What is Value Added Tax?
VAT is a multi –point tax with set-off for tax paid on purchases. It is collected in instalments at each transaction in the production and distributions system. It does not have cascading effect due to the system of deduction or tax credit mechanism.
The following illustration will help in highlighting the differences between a single point tax and Vat.
Assumptions:
First Stage
Selling price of manufacturer (Excluding tax) Rs. 100.00
Tax rate applicable- 20% Rs. 20.00
Selling price including tax Rs. 120.00
Second Stage
Cost price to Wholesale dealer Rs. 120.00
Overheads and profit margin Rs. 60.00
Selling price Rs. 180.00
Third stage:
Cost price to retail trader Rs.180.00
Overheads and profit margin at 50% Rs. 90.00
Selling price to consumer Rs.270.00
Thus, from the above illustration it is clear that the government gets only Rs. 20.00 whereas due to the cascading effect of tax the consumer is under compulsion to pay Rs. 45.00 indirectly towards tax.
By the introduction of vat the Tax base is widened and every intermediary is required to pay tax only on the value addition made by him.
What are the advantage of VAT?
Ø Less chances for tax evasion as the incidence of tax spread over every dealer.
Ø Lower tax rate.
Ø Increased revenue to state gets the tax on the sale price.
Ø A check on creation of black money.
Ø No procedural hazards.
Methods of VAT
1. Addition method
Under this method the various elements of overheads and profits are summed up. This is Known as income approach.
2. Subtraction Method
Under this method the tax exclusive price of inputs is subtracted from the tax exclusive price of output. ( Sale Price- Purchase Price)
3. Tax credit method or Invoice Method
Under this method the tax paid on inputs is reduced from the tax payable on the final product and the difference is paid as VAT.
Now the need for VAT impact Anlysis and the areas that require attention to plan smooth transition to VAT is discussed.
VAT is going to change the style of Maintaining of records as well as the style of business. It would be a impractical to believe that the implementation of VAT is only a change in the system of levy of tax and that it is just a replacement of the present sales Tax ACT.
It is commonly believed that VAT would impact only the pricing policy. Impact of VAT Will encompass all facets of the business i.e., Procurement, manufacturing, distribution, costing and accounting. Staffs need to be educated on the implications of VAT and the software need to be modified to be compatible with the VAT accounting and reporting requirements.
VAT IMPACT ANALYSIS
Though there may be certain common factors relevant to all trade and industry, the impact of VAT needs to be analyzed specific to the business model of the individual business. A sound Knowledge of the VAT law applicable to the individual business model is required. Planning transition to VAT will pose significant challenges to trade and industry.
The impact may be marginal to small traders and manufactures operating within a particular state, procuring all inputs and raw materials within the state and marketing the
goods within the same state. In the case of such entities, the only impact may be on pricing.
The impact will be significant for large organization with operation spread over India.
Since it is difficult to present a common VAT impact analysis applicable generally to all business, the areas that require attention to plan transition are highlighted
PRE TRANSITION INVENTORY
The pre transition inventory needs to be planned properly. Though the sales tax paid on raw material and traded goods under the present sales tax act is eligible for inputs tax credit, the eligibility criteria is not uniform in all the states.
The issues that arise are:-
A. will the tax paid on the entire stock be eligible for input tax credit irrespective of the date of purchase of the goods?
B. What is the tax amount that will be eligible for input tax credit, the tax calculated at the rate applicable under VAT or the tax actually paid under the sales tax ACT?
C. Some of the purchase invoice will not have details of tax rate applied and the tax amount paid as the purchase may be from a dealer in whose hands the sales is not liable to tax as second sale. What will be the tax credit eligible in such cases?
D. What are the records required for substantiating the claim of input tax credit?
E. What is the procedure for claiming input tax credit of the goods in stock as on 31.03.2004?
The answers to the above question in serial are
A. A dealer may have in stock purchased several years back.but input tax credit may be available only for stock purchased within a specified date prior to 01.04.04 as may be specified in the respective state VAT Acts. The Dadra and Nagar Haveli Value Added Sales Tax regulation,2003 appears to be silent on this issue. Clarification is awaited.
