VAT or value-added tax, is a common form of indirect tax levied on services and goods. It is paid to the government by the producers at every stage in the supply chain.
VAT tax 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.
VAT has two components, viz.
VAT = Output Tax - Input Tax
It is charged to the customer on the taxable sales made by the dealer. Here, the dealer or seller can be either the manufacturer, wholesaler, or the retailer registered under VAT.
One has to register to make the sales above the prescribed limit. Once the dealer is registered, it is chargeable on all the taxable sales for a given tax period, usually every month.
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.
However, registered dealers can normally claim a credit for VAT charged on most business purchases.
VAT registration is mandatory for all manufacturers who are involved predominantly in the production of goods and services. The registration process entails listing the company with the Government as a corporation eligible for return of VAT.
As per the VAT registration Act, it’s mandatory for all the business organizations to be registered for VAT payments. In the digital world, VAT registrations can be done online too and is a big relief for business entrepreneurs as it’s convenient and time-effective.
All these features of VAT enforce disclosure of complete information on sales, reducing the chances of tax evasion.
Removing tax on tax reduces prices of goods that the end consumer has to pay
Since dealers conduct self-assessment under VAT, the resources required for this process are fewer, and the revenue department can focus more on collection than administrative processes.
Uniform rates of VAT will enhance trade, 100% self-assessment will reduce the need for taxpayers to visit a tax department officer.
The guidelines and rules for value-added tax vary from state to state as the tax is collected by state governments. Types of VAT rate in India falls under 4 heads that are as follows-
Items that are very basic in nature are sold without any VAT on them. These items are mainly those sold by the unorganized sector in their most basic or natural form. Examples of these types of items are salt, khadi etc.
Items that tend to be highly expensive have a low percentage of VAT applicable. Items such as Gold, silver and other precious stones as well as precious jewelry fall under this category of goods. Most Indian states have fixed VAT for these items which is at 1% of the amount.
Under this category of VAT, daily consumption goods have been put by several state governments. VAT charged on goods essentials such as oil, coffee, medicines etc. is around 4-5% for most of the states in India.
General VAT rates are applicable to goods that cannot be segregated and put under any of the above-listed VAT categories. Goods such as liquor, cigarettes etc. are charged with high VAT rates of 12.5% or 14-15%.
There are a lot of state governments that follow a general rate of VAT for goods which cannot be categorized to the above list of classification. Goods like that are taxed at 12%, 13% or even 15% in various states.
The VAT collection process can be predominantly categorized into two prime categories-
Account-based Collection of VAT
Under the account-based collection method, instead of using sale receipts, tax is calculated on the value added. The difference between revenues and allowable purchases is the value-added tax.
Invoice-based Collection of VAT
This method is used by almost all countries. Under the invoice-based VAT collection process, sale receipts or the invoice is used to compute the corresponding VAT. When the traders sell their goods and services, they offer invoices containing separate details of VAT collected.
Under Accrual based collection, the revenue matches with the time period during which it was earned and matches the cost of raw materials and expenses to the time period during which they were made. Compared to the cash-based collection of VAT, this method is extremely complicated. However, it helps you get information about the business.
Cash-based accounting is much simpler than accrual-based calculation. The main thing that is checked is the cash that is being handled instead of checking the payment of the bills. Whenever any payment is received, that date is recorded as the date of receipt of funds.
There are repercussions to becoming involved in a series of transactions related to VAT fraud. This is true even if the transactions in which you are participating are not illegal in and of themselves.
Revenue will levy penalties as necessary, and you may-