VALUE ADDED TAX

VAT
Presented by:

S GOPALAKRISHNAN. M.Sc., M.B.A., F.I.C.W.A., Cost and Management Accountant

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BASIC QUESTION

Whether amount collected as tax from the consumer reaches the Government? Answer: Why?

N O!

Due to First Point Tax System

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WHAT CONSUMER PAYS? Under First Point System

Sale by Retailer- Max. Retail Price+ Local Taxes

- @ MRP Rs 100.00 and 12.5% Local Taxes - Consumer Pays Rs. 112.50

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CHAIN OF SALES

Manufacturer

C& F Agent Distributor Wholesale Distributor Retailer Consumer

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STAGEWISE TAX INCIDENCE

Under First Point System

Chain of Sales and Impact of Tax ( @12.5% Basic tax and 1% Resale Tax)

Channel

Selling Price- Rs.

Tax Rs.

Net effect Rs.

Manufacturer C& F agent Distributor Wholesaler Retailer

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50.00 65.00 75.00 85.00 100.00

6.25 0.65 0.75 0.85 1.00

6.25 6.90 7.65 8.50 9.50 55

WHAT CONSUMER PAYS? UNDER VAT SYSTEM

Sale by Retailer- Max. Retail Price+ Local Taxes

- @ MRP Rs 100.00 and 12.5% Local Taxes - Consumer Pays Rs. 112.50 Any Change in the price to the Consumer?

NO

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VAT

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STAGEWISE TAX INCIDENCE

Chain of Sales and Impact of Tax (VAT @12.5%)

UNDER VAT SYSTEM

Selling Price- Rs. Tax Rs.

Channel

Net effect Rs.

Manufacturer C& F agent Distributor Wholesaler Retailer

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50.00 65.00 75.00 85.00 100.00 VAT

6.25 1.88 1.25 1.25 1.87

6.25 8.13 9.38 10.63 12.50 77

COMPARISON OF TAX RECEIPT TO GOVERNMENT

Under First Point System (Earlier System) = Rs.

9.50

Under VAT System

( w.e. from 01.01.07)= Rs. 12.50

WHAT HAPPENS TO THE DIFFERENCE IN TAX?

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TAX STRUCTURE IN INDIA THREE TIERS OF GOVERNMENT 1.UNION GOVERNMENT 2.STATE GOVERNMENT 3.LOCAL BODY
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Purposes and effects of Enforcement of law and public order, Taxation Protection of property,
Economic infrastructure roads, legal tender, Enforcement of contracts, etc., Public works, Social engineering, The operation of government itself. Welfare and public services, such as: Education systems, Health care systems, Pensions for the elderly, Unemployment benefits Energy, water and waste management systems, Public transportation.

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POWERS UNDER CONSTITUTION Main Direct Taxes:

- Income tax, - Wealth tax etc Only by Union Govt.

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POWERS UNDER CONSTITUTION Main In-Direct Taxes:

By Union Govt. By State Govt.
Customs Central Excise Service Tax etc Sales tax Central Sales Tax State Excise Land Revenue etc
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By Local Bodies
Octroi Taxes on Property

Taxes on Passengers Advertisements etc

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Different Systems of Sales tax * First Point - Single Stage Tax * Last Point Single Stage Tax * Double Point Tax * Multi Point Tax * Value Added Tax

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First Point - Single Stage Tax

Lower Taxable Base Multiple Rates Litigation Cascading Effect

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VAT

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Larger Taxable Base (More prone to evasion) Multiple Rates Cascading Effect

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Double Point Tax

Turnover tax Retail Tax Complicated Cascading Effect Multiple Rates

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Multi Point Tax

Cascading Effects Multiple Rates

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Value Added Tax

Large Base No Cascading Effect Self Policing Lesser Rate Lesser Litigation Transparent

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VAT

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What is VAT?

VAT is not a tax by itself. It is a system under which tax is levied. VAT is a multistage tax to be imposed at final consumption. Levied as a proportion of value added. Covers goods and services.

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Journey of Sales Tax in IndiaTowards VAT

1938- Madhya Pradesh introduced Sales tax in the form of Petrol tax. 1939- Tamil Nadu is the First state introduced a Multi-point Sales tax. After World War II, close on the heels of TN, many states resorted to Sales tax. 1956- Central Sales Tax introduced. (Origin based) Till 1980- Sales Tax was Multi- point without Set- Off

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Journey of Sales Tax in IndiaTowards VAT

There after, most of the States resorted to Single Point on higher rate of Tax.

Funds needed for Developmental activities of States are NOT adequately supported by Tax collection.

The system of Sales Tax is highly saturated. Increase of Sales Tax rates was the only option. Industry and Trade is adversely affected leading to : Evasion, Suppression and Unhealthy competition among states.
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-flight of trade,

Journey of Sales Tax in IndiaTowards VAT

Industry and Trade is adversely affected leading to : - Flight of trade, - Evasion, - Suppression and - Unhealthy competition among states. States and Union Government felt Tax Reform VAT was the answer.

