India Localisation: VAT: Notes

India Localisation : VAT
 SAP AG 2002
Notes
o SAP R/3 Enterprise

o 2005/Q1
o Material number
 SAP AG WINLEN 1
Copyright
Copyright 2001 SAP AG. All rights reserved.
Neither this training manual nor any part thereof may

be passed on to others, copied or reproduced in any
form or by any means, or translated into another
language, for any purpose without the express prior
consent in writing of SAP AG. The information
contained in this document is subject to change and
supplementation without prior notice.
All rights reserved.
 SAP AG 2002
Notes
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 SAP AG WINLEN 2
Target Audience
This course is intended for the following audiences:
l Members carrying out Sales Tax tasks
l Consultants involved in Project Management for MM and SD

modules
Duration: 2 days
 SAP AG 2002
Notes
User notes
o These training materials are not a teach-yourself program. They complement the
explanations provided by your course instructor. Space is provided on each page for you to
note down additional information.
 SAP AG WINLEN 3
Course Prerequisites
Required Knowledge:
l Any one of the following:
l SD
l MM
With India Localization
Recommended Knowledge: Functional Knowlege
l Legal
l VAT
 SAP AG 2002
Notes
 SAP AG WINLEN 4
Course Overview
Course Overview
Contents:
l Course Goals
l Course Objectives
l Course Content
 SAP AG 2002
Notes
 SAP AG WINLEN 1-1

Course Goals
This course will prepare you to:

l Understand how VAT statutory requirements (as
released in the VAT Draft Rules 2003) are met in SAP
l Set up your systems to be VAT ready
The course includes areas related to Materials
Management and Sales and Distribution
 SAP AG 2002
Notes

Course Objectives
After completing this course, you will be able to:

l Configure the VAT requirements for Logistics
l Perform master data updation and transactions for VAT
Note: This presentation is prepared as per our understanding of draft

legislations dated 10/03/2003. Kindly refer to Government legislations
for analyzing the impact in your business.
 SAP AG 2002
Notes

Course Content
Preface
Unit 1 Course Overview

Unit 2 VAT Overview
Unit 3 Procurement with VAT
Unit 4 Sales with VAT
Unit 5 Stock Transfer and VAT
Unit 6 Impact of VAT Legislation
Appendices
 SAP AG 2002
Notes

VAT Overview
VAT Timeline
VAT Basic Concepts
VAT Business Implications
VAT Period End Processing
White paper and KARVAT

VAT Overview
VAT Timeline
VAT Basic Concepts
Whitepaper and KARVAT

VAT Timeline
Until Dec,2004
Model Vat provided to State
Govt. in 1998
Most States issue draft VAT
legislations
Haryana introduced VAT in
April 2003
Karnataka VAT receives
presidential assent on
15.12.2004
 SAP AG 2002,VAT Overview 3

VAT Timeline
Jan-Feb, 2005
Until
Until Dec,2004
Dec,2004
Empowered
committee brings out
white paper
Model Vat provided to
State Govt. in 1998 States to amend their
Most States issue VAT Bills/Laws in
draft VAT legislations line with white paper
Haryana introduced
VAT in April 2003
Karnataka VAT FM expected to make
receives presidential announcement while
assent on 15.12.2004 laying budget

VAT Timeline
March, 2005
Jan-Feb,2003 All States expected to

bring in amended VAT
Until Dec,2004 laws
All States to notify VAT

rules and VAT Forms
Empowered
Model Vat provided to committee brings out
State Govt. in 1998 white paper Country is geared up
Most States issue draft for VAT by April 1,
States to amend their
VAT legislations 2005
VAT Bills/Laws in line
Haryana introduced with white paper
VAT in April 2003 FM expected to make
Karnataka VAT announcement while
receives presidential laying budget
assent

on 15.12.2004
SAP AG 2002,VAT Overview 5
uExtend Footprint Inside The Enterprise

uExtend To Entire Business Network (Customers, Suppliers, Partner)
uExtend Advantage to Future Deals

VAT Overview
VAT Timeline
VAT Basic Concepts

Current In-direct Tax Scenario
Excise / CENVAT
Local Sales Tax
Central Sales Tax
Turnover Tax
Works Contract Tax
Octroi , Entry Tax
Luxury Tax
Service Tax
Other taxes……

Ideal In-direct Tax Scenario
GST

What we may end up with ??
Excise / CENVAT
Local VAT
Sales Tax
Central Sales Tax
Turnover
VAT Tax
Works Contract
VAT Tax
Octroi VAT
, Entry Tax
Luxury
VATTax
Service Tax

Current VAT : Local Purchase & Sales
Local Purchase Local Sales

Karnataka
TAX Invoice TAX Invoice

Item = RM Item = FG
Basic Price= Rs 100 Basic Price= Rs 150
VAT Amount = Rs 10 VAT Amount = Rs 15
Invoice Val = Rs 110 Invoice Val = Rs 165
Vendor Manufacturer Wholesaler
Input Tax= Rs 10 Output Tax= Rs 15
Net Tax to Govt. = Output Tax- Input Tax

= Rs 15 – Rs 10
= Rs 5
* Assuming General VAT Rate @ 10%


Inter-state VAT : Ideal Scenario
Net Tax to Govt.= Rs 2.5 Karnataka Net Tax to govt.= Rs 2.5
Manufacturer Wholesaler
IP Tax = OP Tax = IP Tax = OP Tax =

RM @ Rs. 100 Rs. 10 Rs. 12.5 Rs. 12.5 Rs. 15 VAT Rs.
15
Sales @ Rs. 125
Karnataka
Transfers to
Sales @ Rs. 150 Maharastra
Sales @ Rs. 200

Consumer Retailer
IP Tax = OP Tax =
Rs. 15 Rs. 20
Maharastra
Net Tax to Govt.= Rs. 5
Assume Uniform Rate of VAT @10%

Inter-state VAT : Proposed Scenario
Net Tax to Govt.= Rs 2.5 Karnataka

Net Tax to Govt.= Rs (-) 9.5
CST @ 2%
Manufacturer Wholesaler
IP Tax = OP Tax= IP Tax = CST =

RM @ Rs. 100 Rs. 10 Rs. 12.5 Sales @ Rs. Rs. 12.5 Rs. 3 .O
125
Karnataka
Transfers to
Sales @ Rs. 150
Maharashtra=NIL
Consumer Sales @ Rs. 200 Retailer
IP Tax = OP Tax
Rs. 0 = Rs. 20
Maharastra
Net Tax to Govt.= Rs.20
Assume Uniform Rate of VAT @10%

VAT Overview
VAT Timeline
VAT Basic Concepts

Business Implications in VAT Regime:
Reg./URD/
Composite
VAT Rates &

Schedules? VAT
Region wise Registration
?? No
Manufacturer
/ Trader

VAT Business Implications: Overview
Inputs Reg./URD/
(VAT able/No VAT able) Composite
VAT Rates &
Schedules ?
VAT
Region wise
Registration
??
VAT No
Invoice
Raw Material
Manufacturer
VAT / Trader
Invoice
Capital Goods
Bill
of Sale
Subcontract/Job Work

Reg./URD/ Sales
Inputs
Composite (Taxable / Non Taxable)
(VAT able/No VAT able)
VAT Rates &
Schedules ? VAT
VAT
Region wise Invoice
Registration
?? (Local sales)
VAT No
Invoice
Raw Material Bill of

Sales
(Exports)
Manufacturer
VAT / Trader
Invoice Bill Of
Sales
(CST)
Capital Goods
Delivery
Bill
of Sale
Challan
(STO)

Reg./URD/ Sales
Inputs
Composite (Taxable / Non Taxable)
(VAT able/No VAT able)
VAT Rates & VAT

VAT
Schedules Invoice
Registration
VAT No (Local sales)
Invoice
Raw Material Bill of

Sales
(Exports)
Manufacturer
VAT / Trader
Invoice Bill Of
Sales
Tax (CST)
Period Period:
Capital Goods
End Month/Qtr
Processing Delivery
Bill
of Sales
Challan
(STO)
Tax VAT
Returns Registers
Self
Assessments ?? Tax Payment

General VAT Rate & List of Schedules:
n General VAT Rate for any Item 12.5 % (proposed)
u Except when the Item falls in any of the following Schedules:
Ø Schedule I - List of Exempted Items 0%

e.g. Essential commodities
Ø Schedule II - List of Valuable Items 1%
e.g. Jewelry- Gold / Silver
Ø Schedule III - List of other items 4%
e.g. Industrial inputs/ Declared Goods
Ø Schedule IV - Negative or Restricted Inputs List
(on which No Input Credit is available)
e.g Office beverages, furniture etc

VAT: Input Tax
uParameters determining Input Tax
lPlant ~ Region & Status (ST Concession,if any)

lVendor ~ Region & Status (Registered,Composite,URD etc)
lMaterial - (Classification of Materials)
nGeneral Requirements for taking Credit on Inputs
lReceipt of Valid Tax Invoice

lPurpose of Use ~ Business / Not In Business Use
uAdditional Requirements for Capital Goods:
uAmortization period for Credit based on State regulations

l 0 to 3 years
l at Monthly installments
nInventory Valuation
u Accounting standard v. Income tax laws

VAT: Output Tax
n Output Tax Liability: (On transaction Value)
l Local Sales
l Inter-State Sales
l Purchase Tax on URD Purchases
l Past LST/CST Liability or Penalties
n Treatment for Input Credit Reversals on account of

l Inter-State Sales (No, in most states )
l Inter-State STO (Partial / Full)
l Exempted Goods Sales (Full)
n Input Credit Reversal on Capital Goods:

l Stock Transferred across the State (within Tax amortization period)
l Change in Use (from Business Purpose to Other)
n Tax Invoice / Bill of Sale

u Separate number range requirement
u Tax Invoice mandatory for taking Input Credit
u CST, Exports to be on Bill of Sale document

VAT Overview
VAT Timeline
VAT Basic Concepts

Period End Processing for VAT
n Requirements for Period End Processing:
u Input Credit Reversal for Taxable or Non-Taxable Sales, as per requirement of

State VAT Acts
u Computation of Net Tax Liability / Refund for a Plant/ Reg. ID
u Preparation of VAT Registers & VAT Returns
u Preparation of Tax Payment / Refund Challan
n When ?
u At The End of Tax- Period (may be month or a quarter)

Net Tax Calculation for a Tax Period:
NET Tax payable = (O + P + R ) – ( I + A ) for each Regd. ID
n Where
O => Output Tax Payable (on Local / Interstate Taxable Sales )
P => Purchase Tax Payable (on Local URD Purchases)
R => Reversal of Input Tax credit (e.g.Purchase Returns)
I => Input Tax Credit (Net of Reversals, if any)
A => Adjustments (e.g. Sales Returns)

Case 1> Local Sales (Taxable)
Taxable Sales
(Tax payable = Rs 15)
Taxable Sales %= 100%
Taxable Purchase
(Tax paid = 10 Rs)
Registered Dealer
URD Purchase
(Tax Paid = 2 Rs) Purchase Tax
(Tax Payable = Rs 2)
CIT = 12 Rs OTL = 15 + 2 Rs Total Sales %=100%
Net Tax Payable to Govt. = (OTL+ Pur. Tax) - (CIT )

= (15 + 2) – (12)
= 17 - 12
= 5 Rs
Assuming Purchase Tax paid is creditable

Case 2> Local Sales (Taxable & Non Taxable)
Taxable Sales
(Tax payable = Rs 15)
Taxable Sales %= 50%
Taxable Purchase Requires

(Tax paid = 10 Rs) Full
Reversals
Exempted Sales
Registered Dealer (Tax payable= Rs 0)
URD Purchase
Exempted Sales % = 50%
(Tax Paid = 2 Rs) Purchase Tax
CIT = 12 Rs OTL = 15 + 2Rs Total Sales %=100%
Net Tax Payable to Govt. = (OTL+ Pur. Tax) - (CIT – Input Tax Reversals)
= (15 + 2) – (12 – 50% x 12)
= 17 - (12 – 6)
= 11 Rs
Assuming Purchase Tax paid is creditable

