Transcript Objective - Taxindiaonline.com

ANALYSIS OF
WHITE PAPER ON
STATE LEVEL
VALUE ADDED TAX
ISSUED ON JANUARY 17, 2005
BY
THE EMPOWERED COMMITTEE
OF STATE FINANCE MINISTERS
(CONSTITUTED BY MINISTRY OF FINANCE)
OBJECTIVE
• Set-off available on input tax as well as tax
paid on previous purchases
• Deletion of related taxes on act of sale, such
as turnover tax, surcharge, additional
surcharge, entry tax etc.
• Rationalization on tax burden
• With elimination of cascading effect,
consumer prices expected to fall in general
• Self-assessment by dealers
• Higher revenue growth for states
ESSENCE OF VAT - SET OFF
• The essence of Value Added Tax (VAT) is in
providing set-off for the tax paid earlier on
purchases (input tax credit) and eliminate the
cascading effect. This input tax credit in
relation to any period means setting off the
amount of input tax against the amount of tax
paid on his sales (output tax). VAT is based on
the value addition to the goods & the related
VAT liability is calculated by deducting input
tax credit from output tax collected on sales
during the payment period.
INPUT TAX CREDIT
• Registered dealer shall be entitled to a tax credit
in respect of the turnover of purchases occurring
during a tax period where the purchases arises
in the course of his activities as a dealer and the
goods are to be used directly or indirectly by him
for the purposes of making sales.
• Input tax credit will be available to both
manufacturers and traders for purchase of
inputs/supplies meant for both sale within the
State as well as to other States.
INPUT TAX CREDIT
• No input tax credit shall be allowed for
purchase of goods from dealer availing
benefit provided under composite tax
scheme, that is those dealers whose total
turnover is less than Rs. 50 lakh provided
they avail benefit under composite tax
scheme.
INPUT TAX CREDIT
• Tax paid on inputs procured from other
States through inter-State sale will not
be eligible for input tax credit.
(Discussed in greater details later)
UTILIZATION OF INPUT TAX
CREDIT
• Input tax credit can be utilised to set-off tax
payable on any sale of goods when such sale
takes place in the course of inter-state trade or
commerce or in the course of export of the
goods out of the territory of India or within that
state.
• Credit arising on input tax paid for goods used in
producing output which is under exempted
category will not be available for setoff in
principle. (Though this issue was left untouched in the white
paper but the draft VAT bills by some of the states provided for this
reservation.)
UTILIZATION OF INPUT TAX
CREDIT
• Utilization of the Input tax credit shall be
as per CENVAT model, that is to say,
credit can be taken instantly irrespective of
the event of sale of the goods on which
input tax credit was paid. In other words,
input-output co-relation will not be precondition for utilizing credit.
UTILIZATION OF INPUT TAX
CREDIT
• In case where input tax paid on goods
used for producing output and such output
goods is transferred under Stock transfer
mechanism or in cases where such input
goods are transferred as such under stock
transfer mechanism, credit arising on input
tax paid in excess of 4% in either of the
above cases will be eligible for tax credit
for set off.
(In my view this proposal in particular is deviating from fundamental principle of perfect value added tax primarily
because liability for output tax do not arise at the time of stock transfer)
INPUT TAX CREDIT ON O/S AS ON
APRIL 2005
• All tax-paid goods purchased on or after
April 1, 2004 and still in stock as on April
1, 2005 will be eligible to receive input
tax credit and can be utilized for set-off
against sale made after April 1, 2005.
C/F OF INPUT TAX CREDIT
• If the input tax credit exceeds the output tax
payable, then the excess input tax credit will be
carried forward to the end of next year. If there
is any unutilized input tax credit at the end of
second year, then the same will be eligible for
refund. (Issue of unjustenrichment has been left
untouched in the white paper)
Input tax credit on capital goods shall be
adjusted over a maximum of 36 equal monthly
installments.
