Value Added Tax in India

Value Added Tax (VAT) in India is an indirect tax on goods and services. It is payable at every stage of the supply chain i.e., from the manufacturer till the goods reach the retailer. The producer who is liable to pay VAT, does so to the state government. VAT calculation is on the basis of output tax and input tax. The VAT Rates may differ from a state to another. This tax applies only on goods transacted within a specific state. Thus, the seller and purchaser have to be in the same state.

In this post, we will discuss VAT features, registration and its steps, Value Added Tax Rates in India, VAT collection, and frequently asked questions.

Features of VAT in India

Here are the features:

  • VAT is chargeable at every state of goods’ sales. It is charged on the respective gross margin.
  • This tax is calculated and collected from time of movement from the manufacturer to the retailer.
  • Thus, it is important for the multistage tax system to take away the tax-on-tax effect.
  • Union Territories and States in India have VAT law. The exemption for threshold limit on the list of goods differs from a state to another.
  • The person/unit liable to pay VAT has to report the monthly sales and purchases with the information on exports to the state VAT department.
  • The tax officials then verify the information and perform a VAT audit every year at least once.
  • The Value Added Tax has two components for calculation. These are the Output VAT and Input VAT.

What is the VAT Registration?

It is compulsory for all manufacturers participating in the production of goods and services to do VAT registration. The procedure for registration consists of listing the company as a corporation eligible to file VAT return with the government. According to the VAT Registration Act, all the business organizations have to mandatorily register for Value Added Tax payments. It is possible to register online, which makes the procedure quick and effective.

Here are the steps for online VAT registration:

  • Go to the official portal of VAT. Login or registration from the registration tab.
  • Enter all the asked details. Do remember to attach the scanned copies of the documents for application.
  • You may receive a temporary VAT registration number instantly.
  • But after the authority completes the verification of the submitted details, a permanent VAT registration number is assigned to the company.

Value Added Tax Rates in India

The VAT rates in India differ from a state to another. The state government collects the tax payments. Here are the types of VAT rate that exist in the country:

  • No Rate: Goods and Services sold by unorganized sectors, basic in nature, available in natural form are usually exempted from VAT. Some of the examples of such goods are Khadi, salt, etc.
  • 1% Rate: Highly expensive items have a low VAT rate applicable. The example of goods include gold, silver, precious stones, jewellery, and more. Majority of states in India have affixed 1% as the rate for such expensive items.
  • 4% to 5% Rate: Here, you will find daily consumption goods handled by several state governments. Examples of such goods include medications, coffee, oil, etc.

Collection of Value Added Tax in India

The method for VAT collection is categorized in two major categories:

1. VAT Collection Method

  • Invoice-Based Collection: This is applicable in almost every country in the world. Here, the collection procedures, invoice or sales receipts are used to compute the resultant Value Added Tax. The traders provide invoices on sale of goods and services. The invoice contains separate information for the collected VAT.
  • Account-Based Collection: Here, instead of invoice or sales receipt, the VAT is computed on the value-added. The amount resulting from the difference between allowable purchases and revenues, constitute the value-added tax.

2. Timing of VAT Collection

  • Accrual-Based Collection: The revenue is matched with the period in which selling takes place. It is matched with the cost of raw material and charges till the time in which the respective deeds are done.
  • Cash-Based Collection: This is simpler than the immediate and above-mentioned method. Here, the handled cash is checked than verifying the bill payments. When a payment comes through, the date is recorded and this serves as the date of receiving the funds.

Frequently Asked Questions about VAT

Here are the Value Added Tax FAQs:

For trade, VAT enhances the business with uniform rates. It offers 100% self-assessment, thus, improving the turnaround time and saving a visit to the tax department officer. Also, for consumers VAT eliminates the tax-on-tax effect. It reduces the price of goods for the end consumer. For the government, dealers can self-assess and pay VAT quickly. This reduces the procedures the revenue department has to undertake to review tax payments. They get to cut down on the administrative procedures, and focus more on the collection.

Here, the goods cannot be put under fixed VAT rate categories. Examples include cigarettes, liquor, etc that may attract a rate between 12.5% to 15% or higher.

Here are the key distinguishing points:

  • Value Added Tax applies on the sales of goods and its gross margin at every state. Thus, the tax is estimated and collected from manufacturer to retailer. VAT is thus collected from producers of the services or goods and the consumer. But Sales Tax applies only on the consumers.
  • The VAT rate is thus lower as opposed to the Sales Tax rates. It helps to offset the tax on inputs in contrast to that on outputs.
  • You can claim input tax credit for VAT. This assists in proper invoice formation.

VAT calculation goes by Output Tax – Input Tax. The Output Tax applies to the customer. This is applicable on taxable sales that the dealer makes. The seller or dealer can be a wholesaler, manufacturer, or retailer that is registered under VAT. So, if the eligible person makes a sale over the prescribed limit, he/she has to do VAT registration. After registration, VAT is chargeable on the taxable sales for a specific duration, usually monthly.

Input VAT is on eligible purchases that a dealer makes. The registered dealer under VAT has to pay in cash for a particular month to the state government. The registered dealers can claim the VAT credit charged on the maximum of their business purchases.

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