Introduction Of Vat In Tamil Nadu

Seminar on Value Added Tax By V. Narayanan Value Added Tax Practitioner January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Agenda  Sales Tax - An Overview  Introduction to VAT  VAT - What it means?  Sales Tax and VAT - A Comparative Study  Advantages of VAT  Registration  Schedules in VAT Act  Implication on works contract (after VAT)  Forms – A Walkthrough  Conclusion

January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Sales Tax – An Overview  Falls under exclusive jurisdiction of state

governments - Article 246 of the Indian Constitution  State governments levy different tax rates for different goods – based on the specific needs of people, businesses and industry  Form of taxation applicable not only in India, but globally January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Genesis of VAT  Formulated during the Chief Minister’s

meet of all the states during 1999  Tamil Nadu was a member right from the beginning  Members included all state finance ministers

January 27, 2007

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Why VAT?  To have uniform rate of tax throughout the    

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country To abolish deferral/waiver/incentives To abolish internal check posts To facilitate self assessment To reorganize commercial tax departments and enable computerization No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Current Status of VAT Implementation  Year 2005: 22 states implemented  Year 2006: 6 states have implemented  Year 2007: Remaining states have

implemented  Status in Tamil Nadu:  July 22, 2006: Finance Minister of Tamil Nadu announced in the state assembly about the introduction of VAT system  October 28, 2006: VAT Act was published in Tamil Nadu Gazette and introduced, effective from January 1, 2007 January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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What is VAT?  VAT is a multi-point tax collected at

every stage  VAT is arrived at by deducing the tax paid on purchases from the tax payable on sales

January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Example Calculation

Data  Purchases: Input worth

Rs. 1,00,000/- in a month  Sales: Output worth Rs. 2,00,000/- in a month  Input tax rate: 4%  Output tax rate: 12.5%

January 27, 2007

S.No

Parameter

Amount (in Rs.)

1

Input purchased within the month

1,00,000

2

Output sold within the month

2,00,000

3

Input Tax Paid

4,000

4

Output Tax Payable

25,000

5

VAT payable during the month after set-off/input tax credit

21,000

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Concept of VAT and Set-off / Input Tax Credit  Essence of VAT is providing set-off for the

tax paid earlier, given effect through the concept of input tax credit/rebate.

 Therefore, 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).

January 27, 2007

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VAT Calculation – A Diagrammatic Representation ‘B’ - MANUFACTURER Sales Value: Rs.140/Gross VAT @ 10%: Rs.14/Net VAT: Rs.14 –Rs. 10 = Rs. 4/-

‘C’ - WHOLESALER Sales Value: Rs.170/Gross VAT @ 10%: Rs.17/Net VAT: Rs.17 – Rs. 14 = Rs. 3/-

‘A’ - RAW MATERIAL PRODUCER Sales Value: Rs.100/Gross VAT @ 10%: Rs.10/Net VAT: Rs.10/-

‘D’ - RETAILER Sale Value: Rs.190/Gross VAT @ 10%: Rs.19/Net VAT: Rs.19 – Rs. 17 = Rs. 2/-

Note: Total VAT collected at four points: Rs. 10 + Rs. 4 + Rs. 3 + Rs. 2 = Rs.19/January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Sales Tax & VAT – A Comparison…1 S.No.

Sales Tax

VAT

1

Tax is levied either at multi-stage or single stage.

Tax is levied comprehensively at every point of sale till retail stage.

2

Tax is imposed only on sales turnover of goods.

Tax is levied on every value addition including services, agricultural activities, labour, interest, royalties etc.

3

Tax paid on purchases is not rebated

Tax paid on purchases (inputs) including capital goods is rebated

4

As tax paid is built in the cost, it taxes the tax. So, there is tax cascading.

As tax paid fully rebated, there is no cascading.

January 27, 2007

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Sales Tax & VAT – A Comparison…2 S.No.

Sales Tax

VAT

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To minimize cost of production, manufacturer produces intermediary products to use in the final product. This leads to vertical integration.

As the tax paid is credited, there is no possibility of vertical integration.