Case 3> Interstate Stock Transfers
Local Purchases Inter-state Stock Transfers
VAT Invoice
Base Price =Rs 100
VAT @ 10%= Rs 10
Inv Value = Rs 110
Allowable
Registered Dealer Credit on
STO = VAT
Rate – 4%
Local Taxable Purchase
(CIT = Rs 10)
Inter-State STO’s
Interstate STO = 100%
CIT = 10 OTL = 0
Allowable Credit on STO = (10 – 4 )% of Tax Base Value

= 6 % of 100 = Rs 6
Net Tax Liability = OTL – CIT (Allowable Credit on STO )
= Rs 0- 6
= Rs - 6 (I.e. Refund/Carry forward)
Assuming Purchase Tax is Creditable & No Input Credit Reversal for Inter-State Sales

Case 4> Exports
Local Purchases Exports
No Input
Credit
Reversal
VAT Invoice for
Base Price =Rs 100 Exports
VAT @ 10%= Rs 10
Inv Value = Rs 110
Registered Dealer Exports

Exports = 100%
Local Taxable Purchase
(CIT = Rs 10)
CIT = 10 OTL = 0
Net Tax Liability = OTL – CIT

= Rs 0- 10
= Rs - 10 (I.e. Refund)
Assuming Purchase Tax is Creditable


Case 5> Local & Interstate Sales (Taxable)
Total Purchases Total Sales
Local Taxable Purchase Local Sales

(CIT = Rs 9) (OTL = Rs 12)
Local Sales = 50%
Inter-State Sales
(OTL = Rs 3)
Interstate Sales = 50%
Registered Dealer
URD Purchase
(CIT = Rs 1)
Purchase Tax
(Tax Payable = Rs 1
CIT = 10 OTL = 15 + 1 Total Sales 100%
Net Tax Payable = (OTL+ Pur. Tax) - (CIT)

= (15 + 1) – (10 )
= 16 - 10
= 6 Rs
Assuming Purchase Tax is Creditable & No Input Credit Reversal for Inter-State Sales

Case 6> Local & Inter-State Sales(Taxable & Non
Taxable)
Total Purchases Total Sales
Local Taxable Purchase Local Sales

(CIT = Rs 9) (OTL = Rs 12) Local Sales = 50 %
Inter-State Sales
Inter-State Purchase (OTL = Rs 3)
Inter-States Sales = 20%
Exports
Exports = 10%
Imports
Registered Dealer
Exempted Sales
URD Purchase
(CIT = Rs 1)
Purchase Tax
Inter-State STO
Inter-State STO
STO = 20%
CIT = 10 OTL = 15 + 1
Tot Sales % =100%
Net Tax Payable = (OTL+ Pur. Tax) - (CIT – Input Tax Reversal for Non Taxable) + All. Credit on STO
= (15 + 1) – [(10 – 20% x 10) + (20% of CIT) x (10-4)%/10%)]
= 16 - [(10 – 2) + (2x0.6)]
= 16 – [8+1.2] = 6.8
Assuming Allowable Credit on Inputs for Inter-State STO = VAT rate – 4%

VAT Overview
VAT Timeline
VAT Basic Concepts

Design of VAT
n The design seeks to strike a federal balance

alance
n Between common point of convergence and flexibility for local

characteristics of the States.
n Common point of convergence relate to concept of set off, its

coverage and related issues
n Flexibility relate to selecting some of exempt goods, amortization

amortization
period of input tax credit on capex etc

Coverage of Goods
n All the Goods will be covered under VAT
n Declared Goods will also be covered
n Certain Goods will remain outside VAT
n These Goods are ;

u Liquor
u Petrol
u Diesel
u Aviation turbine fuel
u Motor spirit
u Lottery Tickets

Coverage of Goods (contd.)
Ø n These goods are outside VAT as their prices are not fully market
determined
n These goods will continue to be taxed either in the existing Laws or

within VAT Act with special provisions
n These goods are to be taxed at uniform floor rates decided by the

EC.

VAT RATE
There will be four categories

n Exempt category
n 1% category
n 4% category
n 12.5% category
Exempt category to have about 46 commodities

VAT RATE (contd.)
Exempt category consists of:

n Natural and un-processed products in unorganized sector
n Items legally barred from taxation
n Items having social implications
Out of 46 commodities 36 are common across the country
10 commodities will be flexibly chosen by individual State from a

list finalized by EC

VAT RATE (contd.)
4% category consists of
n About 270 items
n Common for all the States
n Items of basic necessity such as Medicines and Drugs
n All agricultural and industrial inputs
n Capital goods
n Declared goods

VAT RATE (contd.)
n VAT bill of each State to contain schedule of commodity
n 12.5% category consists of all the remaining goods which are

common across the country
n AED items like Sugar, Textiles and Tobacco will be exempt from the
VAT in the first year
n Such exemption to be reviewed after one year

STATUS OF OTHER TAXES
n All existing taxes like TOT, Surcharge, Additional Surcharge and

special Additional taxes to be abolished
n VAT bills not to make any reference to these taxes
n Existing Entry Tax not being in lieu of Octroi may be continued only
if Vatable
n If not Vatable such Entry Tax to be abolished.
n Existing Entry Tax in lieu of Octroi may continue all though not made
Vatable.

COVER OF SET OFF/INPUT TAX CREDIT
nInput Tax Credit available to both manufacturers and traders
nInput Tax Credit available for purchase of inputs meant for both local
sales and inter-State sales
nInput Tax Credit is available in the month of purchase irrespective of

when the inputs are utilised or sold

STOCK TRANSFER/CONSIGNMENT SALES
nInput Tax Credit is available in respect of purchase of Inputs which are

stock transferred out of the State.
nHowever the credit will be restricted to Input Tax paid in excess of 4%.

CARRY FORWARD OF TAX CREDIT
nIf Input Tax credit exceeds output Tax in a month, it results in excess
credit
nSuch excess to be carried over to end of next fiscal
nTill the end of next fiscal the excess will be adjusted on a month to
month basis
nAny excess remaining un-adjusted at the end of next fiscal will be

refunded
nIn other words, the carry over period is spread in the range of 23 months
to 12 months.

INPUT TAX CREDIT ON CAPEX
nAvailable for both Traders and Manufacturers
nAvailable for adjustment over a maximum of 36 equal monthly

installments
nThe States have liberty to reduce the number of installments
nThere is a negative list of capital goods non-eligible for Input Tax Credit
nThis negative list is to be made on the basis of principles already decided

by the Empowered Committee (principles not published)

SPECIAL TREATMENT FOR EXPORT
nInput Tax paid will be refunded in full
nThis refund will be given within 3 months
nSEZ/EOU will either get exemption or refund of Input Tax paid within 3
months.

TREATMENT OF OPENING STOCK
nAll tax paid goods purchased on or after 01.04.2004 will be eligible
nThe above purchases are eligible if they are still in stock as on

01.04.2005
nInput Tax credit is subject to submission of requisite documents
nRe-sellers holding stock of tax paid goods are also eligible
nSales tax paid on the above stocks will be set off against output tax.

TREATMENT OF OPENING STOCK contd.
nInput tax credit on opening stock will be given after an interval of 3

months
nIn other words, it will be given from the month of July 2005
nInput tax credit will be given over a period of 6 months
nIn other words, Sales Tax paid on opening stocks will be available from
July 2005 till December 2005.

TAX INVOICE
nAll VAT dealers to issue serially numbered tax invoice
nTax invoice to have prescribed numbers
nTax invoice to be signed & dated by dealer/ his regular employee
nDealer to get counter foil/duplicate of tax invoices
nDealers having turnover less than the specified amount to issue Cash
Memo/bill

TIN
nDealers to get unique TIN Numbers
nTIN Numbers consists of 11 digits numerals of which first two digits

represent the State Code.
nBalance 9 digits will be as allotted by concerned State

RETURNS AND ASSESSMENT
nMonthly/Quarterly returns as prescribed by the State VAT Rules to be filed
nReturns to be accompanied with payment challans
nReturns to be scrutinized by the Department within the prescribed time limit
nAny technical mistake detected on scrutiny to be rectified and short payment

made good by the dealer
nReturn Forms as well as other procedures to be simple in all the States.
nThere will not be any compulsory annual assessment

RETURNS AND ASSESSMENT cond..
nIn the absence of a Notice proposing departmental audit, a dealer is deemed to

have been self-assessed.
nVAT bills of all States to state the provision of self-assessment
nOnly certain percentage of dealers will be scientifically selected for

departmental audit
nDepartmental audit wing to be de-linked from tax collection wing
nThe audit to be conducted in a time bound manner and completed within 6

months

RETURNS AND ASSESSMENT cond..
nAudit report copy to be sent to dealer
nIf any evasion is detected on audit the concerned dealer may be taken up
for audit for previous periods
nA comprehensive cross checking computerized system will be worked

out on the basis of co-ordination between various tax authorities of the
State Government and Central Excise and Income-tax Departments

OTHER IMPORTANT ASPECTS
nDeclaration Form like Form 37 etc., will be dispensed with
nIncentive schemes existing under present Sales Tax Laws may be

continued in the manner deemed appropriate by the States
nHowever, States to ensure that VAT chain is not affected
nPenal provisions in the VAT Bills should not be more stringent than
present


Procurement with
VAT
Procurement Process and VAT

MM Configuration
Master Data
TAXINN
Procurement Scenarios

MM Configuration
Master Data
TAXINN

Procurement Processes and VAT
Master Data
Utilization &
Tax Payment Purchasing
SAP R/3
Capital Goods
Credit Good Receipt
Invoice
Verification
 SAP AG 2002, Title of Presentation, Speaker Name 3

Master Data Plant Master

Material Master
Utilization & Vendor Master
G/L Accounts
Condition Record
SAP R/3
Capital Goods
Credit Good Receipt
Invoice
Verification

Master Data
Utilization &
SAP R/3 Tax code à % Tax

and VAT ability
Capital Goods
Credit Good Receipt
Invoice
Verification

Master Data
Utilization &
SAP R/3
Capital Goods
Credit Good Receipt
Inventory Valuation based

Invoice
on VAT ability of Material
Verification
(Tax code from Purchase
Order)

Master Data
Utilization &
Input Tax Credit SAP R/3

Posting
Tax code can be
editedCapital Goods
if required Good Receipt
Credit
Invoice
Verification
n Tax code change to take care of cenvat impact in case of TAXINJ

n Invoice verification posting to be done if VAT invoice is received. Currently
no provision of suspense account. In the event VAT Invoice is not received
– as process park the invoice and do not post.

Input Credit of CG
after “Put in Use” Master Data
and as per State
Act
Utilization &
SAP R/3
Capital Goods
Credit Good Receipt
Invoice
Verification
n There is no specific requirement to maintain credit of Raw Matl and capital

good in separate account.

