ca final vat

5/24/2018 Ca final Vat

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Prof. Tayals Indirect Taxes

Tayal Institute (P) Limited, Mumbai9321144703, 32420612403, D-Definity, Road No. 1, J P Nagar, Goregaon(E), Nr. Station, Mumbai 400063

VALUE ADDED TAX

Main features of VAT scheme

Taxable event for the purpose of VAT is sale of goods. (Goods means allmovable)

Sale shall be within the state. VAT is imposed only on the amount of value addition measured by

deducting the purchase price from the sale price.

VAT is equally applicable to the traders as well as manufacturers. Both arereferred as Dealers.

VAT prevents cascading effect of taxation by providing set-off/input-credit of tax paid at earlier stage. Hence, VAT is a multi-point sales tax

collected on the amount of value addition at each stage.

Constitutional Validity:As per Entry 54 in List II (State List). of Schedule VII

to Constitution of India, States are empowered to levy tax on sale or purchase

of goods other than news-paper.

Differences between Sales-Tax and VAT.

Current Sales Tax Under VAT

1. Tax levied at the stage of the first sale 1. Tax levied and collected at every point

or at the final stage of sale

2. Successive sales (resale) of goods on 2. Tax collected at every point of sale

which tax is already paid do not attract and the tax already paid by the dealer

tax at the time of purchase of goods will

be deducted from the amount of tax

paid at the next sale

3. Dealers reselling tax paid goods do 3. Dealers reselling tax-paid goods will

not collect any tax on resale and file have to collect. VAT and file returns

NIL returns and pay VAT at every stage of sale

(value addition)


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Variants of VAT

Gross Product Variant Income Variant Consumption Variant

VAT Credit of non-capital

inputs only

VAT credit on non-capital

inputs and depreciation

element of capital inputs:

VAT credit on all inputs

viz, non-capital inputs as

well as capital inputs:

(1)Gross Product Variant - VAT Credit of non-capital inputs only

(a) Taxation:VAT is levied on all sales i.e. there is multipoint tax system.

(b) Scope of credit: VAT credit/set-off/deduction is allowed only of VAT

paid on raw material and components other than capital inputs. In other

words, VAT credit is allowed on non-capital inputs, and, thus, no VAT

credit is allowed of VAT paid on purchase of capital goods.

(c) Merits: Cascading effect is prevented due to allowance of VAT credit on

non-capital inputs. The VAT credit reduces the working capital needs,

due to less payment of VAT on sales.

(d) Demerits: VAT paid on purchase of capital goods (like plant and

machinery) will not be eligible for credit and will, therefore, form part of

the cost for the purposes of computing depreciation. The depreciation

element will include a proportion of VAT, which will form part of cost of

the ultimate product. The price of the ultimate product will be higher

and, consequently, the VAT on sales will higher. Therefore, there is

cascading effect of taxes to the extent of depreciation of capital goods.

Example 1Gross product variant : A manufacturer has purchased raw

material for Rs. 1,04,000 (inclusive of 4% VAT) and plant and machinery for

Rs. 2,25,000 (inclusive of 12.5% VAT). The manufacturing and other expenses

(excluding depreciation) are Rs. 3,00,000. He sells the resultant products at50% above cost (VAT on sales is 4%). The plant and machinery is to be

depreciated at 50% straight line. Compute the amount of VAT payable in

cash, as per the Gross Product Variant of VAT:

Solution: Computation of VAT payable in cash

Rs.

Raw material net of VAT (1,04,000 x 100104) 100,000

Depreciation on plant and machinery(50% of 2,25,000 - VAT credit not allowed) 112,500


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Manufacturing and other expenses 300,000

Total cost 512,500

Add: 50% mark-up on cost 256,250

Sale price 768,750

VAT on sales (4% of 7,68,750) 30,750

Less: Input tax credit on raw material (1,04,000 x 4 104) 4,000

VAT payable in cash 26,750

(2)Income Variant - VAT credit on non-capital inputs

and depreciation element of capital inputs

(a) Taxation: VAT is levied on all sales i.e. there is multipoint tax

system.

(b) Scope of credit: VAT credit/set-off/deduction is allowed of VAT

paid on all raw material and components. In case of capital goods,

VAT-credit is allowed only to the extent of depreciation on them. In

other words, VAT credit on capital goods is apportioned to various

years in the ratio of depreciation allowable on such capital goods in

those years. VAT credit on capital goods can be availed of fully, but,

can be utilized only in a pro-rata or deferred manner.

(c) Merits: Cascading effect is prevented due to allowance of VAT

credit. . It reduces the working capital requirement, due to lesser

payment of VAT on sales.

(d) Demerits: There is uncertainty and non-uniformity in computation

of VAT credit, as there is no specified method of computation of

depreciation.

Example 2Income variant: Using the data given in above question, compute

the amount of VAT payable in cash, as per the Income Variant of VAT.


Rs.

Raw material net of VAT (1,04,000 x 100 104) 100,000

Depreciation on plant (50% of price net of VAT i.e. 50% of

2,25,000 x 100 112.5) 100,000


Total cost 500,000Add: 50% mark-up on cost 250,000


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Sale price 750,000

VAT on sales (4% of 7,50,000) 30,000

Less: Input tax credit as follows:

input tax credit on raw materials and components

(1,04,000 x 4104) 4,000

Input tax credit on plant

(50% of VAT i.e. 50% of 2,25,000 x 12.5 112.5) 12,500 16,500


(3)Consumption Variant - VAT credit on all inputs

viz, non-capital inputs as well as capital inputs

(a) Taxation: VAT is levied on all sales i.e. there is multipoint tax

system.

(b) Scope of credit: 100% VAT credit/set-off/deduction is allowed of

VAT paid on all raw material and components as well as capital

goods.

(c) Merits: The merits of consumption variant are as follows -

(i) Cascading effect is eliminated.

(ii) It reduces the working capital requirement, due to the least payment

of VAT on sales.

(iii) it helps in modernization and upgradation of plant and machinery.

(iv) It reduces litigation, as there is no need for any differentiation

between capital goods and non Capital goods, both of which are

treated alike. Further,, there is no need to specify life of Capital good

and rate of depreciation allowance, as is required in case of income

Variant.

(v) Since the VAT paid on capital goods is set-off against VAT liability

on sales, this system is tax neutral.

(d) Demerits:No demerit for manufacturer. But, there is revenue deferment

to the Government i.e. while the credit on capital goods is fully allowed

in the year of purchase, but, the products manufactured by the use of

capital goods are sold in future years, thereby, causing lower revenue in

the years of purchase of capital goods and higher revenue thereafter.

Example 3 -Consumption variant: Using the data given in Example 1,

compute the amount of VAT payable in cash, as per the Consumption Variantof VAT.


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Rs.

Raw material net of VAT (1,04,000 x 100 104).... 100,000

Depreciation on plant (50% of price net of VAT i.e..

