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VAT (Value Added Tax)


The Value Added Tax (VAT) is a type of indirect tax and is one of major source of revenue to the state. The Registered dealers are allowed to collect VAT payable by them from the immediate buyer. They can claim the VAT paid on purchases made only from a registered dealer. The unregistered dealer cannot charge VAT on the invoices, so the buying dealer cannot claim the VAT amount paid as ITC. Also, the unregistered dealers are not eligible for availing concessions, for e.g., exemptions, which are given by the government.

The commercial tax department introduced a new method of levying tax called as the Composition Scheme especially after considering the small dealers whose turnover was low and were unable to maintain the records as per the requirements of VAT Act. These dealers have to pay a lump sum as VAT on the sale value of goods. The VAT paid will not be shown in the invoices. They can account for the total turnover and pay VAT on the same at the end of the return period.

For Assessing the VAT liability of dealers, each state has introduced the system of Filing Returns for different tax periods. The tax periods could be Monthly, Quarterly, Half-yearly and Annual. Each dealer has to file the Return by specifying the total turnover which is exempted as well as liable for VAT along with the purchases made and tax paid on it with the amount of VAT payable or Input tax credit carried forward within the stipulated period.

In this unit, you will learn about Value Added Tax (VAT), which is an indirect tax on goods, introduced in lieu of sales tax, to ensure transparency and greater compliance. The basic premise of VAT is to tax the ‘true value’ added to goods at each stage of the transaction chain. This ultimately reduces

  • Tax paid to the government
  • Cost/tax passed on to the consumer

VAT is a multi-point tax as against sales tax, which is a single-point tax. Under the sales tax regime, the ‘Value’ of goods to be taxed at each stage is computed as Basic Cost + Profit Margin + Sales Tax paid at earlier stages. VAT does away with the cascading effect of tax on tax by allowing a set-off for the input tax, that is, tax paid at earlier stages on purchases. It is an efficient, globally acceptable and easy-to-administer taxation system.

Terms Associated with VAT

Term                                            Descriptions

Input Tax                                       This is a tax paid on purchases.

Output Tax                                    This is a tax charged on sales.

Input Credit                                   The amount of the input tax that is permitted to be set off against the output tax.

Composite dealers are dealers with annual gross turnover not exceeding a certain threshold (threshold is decided by the respective state governments) who can opt for a composition scheme whereby they will pay tax as a small percentage of their gross turnover. However, retailers opting for this composition scheme will not be entitled to input credit. The state government fixes the period and procedure for the payment of lump sum amounts.

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