1]What is value Added Tax or
VAT
A new form of indirect Tax.
 Replaces sales Tax.
 It Taxes only the value added at Various
Stages of Manufacturing and Sale of
goods and distribution.
 A multi – point levy with a benefit of set off
or credit for tax paid on purchase of goods.

2] Origin and spread of VAT
• Concept first developed by
Wilhelm Von Siemens in 1919 in
Germany.
• France went for VAT in 1948.
• Brazil in 1967.
• Many European countries
adopted VAT in 1970’s.
• 141 countries have already
adopted VAT.
3] Why VAT Now?
• International Trend. Vat is seen
as more neutral less distorting
than any other commodity
Taxation.
• Possibilities of standardization
locally and globally.
• Taxes current consumption only.
• VAT is seen as more Progressive
and more social.
4] What is wrong with
existing Sales Tax
• Tends to promote Cascading effect.
• Too many rates.
• Has led to “Tax Wars” Between
States.
• Complexity of law and procedure.
• Fixation with Revenue maximization.
• Administrative hassles.
• Intrusive Assessment Procedures
5] The Design and
Architecture of VAT
-
VAT Types:

Production Type.

Income Type.

Consumption Type
6] Production Type.
• Input tax on capital goods is not
Refunded.
• Discriminates against Capital
investments in plant and
machinery.
• Not used in any country now,
and hence of academic curiosity
only.
7] Income Type.
Input Tax on Capital goods is set off in
staggered amounts over the life of the
Assets.
 Turkey has this type.

8] Consumption Type.

Input Tax on Capital goods is Straight
away refunded in full.

Most popular model.
9] Methods of VAT relief.
• Invoice method/ Invoice credit
method or Tax credit method.
• Subtraction credit method or
accounts method or business
transfer method.
10] VAT Principles
• Origin as the basis.
• Destination as the basis.
11]Origin – based VAT
• Taxes value added domestically
in respect of all the goods
including exported goods.
• Does not tax Value added
abroad.
• In this exports are taxable,
imports are exempt.
12]Destination- based
VAT
• Taxes value added goods that
have as their destination the
consumers of that country.
• Exports are exempt,imports are
taxable.
• Model accords with
consumption type VAT.
13]Salient features of
VAT in India.
• States level Replacement of
Sales Tax.
• Input Tax Credit.
• Carry over of set off.
• Exports zero – rated.
• Rates of 12.5%, 4% and 1% &20%
• Registration/ Return/ Self
assessment/ TIN
…contd
…contd
•
•
•
•
Composition scheme.
Continuation of Tax incentives.
Temporary continuation of CST.
Threshold exemption for Small
Dealers.
• Audit monitoring/
Computerization.
14]Types of Registration
under VAT
• Compulsory Registration.
• Voluntary Registration.
• Suo Motu Registration.
• Temporary Registration.
15]Procedure for
Registration
•
•
•
•
Application Form.
Plus, PAN Card/ Identity card.
Proof of Residence.
Copy of Lease/ Rent deed/ Proof
of Ownership of Premises.
• Bank Account details.
16]Accounts for VAT.



Usual accounts for Purchases,Production,
Storage, Sales and distribution.
Invoice/ Bill of sale/ Credit & Debit notes.
VAT Credit Account.
17]Returns Under VAT.




Monthly Returns [Ex VAT – 100 for
Karnataka, Form I for TN].
Due date, 20th of the following month.
35 Boxes to fill in VAT – 100.
Penalty for non filing.
18] Calculation of VAT.

Input Tax.

Output Tax.

