Value-added tax (VAT) has been a major reform in the structure of taxes in India and has been one of the most effective tools for the development of the country.
Value Added Tax is a tax levied by the Central Government on the sale of goods and services to the consumer. This tax is initially levied on the production of goods and services, but ultimately it has to be paid by the consumer while purchasing it.
The Value-added tax (VAT) system was implemented in India in 2005, replacing the sales tax system that was in practice till 2005, with the main aim of bringing a uniform and transparent system of taxation across all states.
The value-added tax created a new system of indirect taxation and was followed by the Goods and Services Tax (GST), which replaced VAT over time.
Through this blog post, we want to explain you all in detail about Value Added Tax and all its aspects like concept of value-added tax (VAT), its structure, implementation and changes in GST.
What is The Concept of Value-Added Tax (VAT)?
VAT is a point of arrival tax that is levied in proportion to the value addition at each successive stage in the supply chain.
It is very important to be familiar with the basis of VAT, where the tax amount is levied for the change in value between purchase and sale by successive stages.
This makes it possible for all parties within the supply chain to pay tax uniformly, thereby reducing the incidence of tax avoidance to a great extent.
For example, if a manufacturer buys material for Rs 100 and processes it to the value of Rs 150, VAT is payable only on the additional value of Rs 50.
Then the manufacturer has the right to recover the VAT paid on the raw material, thereby shifting the burden of tax to the final customer.
What is the Historical background of Value-Added Tax (VAT) in India?
VAT in India was introduced with the objective of replacing the earlier sales tax system. There were several major issues associated with sales tax; horizontal and vertical inefficiencies caused by cascading effects, lack of transparency, and fluctuations in tax rates across states.
This situation forced people to demand a better and uniform way to collect taxes.The process of evolution of VAT in India was initiated in 1999 with the recommendations of the Empowered Committee of State Finance Ministers, as follows →
The first state to adopt VAT was Haryana, which adopted it in the financial year 2003-04, and other states followed in the next few years.
By 2005, most Indian states had moved to the VAT system, which marked a new turn towards a more rational and structured framework for taxation.
What is the Structure of Value-Added Tax in India?
In our country India, VAT was imposed at the state level, with each state having its own VAT laws, rates and procedures individually. However, the overall structure and principles of VAT were similar across all states, ensuring a certain level of uniformity.
Classification of Goods
Under VAT, all types of goods were categorized in different categories and the tax rates for each of these goods were different. We have mentioned them for all of you.
- Exempted Goods: VAT exemption on all important goods like food grains, vegetables and milk has been provided by the government.
- Low-Rated Goods: Taxes were imposed at meager rates on all kinds of basic necessities, such as medicines and educational materials, usually ranging from just 1% to 4%.
- Standard-Rated Goods: Most of the items were included under the standard rate category, which varied between 12.5% and 15% depending on the state.
- Higher-Rated Goods: Taxes were imposed at very high rates on luxury and demerit goods such as alcohol, tobacco, and high-end consumer goods, often well above the normal 20%.
Input Tax Credit
A very important feature of VAT in India was the provision of input tax credit (ITC). Under this, a business could claim credit for VAT paid on inputs (raw materials, components, etc.) used in the production of goods or services.
This credit could also be offset against the VAT liability on the final product. ITC helped reduce the cascading effect of taxes and also assured that VAT would be imposed only on value addition at each stage.
Intra-State vs. Inter-State Transactions
India had imposed VAT on all inter-state transactions, which in simple terms meant sale of goods within a state. For inter-state transactions, it had imposed Central Sales Tax (CST), which was based entirely on the principles of VAT but governed by central legislation.
What are the Advantages and Disadvantages of Value-Added Tax (VAT)?
