period specifi ed in respective state laws (generally 5 years from the end of the year to which they relate).

Returns under VAT:

The respective state VAT laws require every registered dealer to file VAT returns periodically (monthly/quarterly/annually). The returns are to be fi lled in prescribed form within the prescribed time from the end of the period concerned (i.e. within specifi ed
days from the end of the month/quarter/year). The returns are to be accompanied with the challans evidencing payment of VAT. In some states the return forms are inclusive of challan in which case returns can be fi lled along with payment of challan with the treasury. The VAT retunes contains requisite details such as details of dealer, details of input VAT and output VAT payment of VAT, inventory details. In some state opportunity has been given to revise any mistake or omission in the periodical returns filled by the dealers. The VAT laws make provisions for scrutiny of VAT returns fi lled by various dealers. Such scrutiny involves checking the overall correctness of the information given and also checking whether requisite information has been duly furnished or not. Any technical or other mistake may be required to be corrected by the dealer and any shortfall in payment of tax will be required to be satisfied.

Assessment under VAT:

Meaning: Assessment means determination of the tax liability of a dealer under the respective VAT law. Assessment involves determination of taxable turnover and tax liability thereon along with any other liability under the VAT law.

Self-Assessment or Deemed Assessment: Under VAT there is no system of compulsory assessment at the end of each year by the VAT authorities. VAT system is based on the presumption that unless the contrary is established every dealer is honest.

Self-Assessment: Accordingly the VAT liability is computed by the dealer himself while submitting returns after setting off the input tax credit.

Deemed Assessment: The VAT laws of the respective states provide that except where a specifi c notice is issued proposing detailed/scrutiny assessment within specifi ed time the dealer shall be deemed to have been assessed on the basis of the return
fi lled by him for the period to which such return relates. Compulsory Scrutiny: There is a system of compulsory scrutiny under which all returns fi led by the dealers are subject to scrutiny in a prescribed manner. Any mistake found is required to be corrected by way of revised return or in any other manner within the prescribed time along with payment of differential amount if any.

Assessment in Special Cases: The VAT laws contain special provisions in respect of assess met where there has been evasion of tax and also for escaped assessments.

Provisions of VAT Audit:

Compulsory VAT Audit or Ex ternal Audit: With a view to check massive tax evasion the state VAT laws have incorporated audit of VAT records by Chartered Accountants on some specified basis. The report of such audit is required to be filled within prescribed time and in prescribed form. The audit report is required to contain various particulars as are prescribed by each state.

Departmental Audit or Selective Audit: While there is provision of compulsory audit by a Chartered Accountant in case the turnover exceeds prescribed limit there exists a provision for audit by the authorities of the VAT  department which is not mandatory but is resorted to in selective cases. The departmental audit is provided with a view to promote compliance with the provisions of VAT laws.

Penal Provisions under VAT:

The states have incorporated penal provisions as per the requirements of their individual requirements. However since VAT involves allowing of benefi t of input tax credit which was not available under the earlier state level sales tax laws therefore the
VAT laws contain more stringent provisions to discourage evasion of taxes.

The VAT laws also make provisions for prosecution and punishment by way of imprisonment and fi ne in the case of severe offence.

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