No.1 for CA/CWWA & MECICEC. MASTER MINDS PART 1. INTRODUCTION TO VAT No. QUESTION ABC 4, | Define Value Added Tax and explain the basis, on which the various state laws are | * | enacted? What are the different stages of VAT? Can it be said that the entire burden falls on the final consumer? o What are the objectives for introducing VAT? What are the features of VAT as indicated in the white paper? What are the variants of VAT? ‘What are the methods for computation of VAT? What are the advantages of VAT? What are the limitations of VAT? ele|slolelale Which goods are not covered under VAT pl>|>|>|>]>]>]o 10. | Write a brief note on rates of VAT Sales can be broadly classified in four categories: 4) inter-state sale (levied by union government unc union list) Act-powers under entry 92A of list I.¢. 1b) Sale in course of import (No sales tax is ‘ut import duty is payable) ¢) Sale in course of export (No sales ta commodities) ayable but export duty has been imposed on some d) Intra-state sale (.e., within the state) (Levied by state government under state VAT act power to levy under entry 54 of ist Ilie., state list). Q.NO.1, DEFINE VALUE ADDED TAX AND EXPLAIN THE BASIS, ON WHICH THE VARIOUS STATE LAWS ARE ENACTED. : 4. Meaning: Value Added Tax. a) Is a multi-point tax on value addition, i. increase in value. b) Which is collected at different stages of sale, and ¢) With a provision for set off for tax paid at the previous stage/tax paid on inputs, against the tax collections on sales, before remitting to the Government's account 2. Basis a) Basic Design: The Empowered Committee of State Finance Ministers brought out a White Paper, which provided a base for the preparation of various state VAT legislations b) State Dependent: Since VAT is a state subject, the State has the freedom for appropriate variations, consistent with the basic design, as agreed upon at the Empowered Committee, 3. Purpose: The purpose of introduction of VAT is to bring harmonization in the tax structure of various States and rationalize the overall tax burden IPCC_ 36.5e_IDT_VAT. BLPh: 98851 25025/26 www.mastermindsindia.com Q.NO.2. WHAT ARE THE DIFFERENT STAGES OF VAT? CAN IT BE SAID THAT THE ENTIRE BURDEN FALLS ON THE FINAL COMSUMER? (M08, N09) COMPARISON BETWEEN SALES TAX SYSTEM AND VAT [M 09, NO9 10% Sales Tax 10% VAT Particulars ice | Government | 5. | Government Price Price Revenues Revenues Mr A sells goods to Mr.B 200 200 Sales Tax @ 10% 20 20| 20 20 Total Cost to Mr. 8 220 220 Mr. B processes and creates final products with the additional labour and capital and selis | 440 400 them to Mr.C, a wholesaler with 100% markup Note Sales Tax /VAT 44 aa[_ 40] 40-20=20 Total Cost to Mr.C. 484 400) Mr.C sells to MrP, a retailer at a 25% Mark-up | 605 500 Sales Tax / VAT 60.5 605] 50 50-40=10 Cost to P 665.5 500 P sells itto the consumer at 100% Mark-up 1331 7,000 Sales Tax / VAT 133 133] ‘100| _ 100-50 = 50 Cost to Final Consumer 1464, 1,100 Total Proceeds to Government 257.50 100 Note: It is assumed that no mark-up in respect ot Vemnponent Conclusion: Price of the final product is morgdxter the sales tax system The objectives of introducing VAT are 4. To avail Credit on inputs, leading to cost efficiency. 2 3. 4. 5. Ensure equitable distribution of tax impact amongst the dealers, Easy compliance through transparent and easy procedures. Easy computation of tax Avoids double taxation through input oredit (i.e, avoidance of cascading effect of taxes), NO. WHAT ARE THE FEATURES OF VAT, AS INDICATED IN THE WHITE PAPER? The White Paper on VAT was released by the then Finance Minister, on 17.01.2008. It reflects the consensus of the State Finance Ministers on the basic design of the State Level Value Added Tax The features of VAT, as indicated in the White Paper, are as follows: 1. General a) Registration of dealers with Gross Annual Turnover above Rs.5 Lakhs would be compulsory. b) Small dealers with Gross Annual Turmover not exceeding Rs. 5 Lakhs will not be liable to pay VAT, but State can extend upto Rs. 10 Lakhs. ¢) Small dealers, with Annual Gross Turnover not exceeding Rs.50 Lakhs, who are otherwise lable to pay VAT, can opt for a composition scheme, with the payment of tax at a small percentage of gross turnover. IPCC_ 36.5e_IDT_VAT. 3.2[No.1 for CA/CWA & MECICEC MASTER MINDS d) Dealers opting for composition scheme will not be entitled to Input Tax Credit. ) There would be a Tax Payer Identification Number (TIN) 2. VAT Liability: VAT Liability of a dealer is to be calculated by deducting input tax credit from tax collected on sales during the payment period Q.NO. 5. WHAT ARE THE VARIANTS OF VAT? (PM) (N 07, N 10, M 12) Different variants of VAT Gross ae variant Income variant Consumption variant Tax is levied on all sales Tax is levied on all sales Tax is levied on all sales, and deduction for tax with set — off for tax paid with deduction for tax paid on inputs excluding colinpute) sony) paid, on all business the capital inputs is depreciation on capital inputs (including capital allowed. goods, goods.) Variant Description The gross product variant allows deductions for taxes on all \ents. No deduction is allowed for tax: Gross Product at the time of purchase and at the time yaaa Capital goods are taxed Ue of sale of goods produc ig those capital