50% of 2,25,000 x 100 112.5) 100,000


Total cost 500,000

Add: 50% mark-up on cost 250,000

Sale price 750,000

VAT on sales (4% of 7,50,000) 30,000

Less: Input tax credit as follows :

Input tax credit on raw materials and components

(1,04,000 x 4 104 ) 4,000

Input tax credit on plant (2,25,000 x 12.5 112.5) 25,000 29,000


Advantages of VAT:

VAT structure is superior to the sales tax system because of the following

advantages/ benefits

1. Eliminates multiple tax - It eliminates cascading effect of sales taxsystem by setting off the tax paid earlier at every stage of sale (i.e., a set

off will be given for input tax as well as tax paid on previous purchases).

2. Simple - VAT helps in simplifying the indirect tax system. Because it is

based simply on transactions and not on a base that requires complicated

definition like income or wealth. VAT has the merit of certainty and is

relatively easy to understand.

3. Lowering of tax burden - VAT reduces tax burden and helps reduce

prices.4. Fairness - VAT is a move towards more efficiency, equal competition and

fairness in the taxation system. VAT helps common people, trade,

industry and also the Government. Other taxes, such as turnover tax,

surcharge, additional surcharge, etc. will be abolished as a result of

introduction of VAT. Overall tax burden is rationalized.

5. Tax evasion will be reduced -The adoption of VAT helps in reducing

evasion of tax. There is self-assessment and, therefore, better tax

compliance being less chances of tax evasion. It has the merit of self-

policing in that it induces businesses to demand invoice from their


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suppliers to enable them to obtain credit for the tax paid on their

purchases against their total tax liability. Under a system where the tax is

levied only at one stage, primarily at the first point of sale, as has been

the predominant practice under state sales taxes, shifting the value

added to subsequent stages can reduce tax liability. VAT serves to

counter this by bringing the value added at all stages under the tax.

While evasion can still occur, compared to a single-stage sales tax VAT

provides a built-in mechanism to counter evasion because of the audit

trail it creates. The application of the tax at each point of sale ensures that

if the tax is evaded at one stage the full tax will be realized at a

subsequent stage.

The sales tax system had considerable amount of evasion. Studies related

to evasion of sales tax in India, for instance, indicate that evasion ranges

between 5 and 85 per cent of the tax base depending upon the type of

commodity. As against the system of administration of sales tax, VAT

requires that all the dealers must issue .tax invoices. The subsequent

dealer would maintain these invoices in order to benefit from tax

deduction. This would enable the tax authority to cross check the

declared transactions between taxpayers, consequently reducing the

propensity to evade tax.

6. Tax transparency - VAT has a novel feature of tax transparency. That is,the total burden of tax on a particular commodity is clearly seen from the

transactions. Hence, the economic analysis of the tax structure is

convenient. Under the sales tax system it is difficult to estimate the exact

amount of refund for export.

7. Higher tax revenue -There is higher revenue growth.

8. Uniformity -There is a greater uniformity in this system.

9. Neutral-Under VAT, the tax liability does not depend on the number of

times a product is traded before reaching the final consumer or howmuch of the value is added at what stage in the production-distribution

process. Under VAT, the allocation of resources is left to be decided by

the free play of market forces and competition and not driven by tax

considerations.

10. Stable source of revenue - Because consumption is less volatile than

income, it provides a stable and flexible source of Government revenue.


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Disadvantages in Indian context -The design of VAT that has been adopted

by the States in, India meets several of the criteria of a good VAT as defined

above but is deficient in some crucial respects. Some of these are given

below

1. It does not cover goods as well as services - While VAT extends to the

retail stage, its base is; not comprehensive enough to comprise all goods

and services that go into final consumption. A grievous shortcoming of

the base is non-inclusion of services. The Union Government taxes

services, while VAT is governed by State Governments. The Central

Government may delegate, the powers to tax some services to the states.

But that is yet to come. Besides whether the base of state VATs, which

now extends only to goods, can be integrated fully with the tax on

services eventually is not clear. Hence, as of now, the state VAT base

suffers from a major drawback.

2. Exemptions -As per the scheme of the state VATs was expected to be

fairly comprehensive as exemptions were supposed to be few. Besides,

various concessions extended under the erstwhile sales tax regime for

new industries and so on were also to be eased out. However, under

continuous pressure from various quarters the number of commodities,

which are flow being exempted from VAT in various states, is not that

small.3. Floor rate - The other deficiency of the design of VAT being implemented

by the states is the one embedded in the structure of the rates. The states

have two basic rates; general rate of 12.5 per cent and a reduced rate of 4

per cent (and 1 per cent for gold, etc.). These are supposed to be applied

uniformly in all states and so although they are described as floor rates,

the States will have no discretion to go below or above the prescribed

rates, contrary to what a floor rate ordinarily implies.

4. General rate of 12.5 per cent is too high - The general VAT rate of 12.5per cent is unduly high. This is supposed to be a revenue neutral rate,

though it is difficult to see how a uniform rate could be revenue neutral

for all States. A high rate became all the more necessary on revenue

considerations because a large number of commodities and industrial

inputs have been included in the 4 per cent categories. Many (not all of

them basic necessities) are in the exempt category.

5. Classification of capital goods and Revenue goods - Classification of

goods under different lists creates doubts and disputes as to whether a


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particular item comes within the lower rate category or not, on whether

they are of capital nature or they are or revenue nature.

6. Increase in Cost: Compliance of accounting cost would increase for

traders and small firms.

Role of Chartered Accountants in VAT

The Chartered Accountants can play an pivotal role in proper implementation

of VAT by providing following services -

(1) Record keeping: VAT requires proper record keeping and accounting of

purchases and .sales, input credit on purchases and proper utilization of

such credit against payment of tax on sales.

(2) Tax planning: In order to minimize the incidence of tax, effective tax

planning is required, which involves an analysis of the impact of various

alternatives and selection of the best alternative.

(3) Negotiations with suppliers to reduce price:A chartered accountant will

ensure that the benefit of availability of input tax credit is passed on by

the suppliers to his clients. He may also help the suppliers in availing

VAT credit so that the cost of suppliers is reduced, thereby, reducing sale

price.

(4) Handling the audit by departmental officers: In case an audit is

conducted by the sales-tax/VAT Department of the State, the CharteredAccountant can represent his clients so as to satisfy the auditors by

replying their queries and meeting out their audit objections, if any.

(5) External audit of VAT records: In order to ensure compliance with the

VAT-laws, the laws of certain states provide for audit by external

agencies in case the turnover of the assessee exceeds a specified limit. The

Chartered Accountants are competent/authorized to carry out such

audit. VAT audit is discussed later at a greater length.

********


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Meaning of Input Tax and Output Tax

Input tax: Input tax means the tax paid or payable by a dealer of a State on

purchases - of any goods

a. made in the course of his business,

b. from a registered dealer within the State.

