VAT Key Implementation Issues

S. Madhavan
28th May 2005

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Agenda

Overview

Likely next steps

VAT Act analysis

Key issues surrounding VAT

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Overview
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Overview
Value Added Tax (VAT) is a multistage tax, levied on value added at different stages of production and distribution of a commodity or the supply of a service Since it is a tax on both goods & services, it is also known as a Goods & Services Tax

VAT operates as a tax on the output value with a credit of the tax paid at the previous stage of value addition

This is called the invoice credit method

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Overview
Coverage
550 items covered under VAT

Exclusions are liquor, petroleum products, sugar, textiles, tobacco

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Overview
VAT rates
The VAT rates are as follows 0% 1% 4% : : : Zero rating for exports Precious metals like gold and silver Industrial inputs, capital goods, agro products & medicines (about 270 items) 12.5% RNR : 20% : Other items Demerit rate

Coexistence of the 4% / 10% Central Sales Tax (CST)

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Overview
Input Tax Credit Eligibility
Input tax credits available on opening stocks (1/4/05) of raw materials (not WIP and FG) and stock in trade VAT credit to be restricted only to intra State purchases of: Inputs Capital goods used in manufacturing Input tax relief not available in the following cases: Purchases made inter State CST Purchase of inputs from non VAT registered dealers Usage of inputs in the manufacture of exempted goods
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Overview
Input Tax Credit Utilisation
Credit can be utilized to pay output VAT on Intra State sales Inter State sales of finished products

Loss of credits with regard to non sales transactions i.e. on stock/branch transfers Loss to be limited to the CST rate neutrality in procurement Cash refund of input tax credits on exports
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States & Union Territories presently under VAT

States Andhra Pradesh Arunachal Pradesh Assam Bihar Dadra & Nagar Haveli (UT) Daman & Diu (UT) Delhi Goa Haryana Himachal Pradesh Implementation date 01/04/2005 01/04/2005 01/05/2005 01/04/2005 01/04/2005 01/04/2005 01/04/2005 01/04/2005 01/04/2003 01/04/2005 States Jammu & Kashmir Karnataka Kerala Maharashtra Meghalaya Orissa Punjab Sikkim Tripura West Bengal Implementation date 01/04/2005 01/04/2005 01/04/2005 01/04/2005 01/05/2005 01/04/2005 01/04/2005 01/04/2005 01/04/2005 01/04/2005

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States & Union Territories intending to transition to VAT

Manipur Mizoram Nagaland Chandigarh (UT) Lakshadweep (UT)

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States & Union Territories undecided on implementation of VAT

Chhattisgarh Gujarat Jharkhand Madhya Pradesh Rajasthan Pondicherry (UT) Tamil Nadu Uttar Pradesh Uttaranchal

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Likely Next Steps

Proposed extension of coverage to 2000 items Extension to petro products HSN to form basis of classification Possibility of introduction of a 8% rate CST phase out State Service tax Import VAT
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2% in 2006 - 07 0% in 2007 - 08

Proposed Final Consumption Tax Model

Timeline ?
Unified VAT

Central VAT

State VAT

CENVAT (16%)

Service Tax (10%) CST 2% State VAT (RNR -12.5%) State Taxes State Service Tax

Central Taxes (4%

0%)

Integration of Central & State VAT

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VAT Act Analysis

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Comparative analysis of Sales Tax and VAT provisions

Parameters Tax rates Sales tax 4%, 8% & 12% No zero rating Surcharge, turnover tax, additional sales tax, entry tax N.A VAT 4% & 12.5% Zero rating No additional levies Entry taxes continue but vatable Introduced w.r.t industrial inputs and IT products Threshold of 5 lacs Tax invoices, tax credit register over and above the normal documentation Self assessment Comparison Reduction in tax slabs under VAT Removal of additional levies under VAT

Additional levies

HSN classification

Uniformity in classification under VAT Rationalisation Stringent requirements with regard to documentation under VAT Shift from regulatory control to trust on assessees
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Threshold limits for registration Documentation and records

Varying thresholds Normal documentation and records maintained for accounting purposes Assessment by authorities

Assessment

Comparative analysis of VAT provisions

Haryana VAT rates: Industrial inputs Capital goods as notified IT Products Petroleum products (Petrol. Diesel & ATF) 10%* (4% against forms) 10%* (4% against forms) 4% ATF & Petrol: 20%^ Diesel: 12%^ 4% 4% 4% 4% 4% 4% 4% 4% 12.5%** 12.5%** Delhi West Bengal Maharashtra Karnataka Andhra Pradesh

4% ATF & Petrol: 20%^ Diesel: 12.5%^ 12.5%

4% ATF & Petrol: 1725% Diesel: 17%25% 12.5%

4% ATF & Petrol: 25%-30% Diesel: 31%34% 12.5%

4% ATF & Petrol: 28% Diesel: 20%

4% ATF & Petrol: 32.55% Diesel: 21.33% 12.5%

Residual category 10%

12.5%

* Proposal to introduce a list of industrial inputs/capital goods chargeable @ 4% in line with the provision of other states ** Notification specifying industrial inputs and capital goods chargeable @ 4% expected shortly ^ Multipoint tax
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Comparative analysis of VAT provisions