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METHODS FOR VAT TAXATION

Invoice Method Subtraction Method

With single VAT rate under both system will be same.

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Input and Output Tax

Input Tax Output Tax

Capital Goods Raw Materials Consumables Trading Goods Sales

Business

Vat paid by a registered business on taxable input purchases for business

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VAT charged by a registered business on sales made by the business to its customers
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Input Tax Credit (ITC)

Credit of VAT paid on purchases within the state. ITC available only to VAT registered dealer on:

- Purchases made from another VAT registered dealer. - Purchase of Goods should be in the course of business. - Goods purchased must be taxable goods as specified in the First Schedule of TNGST Act. - Against a valid VAT invoice. - If the Original invoice/ bill is lost, certified copy of invoice produced.

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Input Tax Credit (ITC)

- The goods so purchased must be for: (i) Re-sale within Tamilnadu (ii) Use in manufacture of other goods in Tamilnadu (iii) Use of containers, labels, and other materials for packing of the goods (iv) Sale in the course of Inter-state trade falling under sub-section (1) of Section 8 of CST Act, 1956. (v) Transfer of goods to outside the State to Branch or Agent with support of Form F.

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VAT

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Input Tax Credit (ITC) not allowed

(a) For the purchases made by the registered dealers from outside the State
(b)

Goods purchased in the course of business but used for the purchase of providing facility to the proprietor or partner or director or employee. Purchase of Air -conditioner if the dealers are not dealer in Airconditioner Purchase of all automobiles including all vehicles, if the dealers are not dealing in automobile goods. Purchase of goods for free sample or gift or personal use.

(c)

(d)

(e)

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Input Tax Credit (ITC) not allowed

(f) Goods stolen or lost (g) Inputs destroyed due to fire or lost in storage. (h) Goods damaged in transit
(i)

Goods destroyed at the intermediary stage in the process of manufacture.

(j) Sale of goods in the course of inter- state trade and commerce without Form- C.

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Input Tax Credit (ITC) not allowed

(k) Transfer of goods to outside the state for sale either by branch or agent without Form- F (l) The claim of input tax credit shall be on the basis of original purchase invoice/ bill, if, the original invoice/ bill is lost, the registered shall file duplicate carbon copy of invoice/ bill. If the dealer fails to claim the input tax credit in the month of filing returns he may claim it either before the end of the financial year or before 90 days from the date of the purchase whichever is later.

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How VAT Operates ?

INVOICE METHOD (All Inputs taxable under ONE rate) Particulars Invoice Value Rs. Inputs for A Product X (@12.50%) Product Y (@12.50%) 260 450 -------710 'A' sold goods to 'B' 'B' sold goods to 'C' 'C' sold goods to 'D' 'D' sold goods to 'E' Final 1125 1800 2250 2700 2700 231 400 -------631 1000 1600 2000 2400 2400 29 50 ------79 125 200 250 300 300 ------0 79 125 200 250 0 0 29 50 -------79 46 75 50 50 300 Material Value Rs. Rs. Rs. Rs. VAT ITC NET

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How VAT Operates ?

SUBTRACTION METHOD (All Inputs taxable under ONE rate) Particulars Invoice Value Rs. Inputs for A On Inputs 'A' sold goods to 'B' 'B' sold goods to 'C' 'C' sold goods to 'D' 'D' sold goods to 'E' Final 7101125 1800 2250 2700 2700 710 1125 1800 2250 2250 415 675 450 450 450 79 46 75 50 50 300 Purchase Price Rs. Value Addn+ Tax in Rs VAT @12.5% Rs.

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How VAT Operates ?

INVOICE METHOD (Inputs Taxable at Different Rates) Particulars Invoice Rs. Inputs for A Product X @12.5% Product Y @ 4.0% 450 260 400 250 50 10 0 0 50 10 Material Value Rs. Rs. Rs. Rs. VAT ITC NET

710 'A' Sold Goods to 'B' 'B' Sold Goods to 'C' 'C' Sold Goods to 'D' 'D' Sold Goods to 'E' Final 1125 1800 2250 2700 2700

650 1000 1600 2000 2400 2400

60 125 200 250 300 300

0 60 125 200 250

60 65 75 50 50 300

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How VAT Operates ?

SUBTRACTION METHOD (Inputs Taxable at Different Rates) Particulars Invoice Purchase Price Rs. Inputs for A On input by A 'A' Sold Goods to 'B' 'B' Sold Goods to 'C' 'C' Sold Goods to 'D' 'D' Sold Goods to 'E' Final 710 1125 1800 2250 2700 2700 710 1125 1800 2250 2250 415 675 450 450 60 46 75 50 50 281 Rs. Value Added Tax Rs. VAT @12.50% Rs.

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Journey has just begun... Major steps in convergeing towrds a single and uniform tax.

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THANK YOU

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