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8/2/2019 Value Added Tax Ppt @ Bec Doms Bagalkot Mba
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value added tax
8/2/2019 Value Added Tax Ppt @ Bec Doms Bagalkot Mba
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Meaning of VAT
Value Added Tax (VAT) is nothing but a general
consumption tax that is assessed on the value added to
goods & services.
It is the indirect tax on the consumption of the goods, paid
by its original producers upon the change in goods or upon
the transfer of the goods to its ultimate consumers.
It is based on the value of the goods, added by the
transferor. It is the tax in relation to the difference of thevalue added by the transferor and not just a profit.
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Basic concept of VAT
VAT is not a new mode of tax but only a different
method of sales tax.
VAT is basically a tax on sale of good.
VAT is payable by seller who is termed as a dealer.
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Background of VAT in India
Tax on sale within the state is a State Subject.
Over the period, many distortions had come in taxationdue to unhealthy competition among State by givingsales tax incentives and tax rate war stated to attractmore revenue to state.
Many steps were taken to remove the distortions andrationalize tax structure since 1999.
It was decided to introduce uniform State Level VAT.
After lot of persuasion by Central Government, allStates ultimately agreed to introduce State Level salestax Vat at the conference of Chief Ministers all States atDelhi in November,1999.
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State-wise position of VAT
Haryana was the only State to introduce VAT on 1-4-
2003. 20 States introduced VAT 1-4-2005. these includes
Assam, Andhra Pradesh, Bihar, Delhi, Goa, Karnataka,
Kerala, Maharashtra, Punjab and West Bengal.
State ruled by BJP like Gujarat, Chhatisgarh, Jharkhand,
Madhya Pradesh and Rajasthan introduced VAT on 1-4-
2006.
Tamilnadu introduced VAT on 1-1-2007. Uttar Pradeshintroduced VAT 0n 1-1-2008.
Uttarakhand has not introduced VAT so far. J&K is out of
picture of VAT due to constitutional limitations.
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Compromised VAT
The VAT system as being introduced is result ofdeliberations of committee of representatives from 29states.
Each state has its own views and peculiarities.
Hence, having uniform nationwide VAT is very difficult andsome compromises/ adjustments are inevitable.
This has happened while introducing state VAT also.
VAT works best when there in uniformity in rate andvariation in rates are minimum.
However, in State VAT, the variations in rates is muchhigher.
Many products (like petroleum products) are kept out ofVAT regime. This is incorrect as per VAT principles.
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Basic concept of VAT
VAT works on the principle that when raw materialpasses through various manufacturing stages and
manufactured product passes through various
distribution stages, tax should be levied on the Value
Added at each stage and not on the gross sales price.
This ensures that same commodity does not get taxed
again and there is no cascading effect.
In simple term, Value Added means differencebetween selling price and purchase price. VAT avoids
cascading effect of a tax.
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Cont. Basically, VAT is multi-point tax with provision for
granting set off(credit) of the tax paid at the earlier
stage.
Thus, tax burden is passed on when goods are sold.
This process continues till goods are finally
consumed.
VAT is termed as consumption type tax with
distinction principle. VAT works on the principle of tax credit system.
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Consumption types of VAT
In consumption type of VAT, Value Added is
considered by deducting all purchases, raw materials
and capital items.
Consumption type VAT is popular and it is adopted by
most of the countries.
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Advantages of consumption type VAT
The tax burden is only at the last i.e. consumption state. It becomes easier to give concessions to goods used by
common man or goods used for manufacturer of capital
goods or exported goods and charge heavy duty on luxury
goods.
Administration control is easy due to credit method that
can be adopted.
It makes no distinction between capital intensive and labour
incentive activities.
It is in harmony with the destinationprinciple
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Disadvantage of consumption type of VAT
VAT in India is that all tax is collected in the state in which
goods are finally consumed.
