India Tax Firm

In the following cases credit of tax paid on inputs shall not be allowed:

1. Where final product is exempt-Credit of tax paid on inputs is available only if tax is paid on final products. When final product is exempt from tax, credit will not be allowed. If credit was availed, it will have to be reversed on pro rata basis.

2. No credit if input lost/damaged/stolen before use- Where the inputs have been lost or damaged or stolen before these have been used, credit of tax paid on such input shall not be allowed. If credit was availed, if will have to be reversed.

3. No credit on certain purchase- Generally, in following cases, credit is not available-

(a) Purchase automobiles

(b) Fuel. However, some States are allowing input credit for the same.

* Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus

* a specific category of tax-exempted goods and

* a special VAT rate of 1% only of gold and silver ornaments.

     In general, all the goods, including declared goods will be covered under VAT and will get the benifit of input tax credit.

     The only few goods which will be outside of VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the any other State Act or even by making special provisions in the VAT Act itself, and with uniform floor rates decided by the Empowered Committee.

  Input tax credit on capital goods will also be available for traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly instalments. The States may at their option reduce this number of instalments.

   There is negative list for capital goods (on the basis of principles already decided by the Empowered  Committee) which is not eligible for input tax credit.

Input credit is not be allowed in the following circumstances:

1. Purchasing from unregistered dealers;

2. Purchase from registered dealer who opt for composition scheme under the provisions of the Act;

3. Purchase of goods as may be notified by the State Government;

4. Purchase of goods where invoice does not show the amount of tax separately;

5. Purchase of goods, which are utilised in the manufacture of exempted goods;

6. Purchase of goods used for personal use/comsumption or provided free of charge as gifts (partial credit is available in the State of Maharastra);

7. Goods imported from outside the territory of India or goods purchased before it reaches the custom frontiers of India;

8. Goods purchased from other States viz. inter-State purchases.

(1) Instant credit of input tax

    This input tax credit will be given both to the manufacturers and traders for purchase of inputs/supplies meant for both sales within the state as well as to other States, irrespective of when these will be utilized/sold. This also reduces immediate tax liability.

(2) No input credit on central sales tax paid on purchases from other States

           At present, there is no credit of CST if inputs are purchased from outside the State. For example if the goods are purchased by Delhi dealer from Mumbai for Rs.1.02.000 which includes CST of Rs.2.000 Delhi dealer will not get input tax credit of Rs.2.000. If goods are sent outside State on stock transfer basis, credit (set off) of tax paid on inputs purchased within the State is available only to the extent of tax paid in excess of 2% e.g. if tax paid on inputs is 12.5%, input credit of 10.5% is available.

(3) Input credit on stock transfer to other States

       When CST rate is reduced to Nil, full credit of tax paid on inputs will be available i.e. inter-state sales and dispatches will be ‘zero rated’ and not ‘exempt’.

  VAT is calculated by deducting tax credit from tax collected during the payment period.

Illustration:(Rate of tax assumed is 10%)

Purchase price                                                           Rs. 1.00.000

Tax paid during purchase                                     Rs.10.000(input tax)

Selling Price                                                                Rs.1.50.000

Tax collected during resale                                  Rs.15.000(output)

Input tax credit(Tax paid during  purchase) Rs.10.000

VAT payable(output tax-input tax)                   Rs.5.000

Total tax collected by government                   

At the time of purchase by the dealer              Rs.10.000

At the time of resale by the dealer                    Rs.5.000

Total tax:                                                             Rs. (10.000+5.000)=Rs.15.000

          Current Sales Tax                                                     

1. Tax levied at the stage of the first sale or at the final stage

2. Successive sales (resale) of goods on which tax is already paid do not attract tax

3. Dealers reselling tax paid goods do not collect any tax on resale and file NIL returns

4. Computation of tax liability is complex

5. Sales Tax is not levied at the time of purchases against statutory forms but there is missue of such forms resulting in tax evasion

6. Returns and challans are field separately and the dealers have to give numerous details

7. A large number of forms are required

8. Tax on goods only

9. Assessment done by the department

10. Penalty for defaulters/evaders not strict.

                    Under VAT

1. Tax levied and collected at every point of sale

2. Tax collected at every point of sale and the tax already paid by the daler at the time of purchase of goods will be deducted from amount of tax paid at the next sale

3. Dealers reselling tax-paid goods will have to collct VAT and the file returns and pay VAT at every stage of sale(value addition)

4. It is transparent and easier

5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale

6. The returns and the challans are field together in a simple format after self-assessment done by the dealer himself

7. At the most of a few forms are required

8. Tax on goods and services both.

9. Self-assessments by dealers

10. Penalties will be stricter

What is VAT?

   VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each stage of production and circulation. It is also chargeable on the value of all imported goods. It is charged by registered VAT business/persons/taxpayers. VAT has replaced a number of other taxes and its introduction has not resulted in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost thereof- that is, the difference between the output and the input.

    India already had a system of tax collection wherein the tax was collected at one point from the transactions involving the sale of goods. The single point tax was collected either at the first stage or at the last stage.

   The system of collecting tax at first stage had the following disadvantages:

(a) Since sales tax was levied and collected at the first stage, the tax rate had to be higher. This encouraged tax evasion and sales tax became a tax on honesty, which means the honesty, more the tax liability.

(b) In case somehow the goods escaped the tax at the first stage, the goods escaped tax net altogether since there was no way by which it could be caught at any subsequent stage.

(c) There was ample scope for under-valuation of the value of the goods at first stage, since there was no tax payable at any subsequent stages, even if the goods were subsequently sold at much higher prices.

      In the system of collection of tax at the last stage also, several weaknesses were witnessed:

(a) The tax evasion was maximum since the price level at the last point of sale increases, which encouraged evasion, even if the tax rates were low:

(b) It was difficult to track the goods evading tax since there was no record of their earlier movements and after the last point sale, the goods reached in the hands of the consumers:

(c) This also encouraged under-envoicing  and involves generation of black money due to cash dealing at the last point of sale.