Utilization of Input Credit

for clearing Output Tax
Master Data
liabilities at Period End
Utilization &
SAP R/3
Capital Goods
Credit Good Receipt
Invoice
Verification

MM Configuration
Master Data
TAXINN

VAT salient feature
n No changes as regards the CENVAT rate determination

n One tax rate associated with a tax code
n For each rate and tax code combination, the posting will be into one
G/L account – A new functionality … will be discussed during the
presentation
n Depending on the new legislation, VAT Reports’ requirement will
have to be taken up
Use tax code creation effectively for optimum use of VAT reports

Configuration
n This is applicable for all the companies in the states whether VAT is
applicable from 1st April, 2005 or not.
n Define new tax codes - VAT Deductible and VAT Non-Deductible

u VAT non deductible tax codes could be the existing tax codes themselves
n For Inbound transactions five new Tax condition types have been
introduced:
u JIP4: A/P CST Non Deductible under VAT
u JIP5: A/P VAT RM Deductible
u JIP6: A/P VAT RM/CG Non Deductible
u JIP7: A/P VAT CG Deductible
n Each of the condition type mentioned above should be assigned to a

separate Transaction/Account Key and a separate G/L account. This will
help in the period end processing where individual taxes need to be clearly
identified & reported. For e.g. a separate treatment may be required for
taxes on interstate sale, that could vary from state to state.
n The Non –Deductible RM/CG VAT condition type can be split into two
separate condition types as per individual customer requirement.
n Account Key attached to the condition are used for standard VAT Reporting
n Entry tax etc that remain after VAT rules to be configured as condition types

Configuration – Condition Types
IMG Path - Financial Accounting - Financial Accounting Global Settings - Tax on Sales/Purchases - Basic
Settings- Check Calculation Procedure - Define Condition Types (OBQ1)
n Create Condition Type JIP4: A/P CST Non deductible under VAT as a copy of JIP1
n Create Condition Type JIP5: A/P VAT RM Deductible as a copy of JIP2
n Create Condition Type JIP6: A/P VAT RM/ CG Non-Deductible as a copy of JIP3
n Create Condition Type JIP7: A/P VAT CG Deductible as a copy of JIP2
n Create Condition Type JIN6: A/R VAT Payable as a Copy of JIN2
n Create Condition Type JIN7: A/R CST Payable under VAT as a Copy of JIN1
n Create Condition Type JIN8: A/R CST Surcharge Payable under VAT as a Copy of JIN4
For all the above condition types, Maintain Condition Category as 'D'-"Tax".Ensure the Access sequence “MWST"
Note: Ensure that all the existing Condition Types (For Example : JIP1 to JIP3 and JIN1 to JIN5) used in Tax procedure
TAXINJ have the following attributes. These settings are required to work without any Jurisdiction Code. This is over
and above the new condition types created. "TY2003"
n Access Sequence : MWST
n Condition Category : D
n For following conditions Ensure that condition Category is 'D'-"Tax" & Access sequence is "MWST"
u JMO1 - A/P Excise duty for Setoff
u JAO1 - A/P AED for Setoff
u JSO1 - A/P SED for Setoff
u JMO2 - A/P Excise duty for Inventory
u JAO2 - A/P AED for Inventory
u JSO2 - A/P SED for inventory
u JMOD - A/R Excise Duty
u JAED - A/R Add. Excise Duty
u JSED - A/R Sp. Excise Duty
u JCES - A/R CESS
u Any other Condition types

Configuration – Condition Types
IMG Path à Financial Accounting > Financial Accounting Global Settings > Tax
on Sales/Purchases > Basic Settings > Check and Change Settings for Tax
Processing (OBCN)
n Akey Description Tax Type Non Deduct Posting Ind
uJP4: A/P CST Non Deductible 2 X 3
uJP5: A/P VAT RM Deductible 2 2
uJP6: A/P VAT RM/CG Non Deductible 2 X 3
uJP7: A/P VAT CG Deductible 2 2
uJN6: A/R VAT Payable 1 2
uJN7: A/R CST Payable under VAT 1 2
uJN8: A/R CST Surc Payable under VAT 1 2

Configuration - Define G/L Accounts & Tax Accounts
n Define G/L Accounts:

u IMG > Financial Accounting > General Ledger Accounting > G/L Accounts Master
Records > G/L Account Creation and Processing > Edit G/L Account (Individual
Processing) > Edit G/L Account Centrally (FS00)
u For SAP R/3 4.0B: IMG > Financial Accounting > General Ledger Accounting > G/L
Accounts Master Data > G/L Account Creation > One Step Manual/Automatic
(Alternative 3) > Alternative Methods to Create GL Accounts > Create GL Account
Manually (FS01)
u Create new Tax G/L Accounts for all new Tax transaction keys created above.
n Define Tax Accounts:
u IMG > Financial Accounting > Financial Accounting Global Settings > Tax on
Sales/Purchases > Posting > Define Tax Accounts (OB40)
u Assign appropriate G/L Accounts to the Transaction keys.

Tax Code Creation
Tax Code Creation : An Example
TAX % RAM CG NON CST

VATABLE VATABLE VATABLE
0% V0 V0 V0 V0
1% R1 C1 I1 -
4% R2 C2 I2 N2
12.5 % R3 C3 I3 -
n Customers may create separate tax code for imports, subcontracting and 0 tax
transaction with 0%. Use V0 for exempted goods
n Use transaction FTXP for creation of Tax Code.
n The above is with VAT perspective.

MM Configuration
Master Data
TAXINN

Master data – Vendor Master
VAT
Regn No
n In Vendor Master, User need to maintain Country, Region and VAT

Registration Number.

MM Configuration
Master Data
TAXINN

Configuration – Tax Code

Configuration – Access Sequence
Plant / Vendor / Material

Master Data – Condition Record
Plant/ Vendor/Material
n User should provide all the relevant Tax Codes of Registered vendor with the
combination of Plant, Vendor and Material

MM Configuration
Master Data
TAXINN

Organization Elements
Company Code (EWT)

Chart of A/c INT
Purchase Org (0001)
MAHARASHTRA
TAMIL NADU
VAT Reg ID 1
VAT Reg ID 2
Plant 2 Panvel Plant 3 Chennai

Plant 1 Mumbai
IN10 IN30 IN20

Procurement Scenarios with VAT
Followings are the main procurement scenarios-
Intra State from registered vendor
Raw Material Creditable

Capital Goods Creditable
Raw Material Non-Creditable
Intra State from composite scheme registered vendor
Raw Material
Inter State
Raw Material / Capital Goods
Imports
Raw Material / Capital Goods

Intrastate Procurement of Raw Material (Creditable)
M 001 IN 1 0 V001
M aterial P lant V endor

M aster M aster M aster
B asic =Rs100
ED 16 % =Rs16
VAT 10 %=Rs11.6
Purchase O rder
Total = Rs127.6
V endor
C a p ture E x c ise
Invoice
D r to Inventory A/c = 100 G oods R eceipt
C r to G R /IR A /c = 100
C envat C redit
( P o s t E x c i s e I n v o ic e )
Cr to V endor A /c = 1 2 7 .6 0 Invoice D r to R G 2 3 A / c = 16
Dr to G R /IR A / c = 100 C r to C envat Clr A/c = 16
Dr to C envat Clr A/c = 16 V erification
Dr t o V A T C P A /c = 1 1 .6
Period End
Processing
n Use the following data in practice session:

uRaw Material : WH01
uPlant : IN10
uVendor : INV01
uTax Code : R2
n VAT assumed at 10% for ease of representation.

Intrastate Procurement of Capital Goods (Creditable)
M 003 IN 1 0 V 001

Basic =Rs100
ED 16 % =Rs16
VAT 10 % = R s 1 1 .6
T o tal =Rs127.6 Purchase O rder
Vendor
C a p tu r e E x c i s e
Invoice
G oods Receipt
D r to Inventory A/c = 100
C r to G R /IR A / c = 100 C envat Credit
(Post Excise Invoice)
Invoice D r t o R G 2 3 A /c = 16
C r to V endor A/c = 1 2 7 .6 0
D r to G R /IR A /c = 100 V e r ification C r to Cenvat Clr A/c = 16
D r to C e n v a t C l r A /c = 16
D r to V A T o n H o ld A/c = 1 1 .6
C r t o V A T o n H o ld G P A / c = 1 1 . 6 Input T ax C redit
D r to V A T C redit Pool A/c = 11.6 Put in U se
(D e p e n d u p o n S t a t e A c t )
Period End
Processing

uRaw Material : LTH01
uPlant : IN10
uVendor : INV01
uTax Code : C2
n VAT assumed at 10% for ease of representation.

Intrastate Procurement of RM (Non-creditable)
M 002 IN 10 V 001
M aterial P lant Vendor

B asic =Rs100
ED 16 % =Rs16
VAT 10 % =Rs11.6 Purchase O rder
Total = Rs127.6
Vendor
C apture Excise
Invoice
D r to Inventory A/c = 1 1 1 .6 G oods Receipt
C r t o G R /IR A /c = 1 1 1 .6
Cenvat Credit
C r to V endor A /c = 1 2 7 .6 D r to R G 2 3 A / c = 16
D r t o G R / I R A /c = 1 1 1 .6 Invoice C r to Cenvat Clr A/c = 16
D r to C envat Clr A/c = 16 V erification
Period End
Processing

uRaw Material : WH01 (use non creditable tax code :
uPlant : IN10
uVendor : INV01
uTax Code : I2

Intrastate Procurement of RM (Composite Vendor)
IN 1 0
M 001 V004
M aterial P la n t V endor
Basic =Rs100
ED 16 % =Rs16
VAT 0 % = R s0
Purchase O rder
Total = R s1 1 6
V endor
C apture Excise
Invoice
D r to Inventory A/c = 100 G oods R eceipt
C r to G R /IR A /c = 100
C envat C redit
(P o s t E x c i s e I n v o i c e )
C r t o V e n d o r A /c = 116 D r to R G 2 3 A /c = 16
Dr to GR/IR A/c = 100 Invoice C r to C envat Clr A/c = 16
D r to C e n v a t C l r A / c = 16 V erification
Period End
Processing

uPlant : IN10
uVendor : INV01
uTax Code : I2

Interstate Procurement of Material
IN 1 0
M 001 V002

B asic =R s 1 0 0
ED 16 % =Rs16
C S T10 % = R s1 1 . 6
Purchase O rder
Total =Rs127.6
V endor
C a p ture E x c ise
Invoice
D r to Inventory A/c = 1 11.6 G oods Receipt
C r t o G R /IR A /c = 1 11.6
C envat Credit
(P o s t E x c i s e I n v o i c e )
C r to Vendor A/c = 1 2 7 .6 D r to RG23 A/c = 16

D r t o G R / I R A /c = 1 11.6 Invoice C r to C envat Clr A/c = 16
D r t o C e n v a t C lr A /c = 16 V erification
Period End
Processing

uPlant : IN10
uVendor : INV03
uTax Code : N2

Import of Material
M 001 IN 1 0 V003
Exchange
R a te : M aterial P lant V endor
$1=R s50 M aster M aster M aster
Basic = $100
CD 30 % =Rs1500
CVD 16 % =Rs1040
Purchase O rder
SAD 10 % =754
V endor
C r to C u stom s’ O ffice = 3294

D r to CD C learing A /c = 1500 IV for
D r to C V D C learing A /c = 1040 C u s t o m ’s D u ty
D r to SAD Clearing A/c =754
C apture E x c ise
Invoice
D r to Invento ry A /c = 7254 G oods R eceipt
C r to G R /IR A /c = 5000
C r to C D C learing = 1500
C r to SAD Clearing A /c =754 C envat C redit
Invoice
C r t o V e n d o r A /c = 5000 V erification
D r to G R /IR A /c = 5000 D r to R G 2 3 A /c = 1040
C r to C V D C lr A / c = 1 0 4 0
Period End
Processing

uPlant : IN10
uVendor : INV05
uTax Code : V0

Reversal in case of Vendor Returns
Procurement Returns
At GR (10): At GR (5):
Material Dr 1000 GR/IR Clearing Dr
500
GR/IR Clearing A/c Cr 1000
Material Cr 500
At EI:
At EI:
RG23A Dr 160 Modvat Clearing Dr
Modvat Clearing Cr 160 80
RG23A Cr 80
At IV:
GR/IR Clearing Dr 1000 At IV:
Modvat Clearing Dr 160 Vendor Dr 638
GR/IR Clearing Cr
VAT Credit Pool Dr 116
500
Vendor Cr 1276 Modvat Clearing Cr
80
VAT Credit Pool Cr
58


Sales with VAT
VAT Implication on Sales Process

Business Place
SD Configuration
Master Data
Sales Scenarios

Sales with VAT

Business Place
SD Configuration
Master Data
Sales Scenarios

VAT Implication in Sales Processes
Purchasing
Utilization & Inventory
Tax Payment Valuation
VAT Invoice
Accounting SAP R/3 Verification
Delivery Sales Order

Billing
VAT
impact
 SAP AG 2002, Sales with VAT, 3
n The areas getting affected by VAT are the sales order in which the VAT
taxes appear and the billing document where the accounts get posted. We
are not covering the VAT utilisation.