VAT is a tax which has increased its status in the Indian tax system in a very short span of time and it has many advantages and disadvantages which we have explained in detail in an concise table below.
| Advantages of VAT | Description | Disadvantages of VAT | Description |
| Eliminates the Cascading Effect of Taxes | VAT help in decreasing the taxation and making certain that the tax is charged for added value at each level. | Complexity in Compliance | VAT entails businesses to keep records, submit returns in set intervals, and comply with the regulations which can be exhaustive and cumbersome to small businesses. |
| Promotes Transparency and Accountability | The requirements for preserving records and issuing tax invoices stemming from the law put an emphasis on the suppression of evasion of taxes as well as increase the level of openness. | Regressive Nature | Possible, VAT is regressive, in the sense that lighter pockets will be weighed down more by the prices that incorporate VAT. |
| Increases Revenue for Governments | VAT is a wide tax that is implemented at many levels hence the government gets more and stable revenues. | High Administrative Costs | Paying and collecting VAT also requires resources and cost which are incurred by the government and firms in this system. |
| Encourages Voluntary Compliance | The completeness of tax records maintained by the firms under input tax credit system assures compliance with tax laws. | Possible Inflationary Impact | This tax has the effect of influencing the prices of goods and services in that the imposition or any rise in the standard or reduced rates of VAT may cause the creation of price increases on many goods and services, therefore inflation. |
| Uniformity Across the Economy | VAT ensures equal tax charges on similar products a move that helps reduce this regional biased on taxes. | Impact on Cash Flow | Businesses may be able to produce goods and services and sell them without maybe being able to obtain the inputs required because VAT has to be paid on those inputs before the business is able to collect VAT on the output. |
| Broad Tax Base | VAT impacts practically all client classes and types of products and services hence creates a fair and spread out tax system. | Potential for Tax Evasion | Nonetheless, there are tricks with vat, for example, one can understate sales or even invent the fake invoices and get more credits than is allowed by the system. |
How Does Value-Added Tax Work?
Value-added tax is a tax levied at every stage of the production and distribution process, targeting all value added to goods and services at each stage.
Unlike most other taxes, VAT is imposed on added value rather than on the total price of the product; how it works at different stages of the supply chain is explained below.
Manufacturer’s Level
First of all you should know that this process starts with the purchase of raw material by the manufacturer. For example, if the cost of raw material is ₹1000 and VAT is 10%, then the manufacturer pays ₹100 as VAT. Thus, the total cost is ₹1100.
Then the manufacturer sells these goods to the wholesaler for ₹2000, and he charges ₹200 as VAT, making the total amount ₹2200.
He can get an input tax credit of ₹100 paid for VAT on raw material so that his case as VAT output liability becomes ₹100, which he pays to the government.
Wholesaler’s Level
The wholesaler buys the product from the manufacturer for ₹2,200, which includes VAT of ₹200. When the wholesaler sells the product to the retailer for ₹3000, they add ₹300 for VAT, and thus, the total amount becomes ₹3300.
The wholesaler can further deduct the ₹200 VAT paid to the manufacturer from the ₹300 collected from the retailer so that there is ₹100 of VAT payable.
Retailer’s Level
The regulatory price of the product is ₹ 3,300 and includes VAT of ₹ 300 from the wholesaler. The retailer, on the other hand, sells the same product to the end user for ₹ 4,000 but pays ₹ 400 as value-added tax (VAT) on it, taking the total amount to ₹ 4,400.
The retailer gets an input tax credit for the ₹ 300 VAT collected from the wholesaler and actually pays ₹ 100 VAT. This is the final tax charged and paid by the consumer and is equal to the amount of VAT collected.
How to do Calculation of Value-Added Tax (VAT)?
The calculation of VAT involves determining the tax levied on the sale of goods or services and also understanding how much tax is claimed as input credit. Hence, we have provided you with a step-by-step guide to calculate all VAT below:
Determine the VAT Rate
The first step is to identify the VAT rate applicable on the product or service. As all VAT rates may vary depending upon the type of goods or services and the tax rules of the country. For example, in some cases, it may be standard, reduced or even zero.
Calculate the VAT on Sales (Output VAT)
- Formula:
Output VAT=Sale Price×VAT Rate
- Example: If a product is sold at the rate of ₹ 10,000 and the applicable VAT rate is 12% then it will be the output tax.
