1 +1. CONCEPT OF VALUE ADDED TAX (VAT) VAT is an indirect tax In India VAT has been introduced from 1/4/2005 VAT is a system of paying tax to Govt. which is received on sales by registered dealer after deducting tax paid by him on purchases VAT = ( TAX ON SALES ) – ( TAX ON PURCHASE ) Concept of VAT can be understood from following example: Calculating VAT (Amt. in Rs.) Manufacturer Wholesaler 11,250 1,250 10,000 2,000 12,000 1,500 Retailer er 13,500 1,500 12,000 2,400 14,400 1,800 Custom 16,200 Price Payable VAT Recoverable Net Cost Profit Net selling price VAT charged 10,000 1,250 Sale Price + VAT 11,250 13,500 16,200 (Rs.) 10,000 2,000 2,400 1,800 16,200 Cross Checking Selling Price of Manufacturing Profit of wholesaler Profit of Retailer VAT paid at all stages Final Consumer Price Manufacturer VAT payable 1,250 Vat Recoverable Net VAT Paid 1,250 VAT Borne by VAT Accounting Wholesaler Retailer 1,500 1,800 1,250 1,500 250 300 Customer 1,800 2 Merits of VAT i. Compared to Sales Tax it is more transparent .Customer knows total tax incidence when goods are purchased. ii. Tax rate is low since every dealer takes credit of tax paid by him on purchases. iii. In India Sales Tax rates varies from 0 to 30% depending on state. Under VAT all states will be charging same rate of tax. iv. There will be no frequent changes in rates. v. Finance ministers of all states have agreed not to grant exemption on basis of backward areas. Hence no shifting of industries from one state to another state. vi. Under new regime all the forms are abolished. vii. Under VAT surcharge, turnover tax, additional tax etc.are merged into one tax rate. viii. There are only 5 rate structures. They are: Schedule A - Goods having 0 % rate. This contains mostly agricultural products, necessities etc. Schedule B - Precious metals with 1% rate. Schedule C - Declared and Capital goods, Raw materials, IT products etc. They carry 4% rate. Schedule D - Liquor & Petroleum products, Tax rate varies from 10% to 34%. Specific duty @ Re.1 per liter for High Speed Diesel. Schedule E – All remaining items having rate of 12.5 %. ix. Due to input tax credit & more use of information technology it is difficult to evade tax. x. Department will rely on returns filed by dealer & there is no assessment by department after self assessment by dealer & audit by C.A. In rare cases department may carry out audit of business records & returns. Demerits Of VAT i) Each sale is taxed. Hence more dealers are involved & increased workload for them. ii) Uniform rates have lost flexibility of states to change rates as per their requirements. iii) There are several penal provisions including Imprisonment. Authorities may harass small traders maximum. iv) Refunds may not be released in time by Deptt. This may increase working capital & hence interest cost of business. v) Tax audit by CA & business audit by department takes time, energy& money of companies. 3 2. DEFINITIONS i) Agriculture It includes floriculture, horticulture, raising of crops or garden produce & grazing. It does not include: dairy farming, poultry farming, stock breeding, wood or grass cutting, gathering of fruits, raising of manmade forests or rearing of seedlings or plants. ii) Business i) Person carrying on business is liable to pay tax ii) Business may be with or without profit motive iii) Business includes transactions in connection with or incidental to or ancillary to business. iv) Many decided cases throw light on meaning of business. iii) Capital Assets i) Property of any kind held by assessee whether or not connected with his business or profession but does not include: - Stock-in-trade - Personal effects (excluding Jewelry) - Agricultural land in India - Special Gold Bonds ii) Definition of capital assets is very important as there is separate provision for availing credit on tax paid on capital goods iv) Dealer i) Any person who. Buys or sells goods in the state in connection with his business ii) Dealer Includes Any person doing business of factoring Broker Del Credre Agent Mercantile Agent Commission Agent Auctioneer Non resident dealer or his agent who buys and sells goods in the state. AOP/BOP buying & selling goods to its members iii) Following are considered as deemed dealer: 4 iv) Customs department Central & State Govt. Central & State corporations Local Authorities. Part trust Insurance Cos., Banks, Financial Institutions, Financial corporations Pvt. & public trusts Railway administration Shipping / Air transport Companies Any other corporation, company, body or authority under control of Central or state Government Following are not Dealers Agriculturist who sells exclusively Agricultural produce cultivated & grown by him Educational Institute Transporter v) Goods Means every kind of movable property & includes Electricity Animals & birds in captivity Steam Standing trees agreed to be severed Import license Old newspapers Sim card ( As per supreme court depends on facts of case) Computer software vi) Manufacturer i) Process is manufacturer when new substance having distinct name, character or use emerge. ii) Following processes are treated as manufacture Cutting , sawing, shaping, sizing of timber Refining