Sales with VAT

Business Place
SD Configuration
Master Data
Sales Scenarios

Business Place in R/3
BUSINESS PLACE – A New

Organizational Unit in Logistics Defined at Company Code
Level
Tax Reporting entity
n A new Organizational entity - Business Place (BUPLA) has been brought in

use in Logistics.
n Business Place represents a Tax Reporting entity for an Organization in a
state or Region.
n Business Place in R/3 will be defined at the Company Code level and will be
assigned to Plant(s).
n One Business Place can be assigned to more than one Plant in a Region, but
one Plant cannot be assigned to more than one Business Place.
n Business Place is currently used by SAP customers in many countries for
VAT related Tax Reporting.
n Separate registration only in case of deferral scheme.
n Note: In India Business Place field was in use in Finance for EWT before 1st
April 2003, however, 1st April 2003 onwards this field was replaced with
Section Code for EWT. Now this field is in use for Logistics.

Business Place Assignment
n Business Place is assigned to Plants

Business Place Applicability
Business Place used for VAT related Tax reporting in

n Sales and Distribution
n Materials Management
n Before using in Logistics, Business Place was used in Finance till 1st April
2003.

Business Place
Entity Business Place will primarily be used for -

nDefining Vat Registration Number
nConsolidating data for Period End Processing requirements
nDetermining "Alternate G/L Accounts" for Taxes

Business Place – Scenario 1
PLANT 2
PLANT 1
# Single VAT Registration
# Consolidation for all Plants

before utilization
# Single period end process
reports for all plants
STATE : KARNATAKA
COMPANY ‘ ABC’
PLANT 3
Define
Define Single
Single Business
Business Place
Place for
for all
all the
the Plants
Plants in
in aa state.
state.

STATE : KARNATAKA
PLANT 2
PLANT 1
VAT Registration : ‘XXX’ VAT Registration : ‘YYY’

Output is under deferral/
exemption scheme
COMPANY ‘ ABC’
Define
Define Separate
Separate Business
Business Place for both Plants in the
state.
state.
An Organization has two plants in one state
Output of one plant is under deferral/ exemption scheme
State Law may require separate registration number for both the plants

State specific number range requirements may be specified
Solution: Business Place is

used
used to
to determine
determine number
number
range objects.

Need for maintaining separate VAT Credit and Debit accounts for different
states
Solution: Separate G/L

Accounts are maintained at
state level. Business Place is
used to determine correct
G/L account at the time of
posting.

Sales with VAT

Business Place
SD Configuration
Master Data
Sales Scenarios

Intra State – Finished goods VAT applicable Sales
pricing and Tax procedure
Pricing procedure JFACT

Condition type UTXJ
Access sequence JIND
Access Country/ Plant Region / Region/ TaxCl1Cust/ Tax Cl.Mat
Tax Code S1
Sales Order Pricing Material master

Customer master
Basic Rate Rs85X 10 pcs= Rs 850 Plant details
Excise Duty @20 = Rs 170
Tax Base Amount Rs 1020
VAT Rs. 102
10%
Total Rs.1122 VAT
Tax procedure TAXINJ JIN 6
n 10% VAT rate used for ease of representation. Actual VAT rates as per law.

SD Configuration
Customer Master Changes
n IMG PathàLogistics General àBusiness Partner àCustomers àControl

àDefine Account Groups and Field Selection for Customers (Transaction
OVT0)
n Move Tax type from Suppress Mode to Optional or Required Entry

SD Configuration
Customer Master Changes
n IMG PathàLogistics General àBusiness Partner àCustomers àControl

àDefine Transaction-Dependent Screen Layout (Transaction OB20)
n Move Tax type from Suppress Mode to Optional or Required Entry

SD Configuration
Define Condition Types
n IMG PathàSales and Distribution àBasic Functions àPricing àPricing

Control àMaintain Condition Types (Transaction V/06)
n New SD tax conditions are introduced for the VAT:
uJIN6: A/R VAT Payable
uJIN7: A/R CST Payable under VAT
uJIN8: A/R CST Surcharge Payable under VAT
n The condition category of these and the existing condition types should be
changed to D
n These new tax conditions would need to be added to the relevant pricing
procedure and the tax procedure

SD Configuration
Change SD Pricing Procedure

Control àDefine and Assign Pricing Procedure (Transaction V/08)
n The control parameters for JIN6, JIN7 and JIN8 would remain same as JIN2,
JIN4 and JIN5 respectively

SD Configuration
Create New Condition Table
n IMG Path àSales and Distribution àBasic Functions àPricing àPricing

Control àDefine Condition Tables (Transaction V/04)
n 2 condition tables are required to determine UTXJ in domestic and export
sales document: Table 368 and Table 11
n Table 368 (condition table for domestic pricing) to have following fields:
uALAND: Country
uWKREG: Region of delivering plant
uREGIO: Region of ship-to-party
uTAXK1: Customer tax classification 1
uTAXM1: Material tax classification 1
Table 11 (condition table for export pricing) to have the following fields:
uALAND: Country
uLAND1: Destination country
uTAXK1: Customer tax classification 1
uTAXM1: Material tax classification 1
SD Configuration
Change in Access Sequence

Control àDefine Access Sequence (Transaction V/07)
n Add the condition tables 11 and 368 in the access sequence JIND
n Put condition table 11 before 368, so that the system checks first if the sale
is an export or domestic
n The additional accesses are used in UTXJ to determine the Output Tax
Code in SD Documents
n These accesses do not use jurisdiction code and would help users to
determine the tax code when Tax Jurisdiction code is switched off
n In Export Pricing Procedure also UTXJ would determine the Output Tax
Code maintained for Export

SD Configuration
Define Condition Types (TAXINN)

Control àMaintain Condition Types (Transaction V/06)
n New SD tax conditions are introduced for the VAT:
uJVAT: A/R VAT Payable
uThe condition category of these and the existing condition types should be changed to D
n These new tax conditions would need to be added to the relevant pricing
procedure and the tax procedure

SD Configuration
Settings for Tax Processing (TAXINN)
n IMG Pathà Financial Accounting àTax on Sales and Purchases àBasic

Setting àCheck and Change setting for tax processing (Transaction OBCN)

SD Configuration
Define Account Keys (TAXINN)
n IMG Pathà Sales and Distribution àBasic Functionà Account

Assignment/Costingà Revenue Account Determination àDefine and Assign
Account Keys àDefine Account Keys

SD Configuration
Change SD Pricing Procedure (TAXINN)

Control àDefine and Assign Pricing Procedure (Transaction V/08)
n Condition type JVAT added

SD Configuration
Define Business Place
SM31 àTable name: J_1BBRANCV
n Define a new business place

n Create business place for different controlling areas
n Enter the country and region for which Business Place is created

SD Configuration
Assign Business Place to Plant
SM31 àTable name: J_1BT001WV

Alternate G/L Accounts: Introduction
To determine alternate G/L accounts for Taxes
It is used for Sales Taxes and not meant for excise posting
Helpful in reporting
Useful in maintenance of Tax Codes (input & output)
n The concept of alternate G/L Account is used for LST, CST etc and not
applicable to excise related duty
n This feature will help to determine alternate G/L accounts for Taxes, which will
in turn help user for reporting and maintenance of Tax Code
n This functionality is available for both types of taxes (Input and Output)
n Alternate G/L account if maintained takes priority over other G/L

account maintained in standard

Alternate G/L Accounts: Usage
Alternate G/L account can be used in the following business processes
n Determination of Separate G/L Account for VAT and Non VAT States
n Determination of Separate G/L Account for Deferral & Non-Deferral
Plants by using Business Place
n Determination of Separate G/L Account for Standard and Sub-
contracting Purchases
n Any other Business requirements

Alternate G/L Accounts: Maintenance
Alternate G/L account can be maintained based on:

Chart of accounts
Business Place
Transaction Key
Tax Code
n It may be created for Alternate Debit as well as credit account.

Alternate G/L Accounts: Configuration
Note 607907 to be applied

Transaction: SM30
Table name: J_1IT030K_V

Sales with VAT

Business Place
SD Configuration
Master Data
Sales Scenarios

Master Data
Plant Region

Master Data
Tax classification
Customer

Master Data
Tax classification Material

Master Data
Tax code determination

Master Data
VAT rate 12.5%

Sales with VAT

Business Place
SD Configuration
Master Data
Sales Scenarios

Organization Structure
Company Code (EWT)

Chart of A/c INT
Sales Area (0001/ 01/ 01)
VAT Reg ID 1 VAT Reg ID 2

Ex gp E1, Series gp S1 Domestic, S2 Exports Ex gp E2, Series gp S3
Plant 3 Chennai IN20

Plant 1 Mumbai IN10
Shipping point 0002
Maharashtra
Shipping point 0001
n We are doing sales from Plant IN10 only which is at Mumbai state
Maharashtra

Master Data
Material Master
MBG01 - Professional Mountain Bike with Gears
MB01 - Professional Mountain Bike without Gears
Customer Master
INC01 – Mumbai Dealer
INC02 – Chennai Dealer
INC08 – Depot Customer for VAT
INC09 - Depot Customer for CST
G/L Accounts
VAT Payable A/c - Used for paying VAT on all sales
VAT Alternate GL A/c - Used for paying VAT on all sales

Sales Scenarios with VAT
Followings are the scenarios with VAT

Intra State
• Finished goods (VAT applicable- general VAT rates)
• Finished goods (VAT exempt)
• Depot sales (VAT applicable)
Inter State
• Finished goods
Exports
• Finished goods
• Deemed Exports – Finished Goods

Intra State – Finished goods (VAT applicable –
general VAT rates)
Pricing procedure JFACT

Condition type UTXJ
Access sequence JIND
Access Country/ Plant Region / Region/ TaxCl1Cust/ Tax Cl.Mat
Tax Code S1
Sales Order Pricing Material master

Customer master
Basic Rate Rs85X 10 pcs= Rs 850 Plant details
Excise Duty @20 = Rs 170
Tax Base Amount Rs 1020
VAT Rs. 102
12.5%
Total Rs.1122 VAT
Tax procedure TAXINJ JIN 6
n Participants can try out Finished Goods (VAT applicable with alternate G/L
Accounts)

Intra State – Finished goods (VAT exempt )
1 2 3
Bill of Sale
Shipping
Shipping
Sales Order
Billing
Accounting documents
4
5
Excise invoice
Period end processing
Sales revenue account CENVAT suspense

Customer account ED payable
NVAT-MAT1 VAT 0%
CENVAT suspense
Intra-State Customer Cus_intra1

Intra State - Depot Sales (VAT applicable)
Mumbai Plant IN10

(Factory)
Mumbai Plant IN 30
(Depot)
Purchase Order
Delivery Sales Order
VAT Register Goods Issue

Excise Invoice
Updation
VAT Register Billing

Updation
Stock in Transit
Mumbai Plant IN 30
(Depot)
VAT Register Goods Receipt

Updation
VAT Register required at both ends for period end processing calculation for
reversals etc.

Inter State -Finished goods
1 2
Shipping
Shipping
Sales Order
Inter State Customer (KAR) Cus_inter1
VAT- MAT1 (VAT rate 10%)
5 Billing
3
Bill of Sale
Dr.Customer a/c Dr.CENVAT suspense

Cr.Sales revenue a/c Cr. ED payable
Cr.CST payable 4
Cr. Cenvat Suspense
Excise invoice

Exports -Finished goods
1 2
Shipping
Shipping
Sales Order
Billing
3
5
Bill of Sale
4
Foreign Customer (UK) Cust_exp1
MAT-EXP Excise invoice

Deemed Exports -Finished goods
1 2
Shipping
Shipping
Sales Order
Billing
3
5
Bill of Sale
4
Deemed Export Customer CUST_DEXP1
VAT- MAT1 (VAT rate 10%) Excise invoice
n As per the Whitepaper this scenario may not be valid as there is not VAT
invoice for the same., Final rules to ascertain this.


