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Value Added Tax for PCC AND IPCC
[Submitted by CA. Rajendra Kumar P.
Chennai, Tamil Nadu]
May 16, 2009
- Value added tax in short VAT, was a tax introduced as early as 1919
by Dr.Wilhelm Von Siemens in Germany as a tax on improved turnover.
Professor Thomas.S.Adams suggested this tax in USA as a sales tax with a
credit or refund for taxes paid by the producer on goods bought for
resale or for use in production of goods. However till 1953 no country
introduced VAT. In the year 1954 France introduced it and since then
many countries have adopted this progressive method of taxation.
- Value added tax is a multi point tax. Tax already paid is allowed to
be adjusted against tax payable.
Example:
Tax has to be paid when hotel Saravana Bhavan sells fried rice. The tax
has already paid on the oil used to make fried rice is allowed to be
adjusted against the tax payable on sale of fried rice.
A pen purchased say reynolds from the retail shop suffers tax at the
hands of the retailer let us say Rs.2. The retailer when he purchased
the pen from the wholesaler would have paid tax to the wholesaler say
Re.1. This tax of Re.1 is allowed to be adjusted against Rs.2 the tax
payable. Hence the balance tax to be paid by the retailer to Government.
is Re.1.
- There are three different types of VAT. They are:-
- 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.
-
Value added tax is a tax on value addition. To calculate the tax
component there are several methods used. However there are three
methods, which are most commonly used. They are:-
- Addition Method
- Invoice Method
- Subtraction Method
The subtraction method is again divided into two:-
- Direct subtraction method
- Intermediate subtraction method
Among these methods the most popular and widely used method is the
invoice method.
-
ADDITION METHOD
This method of computing VAT is used under the income variant. Under
this method all the payments including profit is aggregated to arrive at
the total value addition and on this value addition the rate of tax is
applied to calculate VAT. This is not a popular method, as this method
does not facilitate the matching of invoices for detecting the tax
evasion.
-
INVOICE METHOD
This is the most popular and commonly used method. In India this method
is being followed both in Central Excise as well as State VAT. Under
this method tax is charged on the sale value, which is reflected on the
invoice issued to the buyer. The tax charged by the seller which is
reflected on the purchase invoice is taken into account for set off thus
the net tax payable will be tax on sales minus tax on purchases. Any
excess tax paid on purchases is allowed to be carried forward for set
off against future tax liabilities. This method is also called as Tax
Credit Method or Voucher Method. Under the Central Excise Act this
method is known as Cenvat Credit. Even though tax evasion cannot be
ruled out completely yet this method ensures that it is kept under check
as only on raising an invoice for sale the tax paid on purchases can be
set off.
-
SUBTRACTION METHOD
Under this method tax is charged on the value added portion alone at
each state of sale of goods. This method does not recognize set off or
tax credit as the total value of goods sold is not taken into account.
Under this method tax is not separately charged. For imposing tax the
value added is the difference between the total sales and total
purchases.
Under the Direct Subtraction Method the total value of purchases
exclusive of tax is deducted from the total value of sales exclusive of
tax. The balance is the value added which is to be taxed.
Under the Intermediate Subtraction Method the purchase value is taken as
inclusive of tax and other parameters are as per the direct subtraction
method.
-
MERITS OF VAT
I. VAT acts as a check on tax evasion. Unless proper records are
maintained availing credit is not possible under VAT. Hence VAT promotes
maintenance of records thereby checking tax evasions.
II. VAT does not interfere in the decision of making purchases as the
entire tax paid on purchases is allowed to set off. Thus VAT allows free
play of market forces and competition.
III. VAT is a transaction based tax. It does not give room for
interpretation thereby VAT tends to avoid confusion in the minds of the
taxpayer.
IV. It is a transparent tax. The buyer, the seller and also the
Government is aware of the tax from the documentary evidence. Thus VAT
helps the State Government in taking decisions with regard to rate of
tax.
V. VAT ensures better revenue collections and stability the revenue
leakage to the Government is minimum, as tax credit will be given only
on the basis of proof of tax paid at the earlier state.
VI. VAT promotes better accounting systems, as only proper accounting
will ensure proper credit.
VII. VAT does not have any impact on the retail sale price of the
commodity. The tax credit takes care of the cascading effect of prices
due to tax.
-
DEMERITS OF VAT
VIII. VAT can be successful only when there is one rate applicable to
all commodities and there is no exemption. If concessions are given the
fundamental principle of VAT that it will eliminate cascading effect on
price cannot be guaranteed.
IX. In India unless the Central VAT i.e Central Excise & Service Tax is
not merged with State VAT there will always be a distortion effect.
There will be no parity in purchases.
X. VAT is transaction based it requires record keeping which increases
the accounting cost. Small Traders and Firms may find it difficult to
meet this cost.
XI. VAT is charged on each value addition due to which there is a share
of increase in working capital requirement.
XII. VAT is a consumption tax i.e. the tax burden is on the final
consumer. If the income spent on consumption is larger for the poor than
for the rich VAT tends to be regressive.
-
In India VAT has been introduced at the state level since the year
2001 in substitution of sales tax. However the Central Sales Tax on
Interstate Sale is also levied. The Central Government also imposes tax
on manufacture of goods in India, which is known as Excise Duty, and a
tax on select taxable services. All the taxes whether levied by the
state or the Central have to be merged if the benefit has to accrue to
the common man. While presenting the Union Budget for the year 2006-07
the Union Finance Minister announce that goods and service tax will be
introduced from April 1, 2010. If India has to be a single tax nation GST is the only alternative. However a constitutional amendment will be
required to reorganise the levying and collection of tax among States
and Central.
-
The ICAI is rendering Pioneering service in formulating accounting
policies and guidelines for both Central Level and State Level of VAT.
ICAI has issued guidance notes addressing all accounting issues on
Central and State VAT. ICAI also brought out a comprehensive study on
State Level VAT in India. The study discuss various principles of State
VAT and these principles are found incorporated in the various State
Level VAT Legislations. ICAI has a major role to play not only in
auditing the records but also educating the general public and offering
training to the Government Officials on VAT related issues. The role and
scope of ICAI will enlarge and it will become important when GST is
introduced.
-
Many States in India have incorporated the provision of audit by
“Chartered Accountants” in the VAT legislation. A detailed report has
also be described the various states. The Chartered Accountant is
expected to audit the records maintained for the purpose of VAT and
submit the report within the due date. This audit not only acts as a
check on the correctness of the tax paid but also ensures that the assessee has taken due and proper credit. The audited accounts of the
VAT dealer presented to the state VAT authorities ensures that proper
records have been kept and the assessee has followed the provisions of
the Act. The state can safely rely on the audit report and take
decisions on assessment, scrutiny, etc. Thus audit is a value addition
both to the assessee as well as the Government.
ALL THE BEST
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