Value-added taxation in India

Value-added taxation in India was introduced as an indirect value added tax (VAT) into the Indian taxation system from 1 April 2005. The existing general sales tax laws were replaced with the Value Added Tax Act (2005) and associated VAT rules.

A few states (Gujarat, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttarakhand and Uttar Pradesh) opted to stay out of VAT taxation system during the initial introduction of VAT but adopted it later.

As of 2 June 2014, VAT has been implemented in all the states and union territories of India except Andaman and Nicobar Islands and Lakshadweep Island.

History

The federal finance minister of India, on the basis of the resolution adopted in the conference of chief ministers on 16 November 1999, under the chairmanship of Assim Dasgupta, came out with a white paper on state-level VAT, which was released on 17 January 2005, by P. Chidambaram, the federal finance minister.

The paper consisted of three parts:

VAT was not to be mandatory for small dealers with a gross annual turnover of 5 lakh or less, but some states increased the threshold limit to 10 lakh. VAT was implemented in the most states from 1 April 2005.

The OECD (2008, 112–13) cites Chanchal Kumar Sharma (2005) to answer why it has proved so difficult to implement a federal VAT in India. The book claims that although the implementation of a broad-based federal VAT was considered as the most desirable consumption tax for India since the early 1990s, such a reform would involve serious problems for the finances of regional governments. Also, implementing VAT in India during the current economic reforms would have paradoxical dimensions for Indian federalism. On one hand, economic reforms have led to decentralization of expenditure responsibilities, which, in turn, demands more decentralization of revenue raising power if fiscal accountability is to be maintained. On the other hand, implementing the VAT, to make India a single integrated market, would lead to revenue losses for the states and reduce their autonomy indicating greater centralization [1]

Sharma asserts that "political compulsions have led the government to propose an imperfect model of VAT", as it 'goes against the basic premise of VAT', as it lacks both the removal of distortions in movement of goods across states and the uniformity in the tax structure. Chanchal Kumar Sharma (2005:929) states, "Local or state level taxes like octroi, entry tax, lease tax, workers contract tax, entertainment tax and luxury tax are not integrated into the new regime, which goes against the basic premise of VAT, which is to have uniformity in the tax structure. The fact that no tax credit will be allowed for inter-state trade seriously undermines the basic benefit of enforcing a VAT system, namely the removal of the distortions in movement of goods across the states."

"Even the most essential prerequisite for success of VAT i.e. elimination of [Central sales tax (CST)] has been deferred. CST is levied on basis of origin and collected by the exporting state; the consumers of the importing state bear its incidence. CST creates tax barriers to integrate the Indian market and leads to cascading impact on cost of production. Further, the denial of input tax credit on inter-state sales and inter state transfers would affect free flow of goods." (Sharma, 2005:922)

Sharma considers the greatest challenge to be designing a sales tax system that provides autonomy to subnational levels to fixing the tax rate without compromising its efficiency or hindering enforcement.

States where VAT is applicable

Andhra Pradesh, Telangana

The Andhra Pradesh, Telangana Value Added Tax Act, 2005 came into force on 1 April 2005 and contains six schedules. Schedule I contains goods generally exempted from tax. Schedule II deals with zero rated transactions like exports. Schedule III contains goods taxable at 1%, namely jewellery made from bullion and precious stones. Goods taxable at 5% are listed under Schedule IV. The majority of food grains and goods of national importance, like iron and steel, are listed under this head. Schedule V deals with Standard Rate Goods, taxable at 14.5%. All goods that are not listed elsewhere in the Act fall under this head. The VI Schedule contains goods taxed at special rates, such as some liquor and petroleum products.

The Act prescribes threshold limits for VAT registration – dealers with a taxable turnover of over Rs.40.00 lacs, in a tax period of 12 months, are mandatorily registered as VAT dealers. Dealers with a taxable turnover, in a tax period of 12 months, between Rs.5.00 to 40.00 lacs are registered as Turnover Tax (TOT) dealers. While the former category of dealers are eligible for input tax credit, the latter category of dealers are not. A VAT dealer pays tax at the rate specified in the Schedules. The sales of a TOT dealer are all taxable at 1%. A VAT dealer has to file a monthly return disclosing purchases and sales. A TOT dealer has to file a quarterly return disclosing only sale turnovers. While a VAT dealer can buy goods for business from anywhere in the country, a TOT dealer is barred from buying outside the State of A.P.