goods. b) Modernization and %9 of plant and machinery is delayed due to this double tax treatme ple: y a) The income va¥unt of VAT allows for deductions on purchase of raw materials and components, a8 well as the depreciation on capital goods. (i.e.) Credit on capital purchases are allowed in the ratio of depreciation, Income over the life of the capital asset. Variant b) Limitation: i) This method requires classification of purchases in to revenue and capital expenditure, to claim set of. There are difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset, as well as on the rate of inflation 1. Principle: a) Consumption variant of VAT allows for deduction on all_business purchases, including capital assets. b) Gross investment is deductible in calculating value added 2. Merits: a) it does not affect the decisions regarding investment, because the tax on capital goods is also set off against the VAT liability. Hence, the system is tax neutral, with respect to techniques of production (labour or capital intensive), b) It simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. 3. Limitation: The system is tax neutral from the view point of Government as it leads to loss of revenues to the Government Consumption Variant IPCC_ 36.5e_IDT_VAT. 3.3Ph: 98851 25025/26 www.mastermindsindia.com Q.NO.6. WHAT ARE THE METHODS FOR COMPUTATION OF VAT? (PM) (M09) | Methods of computation of VAT “awe Method Invoice Method Subtraction method Aggregating all the factor || Deducting tax on inputs payments and profit from tax on sales ee“ Direct Subtraction method initrd sub len meticy l Deducting aggregate value of purchases, Deducting tax, inclusive value of exclusive of tax, from the aggregate purchases from the sales and value of sales, exclusive of tax taxing difference between them, The various methods of computation of VAT are’ Method Description 4. Suitability: This method is mainly used with income variant of VAT 2. Demeri a) This method does not ee exemptions of intermediate dealers, Addition b) It does not facilitate SS invoices for detecting evasion. Method ¢) There is no rey tax credit, 3. Computation: x a) Step 1: Ag Fall the factor payments, including profits, to arrive at the total value a b) Step 2: Apply the rate on Step 1 to calculate the tax. 4. Suitability: Under Central Excise Law, this method is followed 2. Salient features: a) The most important aspect of this method is that, at each stage, tax is to be charged separately in the invoice b) In India, this method is followed under the state level VAT and the central excise law. This method is also called the "Tax Credit Method” or “Voucher Method’ 3. Merits: Invoice a) In this method the beneficiary is the trade and Industry, because the tax Method collection at all stages is very much lesser than the tax received by the State, due to the facility of set-off of tax paid. b) The possibility of tax evasion is reduced to minimum, because credit can be claimed only when the purchase invoice is produced. 4. Computatior a) Step 1: Compute the tax to be imposed at each stage of sales, on the entire sale value. b) Step 2: Set-off the tax paid at the earlier stage. (i.e, at the stage of purchases in set-off) ¢) Step 3: The differential tax is paid. IPCC_ 36.5e_IDT_VAT. 3.4No.1 for CA/CWA & MECICEC MASTER MINDS 4. Suitability: This method is normally applied, where the tax is not charged separately, 2. Salient Features: a) Tax is charged only on the value added at each stage of the sale of goods. b) This method is suitable when VAT rate is uniform on all commodities. If VAT rates are different on intermediate products and final products, the calculations become very difficult ©) Tax liability can only be calculated periodically. Since, tax payable on a product is not known, end-use based exemption cannot be given under this Subtraction method Method | 3. Methods of determination of value added: a) Direct Subtraction method: Value added = Total value of sales, exclusive of tax Less: Total value of purchases, exclusive of tax. b) Indirect Subtraction Method Value added = Total value of sales, inclusive of tax Less: Total value of purchases, inclusive of tax 4. Computation: a) Step 1: Compute the value added under either of the above methods b) Step ply the rate of tax on the amount calculated in step Q.NO.7. WHAT ARE THE ADVANTAGES OF VAT? (PM) (M10) tax as under- fhe cascading effect of taxation as it allows the 's and also such tax paid does not form part of cost. dealers to avail the credit of tax paid 2. Effect on retails price: VAT reduceS8W final retail price or does not result in its increase as the credit availed of tax paid earlier results in lower cost of production and Also Exports get cheaper as taxes paid at earlier stages could be availed as credit or refunded in cash. 3. Certainty: VAT is based simply on transactions, which prevents the assessee to go through the complex definitions like sales, sales price, purchase turnover, sales turnover etc. Also, the system has a broad scope applicable to al types sales, hence preventing need for any interpretations. ‘Thus, the system brings simplicity, certainty and less litigation in the tax system to a great extent 4, Transparency: Under VAT, the buyers know the amount of tax paid by them while buying anything as well as the Government knows the amount of tax coming at each stage. As the tax charged has to be shown clearly in the invoice, the system becomes transparent with no hidden taxes. 