Output tax: Output tax is the tax charged or chargeable by a registered dealer

on sale, of goods made by him in the course of his business.

Input-tax Credit (ITC)

Input tax credit: Input tax credit means setting-off the input tax paid by a

registered dealer against the amount of output tax payable by him.

Need: Under VAT system, the tax is imposed only on the amount of value

addition made by a dealer. The value addition is difference between the value of

the output/sales and the value of input/purchases. Hence, the tax paid on

inputs (input tax) by a dealer is set-off against the tax payable by him on his

sale (output tax). Thus, he is required to pay the difference only in cash.

Scope of Input tax credit:The following points bring about the scope of input

tax credit-* It is allowed only to a registered dealer;

* The dealer may be trader or a manufacturer

* VAT credit is allowed on purchase of capital goods also.

* VAT credit is allowed only on goods purchased within the state.

* It is allowed to be set-off against the output tax;

* For the purpose of set-off, output tax includes not only the VAT payable

on within the State-sale by the dealer but also the Central Sales Tax

payable on the inter-state sale. In other words, input tax credit can be set-off against VAT payable on intra-state sale or CST payable on inter-state

sale.


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VAT credit is not allowed

Input tax credit is generally given for the entire VAT paid within the state on the

purchases of taxable goods meant for resale or for further manufacture of

taxable goods. However, in case of certain purchases, no VAT credit is allowed.

1. Purchases from unregistered dealers;

2. Purchases of goods from other states viz. Inter-state purchases;

3. Import of goods from outside the territory of India

4. Purchases from registered dealer who has opted for composition scheme;

5. Purchase of non - creditable goods as may be notified by the State

Government;

6. Purchase of goods where the purchase invoice is not available

7. Purchases of goods in cases where the selling dealers invoice doesnt

show amount of tax charged separately;

8. Purchases of goods for use in the manufacture of exempted goods;

9. Goods in stock, which have suffered tax under an earlier Act;

10. Purchase of goods used for personal use or gifts;

11. Purchases of capital goods where credit is available in some cases in

installments

12. Purchases of goods for use as fuel in generation of power;

13. Purchases of goods for being dispatched to outside states as branch

transfer.

Excess Input-tax credit is to be utilized, as under -

1. for payment of VAT;

2. Excess credit remaining, if any, can be adjusted against CST for the

relevant period.

If, after set-off against VAT and CST payable for the concerned period,

there remains any excess of input VAT credit, the same will be eligible to

be carried forward to the next tax-period and so on upto the nextfinancial year.

If there is any excess unadjusted input tax credit at the end of second

year, then the same is required to be claimed as refund. However, some

States grant refund after the end of first financial year itself.


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Input-tax credit on capital goods

Capital Goods: Input tax credit on capital goods is available for registered

dealers being traders as well as manufacturers. In order to manufacture goods

or trade in such goods, a dealer has to purchase capital goods viz, plant and

machinery, furniture, fixture, electrical installations, vehicles etc. Such capital

goods, if taxable, are liable to VAT, which is borne by the dealer.

Sometimes, the dealer may himself manufacture capital assets by purchasing

input raw materials and using them in manufacture. Such input items are also

taxable, the VAT being borne by the dealer.

Capital goods are defined differently in the State-VAT laws of the respective

states.

Need for input-credit on capital goods: A dealer is required to pay VAT on the

purchase of capital goods. Such capital goods are used either in the manufacture

of products or in - facilitating trade in the products. A portion of the cost of such

capital goods is included in the cost of the product by way of depreciation. This

ultimately affects the selling price of the goods.

If the credit of VAT paid on capital goods is not allowed, then, the cost of the

capital goods and the depreciation thereon will be higher This will ultimately

increase the selling price of the goods, thereby, leading to cascading effect oftaxation. VAT will be imposed on selling price, which includes depreciation

element on capital goods inclusive of VAT not allowed as credit.

Policy in white paper as regards credit on capital goods: The White Paper on

State-VAT laws -contains the following policy decisions as regards credit on

capital goods

(a) Credit to all dealers: Input credit on capital goods will be available to

traders and manufacturers. Under the traditional sales-tax system, insome States, partial credit was allowed on capital goods to the

manufacturers only; no credit was allowed to traders. This anomaly has

been removed.

(b) Negative list for capital goods: Not all capital assets are eligible for credit

as capital goods. There will be a negative list for capital goods, which will

not be eligible for input credit. Such negative list is to be based on certain

principles agreed to by the Empowered Committee.

(c) Deferred credit scheme : The State Government have been authorized to

allow the credit of capital goods either at once i.e. 100% credit of VAT


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paid on capital goods is allowed immediately on purchase of capital

goods, or, alternatively, the State Governments may allow input-credit on

capital goods on installment basis. The number of installments cannot

exceed 36 months or 3 years.

Mode of allowing credit on capital goods: The credit of VAT on capital goods

is allowed as under -

(a) No credit is allowed on capital goods mentioned in the negative list.

(b) Some states like the State of Maharashtra have provided 100% credit in

respect of capital goods in the month of purchase of such capital goods.

However, if the capital goods is sold within 36 months (or 3 years), then,

the proportionate input-credit thereon is withdrawn.

(c) Some other states have opted for allowing the credit of VAT paid on

capital goods in monthly installments (maximum no. of installments

being 36 or 3 years).

Procedural requirements:

(a) In respect of the capital goods eligible for input-credit, the dealers should

keep supporting evidences like VAT-invoice of the purchase of such

capital goods, gate-pass, delivery challan, etc.

(b) The other procedural requirements like use of the asset, etc. as specifiedin the state-VAT law will have to be complied with. In case any

permission is required to claim input-credit, such prior permission must

also be obtained;

(c) If credit is allowed in installments, the set-off/credit is to be claimed

accordingly in the returns.

(d) The set-off claimed can be adjusted against normal VAT liability of the

concerned tax-period.

Input VAT credit on goods

Input VAT credit is allowed only in respect of those goods/inputs, which have

been used in the manufacture or processing, etc. of the taxable goods. No input-

VAT credit is allowed in respect of inputs used in manufacture, etc. of tax-free

goods.

Taxable goods means the goods, which are chargeable to VAT i.e. goods other

than the goods specified as tax-free goods in the Schedule to the VAT-law.


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Common goods:Where any inputs are used in the manufacture, etc. of taxable

as well as exempt (tax-free goods), then, input-tax credit shall be allowed in

proportion of sales.

Incentives to exports / units of SEZ and EOU

(1) Refund to Exporters: The White-paper on State-level VAT provides that

in case of goods exported out of India, the exporter will be allowed

refund of the input-VAT paid by them. This refund is to be allowed

within a period of 3 months from the end of the tax-period in which the

goods were exported.

(2) Exemption or refund to SEZ & EOUUnits located in Special Economic

Zones and Export- oriented Units (EOUs) are not liable to VAT, as they

are only engaged in export of goods out of India.