A unique feature of registration in Andhra Pradesh is the facility of voluntary VAT registration and input tax credit for start-ups.

The act not only provides for tax refunds for exporters (refund of tax paid on inputs used in the manufacture of goods exported) but also provides for refund of tax in cases where the inputs are taxed at 14.5% and outputs are taxed at 12.5%.

Gujarat

The Government of Gujarat had pass the “Gujarat Value Added Tax Act, 2003” (Act) in 2003 and specified that the date of implementation (appointed date) of the same would be notified later. Accordingly, the Government of Gujarat has vied notification no. GHN – 14/VAT-2006/S.1.(3)(1)-TH dated 29 March 2006 notified that the appointed date for implementation of VAT regulations in the State of Gujarat shall be effected from 1 April 2006.

However “The Central Sales Tax Act, 1956” (Central Act) which levies sales tax on inter-state sales is still effective and all inter state sale and purchase transactions effected after 1 April 2006 in the State of Gujarat shall continue to be subject to levy central sales tax as applicable earlier.

In Gujarat, "DVAT" Act 2003, will merge three existing state taxes:
Gujarat Sales Tax Act, 1956
Bombay Sales of Motor Spirit Taxation Act,1958 Gujarat Purchase Tax on Sugarcane Act,1989 [2]

Rates under VAT:

The Gujarat Value Added Tax Act, 2003 - Schedule

Schedule No Description
Schedule 1 Goods, the sales or Purchase of which are exempt from tax
Schedule 2 List of Goods Taxable at 5% and other rates as specified in the schedule
Schedule 3 List of Goods Taxable at special rates
General Category Goods not specified in any other schedule taxable @ 15%
  1. Vat Schedule Details rsdaf

Maharashtra

The system of Value Added Tax (VAT) has been implemented, in the State of Maharashtra, w.e.f. 1 April 2005. Every dealer, who becomes liable to pay tax under the provisions of MVAT, shall apply electronically for registration, within 30 days from the date of such liability. VAT is implemented by Department of Sales Tax. Their site address is http://mahavat.gov.in

Rate of tax:
Schedule ‘A’ – Essential Commodities (Tax free)- Nil
Schedule ‘B’ – Gold, Silver, Precious Stones, Pearls etc. - 1.2%
Schedule ‘C' – Declared Goods and other specified goods - 6% (Rates for items other than declared goods changed to 6%)[3]
Schedule ‘D’ – Foreign Liquor, Country Liquor, Motor Spirits, etc. - 20% and above
Schedule ‘E’ – All other goods (not covered by A to D) - 13.5% with EFF CT from 17.09.2016

Kerala

The system of value added tax has been recently introduced in Kerala as well.

Odisha (Orissa)

Odisha adopt VAT in place of sales tax from 1 April 2006.

Sikkim

its 14.5% 15%

Tripura

it is 14.5% in Tripura

Uttarakhand

14.5%

Uttar Pradesh

VAT rate 5% AND 14.5 and cst 1%

West Bengal

VAT 14.5% & VAT 5% & CST 1 %

Delhi

DVAT 2004 as amended by DVAT 2005 and DVAT Rules 2005 came into force w.e.f. 1 April.,2005. It repealed Delhi Sales Tax Act 1975, Delhi Sales Tax on Works Contract Act, 1999, Delhi Sales Tax on Transfer to Right to use Goods Act 2002 and Delhi Tax on Entry of Motors Vehicles into Local Areas Act 1994.[4]

See also

References

  1. ↑ Consumption Tax Trends 2008 VAT/GST and Excise Rates, Trends and Administration Issues: VAT/GST and Excise Rates, Trends and Administration Issues. OECD Publishing. 2008. p. 115. ISBN 9789264039476. Retrieved 5 July 2015.
  2. ↑ http://lemonconsulting.net/lc/legal/itax/form/gnvat.pdf
  3. ↑ "Change in rate of MVAT 5.5% to 6% w.e.f. 17th September 2016" (PDF).
  4. ↑ "Documents, Procedures & Formalities required for VAT Registration in Delhi". TopCAfirms. Retrieved 3 December 2013.
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