5. Self-assessment: Under VAT, dealer has to self-assess his tax liability and also there are very less procedural formalities like submission of forms, maintenance of records, ete. 6. Neutrality: VAT prevents cascading effect of tax, which neutralizes the decision of how much value is to be added and at which stage it is to be added. Also, the system is neutral in respect of the choice of techniques of production and form of business organization Since tax credit of both inputs and capital goods is available, there is no distinction between labor intensive and capital intensive industries. (M13) 7. Better accounting systems: VAT leads to better accounting systems as the maintenance of records and purchase invoices is necessary in order to avail the credit of tax paid on purchases, IPCC_ 36.5e_IDT_VAT. 3.5Ph: 98851 25025/26 www.mastermindsindia.com 8. Better revenue collection and Stability: In VAT, credit of tax paid earlier is allowed only on production of purchase records. This condition leaves no scope for the dealers to suppress any purchase, hence preventing revenue leakage. 9. Helps to tax consignment of goods: Since VAT provides credit of taxes paid against taxes payable, ithelps in taxing consignment of goods, if such tax is introduced at par with VAT. 10.No Tax evasion: Under VAT. credit of tax paid on inputs is allowed only if the dealer has maintained the proper records of such purchases. If the dealer fails to maintain such records, then he won't be able to claim credit resulting in loss of revenue to him. Hence, suppression of purchases is difficult leading to no evasion of tax. 14. Effective Audit: Since the credit can be claimed only on production of purchases records, hence it becomes necessary for the dealers to maintain proper records of invoices. These invoices help in effective audit 12. Increased tax compliance: VAT acts as a self-policing mechanism as the buyer can get credit of tax paid only if the seller issues the invoice showing tax and thus, the buyer insists on getting the invoice from the seller, thereby acting as a police for the seller. Q.NO. 8. WHAT ARE THE LIMITATIONS OF VAT? (M41) Deficiencies of VAT system: The major deficiencies of VAT system as under: 1. Maintenance of detailed accounting records: VAZ system requires maintenance of detailed accounting records which increases the account st Such increased cost may not be affordable by small traders and firms as it meee ‘the benefit received by them from such system, SS 2. Problems arising due to different VAT, ind concessions: VAT is advantageous in case there exists a single rate of VAT without iptions, concessions and / or composition schemes. Such different VAT rates, exemptios ‘eessions, etc, may bring distortions and may also result in cascading effect of taxation 3. Increase in working capital requirements: Since tax is to be imposed at every stage of sale and not on last sale, it resutts in increase in working capital requirements and interest burden on the same However, this criticism is not fully correct as availability of credit on inputs decreases cost of production and ultimately final price and this reduction in price is more than increase due to interest cost. 4, State VAT not integrated with Central VAT: Until the State VAT is integrated with Central VAT and Central Sales Tax, it will be difficult to put at par the purchases from other states with the State purchases because tax on inter-state purchases (ie. CST) is not available as credit / set-off while tax on intra-state purchases (i.e. VAT) is available as credit / set-off. Thus, the advantage of neutrality is confined to purchases within the State. 5. VAT is regressive in nature: VAT is regressive in nature as it is levied on final sale price charged from the consumers and the poor people spend higher proportion of their income on necessities / consumable goods, hence incidence of VAT tends to higher on the poor. 6. Increase in administration cost: The administration cost to the State has increased due to increase in number of dealers under the VAT system. 7. Consumption favoured over production: Since, VAT is a consumption based tax, itis collected by the State consuming the goods. Thus, States where consumption is higher tend to get more revenue than States where production is higher. 8. Tax evasion through bogus invoices: Since input tax credit can be availed on the basis of invoices, dealers try to claim tax credit on the basis of fake invoices — where no purchases has been made — thereby causing loss of revenue to the exchequer. IPCC_ 36.5e_IDT_VAT. 3.6(No.1 for CA/CWA & MECICEC MASTER MINDS ) Q.NO.9. WHICH GOODS ARE NOT COVERED UNDER VAT? | 1. As per the White Paper, generally, all the goods, including declared goods will be covered under VAT and get the benefit of input tax credit 2. Goods not covered under VAT a) Petrol, diesel, Aviation Turbine Duel(ATF) or other motor spirit b) Liquor and ) Lottery tickets The above goods are not covered under VAT because their prices are not fully market determined 3. Though sale of liquor, petrol, diesel and aviation turbine fuel (ATF) is charged to tax under VAT laws in many