Stock Transfer and
VAT
Configuration
Stock Transfer Scenarios

Stock Transfer and
VAT
Configuration

Configuration - STO via MM
Field Opening for STO via MM
 SAP AG 2002, Stock Transfer and VAT, 3
n Open up fields MSEG-EXBWR and MSEG-VKWRT for movement types

301, 303, 305 and 351.
n IMG Path -> Materials Management -> Inventory Management and Physical
Inventory -> Goods Issue / Transfer Postings -> Define Screen Layout
n Here for each of the movement types mentioned above, select the Field
Status group for materials management and mark the fields ‘Ext. GA amount
in LC’ (MSEG-EXBWR) and ‘Sales value in local currency’ (MSEG-VKWRT)
as optional.
n Here the user can enter a value other than the moving average price in field
MSEG-EXBWR and this will affect the moving average price in the sending
and receiving plants.
n The user can also enter a statistical value in field MSEG-VKWRT, which will
not have any affect on the moving average price.

Configuration - STO via SD
Pricing Procedure
n The user has the option to enter the price at the time of proforma invoice
n The steps to enable this are as follows:
uDefining a new pricing procedure:
lIMG Pathà Sales and Distribution-> Basic Functions-> Pricing->
Pricing Control-> Define and Assign Pricing Procedure
uDefine document determination procedure: New entry T for transfer for
India

Pricing Procedure
uDefine pricing procedure determination with new document T and new

procedure for transfer ZSTKTR, type PR00

Assign Pricing procedure for sales price to delivery type
IMG Path: Sales and DistributionàBasic FunctionsàPricingàPricing

ControlàDefine Pricing By Item Categoryà Activate Pricing for Item
Categories
n Activate Pricing for Item category NLN

uWith this the user can maintain a statistical value in the delivery document.

Stock Transfer and
VAT
Configuration

Organization Element
Company Code (EWT)

Chart of A/c CAIN
Purchase Org (0001)
MAHARASHTRA
TAMIL NADU
VAT Reg ID 1
VAT Reg ID 2
Plant 1 Mumbai Plant 2 Panvel Plant 3 Chennai

IN10 IN30 IN20

Stock Transfer and
VAT
Configuration

Inter-State Stock Transfer via MM
M A H A R A S H T R A
IN 1 0 V A T R e g ID 1
M u m b a i
C r In v e n t o r y A / c P l a n t 1 = R s 1 0 0
D r Inventory A /c Plant 2 = Rs100 G oods Issue
M vt 303 P e r io d E n d
Processing
C r ED Payable A/c = Rs16
D r E D C learing A/c = Rs16
E x c ise Invoice
Stock in
T ransit
IN 2 0
C hennai
No Accounting Entries and

N o Invoice verification P eriod E n d
G o o d s R e c e ip t P rocessing
N o VAT credits
M vt 305
D r R G 2 3 A /C A / c = Rs16
C r ED Clearing A/c = Rs16 C apture & P ost
Excise Invoice
T A M IL N A D U
V A T R e g ID 2

IN 1 0 V A T R e g ID 1
M u m b a i
Processing
E x c ise Invoice
Stock in
T ransit
IN 2 0
C hennai

N o VAT credits
M vt 305
D r R G 2 3 A /C A / c = Rs16
Excise Invoice
T A M IL N A D U
V A T R e g ID 2

MInput
A H Credit
A R A S required
will H T R Ato
IN 1 0 Vbe
A reversed
T R e g I D State
1 Act
M u m b a i as per
Processing
E x c ise Invoice
Stock in
T ransit
IN 2 0
C hennai

N o VAT credits
M vt 305
D r R G 2 3 A /C A / c = Rs16
Excise Invoice
T A M IL N A D U
V A T R e g ID 2

Inter-State Stock Transfer via SD
V A T R e g ID 1 IN 1 0 S T O from
P lant 2 –
M u m b a i Q ty 1 EA
Rate 100
D r In v e n t o r y A / c P l a n t 2 = R s 1 0 0 Goods Issue
M vt 641
P e r io d E n d
Processing

D r ED C learing A/c = R s16
E x c ise Invoice
S tock in
Transit
IN 20
C hennai

N o Invoice verification G o o d s R e c e ipt P e r io d E n d
N o V A T c redits
M vt 101 Processing
D r R G 2 3 A /C A / c = Rs16
C r ED Clearing A/c = Rs16 C a p ture & P ost
Excise Invoice
T A M IL N A D U
V A T R e g ID 2

Intra-State Stock Transfer
M um b a i S T O from
Plant 2 –
Plant 1 Q ty 1 E A
Rate 100
D r Inventory A/c Plant 2 = R s100 G oods Issue
C r ED Payable A/c = Rs16 V A T R egister

D r ED Clearing A/c = Rs16
E x c ise Invoice Updation
(Q ty & V a l u e )
Stock in
T ransit
M um b a i
Plant 2

N o In v o i c e v e r i f i c a t i o n V A T R egister
N o V A T c redits G oods R eceipt Updation
(Q ty & V a l u e )
D r RG23A/C A/c = Rs16

C r ED Clearing A/c = Rs16 C a p tu r e & P ost
Excise Invoice
V A T R e g ID 1

V A T R e g ID 1 IN 1 0 S T O from
P lant 2 –
Rate 100
M vt 641
P e r io d E n d
Processing

E x c ise Invoice
S tock in
Transit
IN 20
C hennai

N o V A T c redits
M vt 101 Processing
D r R G 2 3 A /C A / c = Rs16
Excise Invoice
T A M IL N A D U
V A T R e g ID 2

V A T R e g ID 1 IN 1 0 S T Input
O f r o Credit
m will required to
P l abe
n t reversed
2 – as per State Act
Rate 100
M vt 641
P e r io d E n d
Processing

E x c ise Invoice
S tock in
Transit
IN 20
C hennai

N o V A T c redits
M vt 101 Processing
D r R G 2 3 A /C A / c = Rs16
Excise Invoice
T A M IL N A D U
V A T R e g ID 2


Impact of VAT
Legislation
Impact of VAT Legislation

Transition Strategy for New Customers
Transition Strategy for Existing Customers

Impact of VAT
Legislation


Legal Status
n Draft Rules released in 2003
n White Paper released on January 17,2005
n State wise rules to be released
SAP Delivery
n Configuration changes
n Solution for VAT compliance in transactions
Customer Consideration
n All Transactions on VAT from April 1,2005
n Treatment of Opening stock and related activities
n Transition of SAP system to VAT ready scenario
 SAP AG 2002, Impact of VAT, 3

Transition Approach
n Structural Changes delivered in 2003
u Use of Section code in Financials
u Use of Business Place in Logistics
u Zero Jurisdiction Code Scenario
n Section Code in Financials
u Mandatory for use of e-filing functionality of TDS
u Most customers likely to have migrated to the same
n Business Place in Logistics
u No migration issue
u Only configuration and master data

Transition Approach
n Zero Jurisdiction Code Scenario
u High section of customers in multiple Jurisdiction Code/ Dummy
Jurisdiction code
u Configuration changes
u Transition Considerations
l High volume of data conversion
l Certain customers could have upto a million records
l Decision on open transaction handling at customer level
l Can customers foreclose open transaction??
l Skilled assistance required to facilitate data conversion at customer place
l Partner Consultants to gear up to handle this demand
l Limited Time for activity
u End User training
Consultants to revert with Inputs from Customer Base on the above

considerations

Impact of VAT
Legislation


Transition Strategy
n Based as per our understanding of 2003 Rules

n Subsequent slides provide transition solution offered to
customers in 2003

You are going live on or after 1st April
n Do not use Tax Jurisdiction code in the configuration

n Carry out VAT related configuration
n Use Section code field for EWT
n Use Business Place for VAT
n No Transition required after Go-Live. You will be on Stage 2
from day one

Impact of VAT
Legislation


n The Strategy is same in case of:

u Only one state is on VAT by 1st April and the rest remain in Sales tax
regime
u Some states declare VAT on a later date but with retrospective effect from
1st April 2005. Some states with prospective effect.
u All states go for VAT by 1st April
n Transition Stages :
u Stage 0: Existing set up before 1st April
u Stage 1: First Level of Transition
l You can close the Financial year with the existing configuration
l The existing custom based reporting will work
l Tax Jurisdiction code usage is streamlined
l New transactions from 1st April are VAT ready
u Stage 2 : Second Level of Transition
l Tax Jurisdiction code is switched off for transaction data from Apr 1
n Customers could choose to migrate from Stage 0 to Stage 2 directly

Items Stage 0 Stage 1 Stage 2
Period For Transactions For Latest from 30th

till 31st March Transactions April (Before first
from 1st April Period end
processing)
VAT status No VAT VAT or No VAT VAT or No VAT
Tax Jurisdiction Multiple Tax Single Tax Tax Jurisdiction
code Jurisdiction codes Jurisdiction code switched OFF
code (Dummy)
Tax codes to be N/A New mapping No further change
changed for all old tax in Tax codes
codes
Tax code As per Current As per Current MM: Tax Code
determination status status based
SD: Change in
Access sequence

Items Stage 0 Stage 1 Stage 2
Business Place Used in EWT Not to be used in EWT Same as Stage 1
To be only used for

Logistics
Section Code Not available To be used for EWT To be used for EWT
Transition Prepare Tax code Run Transition program Run Transition

activity for mapping 1(for open logistics program 3 for all
customers documents) documents posted
Business place / after 1st April
Section code mapping Run Transition
Program 2 (for Modify Condition
Modify TAXINJ with Business place / types with MWST
new Condition types section code Access sequence
with TAXJ Access configuration switch
sequence over
Assign Routine in
Billing Copy control for
VAT Invoice

Stage 0 to Stage 1
Steps
n Identify & Maintain single transition Jurisdiction Code e.g. ZZ00
n Identify new Tax codes equivalent to old ones and map the same
n Maintain the new jurisdiction code in table J_1INEWJCODE
n Map the old tax codes and jurisdiction codes into the new tax codes
and transition jurisdiction code in table J_1ITCJCMP

Stage 0 to Stage 1 – MM Changes
Steps
n Identify Open POs and related transactions
u Orders that are not blocked
u Orders that are not deleted
u The order quantity is not equal to the goods received quantity
u Goods received quantity and the invoiced quantities are not equal
n Map new tax codes (from the above table) to each order line item for
open orders
u Sample program J_1ITRANSITION_INTERFACE provided as reference for
the above transition.
n Check the updates in table J_1ITCJCUPDATE
n Update open orders through BDC program. Template program

J_1IUPDATE_PO provided.
n Update Vendor Master records with transition jurisdiction code

maintained in table J_1INEWJCODE. Sample program
J_1IUPDATE_VENMAST provided
n Refer Note 607479 for details

Stage 0 to Stage 1 – SD Changes
Steps
n Update customer master records with transition jurisdiction code
maintained in J_1INEWJCODE. Sample program J_1IUPDATE_CUSMAST
provided.
n Identify open sales documents. Reprice the same through update pricing
in the order and billing

Stage 1 to Stage 2 – Tax Procedure Changes
Steps
n Remove dummy Jurisdiction Code
n Remove Tax Procedure from Jurisdiction Code structure
n Change Tax Condition types for Sales/Purchases
n Define Tax Accounts
n Assign Default Tax Codes to Company Codes
n Remove Jurisdiction Code from Excise Settings in India Localization

customizing settings
n Delete Migration Table data created in Stage 1
n The above steps are the same for transition from stage 0 to stage 2 directly

Stage 1 to Stage 2 - MM Changes
MM Configuration and Layout Changes as covered earlier
Vendor Master Data
n Update
u VAT Registration ID
n Remove
u Jurisdiction Code
u In event of use of data conversion tool to remove J Code perform the
following:
l Delete all entries in table J_1ITCJCMAP thru SM30
l Make Jurisdiction Code blank in table J_1INEWJCODE thru SM30
l Run program J_1IUPDATE_VENMAST to remove jurisdiction code from vendor
master
Note: Ensure that consent is obtained from SD process owner prior performing above
steps
Maintenance of New Tax Codes
n This is a mandatory activity
n Create new Tax codes without Jurisdiction Code
n These are to be created for all relevant Tax rates
The tax codes created earlier with Jurisdiction Code can also be re-
created without Jurisdiction code

Recommendation from SAP
n Customers to preferably be in Stage 2
n Choose foreclose of open orders in lieu of data conversion
n Transition can be done prior Apr 1 with the VAT ability specific
configuration made applicable from Apr 1

Remove All Jurisdiction Codes
IMG Pathà Financial Accounting > Financial Accounting Global Settings

> Tax on Sales/Purchases > Basic Settings > Define Tax
Jurisdictions(OBCP)
n Enter the tax procedure TAXINJ and delete all the existing Jurisdiction
Codes.
n Apply Note 607731 to ensure line item wise tax calculation

Remove Jurisdiction Code structure
IMG Pathà> Financial Accounting > Financial Accounting Global

Settings > Tax on Sales/Purchases > Basic Settings > Specify Structure
for Jurisdiction code (OBCO)
n Delete the entry for TAXINJ
Note: Standard Product delivery includes configuration related to Tax
Procedure with Tax Jurisdiction Code. SAP recommends to remove the
Jurisdiction Code entries from the configuration.