They are provided incentives in respect of input-tax credit on purchases

made by them in either of the following manner -

(a) Exemption from payment of tax on purchases (i.e. procurement of

inputs/capital goods without payment of any Input-VAT) ; or

(b) Refund of input-VAT credit on purchases made by- them within 3

months from the date/tax-period of purchase. State Governments

may reduce this time-period of 3 months.


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COMPOSITION SCHEME FOR SMALL DEALERS

Threshold Exemption limit upto Rs. 5 lakhs (or Rs. 10 lakhs) : In order to

provide relief to small dealers, various states have given threshold limit before a

dealer becomes liable to pay VAT. This threshold limit is between 5 lacs to 10

lacs, varying from state to state.

The dealers having turnover upto the threshold limit are not required to get

themselves registered with the VAT-authorities. While the purchases made by

them may have been charged to VAT, the sales made by them are not

chargeable to VAT. Such dealers are not allowed any input-VAT credit.

Composition Scheme for dealers having turnover exceeding threshold limit

but not exceeding Rs. 50 lakhs:The dealers having turnover not exceeding the

threshold limit are fully exempt from VAT liability but the dealers having

turnover exceeding the threshold limit but not exceeding Its. 50 lakhs during

the financial year are allowed to opt for composition scheme under which the

small dealers can discharge their net VAT liability by way of payment of a

composite amount calculated at a specified percentage of turnover. No input-tax

credit is allowed to such dealers opting for composition scheme.

Legal provisions of composition scheme(1) Discharge of VAT liability under Composition Scheme: If any eligible

dealer opts for the composition scheme, his VAT liability shall be

discharged as under -

(a) the dealer shall be required to pay a composite amount of tax.

Composite tax = Gross annual turnover x Composite Rate of Tax

prescribed by the State Government;

(b) the dealer will not be allowed any input-VAT credit on inputs; and

(c) the dealer will not be authorized to issue VAT-able invoices.(2) Provisions of the scheme: The scheme may have one or more of the

following provisions

(a) the rate of composition tax may be reduced upto 0.25%;

(b) the states may levy composite tax on taxable turnover instead of

gross annual turnover;

(c) States may provide for different types of composition schemes for

different classes of retailers.

(3) Dealers not eligible for Composition Scheme: Every registered dealer

who is liable to pay tax under the concerned State-VAT law and whose


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turnover didnt exceed Rs. 50 lakhs in the last financial year is eligible to

opt for the composition scheme. However, the following person shall not

be eligible to opt for composition scheme

(a) a manufacturer or a dealer who sells goods in the course of inter-

state trade or commerce (i.e. dealers effecting inter-state sales and

purchases only) ; or

(b) a dealer who sells goods in the course of import into or export out of

the territory of India (i.e. importers and exporters) ; or

(c) a dealer transferring goods outside the State otherwise than by way

of sale or for execution of works contract (i.e. branch transfers viz.

Consignor, etc. or works contractors)

(4) Mode of exercising option for availing Composition Scheme:

(a) Option: The composition scheme is, generally, optional for the

dealers.

(b) Intimation: A dealer, intending to avail such composition scheme,

will have to exercise the option in writing. The option so exercised

shall be intimated to the Commissioner having jurisdiction over him.

(c) No need to maintain statutory records: if a dealer avails of the

Composition Scheme, he need not maintain any statutory records as

required under the VAT-law He will be required to maintain only

the records of purchase, sales and inventory. A dealer not availing ofthe Composition Scheme shall have to maintain all statutory records

and registers as required under the Act.

(d) No inter-state purchases:The dealer opting for composition scheme

should not have any stock of goods which were brought from

outside the State under composition scheme. Further, once the

option for composition scheme is exercised, the dealer shall not use

any goods brought from outside the State.

(e) No input credit on existing stock: The dealer will not be allowed toclaim input tax credit on the inventory available on the date on

which he opts for composition scheme.

Effect of Composition Scheme on VAT chain

(1) VAT Chain: Under VAT system, the supplier of basic raw -material pays

VAT, which is availed of by the manufacturer as input-VAT credit. The

manufacturer pays VAT on sales of manufactured goods by him after

setting-off input-VAT credit. The VAT paid by the manufacturer is

availed of as input-VAT credit by the wholesaler, who utilises such


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input-VAT credit for payment of output-VAT on sales effected by him.

This continues so on and is often referred to as the VAT Chain.

(2) Break in the VAT-chain: The VAT-chain gets broken as soon as the

goods are purchased by -

(a) an unregistered dealer, or

(b) a dealer opting for composition scheme, or

(c) a dealer the goods produced by whom are exempt/tax-free, or

(d) the ultimate consumer.

The VAT-chain is broken because the aforementioned dealers/the

ultimate consumers cannot issue VAT-able invoices so as to pass on the

credit of VAT to the buyers. .

(3) Loss to the seller-dealer due to Composition Scheme: As soon as a

dealer opts for Composition Scheme, he cannot avail of the credit of the

input-VAT paid by him. This will have the, effect of increasing the cost of

the inputs. Therefore, he will not be able to pass on the benefit of input-

VAT credit to the buyer and the cost of the final product will increase.

(4) Loss to the purchaser: A buyer purchasing goods from a dealer operating

under composition scheme shall not get any credit for composite tax paid

by him on the purchases made by him from such dealer. This will

increase his cost as well.

************

Coverage of goods under VAT

Generally, all goods, including declared goods, are covered under the VAT-laws

of respective States and, thus, get the benefit of input-tax credit. However, the

following goods are outside the VAT are -

(1) Petrol, diesel, Aviation Turbine Fuel (ATF) or other motor spirit,

(2) Liquor and

(3) Lottery tickets.

The States may or may not bring these commodities under VAT laws.

However, it has been agreed that all these commodities will be subjected to

20% rate of tax.


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Various VAT rates under different states

The following table depicts the various tax-rates prevalent under the VAT

system along with a brief description as regards their applicability, -

Rate Description

0% This category has around 50 commodities comprising of

natural and unprocessed products in unorganized sector (e.g.

unprocessed agricultural goods),

items which are legally barred from taxation,

items/goods having social implications

Out of this commodities different states have notified certain goods which are

based on its social importances and remaining goods are common for all

states.

1% This category is meant for precious stones, precious and semi-precious

metals, bullion, gold and silver ornaments, etc

4% This category covers largest number of goods common for all the States,

comprising of

items of basic necessities such as medicines and drugs,

all agricultural and industrial inputs,

capital goods and

declared goods

12.5%All goods other than the goods falling under aforesaid categories and

other than luxury goods

20% Luxury goods

Meaning

Exempt sale:In case of exempt sale, no VAT credit is available. In case of non-

taxable transactions like samples/gifts, the input credit availed is to be

reversed. It is called Reverse Credit of Input Tax.Zero rating:Zero rating means tax on any goods is fixed at 0%. As against

exempt sale, in case of zero rated sales (e.g. export sales), the dealer can avail

input VAT credit.

