abhishreshthaa
Abhijeet S
Design of State-Level VAT
As already mentioned, the design of State-level VAT has been worked out by the Empowered Committee through several rounds of discussion and striking a federal balance between the common points of convergence regarding VAT and flexibility for the local characteristics of the States.
Since the State-level VAT is centered around the basic concept of “set-off” for the tax paid earlier, the needed common points of convergence also relate to this concept of set-off/input tax credit, its coverage and related issues as elaborated below.
Concept of VAT and Set-off / Input Tax Credit
The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.
The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month).
If, for example, input worth Rs. 1lakhs is purchased and sales are worth Rs. 2lakhs in a month, and input tax rate and output tax rate are 4% and 10% respectively, then input tax credit/set-off and calculation of VAT will be as shown below:
(a) Input purchased within the month: Rs. 1, 00,000/-
(b) Output sold in the month: Rs. 2, 00,000/-
(c) Input tax paid: Rs. 4,000/-
(d) Output tax payable: Rs. 20,000/-
(e) VAT payable during the month: Rs. 16,000/- after set-off/input tax credit [(d) – (c)]
Coverage of Set-Off / Input Tax Credit
This input tax credit will be given for both manufacturers and traders for purchase of inputs/supplies meant for both sales within the State as well as to other States, irrespective of when these will be utilized / sold. This also reduces immediate tax liability. Even for stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit.
Carrying Over of Tax Credit
If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund. Input tax credit on capital goods will also be available for traders and manufacturers.
Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly installments. The States may at their option reduce this number of installments. There will be a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit.
Treatment of Exports, etc.
For all exports made out of the country, tax paid within the State will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax paid within three months.
Inputs Procured from Other States
Tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit. However, a decision has been taken for duly phasing out of inter – State sales tax or Central sales tax. As a preparation for that, a comprehensive inter-State tax information exchange system is also being set up.
Treatment of Opening Stock
All tax-paid goods purchased on or after April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input tax credit, subject to submission of requisite documents. Resellers holding tax-paid goods on April 1, 2005 will also be eligible.
VAT will be levied on the goods when sold on and after April 1, 2005 and input tax credit will be given for the sales tax already paid in the previous year. This tax credit will be available over a period of 6 months after an interval of 3 months needed for verification.
As already mentioned, the design of State-level VAT has been worked out by the Empowered Committee through several rounds of discussion and striking a federal balance between the common points of convergence regarding VAT and flexibility for the local characteristics of the States.
Since the State-level VAT is centered around the basic concept of “set-off” for the tax paid earlier, the needed common points of convergence also relate to this concept of set-off/input tax credit, its coverage and related issues as elaborated below.
Concept of VAT and Set-off / Input Tax Credit
The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.
The Value Added Tax (VAT) is based on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month).
If, for example, input worth Rs. 1lakhs is purchased and sales are worth Rs. 2lakhs in a month, and input tax rate and output tax rate are 4% and 10% respectively, then input tax credit/set-off and calculation of VAT will be as shown below:
(a) Input purchased within the month: Rs. 1, 00,000/-
(b) Output sold in the month: Rs. 2, 00,000/-
(c) Input tax paid: Rs. 4,000/-
(d) Output tax payable: Rs. 20,000/-
(e) VAT payable during the month: Rs. 16,000/- after set-off/input tax credit [(d) – (c)]
Coverage of Set-Off / Input Tax Credit
This input tax credit will be given for both manufacturers and traders for purchase of inputs/supplies meant for both sales within the State as well as to other States, irrespective of when these will be utilized / sold. This also reduces immediate tax liability. Even for stock transfer/consignment sale of goods out of the State, input tax paid in excess of 4% will be eligible for tax credit.
Carrying Over of Tax Credit
If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of next financial year. If there is any excess unadjusted input tax credit at the end of second year, then the same will be eligible for refund. Input tax credit on capital goods will also be available for traders and manufacturers.
Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly installments. The States may at their option reduce this number of installments. There will be a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) not eligible for input tax credit.
Treatment of Exports, etc.
For all exports made out of the country, tax paid within the State will be refunded in full, and this refund will be made within three months. Units located in SEZ and EOU will be granted either exemption from payment of input tax or refund of the input tax paid within three months.
Inputs Procured from Other States
Tax paid on inputs procured from other States through inter-State sale and stock transfer will not be eligible for credit. However, a decision has been taken for duly phasing out of inter – State sales tax or Central sales tax. As a preparation for that, a comprehensive inter-State tax information exchange system is also being set up.
Treatment of Opening Stock
All tax-paid goods purchased on or after April 1, 2004 and still in stock as on April 1, 2005 will be eligible to receive input tax credit, subject to submission of requisite documents. Resellers holding tax-paid goods on April 1, 2005 will also be eligible.
VAT will be levied on the goods when sold on and after April 1, 2005 and input tax credit will be given for the sales tax already paid in the previous year. This tax credit will be available over a period of 6 months after an interval of 3 months needed for verification.