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S. Sridharan

A primer on VAT by S. Sridharan

VAT is the short form of value-added tax. It will replace the present sales tax. Under the current 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.

VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax — that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax.

For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands.

Purchase price — Rs 100

Tax paid on purchase — Rs 10 (input tax)

Sale price — Rs 120

Tax payable on sale price — Rs 12 (output tax)

Input tax credit — Rs 10

VAT payable — Rs 2

VAT levy will be administered by the Value Added Tax Act and the rules made thereunder.

What is input tax? Input normally means goods purchased by a dealer in the course of his business. The purchases would include any goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture, processing, packing/storing of other goods or any other business use.

Input tax is the tax paid on inputs. Input tax has been defined in Section 2(xvii) of the Model VAT Bill, 2003 thus: "Input tax means the tax paid or payable under this Act by a registered dealer to another registered dealer on the purchase of goods in the course of business for resale or for manufacture of taxable goods or for use as containers or packing material or for the execution of works contract."

What is input tax credit? Input tax credit is the credit for tax paid on inputs. Every dealer is liable for output tax on the taxable sale effected by him. The basic principle of VAT is that every dealer pays tax only on the value addition in his hands. Input tax credit is the mechanism by which the dealer is enabled to set off against his output tax, the input tax.

Dealers are not eligible for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as may be stipulated in the respective State legislation.

What are the `sales' not liable to tax under the VAT Act? Since the VAT Act applies only to sales within a State, the following sales shall not be governed by the VAT Act: a) sale in the course of inter-State trade or commerce which shall continue to be liable to tax under the Central Sales Tax Act, 1956; b) sale which takes place outside the State; and c) sales in the course of export or import.

Who is a retail dealer? Retail dealer is not specifically defined in most of the draft VAT legislation of States.

In Section 53(2) of the Model VAT Bill, a retail dealer is defined thus: "... a dealer will be considered to be engaged in the business of selling at retail if 9/10ths of his turnover of sales consists of sales made to persons who are not dealers and if any question arises as to whether any particular dealer is a retailer, then the officer in charge of the case shall refer the question to the Deputy Commissioner (Appeals) who shall, after hearing the dealer if necessary, decide the question."

Are retail dealers also required to pay VAT? If not, what is the alternative? Most retail dealers are, at present, not liable to tax, as in the single-point system of tax levy, the tax is paid by the first seller. The retailer, as the second seller, is not liable to tax though they are required to be registered under the State sales tax legislation, if their turnover exceeded the minimum threshold limit for registration.

These dealers, being small in size, may not be able to maintain the records required under VAT. Therefore, retail dealers below a threshold limit of annual turnover, as may be specified in the respective State VAT legislation, may opt for payment of tax at a flat rate of 1-2 per cent.

The turnover limit for eligibility of retailers to opt for payment of tax at compounded rate of tax may be Rs 20-50 lakh as may be specified by the respective States.

All retail dealers with annual turnover above the limit specified will have to pay VAT even if their entire business is in retail.

The terminology is not uniform in all the States. Presumptive tax, turnover tax or composition of tax has been used to describe the levy of tax on retailers.

In the VAT regime, will stock transfer be more beneficial than inter-State sale? Insofar as a decision as to whether goods should be stock transferred and then sold to customers by the branch or should direct inter-State sales be effected, there can be no generalisation.

The decision has to be taken on a VAT impact analysis of each individual business. The tax implications to be considered are:

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