B. The rate of tax applied shall be the rate of tax under the VAT Act or the tax rate actually paid whichever is lower.
C. Some of the States have provided that the credit will be available only when the tax is charge in the purchase bill. But in the case of Andra pradesh, tax credit will be available as per the formula to be prescribed even if the tax is not specified in the purchased bill.
D. The dealer will be required to maintain the original invoice and such other records as may be specified in the respective State VAT Acts.
E. The dealer may be required to file a stock statement as on 31.03.2004 within a short period of a week’s time to forthnight after 01.04.05 to avail input tax credit. One practical problem may come here, since most dealers are not used to such strict stock taking norms. Therefore, a proper planning at this hour is needed.
In view of the restriction on the eligibility on the input tax credit only on goods procured within a period specified in the respective State VAT acts and the strict time limit that may be specified in the respective State VAT Acts, the pre transition inventory needs careful planning.
PRE TRANSITION CAPITAL EXPENDITURE
Inputs tax Credit on capital goods in the manufacture of taxable goods used in the manufacture of taxable goods for sale is eligible subject to such conditions and restrictions as may be specified in the respective state VAT Acts.
Therefore, it may be desirable to plan capital expenditure after implementation of VAT depending upon business needs.
PRICING
Under the present single point system of levy of tax, the manufacturer or the importer of goods into the state is liable to sales tax.There is no levy of sales tax on the further distribution channel. The only tax element that needs to be factored in pricing decisions was the first point levy of tax.
VAT, in simple understanding, is a multi point levy of tax on each entities in the supply chain with the facility of set off of input tax i.e., the tax paid t stage of purchase of goods by a trader and on purchase of raw material by a manufacturer. The set off of input tax will be available only on purchases effected from within the state from a VAT registered dealer. Credit of tax paid on Inter State purchase will not be available except as in the case of Pondicherry draft VAT ACT.
Though in the vat scenario one has to redefine business strategy, one important issue is pricing. Due to multi point levy under VAT, the price to the ultimate buyer will be higher than at present with the levy of tax on the value addition at each point of sale and resale. The possibility of passing on the additional cost to the ultimate buyer depends on the elasticity of supply and demand. If the price increase cannot be passed on to the ultimate buyer the manufacturer or the trader will have to absorb the price increase depending again upon supply/ demand elasticity.
PROCUREMENT
Input tax credit of goods purchased within the state from VAT registered dealers will only be available, as per the draft VAT Acts, Published so far. The only exception is the Pondicherry Act which grants inputs input tax credit of CST paid on paid on inter state purchase at a rate not exceeding 4% under section 16 (1) (i).
The issue of procuring the goods from within the state or outside the state is to be addressed. Though commercial consideration as the quality of the goods, the dependability of the supplier. Cost and other factor are relevant, the tax incidence is a factor to be considered.
Procuring goods from within the state will improve cash flows, as the tax element of the goods will be available for set off against the output tax payable.
MANUFACTURING
VAT will impact significantly manufacturers who have plants in different States manufacturing sub assemblies of a single product that is assemble in a particular state. So far the sub assemblies would have been stock transferred for assembly at the main plant.
In the VAT Scenario, Stock transfer may not be an ideal option as there are restrictions on Availment of input tax credit by the unit affecting the stock transfer. Under VAT input tax credit of raw material used in the manufacture of goods for stock transfer will be restricted to that paid in excess of 4%. This may not be advantageous if the unit effecting stock transfers as most of the basic industrial raw materials may fall in the 4% slab in the VAT schedule sources the inputs locally.
A decision will have to be taken on the advisability of the relocation of manufacturing units so that all the sub assemblies are manufactured in one state.
In case of organizations with location manufacturing facilites, a relook at the product mix will be required to take advantage in the regime of the benefits available to each of the units based on the pattern of procurement and distribution.
