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P raveen B alduas S mart Notes Value Added Tax (Indirect Tax) C.A.-IPCC

Prepared by: Praveen Baldua www.pravinsir.com/www.freecsnotes.com Page 1

VALUE ADDED TAX(VAT) (25 Marks)Q.1. What is VATAns. VAT is similar to Sales tax because of the following features i.e.:

1) VAT is tax on Sale of goods, as it levy at the point of sale.2) VAT is charged only in case of Intra state Sales (for e.g. within Maharashtra) & not Inter state sales.3) VAT is charged on value addition of goods sold i.e.: Difference between purchase value & Sale Value.

4) There are only four rates of tariff i.e.0, 1, 4, & 12.5%.5) Under VAT set off is available between Taxes paid on purchases against Tax payable on sales.6) By 2010 India hopes to combine Goods & Service Tax (GST) (i.e. VAT, Service Tax, Central excise duty

etc.) combined to Uniform VAT for the entire country.7) VAT is not applicable for goods like petrol, diesel, Liquor etc., because their prices are governed by

Government & not by market.

Q.2. What is the need for VAT?Ans. Before the introduction VAT, India was charging Tax on sale of Goods by the following method, but all the

methods were having some problems i.e. explained in detail as follows.1) Single Point Tax System :

Under this system the tax is levied at the First Point of Sale & not on the subsequent sales. Thus there was a loss of Tax revenue to Government.2) Retail Sale Tax System: Under this system tax is l evied at Last point of sale Thus, the problem of loss of tax revenue to Govt. is solved & also there is no cascading effect. But this method is Impractical in India because the retailers like Hawker, Pedlar etc never maintain

Books of Accounts thus no proper payment of Tax..3) Multi Point Tax System

Under this system tax is levied at Every Point of Sale Thus, the Problem of loss of Tax revenue to Govt. is solved. But, the problems of cascading effect arise.Conclusion:Thus all the above three system of taxation of sales suffer deficiencies & hence the need for VAT arise.

Q.3. Critically Analyse 3 Variants of VAT?1) Gross product Variant :

Tax is levied on Multi Point Tax System. Deduction:

a) Deduction is allowed on Raw material & other goods, it means Seller or manufacturer can takecredit of tax paid on purchase set off its against sales.

b) Deduction is not allowed on the capital Goods, it means manufacture cannot take set off. Advantages

a) Set off is allowed on Raw material.b) No cascading effects on Raw material.c) Pressure on working capital decreases incase of Raw material.

Disadvantagesa) Set off is not allowed on capital goodsb) Cascading effects are there in capital goods.c) Pressure on working capital increases in case of capital goods.

2) Income Variant : Tax is levied on Multi Point Tax system. Deduction:

a) Deduction is allowed on all Raw materials & other Goods, it means seller or manufacturers cantake credit of Tax paid on purchases & set off its against sales.

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b) Deduction is allowed only on the depreciation of Capital goods & not on the capital goods, inother words for credit can be availed on a pro rata basis & not in one shot.

Meritsa) No cascading effects.b) Set off is allowed on Raw material in one shot & on capital goods but in phased manner (pro rata

basis) Demerits

a) The most important demerits is, There are different method of depreciation & the life of capitalgoods are also not same, thus the uniformity for calculating tax credit will not be there.

3) Consumption Variant : This variant is widely used in the state. Tax is levied on Multi point Tax system. This system is Tax neutral. Deduction:

a) Deduction is allowed on all Raw materials.b) Deduction is also allowed on capital goods in one shot against the goods sold.

Merits:a) No cascading effectsb) Set off is allowed on both Raw material & capital goods in one shot (100% availability of credit)

c)

Pressure on working capital is highly reduced.d) This method is univ ersally followed.e) No need to examine whether the Goods are capital goods or not.

Demerits:a) For manufactures there is no demerit.b) For, government, the Tax Revenue is totally Neutral.