Stock/branch transfers under VAT laws

Stock/Branch transfers i.e. transfer of stock from head office to the branch do

not involve sale and, hence it cannot be subjected to VAT. However, if inputs

are used in the manufacture of finished goods, which are branch transferred


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then, tax paid. on such inputs goods will be available except 2% out of such tax

retained by the State Governments.

For example, Mr. Ram purchases goods valuing Rs.1 lakh (VAT @ 12.5%)

from Rajasthan and transfers the same to his branch located at Delhi. In this

case, out of total input credit of Rs. 12,500, the credit of only Rs. 10,500 (in

excess of 2% i.e. 10.5% (12.5% - 2%) of Rs. 1 lakh) will only be available.

VAT on imports:

Under the Constitution of India, the power to levy tax on imports vests with the

Central Government. The States cannot levy sales-tax/VAT on imports.

It is necessary to bring imports also into the VAT chain. On account of

availability of input-tax credit/ set-off, the cascading effect of tax would be

reduced and the tax compliance would also improve. However, in order to

bring imports under VAT chain, the power to levy tax on imports would be

required to be brought under the State List of the Schedule VII of the

Constitution.

This would require an amendment in the Constitution and therefore as of now

no credit in VAT is allowed and it forms part of purchase cost from inputs.


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Procedures of VAT

Registration

(1) Eligibility for Registration:Dealers having turnover upto Rs. 5 lath (or

increased limit of Rs. 10 lakhs) need not obtain registration but once

turnover exceed Rs. 5 lakh (as increased limit of Rs.10 lakh in few states)

registration is compulsory, While for others registration is mandatory. All

existing dealers under the state-level sales-tax laws have been deemed to

be registered under the VAT-Act.

(2) Application for Registration:An application for registration is required

to be made in prescribed form along with prescribed authority or any

other specified authority within prescribed time-period (generally, 30

days).

(3) Compulsory Registration:if an assessee, though required to do so, fails

to obtain registration under the VAT Act, he may be compulsorily

registered by the Commissioner, with the following results -

(a) the Commissioner may assess the tax due from him on the basis of

evidence available with him;

(b) the assessee shall have to pay such amount of tax forthwith;

(c) he will be liable to penalty for such default, and

(d) he will not be eligible to set-off input tax credit related to periodprior to compulsory registration.

(4) Voluntary registration:A dealer for whom it is not obligatory to obtain

registration may also obtain registration if the Commissioner is satisfied

that the business of the. applicant requires registration. The

Commissioner may also impose any terms or conditions that he thinks fit

(5) Cancellation of registration:The registration is liable for cancellation in

any of the following cases -

(a) permanent discontinuance of business; or(b) disposal of business; or

(c) transfer of business to a new location; or

(d) annual turnover of a manufacturer or a trader dealing in designated

goods or services falling below the specified amount; or -

Taxpayers Identification Number (TIN).

TIN is a. 11-digit numerical codeallotted to every dealer obtaining registration

under the VAT-law. It is the registration number, which is intended to identify atax payer.


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The 11-digit numerical code shall be made as follows -

(a) First 2-digits: State code as used by the Union Ministry of Home Affairs;

(b) Next 9-digits: Code allotted by each state to the registrant.

TIN is required to be stated on each invoice; hence, TIN will help cross-check

information on tax payer compliance, for example, the selective cross-

checking of sales and purchases among VAT taxpayers.

Invoices

The White Paper mainly provides for the following provisions, after being

registered which are mandatory, and failure to comply with these attracts

penalty:

(i) Every registered dealer whose turnover of sales exceeds the specified

amount shall issue to the purchaser a serially numbered tax invoice, cash

memo or bill with the prescribed particulars.

(ii) The tax invoice shall be dated and signed by the dealer or his regular

employee, showing the required particulars.

(iii) The dealer shall keep a counterfoil or duplicate of such tax invoice duly

signed and dated.

Invoices should be preserved with full care. In case any original invoice is lost

or misplaced, a duplicate authenticated copy must be obtained from the

issuing dealer.A VAT invoice:

(i) help in determining the input tax credit;

(ii) prevents cascading effect of taxes;

(iii) facilitates multi-point taxation on the value addition;

(iv) promotes assurance of invoices;

(v) assists in performing audit and investigation activities effectively;

(vi) checks evasion of tax.

Contents of VAT invoice

(i) name and address of the selling dealer;

(ii) registration number of the selling dealer;

(iii) name and address of the purchasing dealer;

(iv) registration number of the purchasing dealer (may not be required under

all VAT legislations);

(v) pre-printed or self-generated serial number;

(vi) date of issue;

(vii) description, quantity and value of goods sold;


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(viii) rate and amount of tax charged in respect of taxable goods;

(ix) signature of the selling dealer or his regular employee duly authorized by

him for such purpose.

Records

Every dealer liable to pay: tax under the VAT-law should maintain the

following records-

(a) Value and Quantity of Purchases;

(b) Value and Quantity of Goods manufactured;

(c) Value and Quantity of Sales;

(d) Value and Quantity of goods disposed of otherwise than by way of

sale;

(e) Value and Quantity of Inventory/Stock;

(f) Separate record of any exempt sale;

(g) Copies of all invoices, credit and debit notes, etc. issued, in serial

number;

(h) All purchase invoices, copies of customs entries.

(i) Details of the amount of tax charged on each sale or purchase;

(j) VAT Account and total of the output tax and the input tax in each

period

All these records should be preserved for the period specified in respective

statelaws (generally, 5 years from the end of the year to which they relate).

Returns

(1) Periodic Returns Form and Time period: The respective State-VAT

laws require every registered dealer to file VAT-returns periodically

(monthly/quarterly/annually). The returns are to be filed in prescribed

form within the prescribed time from the end of the period concerned.

(2) Contents: The returns are to be accompanied with the challans

evidencing payment of VAT. In some states, the return-forms areinclusive of challan, in which case, the returns can be filed along with

payment of challan with the Treasury. The VAT-returns contains

requisite details, such as, details of dealer, details of input-VAT and

output-VAT, payment of VAT, inventory details, etc.

(3) Revision: In some states, opportunity has been given to revise any

mistake or omission in the periodical returns filed by the dealers.

(4) Self assessment: The VAT-laws make provision for self assessment of

VAT-returns filed by various dealers themselves. Such self assessment

involves checking the overall-correctness of the information given and


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also checking whether requisite information has been duly furnished or

not. Any mistake is required to be corrected by the dealer and any

shortfall in payment of tax will be required to be paid to the credit of

respective State Government .

(5) The biggest advantage in case of VAT return as compared to sales tax

return is it is easy, compact and accurate. With the self assessment

scheme there are very less chances of tax evasion.

Assessment

Assessment means determination of the tax liability of a dealer under the

respective VAT-law. Assessment involves determination of taxable turnover

and tax liability thereon along with any other liability under the VAT-law.