Change Condition Types for Sales/Purchase
n Change Condition Category and Access Sequence for CENVAT and

TAX Condition Types. Changes are:
u Condition Category to be maintained as ‘D’ – “Taxes”
u Access Sequence to be maintained as “MWST”
n Example of CENVAT and Tax Condition Types that need to be
changed:
u JIP1 to JIP8
u JIN1 to JIN8
u JM01, JM02
u JA01,JA02
u JS01,JS02
u JMOD
u JAED
u JSED
u JCES etc
Note : User to create new tax codes as per the requirements of the
organisation after these configuration changes..
IMG - Financial Accounting - Financial Accounting Global Settings - Tax

on Sales/Purchases - Basic Settings- Check Calculation
Procedure - Define Condition Types (OBQ1)

Define G/L Accounts & Tax Accounts
Define G/L Accounts:

n IMG > Financial Accounting > General Ledger Accounting > G/L
Accounts Master Records > G/L Account Creation and Processing >
Edit G/L Account (Individual Processing) > Edit G/L Account
Centrally (FS00)
n For SAP R/3 4.0B: IMG > Financial Accounting > General Ledger
Accounting > G/L Accounts Master Data > G/L Account Creation >
One Step Manual/Automatic (Alternative 3) > Alternative Methods to
Create GL Accounts > Create GL Account Manually (FS01)
n Create new Tax G/L Accounts for all new Tax transaction keys
created above.
Define Tax Accounts:

n IMG > Financial Accounting > Financial Accounting Global Settings >
Tax on Sales/Purchases > Posting > Define Tax Accounts (OB40)
n Assign appropriate G/L Accounts to the Transaction keys.
n Ensure appropriate G/L Accounts to the transaction keys are assigned.

Assign Default Tax Codes to Company Code
IMG > Financial Accounting > Financial Accounting Global Settings > Tax
on Sales/Purchases > Posting > Assign Tax Codes for Non-Taxable
Transactions (OBCL)
n Assign A0 & V0 Tax code to the Company code(s) in use and delete the
existing jurisdiction code.
n Ensure that you have created A0 (Output Tax)& V0 (Input Tax) with zero
rate after removal of Jurisdiction code.

Remove Jurisdiction Code from Default Excise
settings in CIN Customizing
IMG Path:
n For SAP R/3 470:
u Logistics-General > Tax on Goods Movements > India > Basic Settings >
Determination of Excise Duty > Maintain Excise Defaults
n For SAP R/3 40B
u J1IL or J1IL(N) > India Localization Menu > Global Settings > Define Excise Tax
Condition Types (J1IT)
n For other releases
u J1IL or J1IL(N) > India Localization Menu > Global Settings > Excise Defaults (J1IT)
n Remove the existing Jurisdiction code attached to TAXINJ
n Assign E0 Tax Code to Export Tax Code. Ensure that you have created E0
(Output Tax) with zero rate for after removal of Jurisdiction code.

Migration Table Data Deletion
n Delete the following migration table data which was created in stage 1
u J_1INEWJCODE
u J_1ITCJKMP
u J_1ITCJCUPDATE

MM Master Data Updation
Vendor Master Data
n Delete all entries in table J_1ITCJCMAP thru SM30

Vendor Master Data

Change in SD Condition Type (s):
n Condition Category to be changed
IMG Path > Sales and Distribution > Basic Functions > Pricing > Pricing
Control > Define Condition Types (V/06)\
n Select the SD cenvat conditions(e.g. JMOD, JAED, JEX2 etc.) and tax
conditions (e.g. JIN1, JIN2, JIN6 etc.) change the condition category to "D".
n For UTXJ condition type the condition category should not be changed (it
should remain 1)

Transition Program J_1ITRANSITION_INTERFACE

Table J_1ITCJCUPDATE

Program J_1IUPDATE_PO

Program J_1IUPDATE_VENMAST

Maintenance of New Tax Codes
n Create New Tax codes for the various Tax rates

n Recommend that one tax code be created per tax rate. E.g.
u Z2 : Only VAT output tax 12.5%
u Z3 : CST 3 %
u Z4 : LST 4%
n Tax codes with zero Tax Rate should be created for Exports, STO and
for exempted materials also
n The Tax Codes which were created earlier with Jurisdiction Codes can
also be maintained without the Jurisdiction Codes. E.g. X1 tax code
which was created earlier (for VAT 10%) with Jurisdiction Code can also
be maintained again (for VAT 10%) without the Jurisdiction Code.
n IMG Path à Financial Accounting > Financial Accounting Global

Settings > Tax on Sales/Purchases > Calculation > Define Tax Codes
for Sales and Purchase (FTXP)
n Apart from Inventory and G/L Account Posting, Tax codes will also be
important for VAT Reporting.
n VAT Transactions are directly posted in FI posted in FI G/L Accounts.
n Parameters like Business Place, Transaction Key, Tax codes, G/L Accounts
are available in FI taxes for data extraction & for Period End Processing.
n If some of the parameters like Business Place, Transaction Key are the
same, then tax code becomes important to differentiate transactions in FI
for processing Period End requirements. E.g.
u If a state VAT Law provides for credit reversal for exempted goods sales and does not
necessitate credit reversal for Exports. Both transactions are subjected to zero VAT
tax. However, they need to be differentiated using different zero tax code to facilitate
proper treatment during Period End Processing.


A White Paper On State-Level Value Added Tax
This White Paper on State-level Value Added Tax (VAT) is

presented in three parts. To begin with, the justification of VAT
and its background have been mentioned (Part 1). In Part 2, the
main design of VAT, as evolved on the basis of a consensus among
the States through repeated discussions in the Empowered
Committee, has been elaborated. While doing so, it is recognised
that this VAT is a State subject and therefore the States will have
freedom for appropriate variations consistent with the basic
design as agreed upon at the Empowered Committee. Finally,
in Part 3, the other related issues have been discussed for effective
implementation of VAT.
1. Justification of VAT and Background

1.1 In the existing sales tax structure, there are problems
of double taxation of commodities and multiplicity of taxes,
resulting in a cascading tax burden. For instance, in the
existing structure, before a commodity is produced, inputs are
first taxed, and then after the commodity is produced with input
tax load, output is taxed again. This causes an unfair double
taxation with cascading effects. In the VAT, a set-off is given for
input tax as well as tax paid on previous purchases. In the
prevailing sales tax structure, there is in several States also a
multiplicity of taxes, such as turnover tax, surcharge on sales
tax, additional surcharge, etc. With introduction of VAT, these
other taxes will be abolished. In addition, Central sales tax is
1
also going to be phased out. As a result, overall tax burden will
be rationalised, and prices in general will also fall. Moreover,
VAT will replace the existing system of inspection by a system
of built-in self-assessment by the dealers and auditing. The tax
structure will become simple and more transparent. That will
improve tax compliance and also augment revenue growth.
Thus, to repeat, with the introduction of VAT, benefits will be as
follows:
a set-off will be given for input tax as well as tax paid

on previous purchases
other taxes, such as turnover tax, surcharge, additional
surcharge, etc. will be abolished
overall tax burden will be rationalised
prices will in general fall
there will be self-assessment by dealers
transparency will increase
there will be higher revenue growth
The VAT will therefore help common people, traders,

industrialists and also the Government. It is indeed a move
towards more efficiency, equal competition and fairness in the
taxation system.
1.2 For these beneficial effects, a full-fledged VAT was

initiated first in Brazil in mid 1960’s, then in European countries
in 1970’s and subsequently introduced in about 130 countries,
including several federal countries. In Asia, it has been
introduced by a large number of countries from China to
Sri Lanka. Even in India, there has been a VAT system introduced
2
by the Government of India for about last ten years in respect of
Central excise duties. At the State-level, the VAT system as
decided by the State Governments, would now be introduced in
terms of Entry 54 of the State List of the Constitution.
1.3 The first preliminary discussion on State-level VAT took

place in a meeting of Chief Ministers convened by Dr. Manmohan
Singh, the then Union Finance Minister in 1995. In this meeting,
the basic issues on VAT were discussed in general terms and
this was followed up by periodic interactions of State Finance
Ministers. Thereafter, in a significant meeting of all Chief
Ministers, convened on November 16, 1999 by Shri Yashwant
Sinha, the then Union Finance Minister, three important decisions
were taken. First, before the introduction of State-level VAT, the
unhealthy sales tax rate “war” among the States would have to
end and sales tax rates would need to be harmonised by
implementing uniform floor rates of sales tax for different
categories of commodities with effect from January 1, 2000.
Second, in the interest again of harmonisation of incidence of
sales tax, the sales-tax-related industrial incentive schemes would
also have to be discontinued with effect from January 1, 2000.
Third, on the basis of achievement of the first two objectives,
steps would be taken by the States for introduction of State-level
VAT after adequate preparation. For implementing these
decisions, an Empowered Committee of State Finance Ministers
was set-up.
1.4 Thereafter, this Empowered Committee has met

regularly, attended by the State Finance Ministers, and also by
the Finance Secretaries and the Commissioners of Commercial
Taxes of the State Governments as well as senior officials of the
3
Revenue Department of the Ministry of Finance, Government
of India. Through repeated discussions and collective efforts in
the Empowered Committee, it was possible within a period of
about a year and a half to achieve nearly 98 per cent success in
the first two objectives on harmonisation of sales tax structure
through implementation of uniform floor rates of sales tax and
discontinuation of sales-tax- related incentive schemes. As a part
of regular monitoring, whenever any deviation is reported from
the uniform floor rates of sales tax, or from decision on incentives,
the Empowered Committee takes up the matter with the
concerned State and also the Government of India for necessary
rectification.
1.5 After reaching this stage, steps were initiated for

systematic preparation for the introduction of State-level VAT.
In order again to avoid any unhealthy competition among the
States which may lead to distortions in manufacturing and trade,
attempts have been made from the very beginning to harmonise
the VAT design in the States, keeping also in view the distinctive
features of each State and the need for federal flexibility. This
has been done by the States collectively agreeing, through
repeated discussions in the Empowered Committee, to certain
common points of convergence regarding VAT, and allowing at
the same time certain flexibility for the local characteristics of
the States.
1.6 Along with these measures at ensuring convergence

