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Basic Concepts of State Vat

November 19th, 2016

Basic Concepts of State Vat

White paper is policy document issued by Empowered Committee ‘White paper’ was released by Dr. Asim Dasgupta, (Earlier Chairman of Empowered Committee consisting of representatives of 29 States), on 17-1-2005. The White Paper is a policy document indicating basic policies of State Sales Tax VAT. However, the white paper is not a legally binding document. States have deviated from policy indicated in White Paper. The ‘empowered committee’ is a misnomer as really it has no powers.
Vat to eliminate cascading effect State level Vat is introduced to avoid cascading effect of State taxes.

Vat works on system of giving input tax credit (ITC) of state sales taxes paid on inputs and capital goods. Credit on inputs is instant, i.e. as soon as these are purchased.

Credit of capital goods is usually spread over 2/3 years in many States.

No one to one relation Vat does not require one to one relation. Instant credit is another beauty of Vat.
No credit of certain taxes There is no credit of CST paid on inter-state purchases. There is no credit of other taxes like octroi, entry tax, entertainment tax, stamp duty, excise, customs duty, service tax etc.
Purchases not eligible for ITC Broadly, following purchases are not eligible for Vat credit – (a) Inter-state purchases i.e. goods purchased from outside the State (b) Goods imported (obvious, since there will be no Vat invoice) (c) Goods purchased from unregistered dealer (as he cannot charge Vat) (d) Goods purchased from dealer who is paying Vat under composition scheme (as he cannot charge Vat separately in invoice) (e) Purchase where final goods sold are exempt from Vat (f) Final product is given as free sample i.e. goods not sold (g) Inputs stolen/lost/damaged before use/sale (h) Proper Tax Invoice showing Vat separately is not available (i) Ineligible purchases like automobiles, fuel, certain capital goods etc. as specified in relevant State Vat law i.e. items in negative list.
Utilisation of Input Tax Credit The input tax credit can be utilised for payment of Vat (sales tax) of goods sold.

Net Tax payable – Net tax payable is calculated as follows – (a) Output tax plus (b) Reversal of Credit (On exempted goods, stock transfers, free samples, lost inputs) – Less – (c) Input tax credit available. This net amount is required to be paid through prescribed challan on or before due date.

Vat is consumption based tax Vat is consumption based tax on sale of commodities. Thus, Vat is payable in the State in which goods are consumed. If any input tax is paid in which goods were produced, the dealer exporting such goods outside the State is entitled to get refund of such taxes or he can utilise that amount to pay Vat payable on other sales.
All States except J&K have State Vat All States except J&K have introduced State Vat. Each State has its own Vat laws and procedures.
Vat Rates Vat rates are generally as follows  – 0% for goods having special implications, 1% on gold and sliver ornaments, precious stones, 5% on declared goods and for basic necessities and machinery (earlier rate was 4%. Now many States have increased it to 5%), 12.5% Revenue Neutral Rate on all goods (Some States have increased this rate also), and 20% or more on fuel, diesel, cigarettes, lottery tickets etc. [There are variations among various States].

Purchase tax – Some States are imposing purchase tax in certain cases, though not envisaged in White Paper.

Exemption and composition scheme for small dealers Small dealers upto Rs 5 lakhs turnover per annum are exempt [In some States this limit is lower than Rs 5 lakhs]. Dealers having gross turnover exceeding the exemption limit but specified higher limit (which is Rs 50 lakhs in many States) have option of composition scheme. In such cases, 1% tax is payable on gross turnover in many States (without any input tax credit).
Composition scheme for works contract, sale of food articles Composition scheme is available in most of the States in respect of works contract and sale of food in hotel
Zero rated and exempt sales Certain sales are ‘zero rated’ i.e. tax is not payable on final product in certain specified circumstances. In such cases, credit will be available on the inputs i.e. credit will not have to be reversed. Distinction between ‘zero rated sale’ and ‘exempt sale’ is that in case of ‘zero rated sale’, credit is available on tax paid on inputs, while in case of exempt goods, credit of tax paid on inputs is not available.

Exports are zero rated. Inter-state sales will be zero rated when CST is brought down from present 2% to Nil or when GST is introduced.

Tax on inter-state transactions At present, inter-state transactions are not zero rated. If there is ‘sale’, CST @ 2% is payable. If there is stock transfer, input tax credit.(ITC) upto 2% is disallowed. Present CST forms i.e. C, E-I/E-II, F, H, I and J are continuing.
TIN to dealer Each dealer is given a 11 digit Tax Identification Number (TIN).
Departmental and external audit of accounts of dealer There is no regular assessment but selective audit is done by State Vat (sales tax) department.

In case of large dealers, audit report by CA/CWA will have to be submitted. In some States, audit can be done by Sales Tax Practitioners.

Paper work Tremendous paper work is disadvantage of Vat system.
Possibility of Frauds Carousel fraud and frauds due to bogus invoices are very much possible in Vat.
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