States, taxes paid on them are not allowed as credit to the buyer. In other words, they are outside the VAT chain. ATF and petroleum products are liable to minimum 20% VAT in most of the States. Q.NO.10. Write a brief note on rates of VAT ] The following table depicts the various tax-rates prevalent under the VAT system along with a brief description as regards their applicability, - Rate Descring@r® Natural and unprocessed products in unegeed sector (e.g. firewood, plants) - Items 0% | which are legally barred from taxatio tems which have social implications (e.g national flag, salt) { Se 49 | This category is meant for pre SNones, precious and semi-precious metals, bullion, gold and silver ornaments, et 1a) Items of basic necessities like medicines and drugs, all agricultural and industrial inputs, declared goods & capital goods. Originally White Paper had proposed 4% rate 5% on such goods but many States have subsequently increased this rate to 5%. b) Rate of declared goods has also been increased to 5% by many States after amendment of CST Act w.e.f. 08.04.2011 All goods other than the goods falling under aforesaid categories and other than luxury 12.5% | Goods 20% | Luxury goods Note: Though the general rates of VAT are as given hereinabove, however, depending upon the requirements of the State, the States are imposing VAT at other rates as well TS ET 1. X,a manufacturer sells goods to Mr. B, a distributor, for Rs. 2,000 (excluding of VAT). Mr. B sells goods to Mr. K, a wholesale dealer, for Rs. 2,400. The wholesale dealer sells the goods to a retailer for Rs. 3,000, who ultimately sells to the consumers for Rs. 4,000. Compute the Tax Liability, Input credit availed and tax payable by the manufacturer, distributor, wholesale dealer and the retailer, under Invoice Method assuming VAT @ 12.5% (N09) IPCC_ 36.5e_IDT_VAT. 3.7Ph: 98851 25025/26 www.mastermind: Solution Output | Output Net VAT Particulars | Input value | Input Tax valve Tee payable (1) (2) (3) (4) (5) (6) = (5) - (3) Sale by X toB = = 2,000 250 250 Sale by B to K 2,000 250 2,400 300 50 Sale by Kto 2,400 300 3,000 375 75 Retailer Sale by DtoE, 3,000 375 4,000 500 125 2. Briefly answer the following questions:- a) Which is the most popular and common method for computing VAT liability and at what stage is the tax imposed under this method? b) Can VAT be said to be non-beneficial as compared to single stage-last point system? c) What are the items aggregated in the addition method to calculate the VAT payable? When is this method mainly used? d) Does White Paper on VAT allow only a manufacturer to avail set off of input tax credit ‘on capital goods and not a trader? (PM) Soluti a) Invoice method is the most common and pop hod for computing the tax liability under the VAT system. Under this method, tax is, d at each and every stage of sale on the entire sale value, and the tax paid at the e¢ tage is allowed as set-off. b) VAT system has many advantage; reduction in cascading effect of ta system. However, since VAT is, reduced tax evasion, transparency, certainty, which are not there in the single stage-last point 1d oF paid at various stages and not at last stage, it increases the working capital ements and the interest burden on the same. To this extent, it may be considered non-beneficial as compared to the single stage-last point taxation system though to a large extent, this rigour is brought down through input tax credits on purchases. c) Under addition method, all factor payments (excluding value of material) and profit are added to arrive at the value addition on which VAT rate is applied to compute the VAT payable. This method is mainly used with income variant of VAT. d) No. As per the White Paper on VAT, set off of input tax credit on capital goods is available to both manufacturers and traders, 3. Briefly explain whether following purchases are eligible for availing input tax credit: a) Rohan purchased goods from a registered dealer. He claims to have paid VAT on the said goods but the invoice pertaining to said purchase has been lost on account of negligence of a clerk in his office. b) Jain & Co. purchased goods from Tide Enterprises. Tide Enterprises is an unregistered dealer. c) Ankit purchased some capital goods. The final product manufactured by Ankit using these capital goods is exported. d) Mohan purchased goods for being used in execu e) Singla & Co. purchased goods from Malhotra Enterprises, a registered dealer. Malhotra Enterprises has opted for composition scheme under the provisions of respective State VAT Act. n of a works contract. f) Sahil purchased goods from Ganesh. Ganesh has not shown VAT charged on the purchase value, separately in the invoice. (PM) IPCC_ 36.5e_IDT_VAT. 3.8[No.1 for CA/CWA & MECICEC MASTER MINDS 5. Solution: a) Input tax credit cannot be claimed on purchase made by Rohan as the purchase invoice is not available with him. b) Purchases made by Jain & Co. from Tide Enterprises are not eligible for input tax credit as Tide Enterprises is not a registered dealer. ¢) Capital goods used for manufacturing/packing goods to be sold in the course of export out of the territory of India are eligible for claiming input tax credit. Thus, Ankit can claim input tax credit on capital goods purchased by him. d) Mohan can claim input tax credit