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Home > Business > Business Headline > Report

VAT: In effect, tax will be lower

Anil Sasi in New Delhi | March 28, 2003 12:48 IST

A great deal of confusion prevails about the provisions of the proposed value-added tax.

However, VAT is quite simple -- it has to be paid by a registered dealer on the extent of value-addition of the goods when sold by him. The tax liability will be calculated by deducting input tax credit.

As per the draft laws of most states, the tax credit will be given within the same month for VAT paid by a dealer within the state on purchase of inputs for both intra-state and inter-state sale, irrespective of when those will be utilised or sold. This reduces the immediate tax liability of a dealer.

The method of providing the set-off is simple. The credit, which accumulates over a month, will be deducted from the tax collected by the dealer in that month as per the VAT Act.

For instance, for a manufacturer, inputs procured within the state in a month are worth Rs 100,000 and outputs sold in that month are valued at Rs 200,000.

The input tax, paid at 4 per cent, translates into a sum of Rs 4,000, while tax collected at 12.5 per cent on the output is Rs 25,000. VAT payable during the month will be Rs 21,000 (ie, Rs 25,000 minus Rs 4,000).

If the tax credit exceeds the amount collected in a month on sale within the state, the excess credit will be carried over to the next month.

Tax credit can be carried up to the end of the next financial year. The excess, unadjusted VAT will be eligible for refund. Similarly, tax paid on capital goods will also be eligible for credit.

With each incidence of sales being taxed, the local statutory forms will not be required and dealers will be able to buy or sell without mentioning transactions on their registration certificates. The VAT regime envisages 100 per cent self-assessment through a simple, one-page return form, according to state sales tax officials. Under VAT, there will also be a major difference in the assessment of dealers.

At present, assessment of all dealers is undertaken on an annual basis.

But under VAT, this will not be mandatory and there will be a greater reliance on self-assessment by the dealer. The system of assessment will be replaced by a system of scrutiny of returns filed by the dealers and through audit.

"The dealers will be selected on the basis of certain criteria, and audit will be carried out at the dealer's premises with prior notice," a state government official said.

Analysts believe VAT might result in a squeeze in retail margins. Instances of evasion of sales tax are expected to come down despite the system being based largely on the premise of self-assessment. Experts say the incidence of taxation at every step in the retail chain may bring down the effective rate of taxation and result in increased compliance.

Small dealers and retailers, however, will not be liable to pay VAT. There will be an option of a composition scheme, under which they will have to pay tax as a small percentage of their gross turnover.

Book-keeping will also be simpler because the dealers have to maintain only a purchase-and-sales book, besides preserving tax invoices.

Tax will neither be deducted at source nor will a tax clearance certificate be required.

Registrations will be compulsory for dealers having turnover above a threshold, which will be decided by the states.

There will be provision for voluntary registration. Existing dealers will be automatically registered under the VAT Act, as per provisions in most draft VAT laws of the states.

With regard to the treatment of goods in stock with manufacturers and dealers during the transition period, all tax-paid goods purchased on or after April 1, 2002, and still in stock, will be eligible to receive input tax credit, subject to submission of requisite details.

Proof of payment of tax will be needed.

Resellers holding tax-paid goods on April 1, 2003, will also be eligible for credit.

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