VAT & its Applicability

A Value Added Tax (VAT) is a tax that is collected at each stage in the production and distribution of goods and services, as value to the goods is added. It forms an integral part of the GDP of any country and was introduced on April 01, 2005.

VAT is applicable only on goods sold within a particular state, which means that the buyer and the seller need to be in the same state.

WHY WAS VAT INTRODUCED IN INDIA ?

The main aim behind the introduction of VAT was to eliminate the presence of double taxation and the cascading effect from the then existing sales tax structure. A cascading effect is when there is tax levied on a product at every step of the sale. It forms an important instrument for tax consolidation of the country and as such helps towards solving the fiscal deficit issue to some extent.

HOW IS VAT CALCULATED ?

VAT has basically 2 components , namely,

  • Output VAT
  • Input VAT

It is actually calculated as the difference between input tax and output tax.

VAT = Output Tax – Input Tax

Where,

  • Output tax is VAT charged to the customer by a dealer making taxable sales. A dealer is an individual, partnership, or business that is registered under VAT. Any person or business making sales above the prescribed limit are required to register. When a dealer is registered, VAT becomes chargeable on all taxable sales made by that dealer.
  • Input VAT is the tax that is paid on the eligible purchases made by the dealer. Accordingly, when a dealer is registered under VAT, the VAT liability is to be paid in cash to the state government for a particular month.

APPLICABILITY OF VAT

All business transactions involving the sales of goods/commodities carried on within a state by individuals, partnerships, or companies will be covered by VAT.

However, VAT will not cover small businesses with sales below a certain limit. In Maharashtra, the limit is 10 lakhs or below.

TAX RATES PRESCRIBED UNDER VAT

The guidelines and rules for value-added tax vary from state to state as the tax is collected by state governments In India it is divided into 4 categories which are as follows –

  1. NIL :- Items that are very basic in nature and are sold mainly by the unorganized sector such as khadi, salt etc. are fully exempted from tax and fall under this category.
  2. 1% VAT Rate :- Items that tend to be highly expensive have a low percentage of VAT applicable. These include gold, silver, precious jewellery , stones etc. VAT is charged at 1% for the items under this category.
  3. 4 –5% VAT Rate :- VAT is charged at 4% to 5% on certain items that are used on a daily basis .This includes essentials such as oil, coffee, medicines etc.
  4. General VAT Rate :- Items that cannot be segregated and put under any of the above-listed VAT categories fall under the general category. This includesluxury items such as cigarettes, alcohol, etc. VAT is usually charged at high rates of  of 12.5% or 14-15%.

VAT REGISTRATION

Enterprises that make a turnover of more than Rs.5 lakh by selling goods and services are required to be registered under VAT  in their respective states of operation.  On registration, each trader is given a unique 11-digit registration number which is used to for all communication regarding VAT and its filing.

The following documents are required to be submitted to register:-

  • Copy of PAN card
  • Address proof of business
  • Proof of identity of promoters
  • Additional security deposit or surety

 

Thus, in a nutshell, Value-Added Tax is a common form of indirect tax levied on services and goods which is paid by the producer to the government at every point on the supply chain where value is added.

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