as purchase of goods for being used in execution of a works contract are eligible for input tax credit e) Purchases made by Singla & Co. from Malhotra Enterprises are not eligible for input tax credit as purchases from registered dealer who opts for composition scheme under the provisions of respective State VAT Act are not eligible for input tax credit f) Purchases made by Sahil are not eligible for input tax oredit as the invoice issued by Ganesh does not show VAT charged on the purchase value separately in the invoice. Raj and Co., a manufacturer of product ‘X’, sold its goods to a distributor at Rs. 11,250. The distributor sold the goods to wholesaler for Rs. 13,500. The wholesaler sold the goods to a retailer for Rs. 16,875, The retailer sold the goods to consumer at Rs. 22,500. All the sales were inclusive of VAT @ 12.5%. Compute total VAT payable under the subtraction method. (PM) Solution Computation of VAT payable by under subtraction method Particulars (SRR added (Rs.) VAT (Rs.) Sale by manufacturer to distributor 5 14,250 1250x125 y=1,250 1125 Sale by distributor to wholesaler 13,500 - 11,250 = 2,250 12.5 [2250X 1-250 112.5 Sale by wholesaler to retailer 16,875 - 13,500 = 3,375 12.5 [3375x = ]=375 112.5 Sale by retailer to consumer 22,500 - 16,875 = 5,625 [5625x125 y=695 112.5 Total VAT payable 2,500 Compute the VAT payable at each stage using ‘invoice method’ from the particulars given belo Stage Particulars Profit (as % of cost price) 7. | Lifeline Medicaids Ltd. sold the medicines manufactured by it - ; to the distributors of medicines- Healers Pharmacy — at Rs. 80,000. 2, | Healers Pharmacy sold the medicines to the wholesalers- All 18% Well Medicos. 3. |All Well Medicos sold the medicines to the refailers- Cure 20% Medicines. @._| Cure Medicines sold the medicines to the ultimate consumers 28% IPCC_ 36.5e_IDT_VAT. 3.9Pl 8851 25025/26 www.mastermind: om Assume that the VAT rate is 4% and that there was no value addition at various stages of sale except profit margin. (MTP)(FEB 14) Solution: Computation of VAT payable:- Stage Less VAT Tax to Particulars VAT Liability Grea cone 1.__| Medicines sold by Lifeline 0,000 « 4% = 3,200 Medicaids Ltd. to Healers = 3,200 Pharmacy at Rs.80,000 2. | Medicines sold by Healers 3,200 480 Pharmacy to All Well Medicos at Rs, 92,000 (Rs. 80,000 x 115%) 3.__| Medicines sold by All Well to 10,400 * 4% = 3,680 736 Cure Medicines at Rs. 1,10,400 | 4,416 (Rs. 82,000 x 120%) 4. | Medicines sold by Cure (38,000 * 4% = 4416 7,104 Medicines to ultimate consumers | 5,520 at Rs. 1,38,000 (Rs. 1,10,400 *125%) 6. Sowmya Enterprises, a dealer i i Chandigarh, purchased the raw material worth Rs. 50,00,000 (excluding VAT) and manufactured finished goods worth Rs. 90,00,000 from such raw material in the month of April, 2016. It acquired Plant & Machinery worth Rs. 30,00,000 on which 100% input tax credit is available in the year of acquisiten itself. Sowmya Enterprises incurred manufacturing expenses of revenue nature @wORh Rs. 12,00,000 for the manufacture of finished goods. It incurred manufacturing e} % of capital nature worth Rs. 22, 00,000 for the manufacture of finished goods. Compgte¥he VAT liability of Sowmya Enterprises for the month of April, 2016 under gross prodyéSvgiant and consumption variant of VAT. Input and ‘output VAT rate is 4%. State which va fonts ‘beneficial to Sowmya Enterprises? (RTP)(N 13) an Solution Ss Under gross product variant of VAP deduction for taxes on all purchases of raw materials and components is allowed. However, deduction for tax paid on capital goods is not allowed. Hence, the VAT liability under gross product variant would be calculated as under: Computation of VAT liability under Gross Product V: Particulars Rs, VAT payable on sales (90,00,000 x 4%) 3,60,000 Less: Input VAT allowed on raw material (50,00,000 x 4%) 2,00,000 Net VAT payable 1,60,000 Under consumption variant of VAT, deduction for taxes paid on all business purchases including capital goods is allowed, Hence, VAT liability under consumption variant would be calculated as under. Computation of VAT liability under Consumption Variant Particulars Rs. Rs. VAT payable on sales (90,00,000 x 4%) 3,60,000 Less: Input VAT allowed on raw material (50,00,000 * 4%) 2,00,000 Input VAT allowed on capital goods (30,00,000 « 4%) (whole input tax credit is allowed in the year of acquisition itself 1,20,000 | 3,20,000 Net VAT payable 40,000 Since, the net VAT liability under consumption variant is less than the VAT liability under gross product variant, consumption variant is beneficial to the Sowmya Enterprises, THE END IPCC_ 36.5e_IDT_VAT. 3.10(WWo.t for CAICWA & MECICEC MASTER MINDS ) PART 2. CONCEPTS OF INPUT TAX CREDIT UNDER WAT NO. QUESTION ABC 1. | Elucidate the concept of input-tax as well as output-tax B 2, | What purchases are not eligible for input tax credit? OR What are the |, "| exception to input-tax credit 3.