on the basic issues on VAT, steps have also been taken for
necessary training, computerisation and interaction with trade
and industry, particularly at the State levels. This interaction
with trade and industry is being specially emphasised.
4
1.7 It may be noted that while such preparation was
going on, the Chief Ministers of all the States in an important
meeting on State-level VAT convened by the Prime Minister
on October 18, 2002, when Shri Jaswant Singh, the then
Union Finance Minister was present, clearly stated their
intention of introducing VAT from April 1, 2003. About 29
States and Union Territories had expeditiously sent their Bills to
the Ministry of Finance, Government of India for prior vetting.
The Union Ministry of Finance had considered these Bills of
States and Union Territories, and sent their comments/
suggestions to the States and Union Territories in line with the
decisions of the Empowered Committee of the State Finance
Ministers for incorporating the same in VAT Bills to be placed
in the State legislatures and subsequent transmission to
the Government of India for Presidential Assent. At this
stage, there were certain developments which delayed the
introduction of VAT. Despite these developments, most of
the States remained positively interested in implementation of
VAT. Madhya Pradesh VAT Bill had already been accorded
Presidential Assent in November 2002. One State, namely,
Haryana, has already introduced VAT on its own with good
results on revenue growth. It is important to note that in
the meeting of Empowered Committee on June 18, 2004
when Shri P. Chidambaram, the Union Finance Minister,
was invited and was kindly present, all the States, excepting
one, once again categorically renewed their commitment
to the introduction of VAT from April 1, 2005. Even for this
particular State with certain problems, a positive interaction
has recently been organised with that State to resolve
certain genuine ground-level problems. Now nearly all the
States have either finalised their VAT Bills and are in the
5
process of obtaining Presidential Assent, or will reach that stage
very soon.
2. Design of State-Level VAT
2.1 As already mentioned, the design of State-level VAT

has been worked out by the Empowered Committee through
several rounds of discussion and striking a federal balance
between the common points of convergence regarding VAT and
flexibility for the local characteristics of the States. Since the
State-level VAT is centred around the basic concept of “set-off”
for the tax paid earlier, the needed common points of
convergence also relate to this concept of set-off/input tax credit,
its coverage and related issues as elaborated below.
Concept of VAT and Set-off / Input Tax Credit
2.2 The essence of VAT is in providing set-off for the tax

paid earlier, and this is given effect through the concept of input
tax credit/rebate. This input tax 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 input tax
credit from tax collected on sales during the payment period
(say, a month).
If, for example, input worth Rs. 1,00,000/- is purchased

and sales are worth Rs. 2,00,000/- in a month, and input tax rate
and output tax rate are 4% and 10% respectively, then input tax
6
credit/set-off and calculation of VAT will be as shown below:
(a) Input purchased within the month : Rs. 1,00,000/-

(b) Output sold in the month : Rs. 2,00,000/-
(c) Input tax paid : Rs. 4,000/-
(d) Output tax payable : Rs. 20,000/-
(e) VAT payable during the month : Rs. 16,000/-
after set-off/input tax credit
[(d) – (c)]
Coverage of Set-Off / Input Tax Credit
2.3 This input tax credit will be given for both manufac-
turers and traders for purchase of inputs/supplies meant for
both sale within the State as well as to other States, irrespective
of when these will be utilised/sold. This also reduces immediate
tax liability.
Even for stock transfer/consignment sale of goods out of

the State, input tax paid in excess of 4% will be eligible for tax
credit.
Carrying Over of Tax Credit
2.4 If the tax credit exceeds the tax payable on sales in a

month, the excess credit will be carried over to the end of next
financial year. If there is any excess unadjusted input tax credit
at the end of second year, then the same will be eligible for refund.
Input tax credit on capital goods will also be available for

traders and manufacturers. Tax credit on capital goods may be
7
adjusted over a maximum of 36 equal monthly instalments.
The States may at their option reduce this number of instalments.
There will be a negative list for capital goods (on the basis
of principles already decided by the Empowered Committee)
not eligible for input tax credit.
Treatment of Exports, etc.
2.5 For all exports made out of the country, tax paid within
the State will be refunded in full, and this refund will be made
within three months. Units located in SEZ and EOU will be
granted either exemption from payment of input tax or refund
of the input tax paid within three months.
Inputs Procured from Other States
2.6 Tax paid on inputs procured from other States through

inter-State sale and stock transfer will not be eligible for credit.
However, a decision has been taken for duly phasing out of inter-
State sales tax or Central sales tax. As a preparation for that, a
comprehensive inter-State tax information exchange system is
also being set up.
Treatment of Opening Stock
2.7 All tax-paid goods purchased on or after April 1, 2004

and still in stock as on April 1, 2005 will be eligible to receive
input tax credit, subject to submission of requisite documents.
Resellers holding tax-paid goods on April 1, 2005 will also be
eligible. VAT will be levied on the goods when sold on and after
8
April 1, 2005 and input tax credit will be given for the sales tax
already paid in the previous year. This tax credit will be available
over a period of 6 months after an interval of 3 months needed
for verification.
Compulsory Issue of Tax Invoice, Cash Memo or Bill
2.8 This entire design of VAT with input tax credit is

crucially based on documentation of tax invoice, cash memo or
bill. Every registered dealer, having turnover of sales above an
amount specified, shall issue to the purchaser serially numbered
tax invoice with the prescribed particulars. This tax invoice will
be signed and dated by the dealer or his regular employee,
showing the required particulars. The dealer shall keep a
counterfoil or duplicate of such tax invoice duly signed and
dated. Failure to comply with the above will attract penalty.
Registration, Small Dealers and Composition Scheme
2.9 Registration of dealers with gross annual turnover

above Rs. 5 lakh will be compulsory. There will be provision for
voluntary registration. All existing dealers will be automatically
registered under the VAT Act. A new dealer will be allowed 30
days time from the date of liability to get registered.
Small dealers with gross annual turnover not exceeding

Rs. 5 lakh will not be liable to pay VAT. States will have flexibility
to fix threshold limit within Rs. 5 lakh.
Small dealers with annual gross turnover not exceeding

Rs. 50 lakh who are otherwise liable to pay VAT, shall however
9
have the option for a composition scheme with payment of tax
at a small percentage of gross turnover. The dealers opting
for this composition scheme will not be entitled to input tax
credit.
Tax Payer’s Identification Number (TIN)
2.10 The Tax Payer’s Identification Number will consist

of 11 digit numerals throughout the country. First two characters
will represent the State Code as used by the Union Ministry of
Home Affairs. The set-up of the next nine characters may,
however, be different in different States.
Return
2.11 Under VAT, simplified form of returns will be notified.

Returns are to be filed monthly/quarterly as specified in the State
Acts/Rules, and will be accompanied with payment challans.
Every return furnished by dealers will be scrutinised
expeditiously within prescribed time limit from the date of filing
the return. If any technical mistake is detected on scrutiny, the
dealer will be required to pay the deficit appropriately.
Procedure of Self-Assessment of VAT Liability
2.12 The basic simplification in VAT is that VAT liability

will be self-assessed by the dealers themselves in terms of
submission of returns upon setting off the tax credit. Return
forms as well as other procedures will be simple in all States.
There will no longer be compulsory assessment at the end of
each year as is existing now. If no specific notice is issued
10
proposing departmental audit of the books of accounts of the
dealer within the time limit specified in the Act, the dealer will
be deemed to have been self-assessed on the basis of returns
submitted by him.
Because of the importance of the concept of self-assessment

in VAT, provision for “self-assessment” will be stated in the VAT
Bills of the States.
Audit
2.13 Correctness of self-assessment will be checked

through a system of Departmental Audit. A certain percentage
of the dealers will be taken up for audit every year on a scientific
basis. If, however, evasion is detected on audit, the concerned
dealer may be taken up for audit for previous periods. This
Audit Wing will remain delinked from tax collection wing to
remove any bias. The audit team will conduct its work in
a time bound manner and audit will be completed within
six months. The audit report will be transparently sent to the
dealer also.
Simultaneously, a cross-checking, computerised system

is being worked out on the basis of coordination between
the tax authorities of the State Governments and the authorities
of Central Excise and Income Tax to compare constantly the
tax returns and set-off documents of VAT system of the
States and those of Central Excise and Income Tax. This
comprehensive cross-checking system will help reduce tax
evasion and also lead to significant growth of tax revenue. At
the same time, by protecting transparently the interests of
11
tax-complying dealers against the unfair practices of tax-evaders,
the system will also bring in more equal competition in the sphere
of trade and industry.
Declaration Form
2.14 There will be no need for any provision for

concessional sale under the VAT Act since the provision for set-
off makes the input zero-rated. Hence, there will be no need for
declaration form, which will be a further relief for dealers.
Incentives
2.15 Under the VAT system, the existing incentive schemes

may be continued in the manner deemed appropriate by the
States after ensuring that VAT chain is not affected.
Other Taxes
2.16 As mentioned earlier, all other existing taxes such as

turnover tax, surcharge, additional surcharge and Special
Additional Tax (SAT) would be abolished. There will not be any
reference to these taxes in the VAT Bills. The States that have
already introduced entry tax and intend to continue with this
tax should make it vatable. If not made vatable, entry tax will
need to be abolished. However, this will not apply to entry tax
that may be levied in lieu of octroi.
Penal Provisions
2.17 Penal provisions in the VAT Bills should not be more

stringent than in the existing Sales Tax Act.
12
Coverage of Goods under VAT
2.18 In general, all the goods, including declared goods

will be covered under VAT and will get the benefit of input tax
credit.
The only few goods which will be outside VAT will be liquor,
lottery tickets, petrol, diesel, aviation turbine fuel and other motor
spirit since their prices are not fully market determined. These
will continue to be taxed under the Sales Tax Act or any other
State Act or even by making special provisions in the VAT Act
itself, and with uniform floor rates decided by the Empowered
Committee.
VAT Rates and Classification of Commodities
2.19 Under the VAT system covering about 550 goods,

there will be only two basic VAT rates of 4% and 12.5%, plus a
specific category of tax-exempted goods and a special VAT rate
of 1% only for gold and silver ornaments, etc. Thus the
multiplicity of rates in the existing structure will be done away
with under the VAT system.
Under exempted category, there will be about 46 commodities

comprising of natural and unprocessed products in unorganised
sector, items which are legally barred from taxation and items
which have social implications. Included in this exempted
category is a set of maximum of 10 commodities flexibly chosen
by individual States from a list of goods (finalised by the
Empowered Committee) which are of local social importance
for the individual States without having any inter-state
implication. The rest of the commodities in the list will be
common for all the States. Under 4% VAT rate category, there
will be the largest number of goods (about 270), common for all
13
the States, comprising of items of basic necessities such as
medicines and drugs, all agricultural and industrial inputs,
capital goods and declared goods. The schedule of commodities
will be attached to the VAT Bill of every State. The remaining
commodities, common for all the States, will fall under the
general VAT rate of 12.5%.
In terms of decision of the Empowered Committee, VAT on
AED items relating to sugar, textile and tobacco, because of initial
organisational difficulties, will not be imposed for one year after
the introduction of VAT, and till then the existing arrangement
will continue. The position will be reviewed after one year.
Effects of the VAT System
2.20 This design of the State-level VAT has been carefully

worked out by the Empowered Committee after repeated
interactions with the States and others concerned and striking a
balance between the needed convergence and federal flexibility
as well as ground-level reality. If now all the components of the
VAT design are taken together, then it will be seen that the total
effect of this VAT system will be to rationalise the tax burden
and bring down, in general, the price level. This will also stop
unhealthy tax-rate “war” and trade diversion among the States,
which had adversely affected interests of all the States in the
past. Moreover, this VAT design will also significantly bring in
simplicity and transparency in the tax structure, thereby
improving tax-compliance and eventually also the revenue
growth, as mentioned in the beginning.
3. Steps Taken by the States

