Value-Added Tax (VAT) is an indirect tax on goods and services applied at each stage of production, ultimately paid by consumers. It varies by state in India, with different rates for essential items (0%), precious goods (1%), basic consumables (4-5%), and general items (12-15%). VAT is calculated as the difference between output and input taxes. Businesses earning over Rs.5 lakh annually must register for VAT and receive an 11-digit registration number. VAT ensures tax transparency and reduces evasion, benefiting trade, consumers, and the government. It differs from sales tax by applying to both producers and consumers at multiple production stages.
What is VAT?
Value-Added Tax (VAT) is a kind of tax levied on the sale of goods and services when these commodities are ultimately sold to the consumer. It is an integral part of the GDP of any country. VAT tax mainly fall under Indirect tax.
Value-Added Tax (VAT) Rates in India
Since enforcement of VAT and collection of it comes under the purview of state governments, different states have different VAT rules and implementation guidelines.
Hence, the procedure for tax implementation, rates of VAT, timelines for VAT payment and VAT return filing, all differ from one state to another.
Despite state-specific implementations, VAT in India can be divided into four main types:
NIL VAT Rate
In a lot of states items that are very basic in nature are sold without levying any VAT on them. These items are mostly those sold by the unorganized sector in their most basic or natural form. Examples of these type of items are salt, khadi, condoms etc.
1% VAT Rate
For items which tend to be highly expensive, the percentage of VAT applicable needs to be kept low since otherwise the VAT levied could be too high an amount. For such items, VAT is kept as low as 1%.
Gold, silver and other precious stones as well as precious jewelry fall under this category of goods. Most Indian states have fixed VAT for these items at 1% of the amount.
4-5% VAT Rate
A large number of daily consumption goods have been put by several state governments under this category of VAT. So VAT charged on goods like oil, coffee, medicines etc. is around 4-5% for most states in India.
General VAT Rate
General VAT rates apply to goods which cannot be segregated and put under any of the above listed VAT categories. For goods like liquor, cigarettes etc. many governments charge high VAT rates of 12.5% or 14-15%.
Also, many state governments follow a general rate of VAT for goods which cannot be categorized to suit the above classification. Such goods are taxed at 12%, 13% or even 15% in different states.
How is Value-Added Tax (VAT) Calculated?
VAT is actually calculated as the difference between input tax and output tax.
| VAT = Output Tax – Input Tax |
Where output tax is the tax received by the seller for the sale of his goods and services and input tax is the tax paid by the seller for raw materials required to manufacture his goods and services.
VAT Example
- Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials.
- Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000
- Now after selling the food made by using the purchased raw materials, Ram was able to make Rs.1,00,000.
- Supposing 10% output tax, output tax becomes Rs.10,000
So, final VAT payable by Ram comes out to be Rs.10,000 – Rs.5,000 = Rs.5,000
What is VAT Registration Number? How to apply online?
VAT registration is mandatory for enterprises that make a turnover of more than Rs.5 lakh by selling goods and services. All such enterprises are required to register in their respective states of operation. Registering for VAT is necessary for enterprises to start paying VAT. On registration, each trader is given a unique 11-digit registration number which is used for all communication regarding VAT and its filing.
Who should register for VAT?
Any firm making a turnover of more than Rs.5 lakh per annum is required to register for VAT payment.
Documents required for VAT registration
Following is the list of documents that needs to be submitted while registering for VAT:
- Copy of PAN card
- Address proof of business
- Proof of identity of promoters
- Additional security deposit or surety
How much time does it take to register for VAT?
Generally, state governments take around 15-20 days to complete the process of registration. This time may differ from one state to another.
How Do I Register for Value Added Tax (VAT) Online?
Given below are the steps you will have to follow to register for VAT online in India:
Step 1: Visit the official website of VAT and click on the registration tab.
Step 2: Enter all the relevant details and upload the necessary documents.
Step 3: If you are registering on behalf of a corporation then you will be provided with a temporary VAT number.
Step 4: Once your application form and documents provided are verified successfully, you will be provided a permanent VAT number.
Value Added Tax Collection in India
The process of collection of VAT can be safely categorized into two broad heads based on the method of collection of value added tax.