__| Eligible purchases for availing input tax credit A 4,__ | What is carrying over of input-tax credit? When is refund of unutilized input- | tax credit allowed What is need for allowing credit of capital goods? Write a note on provisions relating to capital goods in the White Paper on State-VAT laws How is input credit allowed on common goods used for taxable goods & tax-free goods Incentives to exporters and deemed exporters Differentiate between exempt sales and zero-rates sales How are stock/branch transfers accounted for under VAT laws - leis} > >lal>} > | > Q.NO.1, ELUCIDATE THE CONCEPT OF INPUT-TAX AS WELL AS OUTPUT-TAX Input tax: Input tax means the tax paid or payable by a dealer of a State on purchases 4. Of any goods (including raw materials; capital goods i for resale; or other inputs), Sj 2. Made in the course of his business, S SS Copyrghs Reserved 3. From a registered dealer within the State. QO To MASTER MINDS, Guntur nt, machinery, ete., goods intended Output tax: 1. Output tax is the tax charged or charg by a registered dealer on sale of goods made by him in the course of his business. 2. The output tax for a seller becomes the input tax for the purchaser. Example: 4. Mr. A sells goods valuing Rs.1 lakh to Mr, B, The VAT rate is 4%, In this case, Mr. A will collect Rs 4,000 (4% of Rs.1 lakh) from Mr. B. This sum of RS 4,000 is “output tax” for Mr.A 2. Mr. B.will pay Rs.1,04,000 (Rs.1 lakhs towards the price of the goods and Rs. 4,000 towards the tax). Tax of RS 4,000 paid by Mr. B is “input tax” for him, Q.NO.2. WHAT PURCHASES ARE NOT ELIGIBLE FOR INPUT TAX CREDIT/ OR WHAT ARE THE EXCEPTION TO INPUT-TAX CREDIT? Following are not le for input tax credit: 1. Dealer specific res! Purchases from a) An unregistered dealer, or b) Arregistered dealer who has opted under composition scheme for payment of VAT 2. Goods specific restriction: Purchase of goods a) As may be notified by the State Government, as being ineligible b) Goods in stock, which have suffered tax under an earlier act but under VAT act they re covered under exempted items (This is a transactional provision) IPCC_ 36.5e_IDT_VAT. BALPh: 98851 25025/26 www.mastermindsindia.com 3. Invoice related restrictions: Purchase of goods where the purchase invoice a) Does not show the amount of tax separately b) Is not available with the claimant, or ¢) Has not been issued by the selling registered dealer from whom the goods are purported to have been purchased (based on evidence available) (i.e., "bogus purchases” or “fake bills") 4. Location specific restrictions: Goods imported from a) Outside India (i.e. “high seas purchases’ — custom duty paid cannot be taken as input tax) b) Other states (i.e. “inter-state purchases" - CST cannot be taken as input tax ) 5. Use related restrictions: Purchase of goods, which are being utilized a) In the manufacture, of exempted goods, or (partial credit is available in some states) b) As fuel in generation of power, or c) For personal use/consumption d) For given away free of change as gifts (partial credit is available in state of Maharashtra) Q.NO 3. ELIGIBLE PURCHASES FOR AVAILING INPUT TAX CREDIT. (N12) Purchases eligible for input tax credit: The purchase shall be eligible for availing input tax-credit if they are made — 4. For sale / resale within the State; & 2. For sale to other parts of India in the course oS tate trade or commerce. 3. To be used as - a) Containers or packing materials; ©} b) Raw materials; or SS ¢) Consumable stores, Required for the purpose of manufacture of taxable goods or in the packing of such manufactured goods intended for sale in the State or in the course of inter-State trade or commerce; 4. For being used in the execution of a works contract, 5. To be used as capital goods required for the purpose of manufacture or resale of taxable goods; 6. To be used as - a) Raw materials ) Consumable stores; and b) Capital goods d) Packing materials / containers, For manufacturing / packing goods to be sold in the course of export out of the territory of India: 7. For making zero-rated sales. (Zero-rates sales are the sales of those goods, which are chargeable to VAT at 0% rate of tax.) Q.NO.4. WHAT IS CARRYING OVER OF INPUT-TAX CREDIT? WHEN IS REFUND OF UNUTILIZED INPUT-TAX CREDIT ALLOWED? Input-tax oredit is to be utilized, sequentially, as under ~ 4. For payment of VAT for the relevant period ; 2. Excess credit remaining, if any, can be adjusted against CST for the relevant period IPCC_ 36.5e_IDT_VAT. 3.12[No.1 for CA/CWA & MECICEC MASTER MINDS 3. If, after set-off against VAT and CST as above, the excess of input VAT credit, if any, a) will be eligible to be carried forward to the next tax-period and so on upto the next financial year, b) Ifthere is any, excess, unadjusted input tax credit at the end of second year, then the same is, required to be claimed as refund c) However, some States grant refund after the end of first financial year itself. Illustration: Treatment of input VAT- credit: Mr.A presents following details for March, 2017 4. Opening Balance of Input VAT credit as on 1-3-2017: Rs. 15,000. Inputs purchased during the month of March: Rs. 15 lakh. Within the state sales of manufactured goods: Rs. 20 lakh. aeN Inter-state Sales: Rs. 4 lakh CST rate is 2%. There was no inventory as 1-3-2017 or 31-3-2017. The VAT laws governing Mr, A provide for the refund of input-VAT credit after the end of the first financial year itself. VAT rate is 12.5% on inputs and 4% on sales. Compute the amount of refund available to Mr. A Solution: Computation of refund available to Mr. (amounts in Rs.) Opening balance of input VAT-credit 15,000 Add: VAT credit availed on inputs purchased during March (12.5% of 15 lakhs) | 1,87,500 Less: VAT payable on sales (4% on RS 20 lakh) (80,000) Less: CST payable on inter-state sales (2% on 4 lakh) (8,000) Balance lying as VAT-credit as on 31-3-2017 eligiblétoy refund 1,14,500 Q.NO.5. WHAT IS NEED FOR ALLOWING CREDCSP CAPITAL GOODS? WRITE A NOTE ON PROVISIONS RELATING TO CAPITAL GOODS(0L THE WHITE PAPER ON STATE-VAT LAWS. 7 IRe credit of VAT paid on capital goods is not allowed, then, the cost of the capital goods ag@XS'depreciation thereon will be higher. This will ultimately increase the selling price of the goodSMhereby, leading to cascading effect of taxation since VAT will be imposed on selling price, which includes depreciation element on capital goods inclusive of VAT not allowed as credit. 