A systematic review of the manufacturing practice in the unit will help focus on areas that need to be reoriented to suit the VAT regime.
DISTRIBUTION
Ø Whether stock transfer to depots would be economical than inter state sale?
Ø What should be the length of the supply chain?
Ø Should the current stocking points in different State be continued?
To answer the above question we have to study the present distribution policy in the light of the changes in the VAT regime.
Due respect will have to be given to COSTING, ACCOUNTING AND MODIFICATIONS TO SOFTWARE..
OTHER ASPECTS
SOME of the other aspects that need to be taken care
Ø Staff in the Purchase, Marketing and accounting department should be trained in all aspect of VAT.
Ø Review all existing contracts with suppliers, distributors and job workers for compatibility with VAT requirements.
Ø Redesign Stationery for purchase Orders, Invoices, Books of Accounts etc.,
After Going through the PROPOSED DRAFT OF THE DADRA & NAGAR HAVELI VALUE ADED SALES TAX REGULATION, 2003
Following Common Question comes:-
1 Purchase From inter state & sold in interstate whether input credit will be
available on purchase made from interstate?
Answer: NO
2. Whether E-1 transaction & C Form will continue?
Answer:- YES
3. If any trader purchases trading goods from another state and sells to another state
On E-1/ C transaction what will be the VAT?
Answer:- NO VAT WILL BE PAYABLE
4. Any benefit under VAT on imported good
Answer:- NIL
5. Any input credit will be available on stock in transit on 31.03.2004 to the
Purchasing dealer in case invoice is dated prior to 01.04.2005 and material
received after 01.04.2005
Answer:- YES
6. Position of input credit in case of one item sold at profit and another item at loss
Answer:- Total tax payable for all items will be adjusted from input credit
available subject to genuineness.
7. Branch Transfer
Answer:- Branch transfer is allowed subject to disallowance of input credit/
Purchase tax liability.
8. Whether it will be possible to get input credit for purchase made prior to
31.03.2004 in case tax not shown separately?
Answer :- Purchases affected till 31.03.2004 without showing tax separately will be
eligible for input credit on the basis of formula to be framed by sales tax
Authorities.It is better to tell seller to show local tax separately in invoices.
9. Intrestate purchase whether Input credit is available?
Answer:- NO
10. Whether Interstate Sale will be liable for sales tax after introduction of VAT Scheme?
Answer: - NO
11. Whether input credit for local purchase will be available?
Answer:- Yes, For full value subject to certain condition
12. Whether exemption granted on local sale will be continued?
Answer:- No, as exemption is bound to be withdrawn on introduction of VAT
system.Govt. May give another scheme which may be on the pattern of
deferment payment after a certain period/ immediate monthly payment as
per discounted cash flow method.
13. What will be input credit as on cut off date?
Answer:- Deemed Credit may be given for taxable local purchases subject to certain
condition.
14. Whether Credit will be available for purchases from exempted units?
Answer:- On introduction of VAT every one will be liable to pay sales tax. Hence
input credit will be available only on obtaining Vatable purchase
invoices.
15. What about sales Tax registration?
Answer : New Registration for local sales Tax will be issued.
16. What about Sales Invoices?
Answer:- Central Excise Invoice with some modification Like TIN ( Taxpayer
Indentification Number), VAT Tax amount.
17. Whether input tax credit available for Local Purchase from Unregistered Dealers.
Answer :- NO, We have to insist Purchase to procure material from the Vat
registered Vendors
18. Whether From “XI” for Purchase of Raw Material within U.T. continue or discontinue
Answer :- Not continue
19. Whehter input credit will be available in next year for purchase made within the cut off date but consumed during the financial year?
Answer:- Yes, Tax authorites will come up with formula.
20. Whether stock transfer is liable to attract tax
Answer :- Yes
21. Whether sales to unregistered dealer tax credit will be available for set off
Answer :- Yes
22. Clarification of Formula tax payable = (O+P-I)
Answer : Output Tax + Purchase Tax ( Reverse Tax) – Input Tax
:icon1:
From India, Bangalore
VAT is a multi –point tax with set-off for tax paid on purchases. It is collected in instalments at each transaction in the production and distributions system. It does not have cascading effect due to the system of deduction or tax credit mechanism.
