Join our Law Notes WhatsApp Group and stay updated with Legal and Judicial Updates

Value Added Tax

Jump to:navigation, search
HomeBrud.gifTax LawBrud.gifValue Added Tax

The Value Added Tax (VAT) is a general consumption tax that is assessed on the value added to Goods & Services. It is an Indirect tax applied on the consumption of the goods and is paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.

VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the cycle/chain. The aim is to avoid 'cascading', which can have a snowballing effect on the prices. It is assumed that because of cross-checking in a multi-staged tax; tax evasion would be checked, hence resulting in higher revenues to the government.

Methods of tax collection

  • Two methods
  • First method: Tax is charged separately on the basis of the tax which is paid on purchase, and the tax that is payable on the sale (shown separately in the invoice). Therefore, the difference between the tax paid on purchase and the tax payable on sale as per the invoice is the VAT.
  • Second method: Tax is collected and charged on the aggregate value of the tax payable on sale and purchase, by applying the rate of tax applicable to the goods. Therefore, the difference between the sale price and purchase price would be VAT. It means VAT is the tax which consumers ultimately face, which is collected at each stage.

Items covered under VAT

  • All business transactions that are carried on within a State by individuals /partnerships / companies etc. will be covered under VAT.
  • More than 550 items are covered under the new Indian VAT regime out of which 46 natural & unprocessed local products will be exempt from VAT
  • Nearly 270 items including drugs and medicines, all industrial and agricultural inputs, capital goods as well as declared goods would attract 4 % VAT in India.
  • The remaining items would attract 12.5 % VAT. Precious metals such as gold and bullion will be taxed at 1%.
  • Petrol and diesel are kept out of the VAT regime in India.

Registration for VAT

  • Registration upon reaching turnover
    • Any dealer conducting a business or intending to conduct a business may apply to be registered for VAT. However all persons conducting a business must register for VAT from the date they commence business if they believe their taxable turnover will exceed a threshold of Rs.40 lakhs in 12 consecutive calendar months.
    • All dealers must register for VAT if their taxable turnover exceeds Rs.10 lakhs for the preceding three consecutive calendar months.
  • Compulsory registration: Irrespective of the turnover, the following have to register for VAT:
    • Every dealer importing goods in the course of business from outside the territory of India;
    • Every person residing outside the State but carrying on business within the State;
    • Every dealer registered or liable to be registered under the Central Sales Tax Act 1956, or any dealer making purchases or sales in the course of inter-state trade or commerce or dispatches any goods to a place outside the State otherwise than by way of sale;
    • Every dealer liable to pay tax at Special rates specified in Schedule VI of the AP VAT Act 2005;
    • Every commission agent, broker, del credere agent, auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling, supplying or distributing goods on behalf of his non-resident principal;
    • Every person availing an industrial incentive in the form of a tax holiday or tax deferment;
    • Every dealer executing any works contract exceeding Rs 5 lakhs for the State Govt. or a local authority and any dealer executing works contracts and opting to pay tax by way of composition.

Disadvantages of VAT

  • VAT is regressive
  • VAT is difficult to operate from position of both administration and business
  • VAT is inflationary
  • VAT favors capital intensive firms

Related Statutes