2. Policy in white paper as regards credit on capital qoods: The White Paper on State-VAT laws contains the following policy decisions as regards credit on capital goods — 4. Need for input-credit on capital g a) Credit to all dealers: Input credit on capital goods will be available to traders and manufacturers, b) Negative list for capital goods: Not all capital assets are eligible for credit as capital goods. There will be a negative list for capital goods, which will not be eligible for input credit. Such negative list is to be based on certain principles agreed to by the Empowered Committee, ¢) Deferred credit scheme: The State Government have been authorized to allow the credit of capital goods either at once ie. 100% credit of VAT paid on capital goods is allowed immediately on purchase of capital goods, or, alternatively, the State Governments may allow input-credit on capital goods on installment basis. The number of installments cannot exceed 36 months or 3 years. Q.NO.6. HOW IS INPUT CREDIT ALLOWED ON COMMON GOODS USED FOR TAXABLE GOODS & TAX-FREE GOODS? 4. Input VAT credit is allowed only in respect of those goods/inputs, which have been used in the manufacture or processing, etc. of the taxable goods. IPCC_ 36.5e_IDT_VAT. 3.138851 25025/26 www.mastermind: om 2. No input-VAT credit is allowed in respect of inputs used in manufacture, etc, of tax-free goods. 3. Taxable goods Means the goods, which are chargeable to VAT i.e. goods other than the goods specified as tax-free goods' in the Schedule to the VAT-law. 4, Common goods: Where any inputs are used in the manufacture, etc. of taxable as well as exempt (tax-free goods), then, input-tax credit shall be allowed proportionately only in respect of those inputs which have been used in the manufacture, etc. of the taxable goods. Illustration - Input-credit on common goods: Mr. K, 2 manufacturer of taxable as well as tax-free goods, furnishes the following information for the month of March, 2017 a) Sale of Product A (tax-free goods):Rs. 50 lakhs b) Sales of Product B (taxable goods):Rs. 100 lakhs (VAT @ 12.5%); ¢) Purchases of input ’ (used in manufacture of Product A only):Rs. 30 lakhs (VAT @ 4%) ; d) Purchases of input ‘Y’ (used in the manufacture of Product B only):Rs.75 lakhs (VAT @ 4%) e) Purchases of input Z' (used in the manufacture of Product A & B):Rs.15 lakhs (VAT @ 20%). There was no inventory as on 1-3-2017 as well as on 31-3-2017. Compute the amount of VAT payable in cash by Mr. K for the month assuming that input ‘Z' is used in product A and B in the ratio of 1:2. Ignore implications under other laws. Solution: Computation of VAT liability of Mr. K for the month of March, 2017 (Amt in lakhs) VAT on sales of product B (RS 100 lakhs x 12, 5%S 126 Less: Input VAT credit on input 'Y’ (75 lakh: 3 Proportionate credit on input Z (15 lakhs ee 2 VAT payable in cash by Mr. K € 78 NO. INCENTIVES TO EXPORTI ND DEEMED EXPORTER’ 4. Refund to Exporters: a) Exports are zero rate sale and are not liable to VAT b) Credit of VAT paid on inputs used in manufacture of export goods or goods exported is allowed ¢) Refund: Hence, the white paper provided that in case the goods are exported, the input tax paid by the dealer shall be refunded d) Time: It is to be granted within 3 months from the end of period during which export was made. 2. Exemption or refund to SEZ & EOU units: Units located in Special Economic Zones and Export oriented Units (EOUs) are not liable to VAT, as they are only engaged in export of goods out of india They are provided incentives in respect of input-tax credit on purchases made by them in either of the following manner — a) Exemption from payment of tax on purchases (i.e. procurement of inputs/ capital goods without payment of any Input-VAT); or b) Refund of input-VAT credit on purchases made by them within 3 months from the date / tax- period of purchase. (State Government may reduce this time-period of 3 months), IPCC_ 36.5e_IDT_VAT. 3.14(No.1 for CA/CWA & MECICEC MASTER MINDS ) Q.NO.8. DIFFERENTIATE BETWEEN EXEMPT SALES AND ZERO-RATE SALES. | Exempt sale: In case of exempt sale, no VAT credit is available. In case of non-taxable transactions like samples / gifts, Zero rating: Zero rating means tax on any goods is fixed at 0%. As against exempt sale, in case of Zero rated sales (e.g. export sales), the dealer can avail input VAT credit. Q.NO.9. HOW ARE STOCK/BRANCH TRANSFERS ACCOUNTED FOR UNDER VAT LAWS? ] Stock/Branch transfers i.e. transfer of stock from head office to the branch or vice-versa (viz. Inter- State transfers) do not involve sale and, therefore, they cannot be subjected to sales-tax/VAT. However, if - a) Inputs are used in the manufacture of finished goods, which are stock/branch transferred; or b) Goods purchased for re-sale are stock/branch transferred. Then, tax paid on such inputs/goods will be available as input tax credit subject to retention of 2% out of such tax by the State Governments For example, Mr. Ram purchases goods valuing Rs.1 lakh (VAT @ 12.5%) from Rajasthan and transfers the same to his branch located at Delhi. In this case, out of total input credit of Rs.12,500, the credit of only Rs.10,500 (in excess of 2% i.e. 10.5% (12.5% -2%) of RS. 1 lakh) will ly be availabl only be available. 