Gives a brief description of State Value Added Tax (VAT) In India which was existing in the Pre-GST Era

1. VALUE ADDED TAX (VAT)
By
Dr. Mohmed Amin Mir
Assistant Professor
Department of Commerce & Management Studies
Islamia College of Science & Commerce
(Autonomous with CPE Status)
Srinagar - 190002, Jammu & Kashmir, India

2. Concept of VAT
 VAT was introduced in 2005
 Is a multi-point system of taxation on sale of Goods wherein a
mechanism is provided to grant credit for tax paid on inputs
 Tax is collected in stages for transactions involving sale of
goods
 Input Tax i.e. Paid on purchases is rebated against Output Tax
i.e. Tax payable on sales
 VAT = Tax Collected on Sales - Tax Paid on purchases
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3. VAT has Eliminated Cascading Effect
 Cascading effect of tax implies charging of tax on tax
 At the time of levy of tax, the total value is considered which is
inclusive of all taxes paid upto that point
 If the tax is always charged on the selling price of the product,
the burden of tax keeps on increasing at each point of sales
 Thus, the effect of taxation magnifies as at each level tax is
calculated on value, which includes taxes already levied and
paid
 VAT has been developed to avoid such cascading effect
 Tax is effectively charged only on Value Additions at each
stage and not on the entire sale price
 Cascading Effect has been prevented through Tax Credit
System called INPUT TAX CREDIT (ITC)
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4. Input Tax Credit (ITC)
 In the Pre-GST era, the concept of ITC was prevailing in VAT,
Excise & Service Tax
 ITC is a type of tax rebate given to a dealer
 If any registered dealer is purchasing goods within a particular
state and has paid VAT & subsequently the goods were sold
in the same state, such registered dealer shall be allowed to
take credit for input tax, subject to certain conditions
 The tax is imposed at each stage on the entire sales value &
the tax paid at earlier stage is allowed as Set Off
 Such credit availability is called as ‘Input Tax Credit’.
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5. Input Tax Credit (ITC)
 For Example:
Mr. X is a registered dealer and has purchased inputs worth Rs. 5,00,000 (Plus VAT@ 4%). The
actual sales in the month were Rs. 9,00,000 (Plus VAT @10%)
Output VAT payable = Rs. 90,000
VAT paid on purchases = Rs. 20,000
Net VAT liability = Rs. 70,000
Since, VAT paid on purchases can be adjusted against output VAT payable, the net VAT payable
for the month shall be Rs. 90,000 minus Rs. 20,000
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6. Conditions for ITC under VAT
1. Allowed to a registered dealer only
2. Allowed only if purchases are made from a registered dealer
3. Allowed in respect of VAT paid on purchases of Capital Goods
4. Not allowed on Central Sales Tax (CST) paid on purchases made
from outside state
5. Not allowed in respect of purchases from a dealer who has opted
for composition scheme
6. Not allowed if goods have been used to manufacture the
exempted goods
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7. Variants of VAT
(Various possibilities of Credit for VAT paid on purchases)
1. GROSS PRODUCT VARIANT
 VAT Credit is allowed only on VAT paid on Raw Materials other than Capital Goods. Thus, prevents
cascading effect due to allowance of VAT Credit on non-capital goods
 VAT paid on Capital Goods will not be eligible for credit and forms a part of cost of such goods,
Depreciation portion includes some portion of VAT & also forms a part of cost of Product. When tax
is calculated on this cost, cascading effect still prevails
2. INCOME VARIANT
 VAT Credit is allowed on all VAT paid on Raw Materials and Components
 On Capital Goods, VAT Credit is allowed to the extent of depreciation (apportioned to various years)
on them
3. CONSUMTPION VARIANT
 100% VAT Credit is allowed on VAT paid on Raw Materials and Components as well as Capital
Goods
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8. METHODS FOR COMPUTATION OF VAT
1. Addition Method
 Based upon identification of VALUE ADDED i.e. Aggregate at factor payments
 Payments made to all factors of production are rent, deprecation, hire charges, interest on capital,
wages, profit etc.
 VAT Liability = Tax Rate x Value Added
2. Invoice/ Voucher Method
 Most Common & Popular Method for Computing Tax Liability under VAT system
 Tax is levied on Full Sales Price
 Credit is given for tax paid on purchases. Thus, tax is effectively levied only on Value Added
3. Subtraction Method
 Tax is paid on the difference between Sale Price and Value of purchases
 No question of Tax Credit as the tax has not been calculated on the total value of goods sold
i. Direct Subtraction Method = Aggregate Value of Sales Exclusive of Tax – Aggregate Value of
purchases Exclusive of Taxes
ii. Indirect Subtraction Methods = Tax inclusive Value of Sales - Tax inclusive value of purchases
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