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Abnormal increase in price of the goods

Nominal increase in price of goods

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In single point tax, verification of earlier sufferance of tax is not easy. So, there is large scale evasion of tax.

The system facilitates mechanism for

January 27, 2007

verification of claim of tax credit.

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Advantages  Rationalized Tax Structure: 1% , 4%, and 12.5%  Simple: Minimum exemptions with lesser rate and refund  

   January 27, 2007

procedures. Transparent: Being a consumption tax, more transparency is maintained Bigger Opportunities: By giving tax credits, the manufacturing cost will be less and even bigger enterprises will establish their presence in Tamil Nadu. Reduced Prices of Goods: Elimination of tax cascading and pyramiding effects Growth: Creates more job opportunities in the state. Tax Compliance: Checks tax evasion No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Registration  Registration Fee: Rs.500 for the principal place and Rs.50

for each of the other places for all categories of dealers.  Renewal not required: Registration once granted need not

be renewed each year, will continue to be in force till revoked or till the closure of the business.  Legal Provisions: 

January 27, 2007

Under Section 88 (3) (i) all rules, regulations, notifications, clarifications or orders made or issued under any other provisions of the said act shall continue in force on or after such date under TNVAT too. Until they are repealed or amended.

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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TIN  Tax Payer’s Identification Number (TIN) already

made available to all existing dealers.  TIN consists of 11 digit numerals throughout the country: 



January 27, 2007

First two characters will represent the State Code as used by the Union Ministry of Home Affairs. The set-up of the next nine characters may, however, be different in different States. In Tamil Nadu, the last seven digits relates to the existing TNGST number holders.

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Schedules  6 Schedules (as against 11 in the old

scheme). They include:

January 27, 2007

Schedule Number

Description

1

VATable Goods) Part A - Bullion, Gold, Silver (taxable @ 1%) Part B - Taxable @ 4% (150 items) Part C – Taxable @ 12.5% (69 items) – W.E.F 12.07.2007

2

Non-VATable (12 items)

3

Compounding Schemes for Hotels, Restaurants & Sweet Stalls

4

Exempted Goods (Section 15)

5

Zero Rate Sale – International Organizations

6

Transit Passes No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Compounding Scheme  Applicable to Assesses, who effect

second or subsequent sales, pay 0.5% Tax as a percentage on Gross Turnover. Such dealer cannot collect tax from the customers.  Limit: Rs. 50 Lakhs Per Annum  VAT invoice cannot be issued

January 27, 2007

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Implication on works contract (after VAT)  Section 5 provides for levy of tax on

transfer of property in the goods involved in the execution of works contract. Rule 8 (5) prescribes methods of computing.  ITC is permissible in this Section on goods mentioned in the first schedule purchased within the State and used in the execution of works contract. January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Continued…  Section 6 - compounding Scheme has

been amended recently with retrospective 01.04.2007.  Inter state purchases / stock transfer are not permitted  Dealers paying under this scheme are not entitled for ITC and cannot collect tax from the customers. January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Exempt vis-à-vis Zero Rated Sale  Dealer not entitled for input tax credit if

the sales are not taxable and exempted  Refund on input tax applicable to a dealer who pays no tax on his output For e.g., Export

January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Continued….  Option to be exercised along with the

first monthly return for the financial year or in the first monthly return after the commencement of the works contract. Such option shall be final for the assessment year.  Dealers need not maintain detailed account under this scheme. Sufficient if they maintain records in original for the receiptsNo.and payments 80, Station Road, Radha Nagar, Chromepet, January 27, 2007 21 Chennai – 600 044 Phone: 91-44-2265 4506

Continued.  Section 13 represents TDS provision  Every person responsible for paying any

sum to a contractor has to deduct TDS @ 2% and 4% respectively.  Dealer can provide form S obtained from the respective assessing authority which is called a no liability certificate.  The person deducting the TDS amount has to deposit the same on or before 20th No. 80, Station Road, Radha Nagar, Chromepet, January 27, 2007 22 of succeeding month Chennai – 600 044 Phone: 91-44-2265 4506

Continued…..  A statement in form R and Form T to be

issued to the contractor for the TDS recovery.  Once the contractor produces the Form T TDS shall be adjusted.  Contreventions of the provision interest attracts 1.25% per annum.

