All about VAT !

What is VAT?

It is a multi-point sales tax with set off for the tax paid on purchases.

Under single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. But in VAT tax is levied on each of the entities in the supply chain . Only the value addition in the hands of each of the entities is subject to tax. 

Value Added Tax (VAT) came into existence from April 01, 2005.Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005. 

Features of VAT

VAT is levied on the sale of movable goods .

VAT is imposed on goods only and not services and it has replaced sales tax. 

VAT is an indirect tax .

VAT is a centrally-administered tax with a revenue-sharing mechanism 
Collected in installments at each transaction in the production-distribution cycle.
Does not have cascading (tax on tax) effect due to the system of deduction or credit mechanism.

Necessity of VAT

It prevents businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases.

Elimination of Cascading of taxes : Lower cost

Uniform and Simple Tax Law

Transparent System : Improved Tax Compliance

Increased Revenue Collections

Foster the Indian Common Market

Computation Methods

THE SUBTRACTION METHOD:- The tax rate is applied to the difference between the value of output and the cost of input. 

THE ADDITION METHOD: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc). 

TAX CREDIT METHOD: This entails set-off of the tax paid on inputs from tax collected on sales 

Value Addition

PURCHASES = 200
Tax charged = 10% of 200
from you =20

SALES = 250
Tax charged = 10% of 250
From customer = 25

Out of Rs. 25 charged from the customer, you will pocket 
Rs. 20 (tax paid at the time of purchase) and pay balance 
Rs. 5 to the department.

VAT Slabs

550 items covered 

270 items of basic needs, like medicine, drugs, agro & industrial inputs, capital & declared goods 4% VAT 

Rest 12.5% VAT. 

Gold & silver jewellery - 1% 

VAT Limitations

VAT is regressive 

VAT is too difficult to operate from the position of both the administration and business 

VAT is inflationary 

VAT favours the capital intensive firm 

VAT sparkle varies State by state

What i think....

VAT Tax rates should be made uniform in all states.

Government should run awareness programs to help know end consumer and business men VAT benefits.

Persons maintaining their accounts on computer must ensure that proper back up record is maintained.

Abolition of CST

Full tax credit for inputs as well as capital goods, in the period of purchase