Objective

1
ANALYSIS OF
WHITE PAPER ON STATE LEVEL VALUE ADDED TAX
ISSUED ON JANUARY 17, 2005 BY THE EMPOWERED
COMMITTEE OF STATE FINANCE MINISTERS (CONSTITUTED
BY MINISTRY OF FINANCE)
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OBJECTIVE

• Set-off available on input tax as well as tax
  paid on previous purchases
• Deletion of related taxes on act of sale, such as
  turnover tax, surcharge, additional surcharge,
  entry tax etc.
• Rationalization on tax burden
• With elimination of cascading effect, consumer
  prices expected to fall in general
• Self-assessment by dealers
• Higher revenue growth for states

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ESSENCE OF VAT - SET OFF

• The essence of Value Added Tax (VAT) is in
  providing set-off for the tax paid earlier on
  purchases (input tax credit) and eliminate the
  cascading effect. This input tax credit in
  relation to any period means setting off the
  amount of input tax against the amount of tax
  paid on his sales (output tax). VAT is based on
  the value addition to the goods the related VAT
  liability is calculated by deducting input tax
  credit from output tax collected on sales during
  the payment period.

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INPUT TAX CREDIT

• Registered dealer shall be entitled to a tax
  credit in respect of the turnover of purchases
  occurring during a tax period where the purchases
  arises in the course of his activities as a
  dealer and the goods are to be used directly or
  indirectly by him for the purposes of making
  sales.
• Input tax credit will be available to both
  manufacturers and traders for purchase of
  inputs/supplies meant for both sale within the
  State as well as to other States.

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INPUT TAX CREDIT

• No input tax credit shall be allowed for purchase
  of goods from dealer availing benefit provided
  under composite tax scheme, that is those dealers
  whose total turnover is less than Rs. 50 lakh
  provided they avail benefit under composite tax
  scheme.

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INPUT TAX CREDIT

• Tax paid on inputs procured from other States
  through inter-State sale will not be eligible for
  input tax credit. (Discussed in greater details
  later)

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UTILIZATION OF INPUT TAX CREDIT

• Input tax credit can be utilised to set-off tax
  payable on any sale of goods when such sale takes
  place in the course of inter-state trade or
  commerce or in the course of export of the goods
  out of the territory of India or within that
  state.
• Credit arising on input tax paid for goods used
  in producing output which is under exempted
  category will not be available for setoff in
  principle. (Though this issue was left untouched
  in the white paper but the draft VAT bills by
  some of the states provided for this reservation.)

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UTILIZATION OF INPUT TAX CREDIT

• Utilization of the Input tax credit shall be as
  per CENVAT model, that is to say, credit can be
  taken instantly irrespective of the event of sale
  of the goods on which input tax credit was paid.
  In other words, input-output co-relation will not
  be pre-condition for utilizing credit.

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UTILIZATION OF INPUT TAX CREDIT

• In case where input tax paid on goods used for
  producing output and such output goods is
  transferred under Stock transfer mechanism or in
  cases where such input goods are transferred as
  such under stock transfer mechanism, credit
  arising on input tax paid in excess of 4 in
  either of the above cases will be eligible for
  tax credit for set off.
• (In my view this proposal in particular is
  deviating from fundamental principle of perfect
  value added tax primarily because liability for
  output tax do not arise at the time of stock
  transfer)

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INPUT TAX CREDIT ON O/S AS ON APRIL 2005

• 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 and can
  be utilized for set-off against sale made after
  April 1, 2005.  

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C/F OF INPUT TAX CREDIT

• If the input tax credit exceeds the output tax
  payable, then the excess input tax credit will be
  carried forward to the end of next year. If there
  is any unutilized input tax credit at the end of
  second year, then the same will be eligible for
  refund. (Issue of unjustenrichment has been left
  untouched in the white paper)
• Input tax credit on capital goods shall be
  adjusted over a maximum of 36 equal monthly
  installments.

