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Value-Added Tax (VAT)

VAT, short for 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.

What is VAT in India?

  • VAT is the tax that is charged on the gross margin at every stage in the sale of goods. Tax is assessed and collected at each point, starting from the manufacturer until the product reaches the retailer.
  • It is a multistage tax system with provision for collection of tax paid on the purchases at every point of sale. Thus, it removes the tax-on-tax effect.
  • Every state and union territory has different VAT laws. Moreover, the threshold limit for exemption and the list of goods exempted also varies from state to state. The compliance mainly states the taxpayers reporting the sales and purchases every month along with the details of exports before the state VAT department. The information submitted is then verified by tax officials and is also subject to VAT audit once a year.

How is VAT Calculated?

VAT has two components, viz.

  • Output VAT
  • Input VAT

VAT = Output Tax – Input Tax

Output VAT: 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 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: 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.

Features of VAT

  • Similar goods and services are taxed in the same way. As a result, a similar television from any brand will be charged the same VAT is levied at each stage of manufacture, making taxes easier and more transparent.
  • VAT minimises the likelihood of tax evasion and promotes compliance.
  • At the most basic level, it promotes transparency in the sale of products and services.

What is the VAT Registration?

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 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.

What is the Procedure for VAT Online Registration?

  • Visit the official VAT website and after logging in click on the registration tab
  • Fill in all the relevant details and also attach scanned copies of the required documents
  • The corporation may be provided with a temporary VAT registration number
  • After the successful verification of your application and documents, a permanent VAT registration number will be assigned to your company 

How is VAT Different from Sales Tax?

  • VAT is charged on the gross margin at each stage in the sale of goods. At every stage, the tax is assessed and collected, beginning right from the manufacturer up to the retailer. It is totally different from sales tax as VAT is collected from both producers of goods and services as well as consumers while sales tax is levied only on customers.
  • VAT has thus fewer rates, as opposed to the high number of rates for Sales Tax, and allows offsets of tax on inputs against those on outputs. 
  • Claiming input tax credit under VAT makes sure the invoicing is proper. 

All these features of VAT enforce the disclosure of complete information on sales, reducing the chances of tax evasion.

Benefits of VAT

Trade: Uniform rates of VAT will enhance trade, 100% self-assessment will reduce the need for taxpayers to visit a tax department officer.

Consumers: Removing tax on tax reduces prices of goods that the end consumer has to pay

Government: 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.

VAT Rates in India

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:

  • Nil VAT Rate: 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.
  • 1% VAT Rate: 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 are at 1% of the amount.
  • 4-5% VAT Rate: 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 Rate: 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 that cannot be categorized to the above list of classifications. Goods like that are taxed at 12%, 13%, or even 15% in various states.

VAT Collection

The VAT collection process can be predominantly categorized into two prime categories:

Based on the Method of Collection 

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 are used to compute the corresponding VAT. When the traders sell their goods and services, they offer invoices containing separate details of VAT collected. 

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.

Based on the Timing of Collection

Accrual-based Collection of VAT

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 Collection of VAT

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.

VAT Returns

Businesses with yearly revenue of Rs.5 lakhs or more are required to file VAT returns. VAT is levied on both local and imported products and services. VAT returns are traditionally filed by filling out and submitting the necessary papers to the appropriate authorities. If you are registered under the VAT Act 2003, you can also file it online using the specified user id and password.

Value-Added Tax (VAT) - FAQs

Q1. Is VAT also paid on essential commodities such as salt and oil?

No. Many Indian state governments have abolished the notion of VAT for some essential products.

Q2. Is VAT increasing the cascade impact in the taxing process?

No. Rather, it reduces the possibility of a cascade impact by levying the required tax amount at each stage of production.

Q3. Is VAT’s compliance rate higher than that of sales tax?

Yes. Because VAT is levied at every stage of production, there are less opportunities for loopholes to be used and, as a result, it is better in terms of compliance than sales tax, which is easy to manipulate.

Q4. Does the VAT I pay as part of any purchase make its way to the government?

Yes. The respective state administrations are in charge of collecting VAT, which is then forwarded to the central government.

Q5. Who is VAT actually levied from?

VAT is levied from the producers of goods and services, along with the consumers.

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