Account-based collection of VAT
Under the account-based method of collection, sale receipts are not used, instead, tax is calculated on the value added. Value added is calculated as the difference between revenues and allowable purchases.
Invoice-based collection of VAT
Under the invoice-based VAT collection, sale receipts or invoice is used to compute the corresponding VAT. Traders when they sell their goods and services offer invoices containing separate details of VAT collected. Most countries in the world today use the invoice-based method of VAT collection.Another way to categorize VAT collection is to classify it based on the timing of collection.
Accrual-based collection of VAT
Accrual-based collection matches the revenue with the period during which it is earned and matches the cost of raw materials and expenses to the time during which they were made. This method is extremely complicated as compared to the cash-based collection of VAT. However, it also throws substantial light on information about any business.
Cash-based collection of VAT
Cash-based accounting is simpler than accrual-based calculation. Emphasis is laid on the cash that is being handled instead of whether all the bills are paid. Whenever a payment is received, that date is recorded as the date of receipt of funds.
Why is VAT Required and How is it useful?
India was one of the last few countries to introduce VAT as a form of tax. The taxation process in India was believed to be exploited the most by businessmen and enterprises which had found loopholes for evading taxes. VAT was introduced to minimize this evasion and render transparency and uniformity to the tax payment process.
Value Added Tax is levied in multiple stages of the production of goods and services and comes under the purview of various state governments. Hence, VAT in India might slightly differ from one state to another.
- No exemptions under the VAT system. Levying tax at each stage of the production process ensures better compliance and fewer loopholes to be exploited
- VAT, when enforced properly forms an important instrument for tax consolidation of the country and as such helps towards solving the fiscal deficit issue to some extent
- Since, VAT is a globally accepted taxation system, it will help India integrate better into global trade practices
How does VAT help Trade, Consumers, and Government?
Trade
Trade is enhanced due to VAT’s uniform rates. A taxpayer is not required to visit the tax department officer on conducting a 100% self-assessment.
Consumers
Consumers have to pay less price for items if tax on those goods are removed.
Government
Since the self-assessment is conducted by the dealers under VAT, there are less resources required for the overall assessment process which allows the government to focus on collection of tax rather than worry about the administrative process.
Features of VAT in India
- Similar goods and services are taxed equally. So a similar television from all brands will be taxed the same
- VAT is levied at each stage of production and hence makes the taxation process easier and more transparent
- VAT reduces chances of tax evasion and fosters compliance
- Encourages transparency in sale of goods and services at the lowest level
VAT Returns
VAT returns have to be filed by businesses that have an annual turnover that is Rs.5 lakhs or higher. VAT is payable on all goods and services that are domestic or imported. VAT returns can be filed traditionally by filling and submitting the required paperwork to the appropriate authorities. It can also be filed online if registered under the VAT Act 2003 using the provided user id and password.
How is VAT Different from Sales Tax
- VAT is computed on each stage of the sales of good and is completely different from sales tax as tax is collected from both producer and consumer. In case of sales tax, it is only the consumer who pays the tax.
- In case of VAT, fewer rates are levied, while for sales tax, a higher rate is implemented.
- On claiming input tax under VAT ensures that the invoicing is proper.
Why pay VAT when sales tax is already being levied by government?
VAT and sales tax have different purposes and hence are kept separate. While sales tax calculation is an easy process, VAT is a multi-level process and a more complex form of tax. Sales tax is simply calculated as a percentage of the final selling price of goods and services and is levied from customers at the time of purchase of goods and services.
Some of the most striking points of differentiation between sales tax and VAT are listed below.
- VAT is levied from both producers of goods and services as well as consumers while sales tax is levied only from customers
- VAT is a complex taxation process because it is charged in multiple stages. Sales tax is a pretty straightforward taxation procedure
- VAT is a multi-stage tax levied at each step of production while sales tax is charged from customers at the final purchase of goods or services
- VAT places in a lot of checks and hence is more transparent and efficient while sales tax is easy to fiddle with
- VAT collection places more burden on producers of goods and services which they might ultimately charge from customers, leading to an increased financial burden on customers
- VAT is more transparent and efficient as compared to sales tax and hence generates more revenue for the government than sales tax