Net Tax = Output tax – Input Tax.
19]Negative Net Tax.
 Provision for adjustment against CST
Payable.
 Provision for Refund of the Surplus
amount.
 Option to take the refund in the form of
Tax Credit for the next tax period.
 Controversial order of priority of
adjustment
20]VAT and Branch/ Stock transfer
outside the State.
 Branch/Depot Stock transfers are not taxable
under VAT also.
 Input tax credit for the above
transfers(manufactured goods) is available for
the local taxes paid in excess of 2%.
 If tax credited inputs are stock transferred as
such, such input tax credit is reversible.
21] VAT and Works Contract.
 Labor and service expenses deductible, based
on well- maintained and proper accounts.
 Otherwise, deduction of fixed percentages by
the VAT Department.
 Works Contractors are eligible for the
compounding scheme.
22] VAT and CST
 CST to stay, for now.
 Expected to be abolished when GST is
introduced.
 CST is now outside VAT.
 Input tax credit for CST finished goods is
available in full for local VAT.
23] VAT Refunds.
• Refunds will be set off against
VAT Recoveries, if any.
• Otherwise Payable as follows.
- carry forward to the next Tax
period (or)
- Refunded in cash.
• Provision for compulsory carry
forward.
…contd
…contd
• Provision for demand of security
against Refund.
• Provision for the Bar of unjust
enrichment.
• Provision for denial of input Tax
Credit to the buyer (if VAT
registered) in respect of the refund
irrespective of whether or not the
seller refunds the amount to the
buyer.
24] VAT and Exports.
• Exports are not taxed under
VAT.
• Input Tax Credit is eligible for
Refund.
25] Input Tax Credit.
• Available for purchases of
specified inputs/ capital goods.
• Local VAT alone is eligible.
• From registered Dealers only.
• Credit against Tax Invoice.
• Pro – rata reduction if used in
exempted goods (not applicable
for exports)
26] Time bar for Assessment /
Re-assessment.
Delhi
4 Years from the date of filing of
Return or order of assessment for
the tax period whichever is
earlier.
6 Years for cases involving
concealment.
…contd
…contd
Karnataka:
5 Years – normal case.
10 Years – concealment case.
27]Issues in VAT in
Indian States.
• Lack of harmonization of
definitions of “Dealer” and
“Capital Goods” working of
charging sections.
• Continuation of exemptions/
incentives.
• CST.
• Potential for evasion.
…contd
…contd
• Reliance on Tax Invoices.
• Non – Inclusion of Services.
• Some Commodities kept out of
VAT.
• Threshold exemption.
• Provision for extraction of
Security from the Dealer.
28]Impact of VAT on Supply
Chain.
 Study of value chain.
 Estimation of Tax Points.
 Analysis of Tax Asymmetries.
 Determination of Tax Cost Factor.
THE TAMIL NADU VALUE
ADDED TAX ACT, 2006.
Salient Features
Who is liable to pay VAT ?
Any Dealer of goods.
•Company or Firm or HUF
•A Club, An Association.
•A Society including Co-operative Society.
•A Casual Trader.
•A Factor, Broker, Commission Agent or Del Creder
Agent or any Mercantile agent.
•An Auctioneer.
•Works Contractors.
 Hotels, Restaurants, Sweet Stalls.
 Persons delivering goods on Hire Purchase.
 Transferor` of the right to use goods for
consideration.
 Central/State Government Departments if and
when engaged as a
dealers whether or not in the course of business.
DEEMED ASSESSEES
•
•
•
•
•
•
•
•
•
•
Customs Departments
Port Trust
Municipalities
Railways
Shipping, Transport and Construction Companies
Airlines and Air Port Companies, Advertising Agencies
Vehicle Permit Holders of Motor Vehicles used for Hire
TN State Road Transport Corporations
Bank, Insurance Companies
Government Entities
VAT EXEMPTIONS
Threshold limit of Rs. 10 lakhs .
 Sales of goods to SEZ,/International
Organisations.
 Export of goods.
 Goods exempted u/s 15 – Fourth Schedule.

INPUT TAX CREDIT
First Schedule goods barring :
Items used for providing facility to
employees.
 Automobiles.
 Air conditioners.
 Items for personal use.
 Free Samples, gifts.
 Inputs not sold or used due to theft, loss,
accident on destruction.
CAPITAL GOODS UNDER VAT
 Plant, Machinery, Equipment, apparatus, tools,






appliances or electrical installations, for use in
manufacture of final products.
Pollution control, Quality Control, Lab and Cold Storage
equipments.
Components, Spare parts and accessories of the above.
Moulds, dies, Jigs and Fixtures.
Refractors and refractory materials.
Tubes, Pipes and fittings thereof.
Storage Tanks Used for manufacturing, processing,
packing or storing of goods
excluding Civil
structures and goods as per negative list.
RESTRICTIONS ON INPUT TAX
CREDIT
• Inputs and Capital goods used to produce
exempted goods are not eligible.
• Only credit in excess of 4% of Tax paid on
materials consumed in the manufacture of
goods stock transferred to other States.
• No inputs Tax Credit on CST Purchases or
VAT purchases from other States
TIME LIMIT FOR AVAILING
CREDIT
• Before the end of the financial year or
Ninety days from the date of purchase
whichever is later.
TRANSFER OF CREDIT
• Allowed on transfer of business due
to sale, merger, amalgamation or
lease.
• Transfer of liabilities
• Transfer of inputs and capital goods.
UTILIZATION OF INPUT TAX
CREDIT
• Section 19
• Credit to be used within 180 days of accrual
or before the close of the
next financial year, whichever is later.
Otherwise, the credit will lapse.
• To be adjusted against output tax.
TIME LIMIT FOR ASSESSMENT
AND RECOVERY
• 5 years for reassessment of returns
showing sales at low prices as compared
• To Market prices.
• 5 years for assessment of escaped
turnover.
• 5 years for reassessing wrong availment
of input tax credit.
TARIFF SCHEDULES
• I Schedule
• Part A – Goods taxed at 1%
• Part B – Goods taxed at 5%
• Part C – Goods taxed at 14.5%
• II Schedule – Goods outside VAT.
contd.
• III Schedule – Compounded rate for
Hotels, Restaurants and Sweet stalls.
• IV Schedule – Parts A and B – Exempted
goods.
• V Schedule – List of International
Organizations – Zero Rate sale.
• VI Schedule – Transit Pass.
OTHER FEATURES
• TDS for works contract Tax.
• Levy of purchase tax.
• Input tax credit for stock held on
date of registration.
• Refunds.
contd..
• Purchase Returns.
• Sales returns.
• Compounding tax at 0.5% for
turnover above 10 lakhs but below
50 lakhs
• Functions and Powers of VAT
authorities.
Central Sales Tax
Why CST came at all
 Its financial scope for the governments
 Its administration
 Its future
 Covers inter-state sales as well as exports
and imports of goods

CST……
Defects of CST:
 Form ridden
 C form not easy to obtain
 Tax costs are huge for non “C” form
transactions

CST….
•
•
•
•
•
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Forms under CST – a glance:
C form
F form
H form
E 1 form
E 2 form