INDIA : BEFORE

AND AFTER VAT

 Sales Tax

Sales tax is a consumption tax charged at the point of

purchase for certain goods and service

Revenue –Redistribution – Reprising

In economic terms, taxation transfers wealth from

households or businesses to the government of a
nation
 Central Sales Tax

•  The constitution of India gave power to the state legislature to levy sales
tax on sale or purchase of goods which takes place within the state.

• Although, the State Government were empowered to levy and collect tax
on sales made within its own territory but there was no specific provisions
of levying tax on sale and purchase having interstate composition.

•  As a result, same goods came to be taxed by several states on the ground
that one or more ingredient of sale was present in their state.

• Therefore central sales tax Act 1956 was enacted by the Parliament and
received the assent of the president on 21.12.1956. Imposition of tax
became effective from 01.07.1957
 IMPORTANT FEATURES OF THE ACT.
1. It extends to the whole of India
2. Every dealer who makes an inter-state sale must be a registered
dealer and a certificate of registration has to be displayed at all
places of his business.
3. The rules regarding submission of returns, payment of tax, appeals
etc. are not given in the act
4. Under this act, the goods have been classified as:

• Declared goods or goods of special importance in inter-state trade or commerce

•Other goods.

5. The tax is levied under this act by the Central Government but, it is
Collected by that state government from where the goods were sold.
 Types of sales on which taxes is levied.

• Inter state sales-

• Intra state sales-

• Sale during import and export-

 Rates of Tax
Declared goods Undeclared goods
Rate of tax Rate of tax

Sale to Government Lower of 4% or Lower of 4% or

local sales rate local sales rate

Sale to registered dealer of Lower of 4% or Lower of 4% or

specified good local sales rate local sales rate

Tax free goods in state Nil Nil

Other sale Twice the local 10% or local sales tax

sales tax rate whichever is higher
 Declared goods
It includes those goods which are considered to be of special
importance in inter-state trade or commerce

Cereals Jute

Coal Oil seeds

Cotton Pulses

Crude Oil Sugar

 Changes in central sales tax.

• CST has been reduced to 3% from 4% on 1-04-

2007.
• Tobacco product removed from the list of
declared goods.
• On 01-06-2008 CST reduced to 2%.
 Goods Under CST Act
• Goods must be ‘movable’.
• NO TAX ON IMMOVABLE PROPERTY. 
• No tax on Newspapers though they are
‘goods’.
• Goods of intangible character are ‘goods’.
• Plant & machinery assembled at site is not
‘goods’.
 Provisions of State Laws applicable to CST
• Periodic Returns
• Advance payment of taxes
• Registration of transferee and imposition of tax
liability on transferee
• Recovery of tax from third part.
• Refunds, rebate, penalties and interest
• Treatment of documents furnished by dealer as
confidential.
• Offences and penalties (except those covered in CST
Act itself)
Problems with previous Sales Tax System :

• Tax levied on gross value without any input tax credit

• Multiplicity of rates

• Apart from general sales tax ,states levied surcharge.

• High probability of tax evasion

• Cascading Effect
 VAT ( Value Added Tax )

What is VAT ?

• Tax levied on value added at each stage of product

being produced and sold & not on gross value.
• It is a multi point sales tax
• It gives credit for input taxation.
• Eliminates cascading effect – through input rebate
• Aimed at creating uniform tax structure throughout.
 VAT – Brief History

• Introduced in Morocco in the year 1962

• Followed by Brazil, Denmark, France and Germany

during 1967-68
• Implemented in many countries during the 1980’s

• Presently in more than 160 countries

• US still working under the sales tax regime
• Haryana introduced VAT, w.e.f. 1 April 2003, Most other

States on 1 April 2005, U.P. still a non VAT State

VAT RATES IN INDIA & WORLDWIDE
Country Standard rate Reduced rate

INDIA 12.5% 4%,1%,0%

AUSTRALIA 10% 0%

GERMANY 19% 7% or 0%

UNITED KINGDOM 17.5% 5% or 0%

CHINA 17% 6% or 3%
 VAT RATES IN INDIA
• Uniformity In Rates
– Exempt Rate - 0% On 46 Commodities Consisting Of
– Natural And Unprocessed Products Like- Firewood, Plants,
Garlic
– Items Legally Barred From Taxation Like - News Papers,
Electricity Energy
– Items Having Social Implications Like- Salt, Life Saving Drugs
– Special Rate - 1%
• Gold And Silver Ornaments
 VAT RATES IN INDIA
• Uniformity in Rates
– Essential/Mass Consumption Rate - 4%
• 270 goods comprising basic necessities and
– Industrial inputs;
– IT related goods
– medicines and drugs;
– Iron, Aluminum, Copper, zinc etc.

