Frequently asked questions (FAQ) on VAT
Q. What is VAT?
A. Each commodity passes through different stages of production and
distribution before finally it reaches the Consumer. Some value is added at each
stage of the production and distribution chain. Value Added Tax (VAT) is tax on
value addition at each stage. Under VAT system, a dealer collects tax on his
sales, retains the tax paid on his purchase and pays balance to the Govt.
Treasury. It is a consumption tax because it is borne ultimately by the final
Consumer. The tax paid by the dealer is passed on to the buyer. It is not a
charge on the dealer. Hence, VAT is a multipoint tax system with provision for
set off of tax paid on purchases at each point of sale.
Q. How is VAT computed?
A. The dealer pays VAT by deducting the tax paid on purchases
(input tax) from his tax collected on sales (output tax). Hence, VAT = Output
Tax – Input Tax.
For example: A dealer pays Rs.10.00 @ 10% on his purchase price
of goods valued Rs.100.00. He sells the goods at Rs.150.00 and collects tax
amounting to Rs.15.00 (@ 10%). He will pay Rs.5.00 (Rs.15.00- Rs.10.00) as he
has already paid Rs.10.00 to his seller while purchasing those goods.
Q. How is VAT different from Sales Tax?
A. VAT will have only four rates instead of large number of rats of
Sales Tax, with off setting of tax on inputs against that on output; VAT does
away with tax on tax. Claiming input tax credit under VAT ensures proper
invoicing. Overall, these features of VAT encourage disclosure of complete
information on business turnover.
Q. Who is to be covered by VAT?
A. All business transactions carried on within a State by
individuals, partnerships, Companies, etc. will be covered by VAT.
Q. Who will not be covered by VAT?
A. VAT will not cover small business with a turnover below a
certain limit. In Orissa, a general trader having annual turnover of Rs.2,
00,000/- or more will be covered under VAT. The dealer, who purchases goods from
outside the State for resale inside the State, or sells to outside the State, is
liable to pay tax on his first transaction. The taxable limit for works
contractor is Rs.50, 000/- and for manufacturer is Rs.1, 00,000/-.
Q. What are the tax rates under VAT?
A. There are just four rates under VAT- the zero rate (exempted
goods), 1%, 4% and a general rate of 12.5%. These rates will be uniform in all
States across the country. The same set of goods will be charged at the same
rates in all the States. Most essential commodities are exempt from VAT or fall
in the category of 4%.
Q: Will VAT increase the cost of compliance?
A No. The cost of compliance will come down due to self-assessment as dealers will not have to approach the department for statutory forms or for assessment.
Q. Will the cost of doing business go up as dealers will have to pay tax on their purchases?
A: No. If we assume that the average time required for settling amounts receivable and payable is the same as the time for remitting tax and processing any refund, no additional cost is imposed on trade or industry.
Q. Will prices go up due to VAT and will the consumer suffer?
A: No. As against three slabs of 4, 8 and 12 per cent in the present regime VAT will have only two major slabs of 4 and 12.5 per cent; some commodities falling in the 8 per cent slab will come down to the 4 per cent slab, bringing the prices down. Further, input tax credit and credit allowed for purchase of capital goods should reduce the effective selling price.
Q. Will input tax credit be available on capital goods used in the execution of works contract?
A. Yes. Input tax credit will be available on capital goods purchased after April 1, 2005 for execution of works contracts in NCT of Delhi subject to conditions. However, in case a dealer, after availing tax credit, transfers the assets/capital goods, on which he had availed tax credit, out of NCT of Delhi for executing other works not liable to be taxed in Delhi, the credits so allowed shall be reversed and tax will have to be paid on such transfer of capital goods/assets. The tax so payable shall be equivalent to the
unutilized portion of tax credit allowed by the department less tax payable at usual rates on such transfer or sale.
Q. What is zero rating under VAT? How does it differ from exempt
A. Zero rate is applicable to goods for certain transactions under
VAT and input tax credit is available on those transaction. Under VAT, the goods
exported outside India, sold to an EOU and to a dealer having business under a
Special Economic Zone (SEZ), Software Technology Park (STP), Electronic Hardware
Technology Park (EHTP) are zero rated. In these transactions the tax rate will
be zero and input tax credit will be available. The propose is that the goods
exported or sold to outside the State will be free of any load of tax in it,
which will increase competitiveness and encourage exports.
Exempt goods are those goods whose tax rate is zero, but input tax credit will not be
available. Essential items such as agricultural implements manually operated or animal driven, books, periodicals, journals,
fresh milk, etc. are in the exempted category.
Q. Why are sales to SEZ, STP, and EHTP & EOU zero rated?
A. SET, STP etc. are being set up to promote industry and create
industrial base. Sales to a unit under SEZ, STP, etc. are treated on a par with
export. Hence, the goods sold to SEZ, STP are zero rated to encourage export.
Levy of tax
Q. Is it possible to avail credit for taxes paid on inputs if the goods are sold in another State or are exported?
A. Purchases intended for inter-State sale as well as exports are eligible for tax credit in excess of 4 per cent CST.
Q. If the input is used partly for making taxable goods and partly for exempted goods, will input tax credit be available?
A. Where inputs are partly used for making taxable goods (or inter-State sales) and partly for making exempt goods, the tax credit shall be reduced proportionately. To illustrate, X purchased machinery for Rs. 1 lakh and paid a tax of Rs. 12,500 on it and used it in the manufacture of taxable as well as exempted goods. At that time, he estimated that the share of taxable goods made by the machinery would be 80 per cent. In this case, his input tax credit will be restricted only to 80 per cent of Rs. 12,500 or
Q. How is input tax credit to be claimed? Is there any requirement of a `one to one' correlation between input tax and output tax?