State in which goods are actually produced do not get any
tax, while the State Government has to provide
infrastructure and other facilities for production for which it
has to spend huge amounts.
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Nature of VAT
International VAT/GST guidelines issued by OECD
(organization for Economic Corporation andDevelopment).
Value Added tax systems are designed to tax final
consumptions and as such, in most cases it is onlyconsumer who should actually bear the tax burden.
Indeed, the levied ultimately, on consumption and not
on intermediate transactions between firms, as tax
charged on these purchases is, in principle fullydeductable.
Value added taxes are taxes on consumption paid
ultimately by the final consumers.
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Disadvantages and pitfalls in VAT
One major disadvantage of VAT is tremendous paper
work and record keeping.
VAT system can work only if record keeping is proper
and reliable.
The elaborate a record keeping is not possible to small
business.
In case of small businesses, a composition scheme is
provided where tax is paid on gross value of sales at a
fixed rate.
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Highlights of State Sales Tax/Vat
Tax Credit:
Manufacturer will be entitled to credit of tax paid on inputs used
by him in manufacture. A Trader will be entitled to get credit of
tax on goods which he has purchased for re-sale.
Input Tax Credit:
Credit will be available of tax paid on inputs purchased within
the state. Credit will not be available of certain goods purchased
like petroleum products,liquor,petrol,disesel,motor spirit.
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Contd.
Credit of tax paid on capital goods:
Credit will be available of tax paid on capital goods purchased
within the state. Credit will be available only in respect of capital
goods used in the manufacture or processing.
Instant Credit:
Credit of Central Sales Tax(CST) paid on inputs and capital
goods purchased from other states will not be available.
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Contd
Very few sales tax forms:
Most of present sales tax forms will disappear. However,
forms relating to EOU/SEZ may continue. Forms under CST Act
will continue.
One to one correlation not required:
VAT does not require one to one i.e. Bill to Bill correlation
between input and output. Credit is available as soon as inputs/
capital goods are purchased. The credit can be utilized for
payment of VAT on any final products
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Other provisions of State VATRefund of input tax:
Entire input tax will be refundable within three months, when
final product is exported.Inrespect of sale to EOU/ SEZ, there
will be either exemption of input tax or tax paid will be refunded
within three months.
Check posts and transit passes:
Government can set up check posts. The invoice will have to
be produced at the check posts. System, of transit pass may be
introduced. This is bound to increase harassment of transporters
and is bound to increase corruption to unprecedented.
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Contd.
Exemptions and incentives to new industries already granted
to continue:
All State Governments were offering sales tax incentives to
new industries set ups in the State. The incentives were broadly
of three types.
Exemption: Dont charge tax and dont pay
Deferral: Charges sales tax in invoice but pay after long period
Remission: Charge in the invoice but retain and do not pay to
Government.
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Contd
Entry tax/ Octroi will continue:
There is no proposal to extend VAT to entry tax or Octroilevied by local authorities
Purchase tax:
Though white paper makes no mention of purchase tax, some
States like Keral and Andhra Pradesh have made provision for
imposition of purchase tax when purchase it from unregistered
Dealers. Its credit will be available where VAT credit on
purchases available.
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Accounting Treatment of VAT
As per AS-2,cost of purchase for purpose of inventory
valuation should not include tax, if credit of tax paid is
available.
For purpose of income tax, inventory valuation should be
inclusive of taxes, even if its credit is available, as per section
145A of Income Tax Act.
Purchase a/c should be debited with net amount.VAT credit
receivable on purchases should go to VAT credit receivable
Account.
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Contd
Account of each rate i.e,4%,12.5% etc,is required to be kept
separately.
In case of capital goods, as per AS-10,cost of fixed assets
should include only non-refundable duties or taxes.
In case of sales, the sales account should be credited only with
net amount. Tax payable should be credited to separate account
VAT Payable Account.
If any VAT is payable at the end of period,the balance is to be
shown as currentliability.
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