The following illustration will help in highlighting the differences between a single point tax and Vat.
Assumptions:
First Stage
Selling price of manufacturer (Excluding tax) Rs. 100.00
Tax rate applicable- 20% Rs. 20.00
Selling price including tax Rs. 120.00
Second Stage
Cost price to Wholesale dealer Rs. 120.00
Overheads and profit margin Rs. 60.00
Selling price Rs. 180.00
Third stage:
Cost price to retail trader Rs.180.00
Overheads and profit margin at 50% Rs. 90.00
Selling price to consumer Rs.270.00
Thus, from the above illustration it is clear that the government gets only Rs. 20.00 whereas due to the cascading effect of tax the consumer is under compulsion to pay Rs. 45.00 indirectly towards tax.
By the introduction of vat the Tax base is widened and every intermediary is required to pay tax only on the value addition made by him.
What are the advantage of VAT?
Ø Less chances for tax evasion as the incidence of tax spread over every dealer.
Ø Lower tax rate.
Ø Increased revenue to state gets the tax on the sale price.
Ø A check on creation of black money.
Ø No procedural hazards.
Methods of VAT
1. Addition method
Under this method the various elements of overheads and profits are summed up. This is Known as income approach.
2. Subtraction Method
Under this method the tax exclusive price of inputs is subtracted from the tax exclusive price of output. ( Sale Price- Purchase Price)
3. Tax credit method or Invoice Method
Under this method the tax paid on inputs is reduced from the tax payable on the final product and the difference is paid as VAT.
Now the need for VAT impact Anlysis and the areas that require attention to plan smooth transition to VAT is discussed.
VAT is going to change the style of Maintaining of records as well as the style of business. It would be a impractical to believe that the implementation of VAT is only a change in the system of levy of tax and that it is just a replacement of the present sales Tax ACT.
It is commonly believed that VAT would impact only the pricing policy. Impact of VAT Will encompass all facets of the business i.e., Procurement, manufacturing, distribution, costing and accounting. Staffs need to be educated on the implications of VAT and the software need to be modified to be compatible with the VAT accounting and reporting requirements.
VAT IMPACT ANALYSIS
Though there may be certain common factors relevant to all trade and industry, the impact of VAT needs to be analyzed specific to the business model of the individual business. A sound Knowledge of the VAT law applicable to the individual business model is required. Planning transition to VAT will pose significant challenges to trade and industry.
The impact may be marginal to small traders and manufactures operating within a particular state, procuring all inputs and raw materials within the state and marketing the
goods within the same state. In the case of such entities, the only impact may be on pricing.
The impact will be significant for large organization with operation spread over India.
Since it is difficult to present a common VAT impact analysis applicable generally to all business, the areas that require attention to plan transition are highlighted
PRE TRANSITION INVENTORY
The pre transition inventory needs to be planned properly. Though the sales tax paid on raw material and traded goods under the present sales tax act is eligible for inputs tax credit, the eligibility criteria is not uniform in all the states.
The issues that arise are:-
A. will the tax paid on the entire stock be eligible for input tax credit irrespective of the date of purchase of the goods?
B. What is the tax amount that will be eligible for input tax credit, the tax calculated at the rate applicable under VAT or the tax actually paid under the sales tax ACT?
C. Some of the purchase invoice will not have details of tax rate applied and the tax amount paid as the purchase may be from a dealer in whose hands the sales is not liable to tax as second sale. What will be the tax credit eligible in such cases?
D. What are the records required for substantiating the claim of input tax credit?
E. What is the procedure for claiming input tax credit of the goods in stock as on 31.03.2004?
The answers to the above question in serial are
A. A dealer may have in stock purchased several years back.but input tax credit may be available only for stock purchased within a specified date prior to 01.04.04 as may be specified in the respective state VAT Acts. The Dadra and Nagar Haveli Value Added Sales Tax regulation,2003 appears to be silent on this issue. Clarification is awaited.