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EXPORTS INPUT TAX CREDIT

• For all exports made out of the country, tax paid
  within the State will be refunded (believe at
  discretion of states these sales can be exempted
  in which case refund process can be done away
  with)
• Similarly, units located in SEZ and EOU will be
  granted either exemption from payment of input
  tax or refund of the input tax paid

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IMPACT ON OTHER TAXES

• All other existing state taxes such as turnover
  tax, surcharge, additional surcharge and Special
  Additional Tax would be abolished. Existing entry
  tax would become vatable or shall be abolished.
• However, entry tax levied in lieu of octroi shall
  continue and may not be made vatable at States
  discretion.

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COVERAGE OF GOODS UNDER VAT

• In general, all the goods, including declared
  goods will be covered under VAT and will get the
  benefit of input tax credit.
• liquor, lottery tickets, petrol, diesel, aviation
  turbine fuel and other motor spirit shall be
  outside VAT but continue to be taxed under the
  Sales Tax Act or any other State Act

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VAT RATES

• only two basic VAT rates of 4 and 12.5.
• 4 category comprises items of basic necessities
  such as medicines and drugs, all agricultural and
  industrial inputs, capital goods and declared
  goods
• special VAT rate of 1 only for gold and silver
  ornaments etc.

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VAT RATES

• Certain goods shall be under tax-exempted goods
  category and there will be 46 commodities under
  this comprising of natural un-processed
  products, goods of local social importance, items
  which are barred from taxation and items which
  have social implications.
• The remaining commodities, common for all the
  States will fall under the general VAT rate of
  12.5.

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EXEMPTIONS

• Dealers having turnover upto Rs 5. Lakh will be
  exempt from VAT. No registration required for
  such dealers.
• Small dealers with annual gross turnover not
  exceeding Rs.50 lakh who are otherwise liable to
  pay VAT, shall however, have the option for a
  composition scheme with payment of tax at a small
  percentage of gross turnover to be decided by
  State. The dealers opting for this composition
  scheme will not be entitled to input tax credit.

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INTROSPECTION ON INTER-STATE SALES
SELLERS PROSPECTIVE
BUYERS PROSPECTIVE
INPUT TAX PAID AT THE TIME OF INTER STATE
PURCHASE CANNOT BE TAKEN AS INPUT TAX CREDIT AND
AS SUCH NO SET OFF AVAILABLE FROM OUTPUT TAX
PAYABLE AT THE TIME OF SALE.
SET-OFF OF INPUT TAX CREDIT AVAILABLE ON
CENTRAL SALES TAX PAID AT THE TIME OF
INTER STATE SALES
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INTROSPECTION ON STOCK TRANSFER
STOCK TRANSFEROR s PROSPECTIVE
BUYERS PROSPECTIVE (BUYER BEING IN THE STATE
WHERE STOCK WAS TRANSFERRED
SET-OFF OF INPUT TAX CREDIT AVAILABLE ON STOCK
TRANSFER TO THE TUNE OF INPUT TAX PAID IN EXCESS
OF 4
INPUT TAX PAID BY BUYER CAN BE TAKEN AS TAX
CREDIT AND AVAILABLE FOR SET-OFF WITH BUYERs
OUTPUT TAX .
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WRAPPING UP
The New Tax Regime on concept is no different
from the CENVAT credit scheme prevailing under
Central Excise, the difference being Central
Excise is the duty imposed on manufacturing
activity whereas VAT is imposable on point of
sale. Conceptually the proposals are simple.
Easier said then done, bottlenecks/hassles
limiting vatability on procedural grounds cannot
be ignored. Bureaucracy and Judiciary is yet to
iron out creases on CENVAT credits even after
more than a decade of its existence in the Indian
tax system. Interpretation limiting utilization
of CENVAT credits in Excise have given sleepless
night to most. Firmly believe the new tax regime
will be no exception.
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THANK YOU
DEOKI NANDAN MUCHHAL