Self - assessment: Under VAT, there is no system of compulsory assessment at

the end of each year by the VAT-authorities. VAT-system is based on the

presumption that, unless the contrary is established, every dealer is honest.

The VAT liability is computed by the dealer himself while submitting returns

after setting off the input-tax credit.

Deemed assessment: The VAT-laws of the respective states provide that except

where a specific notice is issued proposing scrutiny assessment within specified

time, the dealer shall be deemed to have been assessed on the basis of the return

filed by him for the period to which such return relates.Compulsory Assessment: There is a system of compulsory assessment under

which those returns filed by the dealers are selected and subjected to assessment

in a prescribed manner. Any mistake found is required to be corrected by way

of revised return or in any other manner within the prescribed time along with

payment of differential amount, if any.

Assessment in Special Circumstances: The VAT-laws contain special

provisions in respect of assessment where there has been evasion or avoidance

of tax and also for escaped assessments.System of cross checking : Since VAT emphasizes upon self-assessment,

therefore, there arises a need of cross-checking the contents of the returns

submitted by a dealer with his other records and the information submitted by

him to other authorities under other laws. Accordingly, -

(a) dealers may be asked to submit a list of sales/purchases (containing the

name of purchasing / selling dealers) made by them above a certain

amount;

(b) a computerized system of cross-checking is being worked, which will

involve comparing the VAT-returns/documents submitted to the VAT-


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authorities with the returns/documents submitted the Central Excise,

Customs, Service Tax and Income-tax authorities of the Central

Government. This shall be possible only on the basis of coordination

between the tax authorities of State Governments and that of Central

Government.

Need:The aforesaid system of cross-checking will act as a deterrent for tax-

evaders and will also lead to significant growth of tax revenue. Since there

will be early identification of tax-evasion, the habitual offenders will fear

adopting tax evasion practices and, therefore, there will be equal competition

amongst the traders/dealers.

VAT audit

Most of the State VAT laws in India provide for audit of accounts of a registered

dealer, if his turnover exceeds an amount specified in the law itself. Such audit

is to be carried out by a practicing Chartered Accountant or sales tax

practitioner and report thereof is to be submitted in prescribed form within the

prescribed time.

Need for VAT audit: VAT audit ensure effective implementation of the VAT

law. The need for VAT audit is summarized in the points mentioned below -

Statutory provisions relating to VAT audit

(1) Compulsory VAT-Audit or External Audit: With a view to check

massive tax-evasion, the State-VAT laws have incorporated audit of

VAT-records by Chartered Accountants or STPs on some specified basis.

Such audit is compulsory for all dealers whose turnover exceeds a

prescribed limit (say, 40 lakhs in the State of Maharashtra and Rajasthan).

Such audit shall be conducted by chartered accountants. The report of

such audit is required to be filed within prescribed time and in prescribedform.

The audit report is required to contain various particulars, as are

prescribed by each State.

(2) Departmental Audit or Selective Audit : While there is provision for

compulsory audit by a chartered accountant in case the turnover exceeds

prescribed limit, there exists a provision for audit by the authorities of the

VAT-department which is not mandatory but is resorted to in selective

cases. The Departmental audit is provided with a view to promote

compliance with the provisions of VAT-law.


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The Departmental audit is resorted in either of the following cases -

(a) dealers selected on the basis of a specified criterion or the dealers

selected on random basis;

(b) where Departmental audit is found necessary in view of requirement

of detailed scrutiny.

If any evasion is detected in the course of audit, the previous records

of the concerned dealer may be taken up for audit. The audit is

conducted in the following manner -

(a) the authorized officers of the department will visit the business place

of the dealer to conduct the audit.

(b) the auditors will be supplied all the information gathered from or

submitted to various agencies such as suppliers, income-tax

department, excise and customs department, banks etc.;

(c) the auditors will examine the correctness of the returns vis-a-vis the

books of account of the dealer or any other information available

with them;

(d) the officers of the higher rank will supervise the audit work to

ensure that it is done in a free, fearless and impartial manner. In

order to complete the disputes and the matters which are pending

with appellate purpose, appeals to commissioner or appellate

tribunal are also form under this law.

VAT authorities

The State-VAT law is administered by various authorities. The authorities and

responsibilities of such authorities are specified in the Act or the rules or the

notification issued there under.

The various authorities under the VAT-law include -

(a) Commissioner of Commercial Taxes,

(b) Joint/Deputy/Assistant Commissioners,(c) Deputy Commissioner (Appeals), and

(d) Commercial Taxes Officer.

Further, for administrative and appellate purposes, tax law board, appellate

tribunal and other authorities have also been constituted.

************


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Practical questions

Illustration 1-Operation of VAT system and VAT accounting:

XYZ Mfg. Co. Ltd. of Rajasthan purchased raw material A from Rajasthan for

Rs. 10,400 (inclusive of 4% VAT), raw material B from Rajasthan for Rs. 22,500

(inclusive of 12.5 % VAT), raw material C from China for Rs. 33,000 (inclusive

of 10% import duty) and raw material D from Maharashtra for Rs. 15,450

(inclusive of 2% CST). The plant and machinery required for manufacture was

purchased for Rs. 2,08,000 (inclusive of 4% VAT). The manufacturing and

other expenses (excluding depreciation) were Rs. 61,550. The plant is to be

depreciated at 100%. The manufacturers margin is 20% on cost. The VAT rate

on the manufactured product is 4%.

By way of necessary accounting entries and VAT chart, show the mode of

operation of VAT system. Ignore the Central Excise implications, assuming

that there is no excise duty on the manufactured product.

Solution: VAT CHART (amounts in Rs.)

Raw material A (net of VAT Rs. 400) 10,000

Raw material B (net of VAT Rs. 2,500) 20,000

Raw material C (import duty will form part of cost, as it is

not available as credit) 33,000Raw material D (CST will form part of cost, as it is not available as credit) 15,450

Depreciation on plant and machinery (100% of 2,00,000 i.e. price net of

VAT of Rs. 8,000) 200,000


Cost of the product 340,000

Add: 20% margin 68,000

Selling price 408,000

Add: VAT @4% of 4,08,000 16,320Cost to the purchaser 424,320

VAT payable in cash by the manufacturer 16,320-400-2,500-8,000= Rs. 5,420.


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Illustration 2-VAT liability at different stages : .Manufacture X extracted raw

produce X and raw produce Y from mines at Rs. 10,000 and Rs. 15,000

respectively and sold the same at 100% margin to Manufacturer B (VAT rate

is 4% on produce X and 12.5%on produce Y). Manufacturer B used X and Y as

raw material and sold the resultant product for Rs. 2,00,000 to wholesaler C

(VAT rate is 4%). Wholesaler C sold the same to Retailer D at 25% above cost

(VAT rate is 4%). The retailer D sold the same to a consumer at 20% above

cost (VAT rate is 4%). Compute the amount of VAT payable in cash by each

person.