Output VAT=₹10,000×12%=₹1,200
- The total price including VAT will be ₹10,000 + ₹1,200 = ₹11,200.
Calculate the VAT on Purchase (Input VAT)
- Formula:
Input VAT=Purchase Price×VAT Rate
- Example: If the same business purchased raw material worth Rs 5000 and the VAT rate was 12%, then it would fall under the category of output tax.
Input VAT=₹5,000×12%=₹600
Determine the Net VAT Payable or Refundable
After calculating both output VAT and input VAT, you can determine the net VAT payable or refundable to the government by subtracting input VAT from output VAT.
- Formula:
Net VAT Payable=Output VAT−Input VAT
- Example: Using the previous examples, if the output VAT is ₹1,200 and the input VAT is ₹600, this would be called the net VAT payable.
Net VAT Payable=₹1,200−₹600=₹600
Consider Special Cases
- Zero-rated Goods: The VAT rate for zero-rated goods and services within India is absolutely 0%. No VAT is levied on sales, but input tax can still be claimed easily.
- Exempt Goods: No VAT can be levied on the sale of the acquired goods and VAT credit cannot be claimed.
Apply the VAT to Different Stages
VAT is levied at every stage of production and distribution. Every business in the supply chain must calculate VAT on its sales and claim all input tax on its own revenue.
What are the VAT Rates in India?
As of the date of this presentation, India has no value-added tax (VAT) covering the entire country. However, in its place, the country has adopted GST, which has replaced the former value-added tax (VAT) system along with other indirect taxes like service tax, excise duty, etc.
GST is a destination based, centralized tax that subsumes all previous indirect taxes on goods and services, and was implemented on 1st July 2017.
But under the previous structure of VAT, in which the VAT rates in India was collected by different states, VAT rates varied across states, and were usually classified into different bands or slabs, including 1%, 4% and 12%.
GST Rates in India
Under GST, the tax rates are categorized into different slabs:
0% (Zero Rate):
- All the essential and valuable things like fresh fruits, vegetables, milk, and grains.
5%:
- All the essential things for your everyday life, like caged food, footwear, and medicines, are under Rs 1,000.
12%:
- All essential goods, such as processed foods, mobile phones, and some medicines.
18%:
- All standard goods and services like soap, toothpaste, computers, and restaurants (non-AC).
28%:
- All kinds of luxury items, such as cars, air conditioners, and specific high-end consumer goods.
How is VAT Different from Sales Tax?
value-added tax (VAT) tax is very different from sales tax; there are many reasons behind this, which we have mentioned in a brief manner below:
Scope of Application
- VAT: Used at some point in manufacturing, processing, marketing, selling, storage, and distribution of the good from the manufacturer to the end user.
- Sales Tax: Imposed only at the time of the last stage of distribution in the consumption chain.
Tax Calculation
- VAT: This is calculated based on the value paid at each stage and businesses are fully able to claim input tax credit on the value-added tax (VAT) paid.
- Sales Tax: It is levied on the total sales price of such goods or services sold to the ultimate consumer without any deduction from other taxes.
Impact on Buisinesses
- VAT: Relies on record-keeping and documentation at every level to enable businesses to claim the tax on inputs paid.
- Sales Tax: The administration is completely simple, as the tax is charged only once on the final sale, and no installment tax recovery can be claimed.
Revenue Collection
- VAT: By imposing tax at every level, equal revenue is guaranteed, which increases the possibility of tax evasion.
- Sales Tax: This involves collection of revenue at one place and there may be certain revenue loopholes, which if exploited, may result in loss of revenue.
Tax Burden
- VAT: Taxes are levied at all levels of production and distribution channels.
- Sales Tax: The overall burden of all taxes is borne by the consumer at the time of purchase.
What is the Collection of VAT in India in FY 2023-2024?
The overall collection of value added tax (VAT) in India in FY 2023-2024 is part of the broader structure of indirect tax revenue, which also includes Goods and Services Tax (GST), Central Excise Duty and Customs Duty.
