overview of vat gm foundation-3

Overview of Value Added Tax 22nd May 2015 V. Ramaratnam & Company, Chartered Accountants, Chennai. Reach us at [email protected] Visit us at www.vramaratnam.com

V Ramaratnam & Company, www.vramaratnam.com.

Things to follow �  Value Added Tax – What It is all about �  History of VAT �  Operation of VAT �  Scope of Goods Covered �  Variants of VAT �  Merits of VAT �  Demerits of VAT �  Input Tax Credit �  Small Dealers & Composition Scheme �  VAT Incentives �  Other Relevant Matters


Value Added Tax � What It is All About

It is levied §  At multiple stages of sale §  Each time on the “Value Added” (Value Added = Sale Price – Purchase Price of

goods) §  By computing VAT on sale price and allowing credit / set-off of taxes on inputs /

capital goods §  Thus, VAT = Tax on Sale – Tax paid on purchases of inputs / capital goods

From Individual Perspectives Buyer -> It’s a Tax on the Purchase Price Seller -> It’s a Tax ONLY on the value added to a product / material / service.


History of VAT �  The VAT, as a concept was first conceived by Dr. Wilhelm Von Siemens, a

German Industrialist in 1918.

�  However, the VAT, as an accounting method, as a tax levy scheme was later introduced in public domain by Mr. Maurice Laure, Director in charge of Taxation in France in early 1954.

�  Thus, VAT made its entry into product – tax levy arena.

VAT in India �  Having formed a committee in 1994, the Central Govt. came out with a

White Paper in 1999 & eventually managed to introduce VAT in 2005.

�  After Haryana placed itself as the first state to levy VAT, now presently all the States & UT of our Nation has its own system to levy VAT

�  TN Govt. imposed VAT on its product sales from 01st January 2007


Operation of VAT �  A [Raw Material Seller] to B [Manufacturer]

�  Price = 100 + VAT 4

�  B now makes the Finished Goods

�  B [Manufacturer] to C [Distributor]

�  Price = 250 + VAT 10 [4% of 250]

�  Now, Pay VAT in Cash = 10 – 4 [ Input Tax Credit] = 6

�  C now finds the Retailer

�  C [Distributor] to D [Retailer]

�  Price = 300 + VAT 12 [4% of 300]

�  Now, Pay VAT in Cash = 12 – 10 [Input Tax Credit] = 2

�  D now delivers the goods to End-User

�  D [Retailer] to E [Customer]

�  Price = 400 + VAT 16 [4% of 400]

�  Now, Pay VAT in Cash = 16 – 12 [Input Tax Credit] = 4

�  The Govt. gains VAT of 4 + 6 + 2 + 4 = 16 [i.e. 4% of Final Sale Price = 400]


Scope – Goods Covered �  Based on TNVAT, 2006

5 % 14.5 % Special Rates Exempt

ITC - Yes ITC - Yes ITC - No ITC - No

Gold Jewellery AC Refrigerators

Alcohol for Human Cons.

[58 / 14.5]

Fruits & Vegetables

Medical Equipments

Health Fitness Equipments

Aviation Turbine Fuel [29] Millets

Paper Mobile / TV / DVD Petrol [27] Agriculture

Implements

Plastics & Granules Cement Diesel [25] Cattle Feed

Readymade Garments Any other Good Cigarettes [20] Milk


Variants of VAT Particulars Gross Product Income Consumption

Tax On Sale Price Levied on Each Sale

Less : VAT Paid on RM [Inputs] Allowed

Less: VAT Paid on Capital Goods

[CG] Not Allowed

Allowed only to the extent of Deprecation

Allowed

Effects Tax on CG is

added to Cost, hence overvalued

Difficulty exists as to measure the

depreciation

Neutral Method

WE FOLLOW THIS


Merits of VAT �  No Tax Evasion – it’s a logical beauty �  Neutrality – I buy the products I wish; produce the way I plan �  Transparency – Happy to know how much I really share �  Better Revenue Collection – Taxmen are happy too �  No effect on Sale Price – My Customers aren’t overcharged