Solution: VAT CHART (all amounts in Rs.)

1. VAT payable in cash by Manufacturer A

4% on produce X i.e. 4% of 20,000(10,000+ 100% of 10,000) 800

12.5% on produce Y i.e. 12.5% of 30,000 (15,000 +100% of 15,000) 3,750 4,550

2. VAT payable in cash by Manufacturer B

VAT @ 4% on sale price of Rs. 2,00,000 8,000

Less: VAT credit on raw produce X & Y 4,550 3,450

3. VAT payable in cash by Wholessler C

VAT @ 4% on sale price of Rs. 2,50,000(2,00,000+25% of 2,00,000) 10,000

Less: VAT credit on purchases from Manufacturer B 8,000 2,000

4. VAT payable in cash by Retailer D

VAT @ 4% on sale price of Rs. 3,00,000(2,50,000 + 20% of 2,50,000) 12,000

Less: VAT credit on purchases from Wholesaler C 10,000 2,000

Total VAT paid to the Government 12,000

The above illustration shows that the VAT paid to the Government at various

stages (here, Rs. 12,000) is equal to the VAT collected from the ultimateconsumer (here, Rs. 12,000 or 4% of 3,00,000).


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Illustration 3

Computation of VAT liability: Mr. X of Rajasthan started business w.e.f. 1-1-

2009 and got himself registered with VAT authorities. He presents the

following details for the month of January, 2009 -

Purchases from Rajasthan 2,000,000

Purchases from Delhi 8,00,000

Sales within Rajasthan out of purchases from Rajasthan 16,00,000

Sales within Rajasthan out of purchases from Delhi 2,00,000

Sales to dealer of Maharashtra Out of purchases within Rajasthan 8,00,000

Sales to dealer of Maharashtra Out of purchases from Delhi 4,00,000

Compute tax payable by Mr. X. Aforesaid amounts are exclusive of taxes.

VAT rate is 4%. CST rate is 2%.

Solution : The tax payable by Mr. X for the month is computed hereinbelow -

Sales within Sales outside

Rajasthan (VAT) Rajasthan (CST)

Total Sales 18,00,000 12,00,000

Gross VAT liability @ 4 % & CST liability @ 2 % 72,000 24,000

Input VAT credit available on purchases

from Rajasthan @ 4% 72,000 8,000

Net taxpayable NIL 16,000

Excess VAT credit to be utilised against payment of CST** 8,000The VAT liability on sales within Rajasthan is Rs. 72,000 while the VAT credit

availed on purchases from within Rajasthan is Rs. 40,000. Hence, whole of the

output tax of Rs. 36,000 will be paid out of the input tax credit of Rs. 40,000.

The excess credit of Rs. 4,000 will be used for payment of CST on sale outside

the State of Rajasthan. The balance amount of (ST payable of Rs. 8,000(12,000 -

4,000) will be paid in cash.


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Illustration 4

Treatment of input VAT-credit: Mr. A presents following details for March,

2009

1. Opening Balance of Input VAT credit as on 1-3-2009: Rs. 15,000.

2. Inputs purchased during the month of March: Rs. 15 lakh.

3. Within the state sales of manufactured goods: Rs. 20 lakh.

4. Inter-state Sales : Rs. 4 lakh.

CST rate is 2%. There was no inventory as on 1-1-2009 or 31-3-2009. The VAT

laws governing Mr. A provide for the refund of input-VAT credit after the

end of the first financial year itself. VAT rate is 12.5% on inputs and 4% on

sales. Compute the amount of refund available to Mr. A. -

Solution : Computation of refund available to Mr. A (amounts in Rs.)

Opening balance of input VAT-credit 15,000

Add: VAT credit availed on inputs purchased during March (12.5% of 15

lakhs) 187,500

Less : VAT payable on sales (4% on Rs. 20 lakh -80,000

Less : CST payable on inter-state sales (2% on 4 lakh) -8,000

Balance lying as VAT-credit as on 31-3-2009 eligible for refund 114,500


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Illustration 5: Need for input-credit on capital goods:

Mr. X manufactures product A out of raw material X. The cost of raw material

X is Rs. 1 lakh. The labour and other manufacturing cash costs are Rs. 4 lakh.

The manufacturing process requires a machinery of Rs. 10 lakh (subject to

VAT @ 12.5%).

The useful life of the plant is 4 years with no salvage. The expected output of

product A is 1,000 units.

Mr. X fixes a profit margin of Rs. 100 per unit. Compute the selling price of

product A and its cost to consumer if - (a) No credit is allowed on the capital

goods; (b) credit is allowed on the capital goods. The VAT rate on final

product is 12.5%. There is no VAT on raw material.

Solution: Computation of selling price of product A

(a) No credit on (b) Credit available

Raw material cost 1,000,00.0 1,00,000.0

Labour and other manufacturing cash costs 400,000.0 400,000.0

Depreciation on machinery:

(10 lakh + 12.5% VAT) 4 (VAT credit not available )281,250.0

10 lakh +4 (VAT credit available, hence, VAT not cost) 250,000,0

Total cost 781,250.0 750,000.0Cost per unit 781.3 750.0

Profit per unit 100.0 100.0

Selling price per unit 881.3 850.0

Add : VAT @ 12.5% 110.2 106.3

Cost to consumer 991.4 956.3

Thus, the availability of VAT credit on capital goods reduces the cost and

resultant selling price of the goods and, therefore, eliminates cascading effect

of taxation.


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Illustration 6

Input-credit on common goods: Mr. K, a manufacturer of taxable as well as

tax-free goods, furnishes the following information for the month of March,

2009: -

(a) Sales of Product A (tax-free goods) : Rs. 50 lakh

(p) Sales of Product B (taxable goods) : Rs. 100 lakhs (VAT @ 12.5%);

(c) Purchases of input X (used in manufacture of Product A only) : Rs. 30

lakhs (VAT @ 4%);

(d) Purchases of input Y (used in the manufacture of Product B only) : Rs.

75 lakhs (VAT @ 4%);

(e) Purchases of input Z (used in the manufacture of Product A &.B) :.Rs. 15

lakhs (VAT @ 20%).

There was no inventory as on 1-3-2009 as well as on 31-3-2009.

Compute the amount of VAT payable in cash by Mr. K for the month

assuming that input Z is used in productA and B in the ratio of 1 :2. Ignore

implications under other laws.

Solution: Computation of VAT liability of Mr. K for the month of March, 2009

(amounts in Rs. lakhs)

VAT on sales of product B (Rs. 100 lakhs x 12.5%) 12.5

Less : Input VAT credit on input Y (75 lakhs x 4%) 3

Proportionate credit on input Z (15 lakhs x 20% x 2/3) 2VAT payable in cash by Mr. K 7.5


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Illustration 7

Computation of VAT liability : Calculate the total tax liability under the State

VAT law and under the Central Sales Tax Act for the month of October 2008

from the following particulars:

Particulars Rs.

