All you want to know about VAT

What is VAT?
Actually, it is a multi-point sales tax and is collected on value addition only at each stage. The concept is akin to excise duty paid by the manufacturer who, in turn, claims a credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale and both work in the same manner, according to the white paper on VAT released by finance minister Chidambaram. The document was drawn up after all states, barring UP, were prepared to implement VAT from April.

What’s on offer?
A full set-off for input-tax credit as well as tax on previous purchases will be provided under VAT. All other taxes such as the turnover tax, surcharge on sales tax, additional surcharge, and special additional tax will be subsumed in VAT. The exception is octroi. VAT will replace the sales tax regime in states with a two-tier tax regime of 4% and 12.5%. The lower rate of 4% will be levied on key products such as medicines and drugs, agricultural and industrial goods. The 12.5% rate will be applied to the rest of the goods sold in India. Products, including petrol, diesel, aviation turbine fuel, liquor and lottery tickets, will be exempted from VAT.

Who gains?

State and Central governments gain in terms of revenue. VAT has in-built incentives for tax compliance — only by collecting taxes and remitting them to the government can a seller claim the offset that is due to him on his purchases. Everyone has an incentive to buy only from registered dealers — purchases from others will not provide the benefit of credit for the taxes paid at the time of purchase. This transparency and in-built incentive for compliance would increase revenues. Industry and trade gain from transparency and reduced need to interact with the tax personnel. For those who have been complying with taxes, VAT would be a boon that reduces the cost of the product to the consumer and boosts competitiveness. VAT would be major blow for tax evaders, both manufacturers who evade excise duty payments and traders who evade sales-tax.

What’ll be the tax burden?
The overall tax burden will be rationalized as it’ll be shared by all dealers, 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 and tax compliance will improve significantly. It will also be simpler and offer easy computation and easy compliance. VAT will prevent cascading effect through input rebate and help avoid distortions in trade and economy by ensuring uniform tax rates.

Who pays?
All dealers registered under VAT and all dealers with an annual turnover of more than Rs 5 lakh will have to register. Dealers with turnovers less than Rs 5 lakh may register voluntarily.

How to pay?
VAT will be paid along with monthly returns. Credit will be given within the same month for entire VAT paid within the state on purchase of inputs and goods. Credit thus accumulated over any month will be utilized to deduct from the tax collected by the dealer during that month. If the tax credit exceeds the tax collected during a month on sale within the date, the excess credit will be carried forward to the next month.

Which goods will be taxable under VAT?
All goods except those specifically exempt. In fact, over 550 items will be covered under the new tax regime, of which 46 natural and unprocessed local products would be exempt from VAT. About 270 items, including drugs and medicines, all agricultural and industrial inputs, capital goods and declared goods would attract 4% VAT. But, following opposition from some states, it was decided that states would have option to either levy 4% or totally exempt food grains from VAT but it would be reviewed after one year. Three items — sugar, textile, tobacco — under additional excise duties will not be under VAT regime for one year but existing arrangement would continue.

What will happen to the Sales Tax Act?

It will continue for the pending assessments, appeals and recoveries and for certain commodities as the government may decide.

What will happen to the Central Sales Tax?

In an ideal VAT regime, there is no room for CST. To begin with, the government is contemplating certain amendments in the CST.

What will be the status of the industries enjoying sales tax exemption and deferment?
The matter is under consideration of the government. Industrial incentives in the form of exemption and deferment of sales tax may have to be continued under VAT as they are commitments made by the government. The units may get certain options.

What else will it cover?
The GOI is contemplating to empower states to collect VAT on considerable number of services as well as on goods on which AED (additional excise duty) is levied.

How has trade taken VAT?
Traders have complained that the increase in tax would lead to price hikes and a drop in demand. Analysts, however, are optimistic about the plan, saying the new system would help increase national revenues by getting more people to pay tax.

What’s the biggest advantage?
The biggest benefit of VAT is that it could unite India into a large common market. This will translate to better business policy. Companies can start optimising purely on logistics of their operations, and not on based on tax-minimization. Lorries need not wait at check-points for days; they can zoom down the highways to their destinations. Reduced transit times and lower inventory levels will boost corporate earnings.