EXPORTS & INPUT TAX
CREDIT
• For all exports made out of the country, tax
paid within the State will be refunded (believe
at discretion of states these sales can be
exempted in which case refund process can
be done away with)
• Similarly, units located in SEZ and EOU will
be granted either exemption from payment of
input tax or refund of the input tax paid
IMPACT ON OTHER TAXES
• All other existing state taxes such as turnover
tax, surcharge, additional surcharge and
Special Additional Tax would be abolished.
Existing entry tax would become vatable or
shall be abolished.
• However, entry tax levied in lieu of octroi shall
continue and may not be made vatable at
States discretion.
COVERAGE OF GOODS
UNDER VAT
• In general, all the goods, including declared
goods will be covered under VAT and will get
the benefit of input tax credit.
• liquor, lottery tickets, petrol, diesel, aviation
turbine fuel and other motor spirit shall be
outside VAT but continue to be taxed under
the Sales Tax Act or any other State Act
VAT RATES
• only two basic VAT rates of 4% and 12.5%.
• 4% category comprises items of basic
necessities such as medicines and drugs, all
agricultural and industrial inputs, capital goods
and declared goods
• special VAT rate of 1% only for gold and silver
ornaments etc.
VAT RATES
• Certain goods shall be under tax-exempted
goods category and there will be 46
commodities under this comprising of natural
& un-processed products, goods of local
social importance, items which are barred
from taxation and items which have social
implications.
• The remaining commodities, common for all
the States will fall under the general VAT rate
of 12.5%.
EXEMPTIONS
• Dealers having turnover upto Rs 5. Lakh will be
exempt from VAT. No registration required for
such dealers.
• Small dealers with annual gross turnover not
exceeding Rs.50 lakh who are otherwise liable
to pay VAT, shall however, have the option for a
composition scheme with payment of tax at a
small percentage of gross turnover to be
decided by State. The dealers opting for this
composition scheme will not be entitled to input
tax credit.
INTROSPECTION ON
INTER-STATE SALES
SELLER’S
PROSPECTIVE
SET-OFF OF INPUT
TAX CREDIT
AVAILABLE ON
CENTRAL SALES
TAX PAID AT THE
TIME OF INTER
STATE SALES
BUYER’S PROSPECTIVE
INPUT TAX PAID AT THE
TIME OF INTER STATE
PURCHASE CANNOT
BE TAKEN AS INPUT TAX
CREDIT AND AS SUCH NO
SET OFF AVAILABLE FROM
OUTPUT TAX PAYABLE AT
THE TIME OF SALE.
INTROSPECTION ON
STOCK TRANSFER
STOCK TRANSFEROR’ s
PROSPECTIVE
SET-OFF OF INPUT TAX
CREDIT AVAILABLE ON
STOCK TRANSFER TO
THE TUNE OF INPUT
TAX PAID IN EXCESS OF
4%
BUYER’S PROSPECTIVE
(BUYER BEING IN THE
STATE WHERE STOCK
WAS TRANSFERRED
INPUT TAX PAID BY BUYER
CAN BE TAKEN AS TAX
CREDIT AND AVAILABLE
FOR SET-OFF WITH
BUYER’s OUTPUT TAX .
WRAPPING UP
The New Tax Regime on concept is no different from the
CENVAT credit scheme prevailing under Central Excise, the
difference being Central Excise is the duty imposed on
manufacturing activity whereas VAT is imposable on point of
sale. Conceptually the proposals are simple.
Easier said then done, bottlenecks/hassles limiting vatability on
procedural grounds cannot be ignored. Bureaucracy and
Judiciary is yet to iron out creases on CENVAT credits even
after more than a decade of its existence in the Indian tax
system. Interpretation limiting utilization of CENVAT credits
in Excise have given sleepless night to most. Firmly believe
the new tax regime will be no exception.
THANK YOU
DEOKI NANDAN MUCHHAL