Value Added Tax in India

Indirect taxation is a major source of revenue for the Union of India and was introduced in 2005 to replace the then existing General Sales tax. Major issue with General Sales Tax was that it practiced tax on tax system thereby resulting in cascading effect on the price of the final good. There was no offsetting or credit available to dealers or manufacturers for the tax paid. So the entire amount of tax would get added to the cost of the goods that would be again taxed at the time of sale. Today in this category, India has two types of taxes- Central Sales Tax (CST) and Value Added Tax (VAT). VAT is imposed on goods that are sold within a single state and CST comes into picture when goods from one state are sold into another. All states have their varying rules regarding VAT but in spirit they remain quite the same.

Applicability of VAT

VAT is applicable to all dealers who have turnover of Rs. 5 lacs and above. In some states this limit has been increased to Rs. 10 lacs. All dealers to whom this Act is applicable have to register themselves and then they are allotted an 11 digit unique identification code. All collections, deposit and filing of VAT takes place under this number.

Meaning of Value Added Tax

As the term implies, VAT is charged on the value added at each stage of manufacturing and distribution process. The entire tax however gets added and is recovered from the end consumer. Let us give you an example of mineral water bottles. The process begins with a manufacturer who supplies pet bottles. Now when the bottles are filled with mineral water, sealed and labeled, there is a considerable value addition. The VAT is charged on this value addition where a normal pet bottle becomes an end product which is mineral water bottle.

But to truly understand VAT, it is important to familiarize yourself with the concept of input and output tax. The tax paid while purchasing the goods is called input tax whereas VAT charged to the customer when making sales is called output tax. To avoid the double taxation and thus the resulting cascading effect, the dealer deducts the input tax paid from the output tax and then makes the payment. Let us take a simple example, again of the mineral water bottle. So the producer got Pet bottle with each bottle costing Rs.5 on which 10% is charged as the VAT. Thus input tax is Rs. 50 paise. Now the bottle was sold for Rs. 20 and again 10% output tax was charged and collected. The amount of output tax therefore comes to Rs. 2. The VAT amount to be paid by the producer of mineral water bottle comes out to be Rs. 1.50 which is Output Tax (Rs. 2) – Input Tax (Rs. 0.50).

Good Covered

For the ease of understanding and differential charge, the goods have been categorized into different categories. Natural and unprocessed items that are barred from imposition of taxes are obviously not charged to VAT. These items include plastic bangles, condoms, aids used by handicapped persons, firewood, khadi etc. Following are the other categories and percentage charge on the goods:

Precious stones, precious and Semi precious metals and bullion- 1-2%

All agricultural and industrial output including capital goods and declared goods-4-5%

Luxury goods like imported items, cigarettes etc- 20% or above

All goods that do not fall under any of the categories mentioned above- 12.5% to 14%.

Due Date for Filing and Paying VAT

All VAT returns are to be filed by 20th of the succeeding month following the month of chargeability. For example- Return for VAT collected for the month of September must be filed on or before 20th October. VAT is payable into government’s credit by 15th of every month following the month of collection. For example VAT collected in the month of September must be deposited by 15th October succeeding September.

So this was a brief introduction about VAT. Now, this system is also in its twilight with GST replacing it from 1st July. This GST is very different from the erstwhile GST and takes care of the loopholes and difficulties faced in the present VAT regime. The first one is the scope of tax evasion is very wide in VAT. All states have different levies and rules which makes it one of the most complicated taxation system in the world. GST will do away with multiple point taxation and shall be levied only at the final destination based on consumption. Apart from these advantages, GST is expected to give a boost to tax revenue collections in India thereby propelling Indian economy. More will be clearer as GST replaces the present VAT system which was very effective when it was introduced but over time has lost its luster. The introduction of GST has been a long fight right from fixing a single rate to its coverage. But finally on July 1st India will enter the new GST era. What is to be seen is whether it meets the expectations and objectives for which it has been introduced!