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VAT ( Value Added Tax )

VAT is a system of indirect taxation, which has been introduced in lieu of sales tax. It is the tax paid by the producers, manufacturers, retailers or any other dealer who add value to the goods and that is ultimately passed on to the consumer. VAT has been introduced to ensure a fair and uniform system of taxation. It is an efficient, transparent, revenue-neutral, globally acceptable and easy to administer taxation system. It benefits the common man (consumer), businessman and the Government.

Further, VAT enhances competitiveness by removing the cascading effect of taxes on goods and makes the levy of tax simple and self-regulatory, ensuring flexibility to generate large revenues.

The cascading effect is brought about by the existing structure of taxation where inputs are taxed before a commodity is produced and the output is taxed after it is produced. This causes an unfair double-taxation. However, in VAT, a set-off is given for input tax (tax paid on purchases). This results in the overall tax burden being rationalized and a fall in prices of goods.

VAT makes the tax structure simple, hassle-free, export-oriented and how the integration of VAT with Tally will help you in the smooth functioning of your business and eliminate the complications that might otherwise arise in VAT.

The essence of VAT is in providing set-off for input tax and this is applied through the concept of input credit/rebate. This input 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. The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting the input credit from the tax collected on sales during the payment period. This concept is explained with an example, in the Computation of VAT section .

VAT works in two different ways:

1. If VAT-registered businesses receive more output tax than the taxes paid as input, they will need to pay the difference to the Commissioner of Taxes (State).

2. If the input tax paid is more than the output tax collected,

o You can carry forward the Input credit and adjust it against the output tax in the subsequent months.

o You can have the Input Credit refunded to you at the end of the current or following year, by the Government.

o You can receive refunds for Input Credit on exports within a period of three months

Term

Description

Input tax Output tax Input Credit Composite Dealers

This is a tax paid on purchases This is a tax charged on sales The amount of Input tax that is permitted to be set off against Output tax. Dealers with annual gross turnover not exceeding a certain threshold (threshold - decided by the respective State Governments) can opt for a composition scheme whereby they will pay tax as a small percentage of their gross turnover. However, retailers opting for this composition scheme will not be entitled to Input Credit. The State Governments fix the periods and the procedures for the payment of the lump sum.

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Advantages of VAT over Sales Tax

· As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents repeated taxation of the same product.

· Simple and Transparent – In the Sales tax system the amount of tax levied on the goods at all stages is not known. However, in VAT, the amount of tax would be known at each and every stage of goods sale or purchase.

· VAT has the flexibility to generate large and buoyant revenues, as it levies tax on value additions.

· Zero rating of tax on exports is possible in case of VAT.

· Fair and Equitable – VAT introduces uniform tax rates across the state so that unfair advantage cannot be taken while levying the tax.

· Procedure of simplification – Procedures, relating to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the taxpayer and the tax collector.

· Ability to provide same revenue to the Government with lower rates of tax.

· Tax does not become a cost of doing business.

VAT Rates

According to the White Paper, there are 550 categories of goods under the VAT system. They are classified into the following four groups, depending on the VAT rate:

VAT @ 4%

The largest number of goods (270) comprising of basic necessity items such as drugs and medicines, agricultural and industrial inputs, capital goods and declared goods are under 4% VAT rate.

Exempted from VAT

There are about 46 commodities under the exempted category. This includes a maximum of 10 commodities that each state would be allowed to select, from a broader approved list for VAT exemption. The exempted commodities include natural and unprocessed products in unorganized sector as well as items, which are legally barred from taxation.

VAT @ 1%

This is for a specific category of goods like gold, silver, etc.

VAT@12.5%

The remaining commodities are under the general VAT rate of 12.5%.

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