Haryana WCT rates General WCT rates Composition Scheduled rates Delhi 12.5% West Bengal Maharashtra Karnataka Scheduled rates Andhra Pradesh Scheduled rates 4% on declared Scheduled rates goods and 12.5% on others 8%*

4%

No specific 2% composition schemes for works contractors At scheduled rates N.A

4%

4%

Lease tax

At scheduled At scheduled rates rates Continues but vatable N.A

At scheduled rates N.A

At scheduled At scheduled rates rates Special entry Continues tax continues but vatable but vatable** 2-15 lacs @4% 5-40 lacs @1%

Entry tax

VAT thresholds 5-40 lacs and @4% composition rates

10-50 lacs @1%

5- 50 lacs @ 0.25%

550 lacs @8%***

* Sub-contractors turnover deductions allowed from gross turnover ** Entry tax levied in lieu of octroi in Karnataka to continue but will not be vatable *** On difference between turnover of sales and purchases
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Comparative analysis of VAT provisions

Delhi Treatment of Goods (except capital goods) opening purchased on or stocks after April 1, 1) Period of 2004 to March 31, 2005 and purchase lying in stock as on zero date 2) Rates Tax paid under Delhi Sales Tax Act West Bengal Goods (except capital goods) purchased on or after April 1, 2004 to March 31, 2005 and lying in stock as on zero date Tax paid under West Bengal Sales Tax Act Maharashtra Trading goods held in stock eligible for set-off irrespective of the date of purchase Karnataka Andhra Pradesh Goods (including capital goods) purchased on or after April 1, 2004 to March 31, 2005 Goods (excluding capital goods) purchased on or after April 1, Capital goods purchased 2004 to March 31, 2005 and on or after 1.4.2003 lying in stock as eligible for set-off on zero date

Tax paid under Bombay Lower of tax paid Tax paid Sales Tax Act excluding under Karnataka under Andhra surcharge or turnover tax General Sales Pradesh Tax Act or General Karnataka VAT Sales Tax Act Act Can be claimed upfront Set-off relating to trading goods/capital goods, to be reversed if the said goods are not sold on or before 31.12.2005 In equal installments over a period of six months from end of three months from zero date In six equal instalments from August 2005

3) Utilization Entire credit can be claimed upfront

In equal installments over a period of six months from end of three months from zero date

Haryana has not been discussed as it is already operating under VAT

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Comparative analysis of VAT provisions

Haryana Existing Not Applicable registration status as on 1.4.05 Delhi To continue West Bengal To continue. However, application for replacement of old RC to be made Maharashtra Karnataka Andhra Pradesh Fresh application To continue Fresh only for dealers application registered under Bombay Sales Tax Act

Definition of Plant etc. used in capital manufacturing goods and other specified purposes like telecom network Treatment of unutilized input tax credit of the year 200506 Can be claimed as refund at the time of assessment

Plant etc. used in the process of mfg./ trade

Plant etc. used Meaning as Plant etc. assigned under in the course of used in the business with course of mfg. the IT Act value of Rs. 10 & works lacs or more contract

Plant & Machinery including computer systems

Can be claimed as refund at the end financial year 2005-06

No specific provision for refund

Can be claimed as refund at the end financial year 2005-06

Can be claimed as refund at the end financial year 2005-06

Can be claimed as refund at the end of financial year 2006-07

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Comparative analysis of VAT provisions

Haryana HSN classification Credit eligibility for stock transfers Incentives Not followed* Not available Delhi Industrial inputs Available in excess of 4% West Bengal Industrial inputs & IT products Available in excess of 4% Maharashtra Karnataka Andhra Pradesh IT products

Industrial inputs & Industrial inputs & IT IT products products Available in excess of 4% Available in excess of 4%

Available in excess of 4%

Converted to deferment

No incentives

Incentives to Incentives to continue as continue as such** such

Incentives to continue as such

Converted to deferment

* Proposed to be introduced for industrial inputs in line with the provisions of other States ** For exemptions continuing to manufacturers, only subsequent value additions by resellers will be subject to VAT

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Key Issues Surrounding VAT

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Key Issues Surrounding VAT

Continuation of CST - Ineligibility of input tax credits on inter-State procurement - Disallowance of credit on stock transfers to the extent of the CST rate Apportionment of input tax credits towards taxable and exempt supplies Lack of uniformity of provisions - Classification (and hence the applicable VAT rate) - Others
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Key Issues Surrounding VAT

Introduction of partial VAT - Uniform pricing of products - Differential documentation requirements - Amendments to ERP/IT systems - Differential accounting treatment

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Thank You

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