of oil Lacquering of polyester film 5 iii) Essence of manufacturing is that something is produced or brought into existence which is different from that out of which it is made. iv) Basic tests of manufacturing are: a) There must be some process on goods. b) Original goods, after process must transform into different goods with change in its substance. c) The change must result in new commercial product. vii) Non- Resident Dealer i) His place of residence is in the state. ii) He has no place of business in the state. iii) He sells or purchases goods in the state. viii) Place of Business i) It includes Warehouse , Godown or other place where dealer stores goods Any place where dealer keeps his books of A/c ii) Department can carry out search only at place of business & not at any other place. ix) Purchase Price (Sale Price) i) Amount paid by purchaser for anything done by seller upto the Delivery of goods ii) It excludes Transit insurance Installation charges, charged separately x) Sale i) Sale of goods within same state ii) It is for cash or deferred payment or other valuable consideration iii) Following are treated as deemed sale Compulsory acquisition of goods Works contract Hire purchase Lease contract Supply of goods to members by an association Supply of food, drinks etc. in restaurant iv) VAT is applicable on sale only 6 3. LEVY OF TAX i) Dealers registered under this Act have to pay tax to State Government as per this Act when they sell goods within the same state. This tax is collected from buyer. ii) Tax is levied at following rates: Schedule No. of items Description of items Tax rate A 51 Agricultural products Nil and necessities B C 3 108 Gold, Silver, Precious Metals Declared goods, Raw Materials Capital goods, I.T. products Liquors Petroleum Products High Speed Diesel All items not covered above 1% 4% D 10 7 20% 10 to 34% 1 Re. per lit. 12.5% E Remaining Notes: i) Product & its packing material has same rate ii) Inter state sale, imports & exports are not taxed under VAT iii) State Government may exempt payment of VAT subject to certain conditions in case of following sales: Goods supplied by SEZ developer,SEZ,100% EOU, STP, EHTP Any goods specified in Foreign Trade Policy Goods supplied to Canteen Stores of armed forces run for their employees Certain textile goods used for textile processing To State Government To Central Government To registered dealer holding license for transmission &/or distribution of electricity under Electricity Act 2003 To Electricity Generating Company as defined in Electricity Act 2003 To Mahanager Telephone Nigam Limited 7 To Bharat Sanchar Nigam Limited To any telephone service provider company holding licence under Indian Telegraph Act Sale of fuel & lubricants to foreign air craft iv) If purchaser fails to comply with conditions under which exemption is granted Penalty is levied @ 1.5 times of applicable tax rate. 4. REGISTRATION Following are the rules for registration i) Limits of turnover for registration Importer - Turnover of business = Rs. 1 lakh & Minimum Sale or purchase of taxable goods = Rs.10,000 Any other dealer - Turnover of business = Rs. 5 lakh & Minimum sale or purchase of taxable goods = Rs. 10,000 i) Dealer must apply for registration within one month (30days) from achieving above turnover iii) Application must be in form No. 101 iv) Application must be signed as under: Category of dealer Signing authority Proprietary firm Individual or person having due authority to act on his behalf Firm Partner H.U.F. Karta Company Director, Manager, Secretary or principal officer A.O.P. Principal Officer or person managing business Any Govt. dept. Any person duly authorized v) If dealer has more than one place of business then application is made for all places. He has to declare one place as principal place & application is made to authority within whose jurisdiction principal place is situated vi) If business is closed, transferred disposed or change of place takes place, dealer has apply for cancellation of certificate within 30 days in form No.103 vii) Certificate of registration must be displayed at each business place viii) Declaration regarding Manager Every dealer has to declare the name of the manger and for this purpose he has to use FORM 105. Time limit for filing this declaration first time is the same as prescribed for registration. When the declaration has to be revised, it shall be made in FORM 105 and 8 has to be submitted within 30 days from the date on which the manager has changed. ix) Declaration of permanent account number (PAN). For declaration of the permanent account number FORM 106 is to be used. The time limit for declaring the permanent account number is as follows: a) Within 60 days from 1/4/2005 for existing registered dealers. b) At the time of registration for new registration c) Within 15 days of obtaining the permanent account number, if the number is obtained at any time after applying for the certificate of registration. x) Certificate is granted in form No.102 5. TAX IDENTIFICATION NUMBER (TIN) It is an unique registration certificate number under VAT It is a 12 digit alpha numeric code First two digits are census code of state (for