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Value Added Tax An Insight Praveen Nigam - Partner Grant Thornton India Not for further distribution without express written permission of Grant Thornton India. © Grant Thornton India: 2006 Contents Brief History Background Indirect Tax Structure in India VAT - A Roadmap to GST

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Value Added TaxAn InsightPraveen Nigam - PartnerGrant Thornton IndiaNot for further distribution without express written permission of Grant Thornton India.

© Grant Thornton India: 2006

  • Brief History
  • Background
  • Indirect Tax Structure in India
  • VAT - A Roadmap to GST
  • VAT- Current scenario
  • VAT- Applicability
  • Rate of Tax
  • Input Tax Credit
  • Other procedural aspects
  • Central Sales Tax
brief history
Brief History
  • Introduced in Morocco in the year 1962
  • Followed by Brazil, Denmark, France and Germany during 1967-68
  • Implemented in many countries during the 1980’s
  • Presently in more than 123 countries
  • US still working under the sales tax regime
  • Haryana introduced VAT, w.e.f. 1 April 2003, Most other States on 1 April 2005, U.P. still a non VAT State
  • Value Added Tax is a:
    • Multi-point taxation
    • Tax only on Value addition through Invoice method
    • A state subject
  • VAT allows credits of tax paid on previous intra state transactions
  • VAT has successfully eliminated the cascading impact of taxes
indirect tax structure in india
Indirect Tax Structure in India
  • Import of goods – Duties of Custom (Basic Duty + Addl. Duty+ CVD)
  • Manufacture of goods – Excise (CENVAT)
  • Sale of goods – VAT/ Sales Tax/ Central Sales Tax
  • Entry of goods in the State / Territorial Limit - Entry Tax / Octroi
  • Rendering of taxable services - Service Tax
  • Heavy cumulative burden of Indirect taxes
vat a roadmap to gst
VAT – A Roadmap to GST