B. The rate of tax applied shall be the rate of tax under the VAT Act or the tax rate actually paid whichever is lower.
C. Some of the States have provided that the credit will be available only when the tax is charge in the purchase bill. But in the case of Andra pradesh, tax credit will be available as per the formula to be prescribed even if the tax is not specified in the purchased bill.
D. The dealer will be required to maintain the original invoice and such other records as may be specified in the respective State VAT Acts.
E. The dealer may be required to file a stock statement as on 31.03.2004 within a short period of a week’s time to forthnight after 01.04.05 to avail input tax credit. One practical problem may come here, since most dealers are not used to such strict stock taking norms. Therefore, a proper planning at this hour is needed.
In view of the restriction on the eligibility on the input tax credit only on goods procured within a period specified in the respective State VAT acts and the strict time limit that may be specified in the respective State VAT Acts, the pre transition inventory needs careful planning.
PRE TRANSITION CAPITAL EXPENDITURE
Inputs tax Credit on capital goods in the manufacture of taxable goods used in the manufacture of taxable goods for sale is eligible subject to such conditions and restrictions as may be specified in the respective state VAT Acts.
Therefore, it may be desirable to plan capital expenditure after implementation of VAT depending upon business needs.
PRICING
Under the present single point system of levy of tax, the manufacturer or the importer of goods into the state is liable to sales tax.There is no levy of sales tax on the further distribution channel. The only tax element that needs to be factored in pricing decisions was the first point levy of tax.
VAT, in simple understanding, is a multi point levy of tax on each entities in the supply chain with the facility of set off of input tax i.e., the tax paid t stage of purchase of goods by a trader and on purchase of raw material by a manufacturer. The set off of input tax will be available only on purchases effected from within the state from a VAT registered dealer. Credit of tax paid on Inter State purchase will not be available except as in the case of Pondicherry draft VAT ACT.
Though in the vat scenario one has to redefine business strategy, one important issue is pricing. Due to multi point levy under VAT, the price to the ultimate buyer will be higher than at present with the levy of tax on the value addition at each point of sale and resale. The possibility of passing on the additional cost to the ultimate buyer depends on the elasticity of supply and demand. If the price increase cannot be passed on to the ultimate buyer the manufacturer or the trader will have to absorb the price increase depending again upon supply/ demand elasticity.
PROCUREMENT
Input tax credit of goods purchased within the state from VAT registered dealers will only be available, as per the draft VAT Acts, Published so far. The only exception is the Pondicherry Act which grants inputs input tax credit of CST paid on paid on inter state purchase at a rate not exceeding 4% under section 16 (1) (i).
The issue of procuring the goods from within the state or outside the state is to be addressed. Though commercial consideration as the quality of the goods, the dependability of the supplier. Cost and other factor are relevant, the tax incidence is a factor to be considered.
Procuring goods from within the state will improve cash flows, as the tax element of the goods will be available for set off against the output tax payable.
MANUFACTURING
VAT will impact significantly manufacturers who have plants in different States manufacturing sub assemblies of a single product that is assemble in a particular state. So far the sub assemblies would have been stock transferred for assembly at the main plant.
In the VAT Scenario, Stock transfer may not be an ideal option as there are restrictions on Availment of input tax credit by the unit affecting the stock transfer. Under VAT input tax credit of raw material used in the manufacture of goods for stock transfer will be restricted to that paid in excess of 4%. This may not be advantageous if the unit effecting stock transfers as most of the basic industrial raw materials may fall in the 4% slab in the VAT schedule sources the inputs locally.
A decision will have to be taken on the advisability of the relocation of manufacturing units so that all the sub assemblies are manufactured in one state.
In case of organizations with location manufacturing facilites, a relook at the product mix will be required to take advantage in the regime of the benefits available to each of the units based on the pattern of procurement and distribution.
A systematic review of the manufacturing practice in the unit will help focus on areas that need to be reoriented to suit the VAT regime.