– Revenue Neutral Rate - 12.5 %

– No specific rate of VAT on Liquor, Petrol,
Diesel & Aviation Turbine Fuel.
 TYPES OF VAT
•Gross product variant.
•Income variant.
•Consumption variant.
 Under the Gross Product Variant taxes paid on purchases of raw materials
and components alone is allowed as deduction. Taxes paid on capital
goods is not allowed as deduction. This method is not in use, as it does
not allow tax deduction of capital goods like plant & machinery on which
the tax is large due to the price of the capital goods. This method is
discouraged, as it does not take into account all the taxes paid by the
buyer.

The income variant of VAT allows for deduction on purchases of raw

materials & components as well as depreciation on capital goods. This
method is also discouraged, as there is no one method by which
depreciation can be calculated as depreciation always depends upon the
life of the asset.
 
The consumption variant of VAT is the most popular method and is
followed widely in many countries. This variant of VAT allows for
deduction of taxes paid on all business purchases including capital assets.
 
Different ways to calculate VAT

– Addition Method
– Invoice Method
– Subtraction Method
 How To Calculate VAT?
VAT is calculated by deducting tax credit from tax collected during the payment period.

Example:
(Rate of tax assumed at 10%).
Purchase Price
Rs.100.
Tax paid on purchase
Rs. 10(input tax).
Sale Price Rs. 150.
Tax payable on sale price Rs. 15(output tax).

Input tax credit

Rs. 10.
VAT payable Rs. 5.
Total tax collection by govt. --------
On the sale price of Rs. 100 paid on the purchase by the dealer Rs. 10.
Net VAT paid by the dealer on value addition after resale Rs. 5.
Total tax at 10% on the last sale price of RS. 150 Rs. 15.
FAQ
Who pays VAT?

• All dealers registered under VAT.

• All dealers with an annual turnover of more than Rs. five lacs
shall register for VAT.
• Dealers with turnovers less than Rs. five lacs may register
voluntarily.
• Dealers having annual turnovers between Rs. five lacs and
twenty-five lacs may opt for a simple composition tax at a
nominal rate in place of VAT.
How to pay VAT?
• VAT will be paid along with monthly returns.
• Credit will be given within the same month for entire VAT paid
within the state on purchase of inputs and goods. Credit thus
accumulated over any month will be utilized to deduct from
the tax collected by the dealer during that month. If the tax
credit exceeds the tax collected during a month on sale within
the state, the excess credit will be carried forward to the next
month.

What will happen to the Central Sales Tax?

• In an ideal VAT regime there is no room for CST. To begin with,
the GOI is contemplating certain amendments in the CST.
What will happen to the Sales Tax Act?

• Continues for the pending assessments, appeals and

recoveries.
• Continues for certain commodities as Govt. may decide.
 Current Position Under VAT
Tax levied at the stage of the first sale (only for Tax levied and collected at every point of sale.Tax
cotton, leather and natural gas at the final stage). levied and collected at every point of sale.
Dealers reselling goods on which tax has already Dealers reselling tax-paid goods will have to
been paid do not collect any tax on resale and collect VAT and file returns and pay VAT at every
file nill returns. stage of sale (value addition).
The manufacturer will pay VAT on the goods
On 19 goods used as raw materials there is no
purchased as raw materials but the VAT paid on
input tax credit on the tax paid on such goods
raw materials will be deducted on the sale of
and 2% tax is levied on other goods used as raw
goods manufactured. Thus duplication of tax
materials for manufacture.
burden on raw materials will be avoided.
Computation of tax liability is complex. It is transparent and easier.
Sales Tax is not levied at the time of purchases VAT dispenses with such forms and sets off all tax
against statutory forms but there is misuse of paid at the time of purchase from the amount of
such forms resulting in tax evasion. tax payable on sale.
Returns and chalans are filed separately and in The return and the chalan will be filed together in
returns the dealers have to give numerous a simple format after self-assessment done by the
details. Scrutiny of returns is also difficult. dealer himself which will be subject to scrutiny.
Huge number of forms required in procedure. At the most a few forms required.
Six taxation rates. Only two rates.
Tax only on goods. Tax on goods and services both.
Assessment done by the department. Self-assessments by dealers.
Penal provisions for defaulters and evaders of
Penalties will be stricter.
tax not very strict.
VAT- ISSUES
AND
CONCERNS
• Differential tax treatment
• Phasing out of CST
• Incentive schemes
• Exemption schemes
• Accounting systems
• No uniformity in the
rates
• Movement of goods
• Additional burden
on tax authorities,
producers and
shopkeepers
• Possibility of tax
evasion
Current status of VAT in India
All States: VAT
UP:- 1st Jan 2008