Inputs purchased within the state 170,000

Capital goods used in the manufacture of the taxable goods 50,000

Inputs purchased from a registered dealer who opts for composition

scheme under the provisions of the Act 10,000

High seas purchases of inputs 100,000

Finished goods sold :

(a) within the state 200,000

(b) in the course of inter-State trade 250,000

Applicable tax rates are as follows : -

Case (a) : VAT rate on capital goods 12.5% ; Input tax rate within the state

12.5% ; Output

tax rate within the state 4%; Central sales tax rate 2%

Case (b) : VAT rate on capital goods 4% ; input tax rate within the state 4% ;

Output tax

rate within the state 12.5% ; Central sales tax rate 2%.

*Note The capital goods are not the goods included in the negative list.(RTP June, 2009)

Ans : Case (a): Computation of the tax liability for the month of October 2008-

Particulars Rs.

Output-VAT on sales within the State @ 4 % 8,000

CST on the inter-state sales @ 2% 5,000

Total tax due 13,000

Less : Input credit on eligible purchases and capital goods i.e. 12.5%

of 220000 (inputs purchased within state and capital goods).- Inputs purchased from dealer under composition scheme

and high-seas purchases/import of inputs is not eligible for

input credit. 27,500

Balance input-credit to be carried forward 14,500

Case (b) : Computation of the tax liability for the month of October 2008 -

Particulars Rs.

Output-VAT on sales within the State @ 12.5% 25,000

CST on the inter-state sales @ 2% 5,000

Total tax due 30,000


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Less : Input-credit on eligible purchases and capital goods i.e.

4% of 220000 (Inputs purchased within state and capital goods).

Inputs purchased from dealer under composition scheme

and high-seas purchases/import of inputs is not eligible for input credit. 8,800

Total tax payable for the month 21,200

Illustration 8

Computation of VAT liability: Calculate the VAT liability for The period Jan.

1, 2009 to Jan. 31,2009 from the following particulars:

Inputs worth Rs. 1,00,000 were purchased within the State. Rs. 2,00,000 worth

of finished goods were sold within the State and Rs. 1,00,000 worth of goods

were sold in the course of inter-State trade. VAT paid on procurement of

capital goods worth Rs. 1,00,000 during the month was at 12.5%. If the input

and output tax rate in the State are 1.5% and 4% respectively and the central

sales tax rate is 3%, show the total tax liability under the State VAT law and

under the Central Sales Tax Act (Nov. 08 (NS) 5 Marks)

Ans :Computation of the tax liability for the period Jan. 1, 2009 to Jan. 31, 2009:-

Particulars Rs.

Output-VAT on sales within the State @ 4% 8,000

CST on the inter-state sales @ 3% 3,000Total tax due 11,000

Less : Input-credit on eligible purchases and capital goods i.e.

12.5% of 200000 (Inputs purchased within state and capital goods) 25,000

Balance input-credit to be carried forward 14,000


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Illustration 9

Normal Taxation v. Composition Scheme: Mr. A, a retailer who keeps no

inventories, presents the following expected information for the year -

(1) Purchases of goods :.Rs. 20 lakhs (VAT @ 4%)

(2) Sales (at fixed selling price indl of all taxes) : Rs. 30 lakhs (VAT on sales @

4%).

Discuss whether he should opt for composition scheme if composite tax is 1%

of turnover. Expenses of keeping detailed statutory records required under

the VAT-laws will be Rs. 50,000 p.a., which shall get reduced to Rs. 20,000 if

composition scheme is opted for. Other expenses are Rs. 3,00,000 p.a.

Solution : The cost to the ultimate consumer under two schemes is as under -

Normal Composition

VAT Scheme*

Cost of goods sold (*No credit under composition scheme,

hence, cost of goods sold will be higher) 2,000,000 2,080,000

Add: Costs of maintaining records 50,000 20,000

Add: Normal Expenses 300,000 300,000

TOTAL COSTS 2,350,000 2,400,000

Sales (inclusive of all taxes) 3,000,000 3,000,000

Less : Tax (VAT =30 lakh x 4+104);

(Composite Tax =30 lakh x 1%) 115,385 30,000Sales (net of taxes) 2,884,615 2,970,000

Profit of the dealer (Sales, net of taxes Total Costs) 534,615 570,000

Conclusion: It is apparent that while cost to ultimate consumer, in both the

cases remains same, the profit of the dealer is higher if the dealer opts for

composition scheme. Hence, composition scheme should be opted.

Illustration 10Loss of VAT-chain due to composition scheme: Manufacturer A extracted

raw produce X and raw produce Y from mines at Rs. 15,000 and Rs. 20,000

respectively and sold the same at 150% margin to Manufacturer B (VAT rate

is 4% on produce X and 12.5% on produce Y). Manufacturer B is a dealer

operating under composition scheme who is liable to VAT @ 0.4% of

turnover. Manufacturer B of Jaipur used X and Y as raw material; added 100%

of cost of raw materials towards manufacturing expenses and profits and sold

the resultant product to wholesaler C. Wholesaler C sold the same to Retailer

D at 25% above cost (VAT rate is 4%). The retailer D sold the same to a


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consumer at 20% above cost (VAT rate is 4%). Show the amount of VAT

payable by each person.

Solution: VAT CHART (all amounts in Rs.)

Particulars VAT on sales VAT creditNet VAT payable

1. Manufacturer A 7,750 No input tax 7,750

2. Manufacturer B ( Opted for Composition

Scheme) 762 No credit 762

3. Wholesaler C 9,525 No credit 9,525

4. Retailer D 11,430 9,525 1,905

Notes :

(A) The VAT liability at each stage is shown below Rs.

Cost to Manufacturer A (15,000 + 20,000) 35,000

Add: Profit of Manufacturer A @ 150% of cost 52,500

Sale price of Manufacturer A 87,500

Add: VAT [4% of (15000 + 150% of 15000) 12.5% of

(20000 + 150% of 20000) 7,750

Raw material Cost to Manufacturer B 95,250

Add: Margin for expenses and profits at 100% of raw material cost 95,250

Sale price of manufacturer B/Cost to C (Composite Tax cannot be

recovered) 190,500

Add: Profit margin @ 25% 47,625Sale price of Wholesaler C 238,125

Add: VAT @ 4% 9,525

Purchase price of Retailer D (inclusive of VAT) 247,650

Cost to retailer D (net of VAT) 238,125

Add : 20% margin of D 47,625

Sale price of retailer D 285,750

VAT @ 4% thereon 11,430

(B) This illustration shows the effect of breakage of chain due to compositionscheme. A single dealer who has opted for composition scheme in the

chain of sale of a product would lead to increase in cost due to no input-

VAT credit to him and no VAT-able invoice issued by hint.

ca final vat

Documents

purpose of vat

payment of vat

proportion of vat

credit of tax

tax paid goods

purchase of capital

vat creditsetoffdeduction

tax levied