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An Overview of Value Added Tax in India

VAT or Value Added Tax is a term referred to when a tax is added to goods at every step during the production process. Since manufacturers are allowed by the law to collect taxes on their sales, it is the consumer who ultimately pays these taxes.

But in VAT every commodity progress towards different stages in the process of production and distribution before it finally reaches the consumers. During the production and dispersion stages, values get added to the commodity in the form of leverage through taxes.

In the VAT system, the dealer collects taxes on his/her sales, keeps the taxes paid on his/her purchase and then pays the balance to the tax department of India. VAT is a multi-faceted taxation system that provides authorisation for collecting the tax paid on purchases at each division of sale.

The Tax Rates under VAT

Each state in India has its very own VAT legislation, VAT rates, taxable base and list of taxable goods. Even the VAT rates will differ from one state to another. As the enforcement of VAT and its collection falls under the authority of the state governments, so these states have different VAT rules and implementation guidelines.

Vat Rate image

VAT in India can be categorized into four main types:

  • NIL VAT Rate: Many states of India sell basic commodities without levying any VAT on them. Usually, these commodities are sold by small manufacturers in its most basic or natural form. Example; salt, khadi etc.
  • 1% VAT Rate: Products which are extremely expensive fall under this category. The percentage of VAT must be kept low for such items else the VAT burden could end up being too high. Items like gold, silver and the rest of the other precious stones are levied a 1% VAT. Many states in India have fixed the rate for this category at 1%.
  • 4-5% VAT Rate: Many goods that are daily consumed falls under this category. In many states commodities like oil, coffee, medicine etc. are charged 4-5% VAT Rate.
  • General VAT Rate: Items which cannot be separated into the above categorization falls under General VAT Rate. In many states, goods like liquor, cigarettes etc. are charged a high VAT Rate of 2.5% to 14-15%.

The main purpose of VAT charges is to equalize the overall tax burden amongst individual taxpayers and manufacturers. VAT has in fact improved taxation process by making it more efficient, equalizing competition and creating an unbiased practice of taxation system.

The main benefits of Value Added Tax are as follows:

  • VAT reduces tax evasion as it is imposed throughout every stage and if an entity evades the tax liability during one stage then it will be caught in the next stage.
  • VAT scraps off a large variety of taxation, as it abolishes the turnover tax, a surcharge on sales tax, additional surcharge etc.
  • VAT makes the tax structure more transparent.
  • Overall improvement in tax order.
  • VAT generates a higher revenue growth.

VAT Registration Process

Registering under VAT policy is a must for goods seller and service providers that earn a turnover of more than Rupees 5 lakhs per annum. Any entity falling under the ‘Rupees 5 lakhs and more category’, should register for VAT within one’s respective state where the business operation is established. Upon registration, a business entity is given a unique 11-digit registration number which will be used for every communication regarding VAT and its filing.

Documents required during VAT registration

Vat Documents image

The following list of documents must be submitted while registering for VAT:

  • A copy of the applicant’s PAN card.
  • Address proof of the business establishment.
  • Identity proof of the promoters.
  • An additional security deposit or a surety.

The Benefits of Value Added Tax

Value Added Tax has a series of benefits for trade, consumers, and the government.

  • Trade: A consistent rate of VAT will boost trade and the 100% self-assessment will cut back the need for taxpayers to constantly visit a tax department officer.
  • Consumers: When taxes on tax is removed, it reduces the prices of the commodity which are bought by the end consumer.
  • Government: With VAT, dealers will end up conducting self-assessment and the resources required for this procedure will be less which will eventually result in the Revenue Department focusing more towards collecting rather than administering.

VAT payment after sales tax is levied by the India government

VAT and sales tax are separate segments of taxation as they both work differently from one another. The calculation of sales tax is a simple and easy process but, VAT is multi-faceted or multi-leveled process, making it a more complex form of taxation.

The viable points of differentiation between sales tax and VAT are listed as follows:

VAT
  • VAT is a long taxation process as it is charged in multiple stages.
  • VAT is a taxation levied during each step of production.
  • The VAT producer requires a lot of inspections which is why it is more transparent and efficient.
  • VAT puts more burden on the producer and service providers while in other cases the burdens are ultimately transferred to the consumers.
  • VAT typically generates greater revenue for the government of India.
Sales Tax
  • The burden of Sales Tax entirely falls upon the final consumers.
  • Sales tax is simple and a direct simple taxation procedure.
  • Sales tax is easy to understand.

Frequently Asked Questions

Q. What does Output Tax mean?
Output tax is defined as the Value Added Tax charged by a dealer to the customer during taxable sales. A dealer could be an individual, a partnership business or a business enterprise which is registered with VAT. Output VAT is the VAT calculated and charged by a dealer on his/her own sales of goods and services if the business is registered under the VAT Act.
Q. What does Input Tax mean?
Input Tax is the tax paid by a dealer while purchasing any commodity. VAT is charged on many levels but when a dealer is registered under VAT, then the dealer can claim a credit for VAT charges on most of the purchases. Input Tax applies not just to the VAT levied on purchases of raw materials or on goods purchased for reselling but it is also applicable to capital goods (production machinery or equipment).
Q. Explain VAT computation?

VAT computation can be perceived as follows; when a dealer pays VAT by subtracting the tax paid on his/her purchases (input tax) from the tax collected on sales (output tax).

Simply put, VAT = Output Tax – Input Tax.

Q. How is VAT different from Sales Tax?
VAT taxation percentage has a lower rate comparatively to Sales Tax. When one claims input tax credit under VAT it will ensure a detailed invoice. The overall features of VAT encourage transparent disclosure of information on sales, thereby VAT reduces the possibility of tax defaulters.
Q. What are the entities covered under VAT?
VAT covers every business transactions concerning to the sales of goods and commodities which are carried out within the territory of a state by individuals, business partnerships or companies. VAT does not cover smaller businesses with sales under the specified limit set by the VAT Act.

In the News

  • All India ITR launches Income tax e-filing Mobile App for Android and IOS

    Daily Excelsior News: File your income tax returns, process rent receipts, calculate taxable income and HRA exemptions at the touch of your smartphone screen with All India ITR’s new mobile app. Meeting tax compliance has never been easier.

    13th June 2017

    Daily Excelsior News