J&K

Punjab Chandigarh
Haryana Uttaranchal
Delhi UP
Assam
Rajasthan Bihar

MP Jharkhand
Gujarat WB
Chattisgarh
Orissa
Maharashtra
20 States VAT live April 1, 2005

AP
Goa 2 State/ UT implementing VAT
between the period April 1, 2005 to
Karnataka
March 31, 2006
Pondicherry
5 States implementing VAT wef
Tamil Nadu
Kerala April 1, 2006

2 State/UT implementing VAT on or

after January1 ,2007
 Current Scenario
• If the annual turnover of a business remains lower than Rs. 5
lakh
Turnover Annually Return
Payment of
Taxes
Up to Rs.25 Lakhs Quaterly Quaterly
From Rs.25 L to 1 Cr Quaterly Monthly
Above Rs.1 Cr Monthly Monthly
Last date of filling Return & Payment of taxes is 20th of next
month/Qtr
• The tax revenue of the 31 VAT States/UTs in 2006-07 -21% and
growth of 14.6 per cent during the first six months of 2007-08
for 32 states
• Central Government had declared a compensation package
• Tax on inputs to be set-off against tax on final products
 VAT SYSTEM

Producer Manufacturer Trader Consumer

Pays the FIRST Pays tax on Pays tax on

POINT tax VALUE ADDED VALUE ADDED

Total tax incidence on consumer = FP tax paid by producer

+ Tax on Value added by M/F
+ Tax on value added by trader

= Tax on retail sale price

12/08/2021 Department of Sales Tax 33

• Taxes abolished
– Turnover tax, Re-sale tax, Surcharge, Special Additional Tax etc.
• Entry Tax
– Has been made Vatable
– Entry tax in lieu of Octroi - not Vatable
• Central Sales Tax
– Charged @3% from 1 April 2007
– Abolished by 2010
• Uniformity in Rates
– Exempt Rate - 0% on 46 commodities consisting of
– Special Rate - 1%
• Conclusion – Survey done in 2nd Nov 2010
 Advantages
• No requirement of Forms.
 No double taxation as if tax is collected once
 Lesser chances of evasion
 Assessments can be taken up immediately after the close
of the return period.
• Voluntary registration
• VAT results in more savings and less consumption
• Simplification of the previous indirect tax system and its
administration
• Increased Revenue
Disadvantages
• Amount Lost In
Implementation
• VAT Favours The Capital
Intensive Firm
• VAT Is Inflationary
• Regressive Tax System
 Why do we need GST ?

 GST in India and it’s key features

 Benefits of GST
 Issues and Challenges of GST
 Industry expectation from GST

 Impact on operations
 FAQ’s

 Conclusion
 Why do we need GST ?

 Part of a tax restructuring exercise, to enable India to

integrate with the globally accepted tax rationale.
 To remove cascading impact of various indirect taxes.
 Taxed on consumption and not on income.
 To broaden the tax base and also score further on revenue
generation with equity and transparency.
 Subsume Multiple taxes – ED, ST, VAT Etc.

 Simplified Procedure – Uniform Rates, HSN,

Exemption Lists etc.
 Integration with Global Trends- Cost, Efficiency &
Administration.
 GST in India and it’s Key Features
 GST is an indirect tax on consumption.
 Dual GST : a central and state GST to apply on the
same base (CGST and SGST).
 IGST proposed for inter-state transactions.

 Central and state taxes to be subsumed in GST.

- central excise, additional excise duties, service tax, additional customs duty,
special additional duty of customs, surcharges for the centre
- state VAT, entertainment tax, luxury tax, betting taxes and surcharges on supply of
goods and entry tax not in lieu of Octroi.
 Rate Structure:

 All present exemptions of goods to continue. On

tobacco, alcohol and petroleum products, it is
proposed that status quo remains.

 Three rates on the rest of the transactions – two

rates for goods – a lower rate for “necessary items
and goods of basic importance” and a standard rate
for the rest, and a third rate for services.

 Exports to be zero-rated and all imports in to the

country would be subject to GST.
 PAN-linked taxpayer identification number, to allow
for easy sharing of information across the different
tax administrations.
 Benefits of GST
 GST will boost up economic unification of India and
evade the cascading effect in Indirect tax regime.
 In GST system, both Central and state taxes will be
collected at the point of sale. Both components
(CGST and SGST) will be charged on the
manufacturing cost.
 Lower transaction cost for final consumers.
 It will result in a simple, transparent and easy tax
structure.
 It will bring uniformity in tax rates with only one or
two tax rates across the supply chain.
 Good administration of tax structure.