3.1 It is now of significance to note that most of the States,
after collective interaction in the Empowered Committee, have
either already modified or agreed to modify their VAT Bills by
14
incorporating these common points of convergence including
flexibility as mentioned in the VAT design above, and are also
taking other preparatory steps towards introduction of VAT from
April 1, 2005.
3.2 As a part of the preparatory steps, the States have

started the process of preparing the draft of VAT Rules, including
Books of Accounts to be maintained. The objective will be to keep
these as simple as possible so that it becomes easy for a small
trader to comply with the requirements.
3.3 Moreover, the States have initiated, and in many cases

also completed, steps for computerisation upto the levels of
assessing officers and also at the check posts. This process will
continue since this is extremely important for document-based
verification and integration with Taxation Information Exchange
System as well as with information of the Central excise and
income tax systems as indicated earlier.
3.4 It may be mentioned here that appropriate Central

funds for VAT-related computerisation in the North-Eastern
States are also being released by the Government of India.
4. Related Issues
4.1 While the States have thus taken several steps towards
introduction of VAT, certain supporting decisions were critically
needed at the national level for more effective implementation
of VAT from April 1, 2005.
4.2 It needs to be carefully noted that although introduction

of VAT may, after a few years, lead to revenue growth, there
may be a loss of revenue in some States in the initial years of
15
transition. It is with this in view that the Government of India
had agreed to compensate for 100 per cent of the loss in the first
year, 75 per cent of the loss in the second year and 50 per cent of
the loss in the third year of introduction of VAT, and the loss
would be computed on the basis of an agreed formula. This
position has not only been reaffirmed by the Union Finance
Minister in his Budget Speech of 2004-05, but a concrete formula
for this compensation has also now been worked out after
interaction between the Union Finance Minister and the
Empowered Committee.
4.3 As mentioned earlier, there is also a need, after

introduction of VAT, for phasing out of Central Sales Tax
(CST). However, the States are now collecting nearly Rs. 15
thousand crore every year from CST. There is accordingly
a need of compensation from the Government of India
for this loss of revenue as CST is phased out. Moreover,
while CST is phased out, there is also a critical need for
putting in place a regulatory frame-work in terms of Taxation
Information Exchange System to give a comprehensive
picture of inter-State trade of all commodities. As already
mentioned, this process of setting up of Taxation Information
Exchange System has already been started by the Empowered
Committee, and is expected to be completed within one year.
The position regarding CST will be reviewed by the Empowered
Committee during 2005-06, and suitable decision on the phasing
out of CST will be taken.
4.4 It is also essential to bring imports into the VAT

chain. Because of the set-off, this will not result in any tax
cascading effect, but will only improve tax compliance.
A proposal for VAT on imports, including the collection
mechanism with adequate safeguards for the protection of
16
interest of land-locked States, is being discussed with the
Government of India.
4.5 Similarly, discussion between the Empowered

Committee and the Government of India is going on for an early
decision on the question of collection and appropriation of service
tax by the Centre and the States.
If decisions on VAT on imports and service tax are taken

expeditiously at the national level, then these two important
spheres of taxation can be integrated, along with the AED items
as mentioned earlier, into the VAT system of the States from the
second year of introduction of VAT.
4.6 It may be noted that this VAT design has been worked
out carefully by the Empowered Committee to strike a balance
not only between the common points of convergence and federal
flexibility, but also a balance between what can be done to begin
with and what should be incorporated subsequently for further
perfection of the VAT system.
4.7 For successful implementation of State-level VAT, close

interaction with trade and industry is specially important. The
Empowered Committee has therefore also set up a Consultative
Committee with one representative from each of the national
level trade organisations and national level chambers of
commerce and industry. This Committee has already started
interacting with the Empowered Committee. This process of
interaction will continue regularly to discuss issues and sort out
problems of implementation of VAT. Such Consultative
Committees will also be set up at the level of each State, and
interaction with the State Government will take place in a
similarly regular manner.
17
4.8 In course of discussion with representatives of trade
and industry, reference has often been made to the earlier VAT
Bills of some of the States. It should be clearly noted, as already
mentioned before, that all the States have agreed to amend their
earlier VAT Bills so as to conform broadly to the common design
as elaborated in this White Paper. This process of amendment
has also already started. The point of reference on VAT should
therefore be this design of VAT as explained in this White Paper.
It should also be mentioned that there are some important points
on the ground-level implementation of VAT which have been
raised by the representatives of trade and industry. Many of the
points will be taken care of in the VAT rules of the States, with
changes where necessary.
4.9 Finally, a comprehensive campaign on State-level will

be launched to communicate in simple and transparent manner
the benefit of VAT for common people, traders, industrialists
and also the State Governments. This campaign will then be
launched first at the national level on the basis of necessary
coordination between the States and the Centre. This will then
be simultaneously followed up at the level of every State and
also in districts of the States. This campaign will be based on
written materials as well as publicity through all media. The
purpose of this campaign will be a two-way interaction between
the Government and the trade and industry as well as the
common people.
There is now only looking forward to the introduction of

State-level VAT by all the States and Union Territories from
April 1, 2005. We seek cooperation of all sections of people in
the country.
——————
18
PREFACE
This White Paper is a result of collective efforts of all the

States in formulating the basic design of the State-level Value
Added Tax (VAT) through repeated and candid discussions in
the Empowered Committee of State Finance Ministers.
The State-level VAT, as elaborated in this White Paper, has

certain distinct advantages over the existing sales tax structure.
The VAT will not only provide full set-off for input tax as well as
tax on previous purchases, but it will also abolish the burden of
several of the existing taxes, such as turnover tax, surcharge on
sales tax, additional surcharge, special additional tax, etc. In
addition, Central Sales Tax is also going to be phased out. As a
result, the overall tax burden will be rationalised, and prices, in
general, will fall. Moreover, VAT will replace the existing system
of inspection by a system of built-in self-assessment by traders
and manufacturers. The tax structure will become simple and
more transparent. This will significantly improve tax compliance
and will also help increase revenue growth.
While this State-level VAT has all these advantages, it is a

State subject derived from Entry 54 of the State List, for which
the States are sovereign in taking decisions. On these decisions
on VAT, the States, through discussion in the Empowered
Committee, have found it in their interests, to avoid unhealthy
competition and have certain features of VAT to be common for
all the States. These features will constitute the basic design of
VAT. At the same time, the States will have freedom for
appropriate variations consistent with this basic design. This
White Paper is a collective attempt of the States to strike a balance
between this needed commonality and the desired federal
flexibility in the VAT structure.
The White Paper also strikes a balance between what
is possible in the VAT design to begine with and what can
be improved upon in subsequent years as we gather more
experience.
The White Paper further mentions how after working out a
consensus on this VAT design, nearly all the States either have
finalised their VAT Bills by now and are in the process of
obtaining Presidential Assent, or will reach that stage very soon.
Even for one major State where there are some ground-level
problems, a positive interaction with the Empowered Committee
has recently opened up the possibility of resolving most of these
problems.
These efforts of the States towards formulation of VAT design
and its implementation have received full cooperation of the
Finance Ministry, Government of India. At the same time,
the Finance Ministry has never imposed their views on us.
We, therefore, remain thankful to the former Union Finance
Ministers––Dr. Manmohan Singh, Shri Yashwant Sinha and
Shri Jaswant Singh. We are specially grateful to Shri P.
Chidambaram, the present Union Finance Minister, for his active
support over the last eight months, when he not only helped
formulate the modality of Central financial support to the
States for possible loss of revenue in the transitional years
of implementation of VAT, but also took time off his busy
schedule to participate with us in the campaign for VAT in
the States.
(ii)
It has always been fruitful to have interaction with
Dr. Parthasarathi Shome, Adviser to the Union Finance Minister,
for his insightful observations on the analytical structure of VAT
as well as his reference to vast experience in the implementation
of VAT. The Secretary, Revenue, Additional Secretary, Revenue
and all the concerned officials of the Revenue Department of
the Finance Ministry have helped us by participating in the
discussions whenever we requested them, and also by assisting
in various procedural matters. Interaction with Dr. Govinda Rao,
the Chairman of Technical Experts Committee on VAT and other
members of the Committee has also been useful. We take this
opportunity to thank all of them.
Discussions with the representatives of trade organisations
and chambers of commerce and industry at the national level as
well as in the States have been relevant in assessing the ground-
level difficulties. Together with them, we are determined to
overcome these difficulties in implementing VAT in the States.
We remain thankful to them, and our mutual interaction will
take place regularly.
Finally, this White Paper could be written only on the basis
of lively support of the Finance Ministers of the States, and with
constant help from the Finance Secretaries and the
Commissioners of Commercial Taxes of the States. The
Commissioners of Commercial Taxes have often burnt their mid-
night oil, and their contribution should be particularly recorded.
Shri Ramesh Chandra, Member-Secretary of the Empowered
Committee had to carry on the difficult administrative task in
the functioning of the Empowered Committee. We appreciate
the efforts of Shri Chandra and the staff of the Empowered
Committee.
(iii)
Even after all these efforts, there may be some unavoidable
shortcomings in this White Paper, which we will try to overcome
as we learn more from the actual experience of implementation
of VAT. With this background and the attitude, this White Paper
is an expression of the genuine commitment of the States to the
implementation of VAT from April 1, 2005, which we are all
looking forward to.
Asim Kumar Dasgupta

Convenor,
Empowered Committee of
State Finance Ministers,
and
New Delhi, Finance Minister,
January 17, 2005. Government of West Bengal.
(iv)
A White Paper
On
State-Level Value Added Tax
By
The Empowered Committee of State Finance Ministers
(Constituted By the Ministry of Finance,
Government of India
On the Basis of Resolution Adopted in the
Conference of the Chief Ministers on
November 16, 1999)
New Delhi
January 17, 2005
A White Paper
On
State-Level Value Added Tax
By
The Empowered Committee of State Finance Ministers
(Constituted By the Ministry of Finance,
Government of India
On the Basis of Resolution Adopted in the
Conference of the Chief Ministers on
November 16, 1999)
New Delhi
January 17, 2005

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This course is intended for the following audiences:

l Members carrying out Sales Tax tasks

l Consultants involved in Project Management for MM and SD

 SAP AG WINLEN 1-1

This course will prepare you to:

 SAP AG WINLEN 1-2

After completing this course, you will be able to:

Note: This presentation is prepared as per our understanding of draft

 SAP AG WINLEN 1-3

Unit 1 Course Overview

 SAP AG WINLEN 1-4

 SAP AG WINLEN 2-1

 SAP AG WINLEN 2-2

 SAP AG 2002,VAT Overview 3

 SAP AG WINLEN 2-3

 SAP AG 2002,VAT Overview 4

 SAP AG WINLEN 2-4

Jan-Feb,2003 All States expected to

All States to notify VAT

uExtend Footprint Inside The Enterprise

 SAP AG WINLEN 2-5

 SAP AG WINLEN 2-6

 SAP AG WINLEN 2-7

 SAP AG 2002,VAT Overview 8

 SAP AG WINLEN 2-8

 SAP AG 2002,VAT Overview 9

 SAP AG WINLEN 2-9

Local Purchase Local Sales

TAX Invoice TAX Invoice

Vendor Manufacturer Wholesaler

Input Tax= Rs 10 Output Tax= Rs 15

Net Tax to Govt. = Output Tax- Input Tax

* Assuming General VAT Rate @ 10%

 SAP AG WINLEN 2-10

Net Tax to Govt.= Rs 2.5 Karnataka Net Tax to govt.= Rs 2.5

IP Tax = OP Tax = IP Tax = OP Tax =

Sales @ Rs. 200

Assume Uniform Rate of VAT @10%

 SAP AG 2002,VAT Overview 11

 SAP AG WINLEN 2-11

Net Tax to Govt.= Rs 2.5 Karnataka

IP Tax = OP Tax= IP Tax = CST =

Consumer Sales @ Rs. 200 Retailer

Assume Uniform Rate of VAT @10%

 SAP AG 2002,VAT Overview 12

 SAP AG WINLEN 2-12

 SAP AG WINLEN 2-13

VAT Rates &

 SAP AG 2002,VAT Overview 14

 SAP AG WINLEN 2-14

 SAP AG 2002,VAT Overview 15