Maharashtra it is 27) Next two digits are check digits generated by computer program. Purpose of this code is to establish validity of particular TIN Next seven digits are running Sr. Nos. starting from 0000001 to 9999999 All dealers having registration under VAT & CST must apply for TIN Application must in form No.108 TIN is issued on or before 15-3-2006 If dealer has not obtained TIN then he would be treated as unregistered dealer with effect from 1-1-2006 New registrations will automatically get TIN on applying for registration 6. INVOICE i) No input tax credit without invoice ii) Known as Tax Invoice iii) Must be issued when one registered dealer sells any taxable goods to another registered dealer iv) Preserved for 3 years from end of financial Year. v) It must contain following details • Words “Tax Invoice” in bold on top • Name, address, Reg. No. of –selling & purchasing dealer 9 • SR. No. & date • Description, Qty, price & amount of goods sold & tax amount • Signed by selling dealer or his authorized agent vi) Issue of tax invoice not applicable to cases covered by composition scheme vii) Tax invoice must contain certificate or declaration that dealer holds Regn. Certificate or exempted from tax. viii) Dealer can sell against cash & issue cash memo which would contain details same as for credit memo ix) For every sale invoice or cash memo must be issued x) Invoice / cash memo can be preserved in electronic form with prior permission of commissioner 7. i) SET-OFF or CREDIT OF TAX PAID ON PURCHASES Conditions to avail Set-Off • Dealer must be Registered Dealer • Dealer has to maintain record of purchases in chronological order giving following details: - Date of purchase - Name & Reg. No. of selling dealer - Number of invoice - Purchase price of goods - Amount of purchase tax payable/paid - Amount of sales tax recovered from him by selling dealer • Dealer must produce invoice if required by commissioner to claim set-off Rules of Set-Off • Set– Off can be claimed only after filing particulars of stock held on 31/3/2005 • SET- Off is claimed as under : Capital goods – when they are resold Other goods – In the first return to be filed after 1/4/2005 • In following cases full SET- Off is not available - For fuel 3% of purchase price not available for set-off - 3% of purchase price of goods used for manufacturing of tax free goods. ii) 10 - 3% of purchase price in case of branch transfer (other than capital goods) only within India - In case of goods utilized in works contract & dealer opts for composition scheme. He is entitled for 64% SET- Off. In composition scheme dealer can pay 5% composition tax on contract value in case of construction contracts &.8% in case of other contracts. - Office equipments treated as assets qualify for set-off less 3% of purchase price - Dealers having license for transmission &/or distribution of electricity qualify for set-off on purchases used for such transmission or distribution after deducting 3% of purchase price • If business is discontinued Set- Off is not allowed on goods held in stock • In following cases SET- Off is not available - If claimed under any earlier law - Purchase of motor vehicles as asset.( Set-Off available to motor dealer) - Purchase of motor spirit - Purchase of crude oil by oil refinery - Purchase by – Shipping companies - Purchase of consumables & capital assets by dealer who is engaged in labor work or job work & sells waste or scrap of goods obtained during job work - Purchase by dealer claming exemption or deferment of tax - Purchase of intangible goods [other than Import license, exim scrip, special import license, duty free advance license, export permit, DEPB,SIM cards, software for dealer trading in software, copyright which is resold within 12 months of purchase] - Purchases for works contract for construction of immovable property other than plant & machinery - Purchase of any goods used in erection of immovable property other than plant & machinery - Purchase of any liquor if dealer has opted for composition scheme - Purchase by Mandap Keeper if he has opted for composite scheme - Purchase of capital goods by hotels. 11 8. RETURNS & TAX PAYMENT (A) Submission of returns As VAT heavily depends on self assessment, payment of tax & filing of returns is an important aspect. i) Following forms are used for filing returns Form No. To be used by 231 Dealers who are not: - Opted for composition scheme - Executing Works Contract - Engaged in leasing - Under Package Incentive Scheme - Notified Oil Companies 232 Dealers opted for composition scheme except: - Works Contractors opting for composition scheme - Dealers opting for composition for part of business 233 Dealers: - Executing Works Contract, whether covered or not by composition scheme & has any other business or not - Opting for composition scheme for part of business - Engaged in leasing [Even if having other business] 234 Dealers covered by Package Incentive Scheme 235 Notified Oil Companies ii) Frequency of Filing Returns Sr. No. Tax Liability P.A. Period of return Due date 1 Rs. 1 lakh or less & 6 Monthly 21 days after Refund entitlement end of period Rs 0 to Rs. 10 lakh -----------------------------------------------------------------------------------------2 > Rs.1lakh & up to 10 lakh Quarterly - Door Refund entitlement > Rs. 10 lakh & up to 10 Crs. -----------------------------------------------------------------------------------------3 > Rs. 10 lakh or Monthly -DoRefund entitlement > Rs. 10 Crs. ------------------------------------------------------------------------------------------4 Retailer opting for 6 Monthly - DoComposition Scheme 12 -------------------------------------------------------------------------------------------5 Dealers registered during 6 Monthly - Dothe year -------------------------------------------------------------------------------------------iii) Authority with whom returns are to be filed Every registered dealer must file returns duly signed in appropriate form as under: (a) Where tax including interest & penalty is due as per returns then returns should be submitted to treasury when paying such amount. (b) When no tax is payable according to returns it is to be submitted to: - In case of Non Resident Assessee to Assessing Authority ( NonResident Circle) Mumbai - In case of dealer having multiple business places, then consolidated returns must be filed to the assigned authority - In all other cases to assessing authority in whose jurisdiction place of business is situated iv) Revised Returns (a) Dealer if discovers any omission or incorrect statement in the returns filed he can furnish revised returns before expiry of 8 months from end of year or notice of assessment is served on him whichever is earlier (b) Dealer if discovers any omission or incorrect statement in the revised returns filed he can furnish revised returns before expiry of 8 months from end of year or notice of assessment is served on him whichever is earlier (c) When revised returns are filed original returns are taken as withdrawn & substituted by revised returns (v) Electronic filing of returns (a) Dealers with tax liability in P.Y. 2006-07 Rs. 1 crore or above have to file their returns from February 2008 onwards in electronic form (a) Dealers with tax liability in P.Y. 2007-08 Rs. 10 lakh or above have to file their returns from May 2008 onwards in electronic form (vi) Annual Returns (a) Under the Act no annual returns are to be filed (b) However deemed dealers i.e. following persons have to file annual returns if their tax liability is up to Rs. 1 crore in P.Y. Customs department Central & State Govt. Central & State corporations Local Authorities. 13 Part trust Insurance Cos., Banks, Financial Institutions, Financial corporations Pvt. & public trusts Railway administration Shipping / Air transport Cos. Any other corporation, company, body, or authority under control of Central or state Government vii) Details to be given in returns • Turnover of sale & purchases • Claim of set-off • Amount of set-off carried forward. • Amount of set -off claimed as refund • Calculation of tax • Cumulative quantum of benefit • Name, address, registration number etc. viii) Issuing Defect Memo (a) Assessing officer can examine returns filed to ascertain whether it is correct & complete (b) If it is not correct & complete he may serve on dealer a Defect Memo in writing within four months of receipt of returns (c) Dealer receiving memo has to rectify deficiency & file new correct & complete return within one month from date of serving memo. If he does not submit corrected returns within one month it is treated as returns have not been submitted. ix) Penalty provisions relating to return (a) If any person fails to file returns as per provisions of the Act Commissioner may impose penalty of Rs.10,000 (b) If returns are filed before proceeding for levy of penalty, the penalty shall be Rs.5,000 (c) For filing incorrect returns penalty is Rs.1,000 (B) Payment of Tax (i) Calculation of tax payable Sr. No. Content 1 Sch. A 2 Sch. B 3 Sch. C 4 Sch. D. Amt. Tax 14 5 Sch. E Total sales & tax Collected during month Less : sales returns (within 6 months ) = Net sales & tax Less : Balance in set -off account = Tax payable with returns --------------------------------------------Amt. Tax ------------------------- (ii) Time for Payment of Tax (a) Registered dealer has to pay tax along with returns for the period covered by return including interest payable (b) If any sum is determined as per composition scheme the same has to be paid within time limit prescribed in order for such composition (c) If any fine is imposed the same shall be paid before date specified in notice by commissioner or Tribunal (iii) Method of Payment (a) Every payment should be accompanied by return cum challan (b) Amount should be stated both in words figures (c) The form accompanying payment should be duly filled in & verified by payer (d) Payment is to be made in Government treasury & one copy is returned by treasury to payer as acknowledgement (e) No payment should be made to any authority or officer in cash (f) The instalment granted under any order should be inclusive of interest & should not exceed one year & periodicity cannot be more than one month (iv) Other provisions relating to payment (a) For delayed payment of tax interest is charged @ 1.25% p.m. or part thereof for the delayed days (b) Tax amount is to be rounded off to the nearest rupee Fifty paise & above next rupee & below fifty paise ignored 15 (c) If dealer has not paid tax, interest & penalty as per returns, assessing authority may issue him notice requiring him to pay the amount as per returns (d) Any amount paid by dealer is appropriated in following order 1. Interest 2. Penalty 3. Sum forfeited 4. Fine 5. Tax payable (e) Excess amount paid by dealer is refunded to him. Such refund amount is first applied to recovery of dues from him for whom notice has been issued to him. If the refund is in excess same is recovered along with interest @ 1.25% p.m. or part thereof. 