Q.4. Explain the Three commonly used Method for computation of Tax?Ans. There are three methods used which is explained in details as follows:

1st Method : ADDITION METHOD 1) Tax is levied on value addition only at every stage.2) Value addition includes the further processing cost & profit.Disadvantage:1) There is no scope for matching of sales invoices with purchase invoices, with the result deduction of

evasion became difficult.2nd Method: INVOICE METHOD / TAX CREDIT MEHTOD / VOUCHER MEHTOD.

1) Tax is levied on Total Sale value at every stage of sale.2) Under this method seller will deduct VAT paid on purchases from VAT collected on sales. &

difference pay to government.MERITS:1) Govt. receiver full tax money in Installment (Not in lump sum)2) This methods force dealers to maintain proper records to avail benefit of set off.DEMERITS1) There are Bill traders in the market who issue fake invoice for some consideration, some

dealers may take help to avail credit.3 rd Merit: SUBSTRACTION METHOD

1) Tax is calculated on the value addition only at every stage.2) In this method the VAT is included in Invoice price i.e.(Sale price + VAT)DEMERITS1) This method gives different results for Uniform rate & Varying rates.

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Q.5. Explain Merits & Demerits of Vat .Ans. MERITS

1) No Tax evasion :For claiming set off the dealer should maintain proper accounts of purchases & sales accounts, that taxevasion is ruled out.

2) Ensured Neutrality :All purchases carry credits which get set off against Tax on sales, thus this system has anti cascading effectwhich ensures neutrality in selection on source of purchases.

3) Transaction based system :Vat is applicable to all sales, thus the simple equation is as follows:VAT payable = Tax on sales Tax on purchase.

4) Transparency :The amounts of Tax are clearly & separately indicated in the invoice thus, a buyer knows the amount he pays& Govt. knows the amount of tax he gets.

5) Multipoint tax system :At every stage of sale the VAT is charged & to balance due is collected from last stage of sale i.e. consumers.

6) Self policing systemFor getting tax credit on purchases, the dealer has to follow better accounting system, otherwise he loosethe benefit of set off.

DEMERITS1) Varying VAT Rates :

There are varying rates & some goods are out of VAT & composition schemes & exemption schemes are alsoavailable, Thus 100% benefit of VAT is not gained.

2) No credits against other Taxes :No credit is given against CST & VAT of other states thus 100% neytrility cannot be fully achieved.

3) No difference between poor & Rich :The poor man bear the tax burden on per with the rich is an unavoidable demerit of VAT.

4) Increase in Tax administration cost :Due to Multi point tax system, every seller pay tax & every seller takes credit on inputs thus consequentlythe burden of details check of accounts of all dealers has increased.

Q.6. Briefly mentions the contents of white paper on state level VAT in India?Ans.

The Empowered committee of States Finance ministers met regularly & with collective efforts introducedwhite paper on 17/1/2005.

White paper provides a base for preparation of state VAT legislations. The white paper consists of do following:

1) Justification of VAT & Background2) Design of state level VAT3) Steps taken by the states.

Q.7. Discuss the Role of Committee of state Finance Ministers in implementation of state level VAT in India?Ans. In order to replace existing sales tax system by VAT, the committee of state Finance ministers has played

very important role in:1) Simplifying the rate structure by adoption of four general rates (0,4,8,12) & Two special floor rates ( 1 &

20)2) Keeping exemptions to a minimum3) Preparing a list of exempt goods4) Enhancing the transparency in Tax system.5) Setup ping massive tax payers education programme, computerization of sales tax administration &

preparation of model VAT legislation.

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Q.8. Discuss to role of ICAI in implementation of VAT .Ans. The role ICAI in Implementation of VAT are explained as follows.

1) Accounting Guidelines & Guidance Notes : ICAI has provided necessary accounting guidelines at a state level VAT as well as Guidance notes to

address all the accounting issues regards to VAT.2) Record keeping :

VAT requires proper record keeping & accounting for availing input tax credit & success of VAT. Chartered accountants are well equipped to perform such tasks.

3) Tax planning : Chartered accountant is competent to choose the most optimum method of purchase & sales in

order to minimize the tax impact.4) VAT Audits :

Only Chartered Accountants had an authority to conduct VAT Audits, it ensures proper maintenanceof books as well as no tax evasion.