Demerits of VAT �  Multiple Rates – How many rates do I have to know & pay then �  CST vs. State VAT – Oh no, I can’t buy from the neighboring states

�  Documentation – I lost my purchases bills and I lose my ITC too �  Working Capital – Unhappy to hold money always to pay some VAT

�  Administrative Cost – State-run Govt. incurs costs & time


Input Tax Credit �  ITC = Input Tax adjusted / rebated / deducted from the Output Tax

�  Yes, I can avail ITC, if I have purchased goods for o  Intra Sale Trading [I play within the State] o  Inter State Trading [I also sell outside my business state]

o  Use in Manufacture of Goods [I use them in making the goods which I got to sell] o  Use in Manufacture of Specified Goods [I use them in making Export Goods]

o  Use in Works Contract [ I execute Works Contract & I use them there] o  Use as Capital Goods [These goods are meant for production technique]


Input Tax Credit

�  And I lose my ITC in these instances

o Dealer Specific [No purchases from Unregd. / Dealer with Comp.Scheme]

o  Invoice Specific [No ITC where Invoices do not show TAX amt Or I lost it]

o  Location Specific [No purchases from Outside India OR Other States]

o Usage Specific o  I used them in making exempted goods o  Used for personal use o  Goods stolen / damaged in Transit / returned o  Given away free of charge as gifts


Small Dealers �  I do a business having a turnover less than Rs.10 Lakhs [TN , it is 5 Lakhs]

o  Now, I’m not required to REGISTER for VAT

o  Also, Not required to pay any VAT or avail any Input Tax Credit

�  Next phase, My turnover is more than 10 Lakhs but less than 50 Lakhs o  Now, I can opt for Composition Scheme o  Its an OPTIONAL Scheme o  TAX payable = Gross Turnover * Specified % of Rate

(Differs for States / Products)

o  No Input Tax Credit is allowed


Composition Scheme �  Merits �  Simple to Calculate the Tax Amt [No Complicated Maths]

�  Very Small Quantum of Tax [Economical to the business scale]

�  Simple in Maintaining Records [No more cumbersome books]

�  Neutral About my Purchases [Anyways, I’m not claiming ITC]

�  Demerits �  When I buy from People ◦  VAT is on my account [Losing ITC on my Purchases isn’t fine all the times]

�  When People buy from Me ◦  Less takers for my Goods [Since they aren’t eligible to avail ITC]


VAT Incentives �  Composition Scheme

◦  Dealers who effects second & subsequent sale in the State – Rate = 0.5%

◦  Dealers who execute Works Contract – Rate = 2% [Civil] & 4% [Others]

◦  Dealers – Hotels / Restaurants / Sweet Stalls – Rate = 2% [Originally 4%]

�  Exemption Scheme

◦  Allowed on basis of Quantum / Period / Both

◦  I’m not required to pay any VAT Amounts, either on my Purchases or Sales

�  Deferment Scheme

◦  I do pay VAT on my purchases and make / trade products

◦  Now, I do collect the VAT amounts on my output from the Buyer

◦  However, I DO NOT have to PAY them IMMEDIATELY to the Govt.

�  Remission Scheme

◦  I do pay VAT on my purchases and make / trade products

◦  Now, I do collect the VAT amounts on my output from the Buyer

◦  However, I DO NOT have to PAY them to the Govt. at all.


Other Relevant Matters �  Time Frame – Availment of Input Tax Credit – Inputs / Capital Goods /

Zero Rated

�  Time Frame – To Maintain the Books / Dept. can come back for probe

�  Time Frame – Return Filing & Revisions thereupon

�  Allotment of TIN [ 11 Digit Unique Identification Number ]

�  ITC against CST vs. CST Tax against VAT

�  VAT Audit – Turnover of Rs.100 Lakhs

�  VAT Scrutiny – 20% of Total Assessment [Random Scrutiny]


Thank You All !!

� The Way Forward, the GST


overview of vat gm foundation-3

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