9. COMPOSITION SCHEME i) VAT is a multi-point sales tax all persons involved in distribution chain have to collect tax, pay to the government after availing input tax credit. No. of dealers are unmanageable & it is administratively difficult for department to control them. Department would like to concentrate on dealers who contribute substantial amount to exchequer. Therefore composition scheme has been introduced ii) Highlights of the scheme • Retailers having turnover less than 5 lakhs are exempted from registration and other requirements of the Act. • If dealer imports good from other states or other countries than exempted turnover is Rs. 1 lakh only • Scheme is applicable to retailers and dealer is considered as retailer if 90% sale is to customers who are not dealers • Dealers availing scheme cannot issue tax invoice • Dealer not to collect tax separately on sales • Dealer not eligible for input tax credit • Dealer has to issue bill or cash memo which contains specified details & declaration • Retailers having turnover upto 50 lakhs are eligible for scheme • Scheme not applicable to following dealers: - Manufacturers - Importer - Taxable goods purchased from unregistered dealer 16 - Retailer of liquor - Reseller of drugs - Reseller of motor spirit iii) Tax Rate = 5% of [ total sales – total purchase ] during 6 months period If : (i) Turnover consists of Schedule A i.e. exempted goods & (ii) more than50% turnover is of goods with tax rate 4% = 8% of [total sales – total purchase] during 6 months If turnover consists more than 50% of goods with tax rate 12.5% Turnover of following goods is to be excluded: - Foreign Liquor - Country Liquor - Imported Liquor - Drugs - Motor Spirit iv) If the dealer wants to avail composition scheme he has to apply in form 4. The application is to be made before 14th July or at the time of applying for certificate of registration in case of new dealers. Option once exercised can be changed during next financial year only. (v) State Government may provide special composition scheme for following businesses: Type of Business 1. Eating House/Hotel Restaurant 2. Bakers Composition tax rate( as % of turnover) 8% for registered. Dealer & 10% for unregistered dealer 4% for registered. Dealer & 6 % for unregistered dealer (up to turnover Rs.30 lakhs) Normal tax on amount exceeding Rs. 30 lakhs 12.5% on 15% of sale price 8% of contract value 3. Dealers of second hand Motor Vehicles 4. Works contract 17 10. ASSESSMENT i) Self Assessment If dealer has filed returns then department cannot carry out assessment after 2 years from end of relevant year. If dealer has not filed returns then above period is extended to 3 years ii) Best Judgement Assessment If registered dealer has not filed return before due date concerned officer may assess dealer as per best of his judgement without serving notice & without affording an opportunity of being heard If after passing assessment order dealer submits returns along with evidence of payment of tax then officer cancels assessment order After canceling order dealer is assessed as per other provisions of the Act & order is passed within 3 years from end of relevant year iii) Assessment when sale or purchase is not disclosed If officer is of the opinion that: -- Turnover of sale or purchase has not been declared or -- Tax has been paid at lesser rate or -- Set-off has been wrongly claimed or -- Deduction has been wrongly claimed Then he can serve notice within 5 years & proceed to assess him & pass order within 5 years after giving opportunity of being heard to the dealer iv) Assessment for giving effect to findings of tribunal & courts In order to give effect of decisions of Tribunal, High Court or Supreme Court the assessment is to be completed within 36 months from date on communication of findings or direction containing in court order to commissioner 11. AUDIT i) By department Commissioner can order audit of any dealer 18 Dealer has to provide all facilities & show all records to department auditor. ii) By chartered accountant (Tax audit) If any one of the following conditions is fulfilled dealer must get his books audited by C.A. - Turnover exceeds 40 lakhs (sale or purchase) - He holds license under prohibition act. Report must be submitted within 8 months after end of year. If dealer fails to submit this report within prescribed time commissioner shall impose penalty equal to 10% of total sales after giving dealer opportunity of being heard.
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