Phase - I

  • Single point tax with multiple rate of taxes without any provision of set off

Phase - II

  • Multipoint taxation with provision of set off known as VAT


  • Levy of service tax on specified services by the States
  • Uniformity of rates across
  • Balancing of total impact of taxes
  • Abolishing CST in a phased manner
  • Arriving at a consensus rate of Goods & services
  • Implementation of GST ( Goods and Service Tax) by 1 April 2010
vat current scenario
VAT – Current scenario
  • In most of the States Implemented from 1 April 2005, other States joined later
  • U.P. still not under the VAT
  • Tax on inputs to be set-off against tax on final products
  • Taxes abolished
    • Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc.
  • Entry Tax
    • Has been made Vatable
    • Entry tax in lieu of Octroi - not Vatable
  • Central Sales Tax
    • To be charged @3% from 1 April 2007
    • To be abolished by 2010
vat applicability
VAT – Applicability
  • VAT not levied on
    • Inter-state sale / Inter-state branch transfer
    • Imports
    • Dealers below threshold level
  • 0% VAT rate on Exports
  • No specific rate of VAT on liquor, petrol, diesel, aviation turbine fuel
rate of tax cont
Rate of Tax cont…
  • Uniformity in Rates
    • Exempt Rate - 0% on 46 commodities consisting of
        • natural and unprocessed products like- Firewood, Plants, Garlic
        • Items legally barred from taxation like - News papers, Electricity energy
        • items having social implications like- salt, life saving drugs
    • Special Rate - 1%
      • Gold and silver ornaments
rate of tax cont10
Rate of Tax cont…
  • Uniformity in Rates
    • Essential/Mass Consumption Rate - 4%
      • 270 goods comprising basic necessities and
        • Agricultural and industrial inputs;
        • IT related goods
        • medicines and drugs;
        • capital goods;
        • Iron, Aluminum, Copper, zinc etc.
    • Revenue Neutral Rate - 12.5 %
rate of tax cont11
Rate of Tax cont…
  • Most statutory Forms under State Sales Tax laws for concessional rate abolished
  • Composition Schemes on the basis of turnover, e.g. in Delhi, dealers having turnover upto 50 Lac may opt to pay tax at a composite rate of 1% subject to specified conditions
rate of tax cont12
Rate of Tax cont…
  • Specific provisions related to tax on Works Contract
    • Bifurcation of goods and services
    • Specific rate of deductions
    • More complicated abatement schemes under West Bengal
    • Composition scheme for specified categories
input tax credit
  • Input tax credit available on:
    • VAT paid on inputs
    • VAT paid on Capital Goods
    • Entry Tax (not in lieu of Octroi)
  • Credit can be utilized towards
    • VAT payable on Finished Goods
    • CST payable on Inter State Sales
    • Any interest or penalty under VAT
  • Refund in case of exports
  • Refund of unutilized credit at the end of specified period
input tax credit14
  • VAT credit in case of Capital Goods
    • Available but to be adjusted over a period of three years or specified period
    • Not available on Capital Goods specified in negative list like Cars, Air Conditioners etc.
  • VAT Credit refunded within three months in case of exports where turnover is above Rs.5 Crore
  • Unutilised Credit to be carried over till the end of the next financial year & would be refunded if remains unutilised
input tax credit restrictions
  • VAT credit available only in case of :
    • Taxable intra State sales
    • Taxable inter-state sales
    • Export out of India
    • In case inter state stock transfer -VAT credit to be reduced
      • In case of goods specified in the IInd schedule – 100% ( 1%)
      • In case of goods specified in the IIIrd schedule – 100% ( 4%)
      • In case of goods specified in the Ivth schedule – 20% ( 20%)
input tax credit restrictions16
  • VAT Credit not available in following cases:
    • Inputs used in the manufacture of exempted goods
    • Purchases for other than manufacture/ re-sale
    • Purchases made inter State/ in-transit
    • Purchases of goods of negative list
      • Delhi - Fuel in the form of Petrol, Diesel and Kerosene, LPG, CNG, Coal
      • AP - Fuel, Coal and Natural Gas used for power generation
      • Jharkhand - Consumables
      • Tripura – Credit available in excess of 4% on petroleum products (other than petrol, ATF and diesel) and other fuels
procedural issues
Procedural Issues
  • Different rate of VAT on Petroleum products
    • Delhi 20%, M.P. – 29%, Gujarat – 24% ~ 38%
  • List of goods exigible to VAT @4% not uniform for all the States for example Ornaments made of rolled gold and imitation gold are exigible to VAT @4% in M.P. whereas in Delhi chargeable to VAT @12.5%
  • Applicability of VAT on Deemed Exports
    • No specific exemption, methodology of payment of tax and refund
other procedural aspects
Other Procedural aspects
  • Goods sent for job-work
    • States providing methodology similar to Excise Law i.e. reversal of input tax credit on non receipt of goods within 180 days
    • Some States treating dispatch to job-workers as branch transfers
  • No uniform list of capital goods and utilization on input tax credit thereon
central sales tax concept cont
Central Sales Tax – Concept cont…
  • Tax on inter state sale of goods
  • Tax collected by the State where movement of goods commences
  • No tax on
    • Stock transfer/ branch transfer
    • In transit sales
    • Sale in the course of imports
    • Export sale
central sales tax concept cont20
Central Sales Tax – Concept cont…
    • Sale to registered dealer for manufacture, resale or used Telecommunication network, Mining, electricity generation/ distribution – 4% against Form - C
    • Sale to Government – 4% against Form - D
    • Others not covered by above
      • Declared goods twice the rate applicable in the State – 8%
      • Others- higher of 10% or Sales Tax/ VAT applicable
    • No CST if goods generally exempt from VAT/ Sales tax
central sales tax importance
Central Sales Tax - Importance
  • CST never intended as a major revenue generating legislation but mere a regulative legislation
  • Today some States are reluctant to give up CST revenues whereas for some States CST is irrelevant
  • As per the budget announcement CST is likely to be reduced to 3% from April 1, 2007
  • Total phase out expected by 2010