Gujarat Sales Tax - Vat in Gujarat

Background

Chief Ministers’ Conference in November 1999 – All states agree to introduce VAT in place of Sales Tax from April 2001

State Finance Ministers decide on 7.1.2002 to introduce VAT from 1.10.2002

Steps taken by Gujarat for tax reforms:

Slabs of sales tax rates reduced from 23 to 6

Turnover Tax abolished from April 1997

No. of prohibited goods (not eligible for tax set off) reduced from 73 to 19

Sales Tax incentives to industries stopped from 1.1.01

Computerization of the Sales Tax Department

Deemed and simple assessments for small dealers

Dealers are registered afresh – the new registration to be valid for VAT

What is VAT?

It is nothing but Sales Tax.

It is a multi-point sales tax.

It is collected on value addition only at each stage.

Tax paid by the dealer is deducted from the tax payable collected at every point of sale and the tax already paid.

How is VAT different from the current Sales Tax?

Current Position	Under VAT

Tax levied at the stage of the first sale (only for cotton, leather and natural gas at the final stage).	Tax levied and collected at every point of sale.Tax levied and collected at every point of sale.
Successive sales (resales) of goods on which tax is already paid do not attract tax.	Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale.
Dealers reselling goods on which tax has already been paid do not collect any tax on resale and file nill returns.	Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition).
On 19 goods used as raw materials there is no input tax credit on the tax paid on such goods and 2% tax is levied on other goods used as raw materials for manufacture.	The manufacturer will pay VAT on the goods purchased as raw materials but the VAT paid on raw materials will be deducted on the sale of goods manufactured. Thus duplication of tax 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 against statutory forms but there is misuse of such forms resulting in tax evasion.	VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale.
Returns and chalans are filed separately and in returns the dealers have to give numerous details. Scrutiny of returns is also difficult.	The return and the chalan will be filed together in a simple format after self-assessment done by the dealer himself which will be subject to scrutiny.
Huge number of forms required in procedure. Six taxation rates.	At the most a few forms required. 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 tax not very strict.	Penalties will be stricter.

Why VAT?

More equitable – tax burden is shared by all dealers.

More transparent – easy procedures and only two rates, broadly speaking.

Simpler- easy computation and easy compliance.

Credit for input taxation - cost efficiency.

Better Compliance - through self-policing.

Prevents cascading effect – through input rebate.

Avoids distortions in trade and economy – uniform tax rates.

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 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.

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.

Which goods will be taxable under VAT?

All goods except those specifically exempt.

What types of input tax are eligible for VAT credit?

Input tax credit is given for entire VAT paid within the state on purchases of taxable goods meant for resale/manufacture of taxable goods.

Input credit excludes purchases:

from unregistered dealers

from other states/countries

of goods used in manufacture of exempted goods

of capital goods

goods used as fuel in power generation

of goods to be dispatched as branch transfers outside Gujarat

of goods used in manufacture of goods to be dispatched outside Gujarat as branch transfer/consignments

and in cases where the dealer does not have invoices showing amounts of tax charged separately by the selling dealer.

What to expect under VAT (Recommendations of the VAT Advisory Committee)

Number of tax rates should not exceed two.

Tax exemptions on food grains, vegetables, fruits and processed milk.

4% tax on essential goods, declared goods, capital goods and industrial inputs.

Special rate of 1% on gold and silver and articles thereof.

Current system to continue for diesel and petrol.

All other goods to be taxed on the basis of revenue neutrality.

What will happen to the Sales Tax Act?

Continues for the pending assessments, appeals and recoveries.

Continues for certain commodities as Govt. may decide.

What about the Bombay Sales of Motor Spirits Taxation Act, 1958?

It may continue for a few years and VAT will exclude HSD (diesel), motor spirits (petrol) and ATF (aviation fuel) initially.

What will be the status of the industries enjoying sales tax exemption and deferment?

The matter is under consideration of the government. Industrial incentives in the form of exemption and deferment of sales tax may have to be continued under VAT as they are commitments made by the government. The units may get certain options.

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 else will VAT cover?

The GOI is contemplating to empower states to collect VAT on considerable number of services as well as on goods on which AED (additional excise duty) is levied.

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