 It will result in cost competitiveness of goods and

services in Global market.
 It will result in increased tax collections due to
wider tax base and better conformity.
 Issues and Challenges of GST
 Integration of a large number of Central & State
Taxes – multiplicity of taxes and tax rates.
 How to levy tax on consumptions whether as multi
point levy or levy at final consumptions.
 Power to levy and collect taxes – necessary
constitutional amendments.
 Rationalization of thresholds and exemption limits.
 Operating a seamless input credit system – no
cascading.
 Integrating the origin based tax with the destination
based GST.
 Standardization of systems and procedures.

 Training of tax administrators and assesses.

 Protecting and balancing the present and future

revenues of the Centre and the States.
 Safeguarding the interests of less developed States
with lower revenue potential.
 Industry expectation of GST
 Policy related
• Seek cross-credit between CGST and SGST
• Continue area based exemptions
• Removal of entry tax / Octroi, cess
• Common frame-work of laws with binding directives
• Uniformity in rates across States
 Transition related
• Allow utilization of accumulated credit
• Early release of the reporting requirement to gear
up systems
 Compliance Related
• GST Registration based on the existing registrations
• One Window administration including e-payments
and e-refunds
• Integration of check-posts
• Introduction of digital signatures.

 Others
• Speedy disposal of existing refund applications
under existing laws
 Impact of GST

• India could gain as much as $15 billion

annually once the GST is in place.
• The impact of Goods and Services Tax on
certain sectors are discussed hereunder :
 Food Industry
• Impact On Those Living Under Subsistence Levels
• Complete Exemption For Food Items Would Drastically Shrink
The Tax Base
• Food Includes A Variety Of Items, Including
 Grains And Cereals,
 Meat,
 Fish, And Poultry,
 Milk And Dairy Products,
 Fruits And Vegetables,
 Candy And Confectionary,
 Snacks,
 Prepared Meals For Home Consumption, Restaurant Meals, And
Beverages.
 FMCG Sector
• Size Of $25 Billion (Rs 120,000 Crore) At Retail Sales In
2008
• Expected To Fuel Growth Further And Raise The
Industry’s Size To $47 Billion (Rs 225,000 Crore) By
2013 And $95 Billion (Rs 456,000 Crore) By 2018
• Implementation of GST will have several benefits for
the FMCG sector including uniform, simplified and
single point taxation and thereby reduced prices.
 Rail Sector
• Suggestions For Including The Rail Sector Under The
GST Umbrella To Bring About Significant Tax Gains
And Widen The Tax Net So As To Keep The Overall
GST Rate Low.
• The Added Benefit Of Ensuring That All Inter-State
Transportation Of Goods Can Be Tracked Through
The Proposed Information Technology (IT) Network.
 Impact On Small Enterprises
• Three categories of small enterprises in the GST
regime
– Below The Threshold
– Between The Threshold And Composition
Turnovers
• Turnover Based Tax

– Turnover Threshold
 Conclusion
• Implementation of a comprehensive GST across goods and

services is expected, ceteris paribus, to increase India’s GDP

somewhere within a range of 0.9 per cent to 1.7 per cent.

• The corresponding changes in absolute values of GDP over

2008-09 is expected to be between Rs. 42,789 crore and Rs.

83,899 crore, respectively.

• Gains in exports are expected to vary between 3.2 and 6.3 per

cent with corresponding absolute value range as Rs. 24,669

crore and Rs. 48,661 crore.

 Contd...
• Imports Are Expected To Gain Somewhere Between 2.4 And 4.7

Per Cent With Corresponding Absolute Values Ranging

Between Rs. 31,173 Crore And Rs. 61,501 Crore.

• In Sum, Implementation Of A Comprehensive GST In India Is

Expected To Lead To Efficient Allocation Of Factors Of

Production Thus Leading To Gains In GDP And Exports. This

Would Translate Into Enhanced Economic Welfare And

Returns To The Factors Of Production, Viz. Land, Labour And

Capital.
 FAQ
• How Does It Work ?
Stage Of Purchase Value Value At Rate Of GST On Input Tax Net GST=
Supply Value Of Addition Which GST Output Credit GST On
Chain Input Supply Of Output -
Goods Input Tax
And Credit
Services
Made To
Next Stage

Manufact
100 30 130 10% 13 10 13-10 = 3
urer
Whole
130 20 150 10% 15 13 15-13 = 2
Seller
Retailer 150 10 160 10% 16 15 16-15 = 1
 FAQ – Contd...
• How Will GST Benefit Industry, Trade And Agriculture ?

– Wider Coverage Of Input Tax Set-off And Service Tax Set-

off
– Subsuming Of Several Central And State Taxes In The GST

– Phasing Out Of CST

 The transparent and complete chain of set-offs which will result

in widening of tax base and better tax compliance may also lead

to lowering of tax burden on an average dealer in industry,

trade and agriculture.

Thank You