January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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VAT & CST Act  CST rate of tax has been brought down

to 3% effective from 01.04.2007 for interstate transaction  Input Tax Credit allowed for inter-state sale – Section 8.1 of CST Act  No Input Tax for inter-state purchases and stock transfer

January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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VAT & Stock Transfer  Due to existence of CST Act, stock

transfers/consignment sales are exempted as at present  When stock transfers are exempted, ITC is eligible in excess of 3% for rebate on the goods used to produce products

January 27, 2007

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VAT & Deemed Sales  Tax on deemed sales such as Leasing,

Works Contract are Vatable – Sec 5  Composition of Tax on work contract is available: 2% on civil works and Sec 6 civil maintenance works  4% on other contracts

January 27, 2007

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Tax Computation on WCT – Sec 5

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Treatment of Exports & Deemed Exports  Export will be zero-rated. Refund on ITC  Penultimate sale is also treated as Export and

eligible for ITC  Sales to SEZs and International Organizations are zero-rated ITC available for both contractors as well as sub-contractors  Refund of ITC to Exporters/Deemed Exporters will be made within 180 days from the date of claim. Beyond which period such credit lapse to Government. January 27, 2007

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January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Capital Goods  ITC eligible for purchase of capital goods

used for the manufacture of taxable goods  Eligibility: From the date of commencement of commercial production  50% can be adjusted in the first year, balance 50% in the second and third year  Remaining unadjusted amount, if any will lapse January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Returns  Every Dealer should file monthly return

in Form I disclosing the input tax paid and output tax payable by 20th of the following month  Details of TIN should be furnished on both purchase and sales  Separate Forms J, K, L, M are meant for various categories of dealers January 27, 2007

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Assessment Procedure  Self-assessment for VAT dealers in

terms of submission of returns upon setting of tax credit  No compulsory annual assessment as at present  Failure to file monthly returns assessing officers can resort best judgment assessment order after giving reasonable opportunity. January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Continued…  Penalty @150% of the tax assessed is

applicable in case of best judgment assessment.  Limitation for revision of assessment is 5 years from the date of original assessment order. (Section 27)  Appeal, revision procedures are similar to TNGST Act. January 27, 2007

No. 80, Station Road, Radha Nagar, Chromepet, Chennai – 600 044 Phone: 91-44-2265 4506

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Input tax Credit  Section 19 and Rule 10 are relevant for

ITC claim.  ITC is available in respect of tax paid goods i.e. vatable goods. (4% & 12.5%)

January 27, 2007

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Scrutiny of Accounts  Detailed scrutiny on 20% of the dealers

on a random basis  If evasion is detected upon scrutiny/audit, dealer may be assessed for all the previous periods (5 years)

January 27, 2007

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Audit  Enforcement Wing will be the Audit Wing

for VAT  Audit will be conducted at the premises of the Tax Payer with prior intimation  Before Audit Closure, the audit team discusses with the Tax Payer on the findings and a detailed report is given to the dealer January 27, 2007

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Treatment of Waiver & Deferral  Units enjoying waiver will be required to

switch over to deferral mode of payment  Units enjoying the benefits of deferral will continue for the un-expired period subject to unused portion of monetary ceiling

January 27, 2007

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Status of Other Taxes after Introduction of VAT  Additional Sales Tax, Surcharge, and

Resale Tax will be abolished  No provision for concession sale, hence no declaration forms such as Form XVII

January 27, 2007

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Forms  Totally, 46 forms have been introduced  Important Forms:  Registration

Formalities – Forms A-F  Monthly Returns – Forms I, J, K, L, & M  TDS Forms – Forms R, S, & T  Stock Inventory & Refund – Forms V & W  Despatch – Forms JJ, LL, & NN

January 27, 2007

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Conclusion

January 27, 2007

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Thank You

January 27, 2007

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