A. There is no need for a `one to one' correlation between input tax credit and output tax. Quite a number of small businesses are under the misconception that input tax has to be adjusted against output tax on a bill to bill basis.
The operation of the input tax mechanism is simple. The dealer will be eligible to take credit for the eligible input tax in a tax period as specified on the entire purchases. He will charge VAT at the prescribed rate as is done in the present system for levy of sales tax. The VAT or output tax payable is compiled on a monthly basis as is done now. The dealer can adjust the input tax eligible on the entire purchase in the tax period against the output tax payable irrespective of whether the entire goods purchased are sold or not. For example, if the input tax credit in a particular month is Rs. 1,000 and the output tax payable is Rs. 500, the excess input tax of Rs. 500 can be carried forward to the next tax period.
Assuming no further input tax credit in the following month and that the output tax payable is Rs. 700 the dealer will pay Rs. 200 along with the monthly return.
Q. What is the applicable rate of tax on packing materials as outputs?
A. Packing material or containers are always sold with some goods packed or contained in it. No separate rate of tax is applicable on sale of such packing material/container. The rate of tax applicable to the goods packed in such packing material will be the rate of tax applicable on this packing material. Where such goods are exempted from tax, the packing material/container will also be exempt from tax.
Q. Can input credit on packing material be availed on use of petroleum products?
A. The eligibility for input tax credit on packing material also depends on the item packed therein. In case items packed therein are not eligible for input tax credit under certain circumstances, such credit will not be available on the packing material as well.
Q. Is there any restriction for availing input tax credit depending on the manner of disposal of goods, say, as free gifts or on stock transfer?
A. Yes. Input tax credit will be available on output tax payable on sales within the State and on inter-State sale. Restricted input tax credit is available on stock transfer/consignment
dispatches outside the State.
Q. How can a dealer adjust the input tax against output tax when he makes taxable and exempt supplies? Will the input tax credit relating to exempt supplies lapse?
A. If the purchases are used partly for making taxable supplies, input tax credit shall be allowed proportionate to the extent they are used for that purpose. However, no input tax credit is allowed on the portion used for making exempt goods.
Q. Is there any tax liability on scrapping a capital asset on which input tax credit has been availed? What will be the tax implication on sale of such scrapped machines?
A. Tax will be levied on the sale of scrapped machines. However, the tax liability is subject to set off against any credit that may be available in the
Q. What amount will be available as input tax credit in case machinery is used for manufacture of taxable goods as well as exempted goods?
A. The input tax credit will be available on a proportionate basis.
Q. What should be done by a purchasing dealer to return rejected goods to the seller? What happens in case such a dealer is not registered under the State VAT Act?
A. In case the buying dealer is registered under the VAT Act, he shall, on returning the goods, issue to the selling dealer a duly signed delivery cum debit note
(DDN). In case the buying dealer rejecting the goods is not a registered dealer under some other State and did not issue the DDN in respect of goods returned by him, the selling dealer may issue a credit note in respect of goods so returned to him and deduct the value of such goods from his gross turnover.
The selling dealer, in this case, may be asked by the authority to furnish evidence of the receipt of goods back by him, credit of the amount of such rejection of goods to the account of the purchaser of goods and payment thereof to him.
Q. Is input tax credit available on goods stock transferred? If ineligible, will the input tax credit relating to such goods lapse?
A. VAT Act provides for no input tax credit on goods dispatched on stock transfer. However, if the goods have been purchased locally on payment of tax and subsequently stock transferred after taking input tax credit, the input tax credit shall have to be reversed to the extent of 4 per cent.
Q. Can input tax credit be claimed on stock of goods on the date of implementation of VAT?
A. All taxed stock purchased between April 1, 2004 and March 31, 2005 will be eligible for input tax credit.
Q. Will input tax credit be available on purchase of second hand machinery?
A. Yes. The requirement of law in respect of purchase of second hand machinery is the same as for new machinery. If the purchase of second hand machinery otherwise satisfies all other requirement of availability of input tax credit, the credit will be available.
Q. What is the composition scheme? What are the benefits for small dealers?
A. If the taxable quantum of a dealer does not exceed Rs. 25 lakhs in a year, and the dealer does not import or export goods or makes inter-State sales or purchases goods from an unregistered dealer, the dealer can opt for the composition scheme. Under this scheme, he needs to pay only 1 per cent of the taxable turnover and he need not maintain detailed accounts.
Q. What is fair market value and how is it calculated?
A. If sales or purchases are under or over invoiced, the department can subject the same to a fair market value assessment of the consideration to account for or for computing the input or output tax liability. It shall be recomputed on an arm's length principle.
Payments and refunds
Q. Can a dealer whose input tax credit exceeds the output tax payable in a tax period or in a year claim refund of the excess credit?
A. Yes. The dealer can claim the excess. Since the rate of tax on input and sales is the same in the case of a dealer, there will only be value addition and there may not be a situation where the input tax credit exceeds the output tax payable.
Q. What are the circumstances in which refund of input tax credit is permissible?
A. Refund of input tax credit is normally permissible in the case of a zero rated sale. Exports are zero rated sales. The input tax credit liable to the export sales will be eligible for refund. Refund may also arise in case input tax credit exceeds tax liability.