Q.9. Can input Tax credit/ Rebate be carried forward? Discuss?Ans.

Input Tax credit means setting off the amount of Input tax available against the amount of output Tax.

Input tax credit is first utilized for payment of VAT & the excess credit can be adjusted against CST. After adjustment of VAT & CST, excess credit if any, will be carried over the end of next year (2 nd year) &

at the end of second year, the tax credit will be eligible for refundable. However some states decided to grant refund at the end of first year itself.

Q.10. List the eligible purchases for availing input Tax credit .Ans. The taxable goods purchase for the following purpose will be eligible for Tax credit.

1) For Sale/Resale within State.2) For Sale to other parts of Indian (Inter state sale)3) To manufacture taxable goods or packing such manufacture goods for sale in state or inter state sale.4) To manufacture goods or packing such manufactured goods for exports.5) For execution of work contracts.

6)

To use capital Assets for the purpose of Manufacture or resale of Taxable goods.

Q.11. List the purchases not eligible for Tax credit.Ans. Input tax credit will not be allowed in following transactions:

1) Purchase from Unregistered dealers.2) Purchases from Registered dealers opt for composite scheme.3) Purchases from other state (Inter state purchases)4) Import from outside Indian.5) Purchase of goods for self consumption or Gift.6) Purchase of Exempted Goods under VAT.7) Purchase for manufacturing Exempted Goods.8) Purchase of Goods without purchase invoice.9) Invoice does not show tax separately.10) Purchase of goods notified by state Govt.

Q.12. How will the input tax credit be availed when common inputs are used for Taxable & tax free goods .Ans. Input tax credit allowed in proportionate .

Q.13. Explain whether units in SEZ & EOU units are required to pay input tax on purchases made by them?Ans. Units located in SEZ & EOU are granted either exemption for payment of VAT or refund of VAT payment

within 3 months.

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Q.21. Distinguish between Compulsory reg. and Voluntary reg.Ans:

Compulsory Registration A dealer fails to obtain registration under VAT act & he may be registered compulsorily by the

commissioner. Failure to get registered shall attract penalty & forfeiture of Input tax credit.

Voluntary Registration A Dealer not eligible for registration may obtain registration under VAT Act. No Question of penalties & forfeiture of Input tax credit arise.

Q.22. Explain Tax payers IDENTIFICATION NUMBER (TIN)Ans.

TIN is a code to identify a tax payer. It is the registration number of the dealer. TIN will consist of 11 digit numbers the first two character will represent the state code & the next nine

numbers will be however, different in different states. TIN will facilitate computer applications & will help cross check information on tax payer compliance.

Q.23. List the Records to be Maintained under VAT system.

Ans. The following records should be maintained under VAT system:1) Purchase records2) Sales records3) VAT Accounts4) Copies of all invoic es issued in serial No.5) Copies of all Debit note & Credit note issued in chronological order.6) Copies of all purchase invoices received.7) Copies of all Debit note & Credit Note received in chronological order.8) Receipts of payment of custom duties & taxes.9) Details of goods manufactured & delivered.10) Separate record of exempt sale etc.

Failure to keep these records may attract penalty.

Q.24. VAT Invoices .Ans.

Invoice is a document indicates goods sold, tax charged & otar details etc. The input tax credit is available on if proper invoices are maintained. It is compulsion that:

a) Every registered dealer should issue to purchaser a serially numbered tax invoice, cash memo or bill.b) Tax invoice should be dated & signed by the dealer or his regular employee.c) Dealer should keep a counter foil or duplicate of such tax invoice.

Importance of VAT Invoice1) Helps to determining the input tax credit.2) Prevents cascading effects of taxes3) Facilitates multi point taxation on the value addition4) Promoter assurance of invoices5) Check evasion of Tax.

Contents of VAT Invoice1) The word TAX INVOCIE in a prominent place.2) Name, address & Reg. No. of seller.3) Name, address & Reg. No. of buyer.4) Pre printed self generated serial No.

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5) Date of issue.6) Description, Quantity & value of goods sold7) Rate & Tax charged on Goods.8) Signal of Dealer or regular employee.

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