2 UTS UY 4. Show the format of a TAX Invoice. Solution: No prescribed statutory format n for tax invoice in any State VAT Act. A proforma might look as below TAX INV IGINAL BUYER'S COPY Seller's Name Tax Invoice No: Address: Date’ Phone No. Challan No. and Date: VAT Registration No: Buyer's Name and Address: CST Registration No: Buyer's VAT Registration No. (If any) Se ee Rupees in figures E&OE Signature (Selling Dealer or his authorized Employee) IPCC_ 36.5e_IDT_VAT. 3.15Pl 8851 25025/26 www.mastermind: 2. Compute net VAT liability of Rishi, from the following information: Particulars Rs. Rs. Raw materials from foreign market 1,20,000 (Includes duty paid imports @ 20%) Raw material purchased from local market 2,50,000 Cost of raw material 40,000 Add: Excise duty @ 16% 2,90,000 14,600 Add: VAT @ 4% 3,01,600 Raw material purchased from neighboring state (includes CST @ 2%) 51,000 Storage and transportation cost 9,000 Manufacturing expenses 30,000 Rishi sold goods to Madan and earned profit @ 12%, on the cost of production. VAT rate ‘on sale of such goods is 4%. (Pm) Solution Particulars Rs Raw materials from foreign market 7,20,000 Raw material purchased from local market (cost-portion only) 2,90,000 Raw materials purchased from neighbouring, 51,000 Storage and transportation cost 9,000 Manufacturing expenses \S 30,000 Cost of production Q ,00,000 Add: Profit margin at 12% 60,000 ‘Sale Value SS 5,60,000 VAT on sale value at 4% 22,400 Less: VAT on purchases = (2,90, 080 x 4%) 11,600 Net VAT liability 10,800 3. Compute the total value of purchases, eligible for input tax credit, from the following particulars: Particulars Rs. Inputs purchased from a registered dealer, who opts for composition 10,000 scheme, under the VAT Act Inputs purchased for being used in the execution of a works contract 7,00,00 Raw material purchased from unregistered dealers 70,000 High seas purchases of inputs 1,00,000 Goods purchased for sale to other parts of India, in the course of Inter-| 20,000 State trade or commerce Solution Computation of purchases eligible for Input Tax Credit Particulars Rs. je Purchases Input purchased for being used in the execution of a works contract, 1,00,000 Add: Goods purchased for sale to other parts of India in the course of Inter- State trade or commerce 20,000 IPCC_ 36.5e_IDT_ VAT. 3.16(No.1 for CA/CWA & MECICEC MASTER MINDS 4, Purchases eligible for input tax credit 1,20,000 Ineligible purchases Inputs purchased from a registered dealer who opts for composition scheme under the VAT Act 10,000 Raw material purchased from unregistered dealers 70,000 High Seas purchases of Inputs 4,00,000 Purchases not eligible for put tax credit 180,000 Note: For the purpose of computation of value of purchases eligible for input tax credit, the following have not been included: a) Inputs purchased from a registered dealer, who opts for composition scheme, under the provisions of the Act, of worth Rs. 10,000. b) Raw material purchased from unregistered dealers, of worth Rs. 70,000 c) The inputs imported from outside the territory of India, commonly known as high seas, purchased of worth Rs. 1,00,000 Mr. Rajesh is a registered dealer and gives the following information. You are required to compute the net tax liability and total sales value, under Value Added Tax a) Rajesh sells his products to dealers in his state and in other states. b) The profit margin is 15% of the cost of production and VAT rate is 12.5% of sales. c) Intra State purchases of raw material costs Rs. 2,50,000/- (excluding VAT at 4%) d) Purchases of raw material from an unregistered dealer for a cost of Rs. 80,000/- {including VAT at 12.5%) ) High seas purchases of raw material are for Rs.1,85,000 (excluding the custom duty, at 10% of Rs.18,500) f) Purchases of raw materials from other states (excluding CST at 2%) Rs. 50,000. 9) Transportation charges, wages and other manufacturing expenses, excluding tax, amounts Rs.1,45,000. h) Interest paid on bank loan is Rs. 70,000 (PM) (RTP MAY ~ 16) (N 10) Solution Particulars Rs. Intra State Purchases 2,50,000 Purchase from unregistered Dealers 80,000 High seas purchases (1,85,000 + 18,500) - (Including Customs Duty paid will be considered) 2,03,500 Purchase from other states (50,000+1,000)- (Including CST paid will be considered) 51,000 Transportation charges, wages and other manufacturing expenses 1,45,000 Cost of Production 7,29,500 Add: Profit Margin at 15% 1,09,425 Sale Value 8,368,025 VAT on Sale Value at 12.5% 104,866 Less: VAT on purchases = (2,50,000 x 4%) (10,000) Net VAT Liability 94,866 IPCC_ 36.5e_IDT_VAT. 3.17