Although GST has established itself as a significant tax at par with value-added tax or value-added tax (VAT), for some products, de facto VAT is still applicable for specific items like petroleum products, liquor, and some other minor items.
Total indirect taxes including value-added tax (VAT) and other taxes have shown a very satisfactory growth in the first six months of the current financial year 2023-2024.
The provisional figures of gross direct tax collection show various types of taxes like income tax, corporate tax etc. at ₹ 9,87,061 crore, registering a growth of 18.29% and this is attributed to the overall good tax compliance and economic activity in the country during the year.
As a part of state-level taxes, VAT varies across states in India and each state has its own mechanism of collection and reporting of VAT revenue. Thus, the subsequent collection and contribution of VAT on specific goods remains a part of states’ revenue even under GST.
How is VAT Helps Trade, Consumers and Government of India?
There are various ways why a value-added tax (VAT) may be imposed on all trades, consumers and government which are mentioned in details below.
Trade
- Transparency: Value-added tax (VAT) enhances taxation accountability in the supply chain as there are minimal opportunities for duty avoidance, which promotes efficiency in the business organization.
- International Competitiveness: It supports exports inasmuch as it refunds the value-added tax (VAT) paid on exported products, hence making domestic products more relevant in the global market.
Consumers
- Fair Pricing: Value-added tax (VAT) helps a lot in avoiding the fear of taxes as it does not allow tax to be imposed on tax, which results in unreasonably high prices due to multiple taxes.
- Product Variety: This challenges all companies to develop a variety of affordable products and make them available to customers, which will benefit them.
Government
- Stable Revenue: Value-added tax (VAT) is another significant source of revenue as it is more stable than other revenue sources needed to finance government services and develop infrastructure.
- Tax Compliance: The process of collection is multistage, and this, in a way, makes fiscal evasion unachievable, making the general tax compliance higher.
We have learned everything about value-added tax (VAT) that every individual should know, but now this question definitely comes in the mind of many people that how to register value-added tax (VAT). Keeping this problem in mind, we have given the complete information of its vertical registration for all of you below.
What is VAT Registration?
value-added tax (VAT) Registration is the process through which a business or an individual applies to the competent tax authorities to be registered as the legal agent through which Value Added Tax (VAT) is collected.
This registration is compulsory for firms that have a certain turnover level as may be defined by the tax laws in the country.
Who Should Register for VAT?
The registration for value-added tax (VAT) is compulsory when the taxable turnover of business exceeds the value-added tax (VAT) threshold set by the government throughout the world. It is often pegged on the value of taxable sales of goods and services in a specific period, often a year.
Some firms may also opt to register even if their turnover is below the threshold, for example where they seek to recover value-added tax (VAT) on their inputs or just to enhance their firms credibility.
There are times when some companies in some particular lines of business or those who do certain types of sales such as export sales, need to be registered for value-added tax (VAT) even if they are below the threshold.
To some extent it is necessary to study the existing rules regarding the Value Added Tax in a particular country.
Which Type of Required Documents for VAT Registration?
While registering for value-added tax (VAT) (now replaced by GST) within India, a businessman needs to submit a number of documents which we have mentioned in detail below:
Proof of Identity
- Business PAN card of the proprietor of the business.
- A picture or pictures of the owner or partners in passport size.
Proof of Address
- Utility bill particularly a receipt for electricity or a rental agreement or latest property tax receipt of the business premise.
- Photo ID and address proof of the proprietor, partners or directors (Aadhaar card, voter ID etc. ).
Business Registration Proof
- Incorporation certificate for companies.
- Partnership deed for partnerships.
- Other supportive registration documents for the sole proprietor or an LLP, as the case may apply.
Bank Account Details
- An official receipt or canceled check or bank statement showing the name of the business as it appears on the account.
Authorization Letter
- Where the company has not registered itself, the letter of authority or board resolution requires a specific person to register the company for value-added tax (VAT).
Additional Documents
- Additional documents, where necessary, may be required, which may include the business’s Memorandum of Association (MOA}/or Articles of Association (AOA).