DISTRIBUTION
Ø Whether stock transfer to depots would be economical than inter state sale?
Ø What should be the length of the supply chain?
Ø Should the current stocking points in different State be continued?
To answer the above question we have to study the present distribution policy in the light of the changes in the VAT regime.
Due respect will have to be given to COSTING, ACCOUNTING AND MODIFICATIONS TO SOFTWARE..
OTHER ASPECTS
SOME of the other aspects that need to be taken care
Ø Staff in the Purchase, Marketing and accounting department should be trained in all aspect of VAT.
Ø Review all existing contracts with suppliers, distributors and job workers for compatibility with VAT requirements.
Ø Redesign Stationery for purchase Orders, Invoices, Books of Accounts etc.,
After Going through the PROPOSED DRAFT OF THE DADRA & NAGAR HAVELI VALUE ADED SALES TAX REGULATION, 2003
Following Common Question comes:-
1 Purchase From inter state & sold in interstate whether input credit will be
available on purchase made from interstate?
Answer: NO
2. Whether E-1 transaction & C Form will continue?
Answer:- YES
3. If any trader purchases trading goods from another state and sells to another state
On E-1/ C transaction what will be the VAT?
Answer:- NO VAT WILL BE PAYABLE
4. Any benefit under VAT on imported good
Answer:- NIL
5. Any input credit will be available on stock in transit on 31.03.2004 to the
Purchasing dealer in case invoice is dated prior to 01.04.2005 and material
received after 01.04.2005
Answer:- YES
6. Position of input credit in case of one item sold at profit and another item at loss
Answer:- Total tax payable for all items will be adjusted from input credit
available subject to genuineness.
7. Branch Transfer
Answer:- Branch transfer is allowed subject to disallowance of input credit/
Purchase tax liability.
8. Whether it will be possible to get input credit for purchase made prior to
31.03.2004 in case tax not shown separately?
Answer :- Purchases affected till 31.03.2004 without showing tax separately will be
eligible for input credit on the basis of formula to be framed by sales tax
Authorities.It is better to tell seller to show local tax separately in invoices.
9. Intrestate purchase whether Input credit is available?
Answer:- NO
10. Whether Interstate Sale will be liable for sales tax after introduction of VAT Scheme?
Answer: - NO
11. Whether input credit for local purchase will be available?
Answer:- Yes, For full value subject to certain condition
12. Whether exemption granted on local sale will be continued?
Answer:- No, as exemption is bound to be withdrawn on introduction of VAT
system.Govt. May give another scheme which may be on the pattern of
deferment payment after a certain period/ immediate monthly payment as
per discounted cash flow method.
13. What will be input credit as on cut off date?
Answer:- Deemed Credit may be given for taxable local purchases subject to certain
condition.
14. Whether Credit will be available for purchases from exempted units?
Answer:- On introduction of VAT every one will be liable to pay sales tax. Hence
input credit will be available only on obtaining Vatable purchase
invoices.
15. What about sales Tax registration?
Answer : New Registration for local sales Tax will be issued.
16. What about Sales Invoices?
Answer:- Central Excise Invoice with some modification Like TIN ( Taxpayer
Indentification Number), VAT Tax amount.
17. Whether input tax credit available for Local Purchase from Unregistered Dealers.
Answer :- NO, We have to insist Purchase to procure material from the Vat
registered Vendors
18. Whether From “XI” for Purchase of Raw Material within U.T. continue or discontinue
Answer :- Not continue
19. Whehter input credit will be available in next year for purchase made within the cut off date but consumed during the financial year?
Answer:- Yes, Tax authorites will come up with formula.
20. Whether stock transfer is liable to attract tax
Answer :- Yes
21. Whether sales to unregistered dealer tax credit will be available for set off
Answer :- Yes
22. Clarification of Formula tax payable = (O+P-I)
Answer : Output Tax + Purchase Tax ( Reverse Tax) – Input Tax
:icon1:
From India, Bangalore
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