What is the Overall Procedure of VAT Registration?
As value-added tax (VAT) has been replaced by GST in India, we would like to give you all the details of the simple process of value-added tax (VAT) registration which we have explained below in both online and offline mode:
VAT Online Registration
- Visit the VAT Portal: Visit the website of the specific state to which you belong for the official value-added tax (VAT) portal.
- Create an Account: There is a registration form that needs to be filled in with your business information and email in order to open an account.
- Fill the Application Form: It can be amended by filling up the form VAT registration along with required information like Business name & address, PAN number, turnover etc.
- Upload Documents: Scan and upload the required documents, which are identification, address proof, business registration, and bank account details.
- Payment of Fees: The registration fee can also need to be paid through net banking, debit/credit or through other modes.
- Submission: Fill out the application form and send a scanned copy to the postal address provided here online. You will obtain an acknowledgment with a reference number for tracking as well.
- Verification: The authorities shall consider your application and supplied documents. It is understood that they may communicate with you for further details or information as and when required.
- Issuance of VAT Registration Certificate: Upon registration, you get your VAT registration certificate through email or post in case of traditional filing.
VAT Offline Registration
- Obtain the Form: Go to your local VAT office to fill in the application for VAT registration or access it at the web site of the local VAT authority of the given state.
- Fill out the Application: Fill in all the necessary information, such as business name and type, address for registration, and PAN No.
- Attach Documents: Make photocopies of all the documents that you require, such as passport, driving License, Utility bills, business registration, and bank records.
- Pay Fees: The registration fee must be paid at the VAT office or through a bank challan prescribed.
- Submit the Application: Complete the application form and attach the necessary documents to it, then send the form to the local authorities of value-added tax.
- Verification: There shall always be an authentication process that might warrant a physical examination of your business premises.
- Receive VAT Certificate: Once the above verification is over, you shall be provided with the VAT registration certificate by the VAT office.
In Conclusion
Value-Added Tax (VAT) was implemented and followed in the structure of India’s tax system, which became the basis of a modern and more logical system of indirect taxation.
VAT has for the most part been substituted by GST, however, the principles inherited from the former are valid for the contemporary tax system.
VAT to GST is one of the most critical changes recorded in India with reference to the unified and efficient taxation system.
GST has helped rationalize the tax structure, lessen the regulatory obligations, and boost the economy due to trade in the inter-state business.
In this blog, we have tried our best to make you understand every aspect of value-added tax which many others are not able to explain to you.
Finally, we would like to tell you that we have presented the entire blog post on value-added tax in a well-researched manner. There is no such information in it which is not available on other engines.
FAQs
Q1. What is the difference between VAT and GST?
A1. VAT was a state-level indirect tax on the sale of goods, while the GST is an indirect tax on the supply of goods and services across the country. VAT and a host of indirect taxes were subsumed by GST which has set up a single tax system in the country.
Q2. Can businesses still claim Input Tax Credit (ITC) under VAT?
A2. Under the GST regime opted by the Government of India, claiming of ITC under VAT is not possible. But they can avail ITC under the GST regime in respect of goods and services taxable under GST regime only.
Q3. Was VAT applicable on services in India?
A3. VAT was not applicable to Service Tax in India for initially it was only related to the tax on sale of goods. Before the introduction of GST, service was also a category that attracted tax under the Service Tax regime.
Q4. How was VAT calculated in India?
A4. VAT was calculated as a percentage of the value added at each stage of production or distribution. The tax was levied on the difference between the purchase price and the selling price.
Q5. Why was VAT replaced by GST in India?
A5. VAT was replaced with GST for the more simplified method of taxation and to do away with the burden of taxes on the cost of goods and services, and to have a standard form of taxation in each state of the country to enhance the ease of doing business.
Q6. Did all states in India adopt VAT at the same time?
A6. No, never at one time was it implemented fully, but it started earlier with on state adopting it and then other follow later. Haryana was the first to adopt VAT in the year 2003 and several other states also adopted this scheme in the successive year.
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