Page 208 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Unit 12: Central Sales Tax

12.6.1 Importance of VAT in India Notes

India, particularly being a trading community, has always believed in accepting and adopting
loopholes in any system administered by State or Centre. If a well-administered system comes
in, it will not only close options for traders and businessmen to evade paying their taxes, but
also make sure that they'll be compelled to keep proper records of sales and purchases.

Under the VAT system, no exemptions are given and a tax will be levied at every stage of
manufacture of a product. At every stage of value-addition, the tax that is levied on the inputs
can be claimed back from tax authorities.

At a Macro Level, Two Issues Make the Introduction of VAT Critical for India
Industry watchers believe that the VAT system, if enforced properly, will form part of the fiscal
consolidation strategy for the country. It could, in fact, help address issues like fiscal deficit
problem. Also the revenues estimated to be collected can actually mean lowering of fiscal deficit
burden for the government.
International Monetary Fund (IMF), in the semi-annual World Economic Outlook expressed its
concern for India's large fiscal deficit - at 10 per cent of GDP.
Moreover any globally accepted tax administrative system would only help India integrate
better in the World Trade Organization regime.

Items Covered under VAT
These items are mentioned below:

 All business transactions that are carried on within a State by individuals/partnerships/
companies etc. will be covered under VAT.

 More than 550 items are covered under the new Indian VAT regime out of which 46
natural & unprocessed local products will be exempt from VAT
 Nearly 270 items including drugs and medicines, all industrial and agricultural inputs,
capital goods as well as declared goods would attract 4 % VAT in India.
 The remaining items would attract 12.5 % VAT. Precious metals such as gold and bullion
will be taxed at 1%.
 Petrol and diesel are kept out of the VAT regime in India.

Tax Implication under Value Added Tax Act

Seller Buyer Selling Price Tax Rate Tax Tax Credit Net Tax
(Excluding Invoice Payable Outflow
Tax) value
(InclTax)
A B 100 4% CST 104 4 0 4.00
B C 114 12.5% VAT 128.25 14.25 0* 14.25
C D 124 12.5% VAT 139.50 15.50 14.25 1.25
D Consumer 134 12.5% VAT 150.75 16.75 15.501.25
Total to Govt. VAT 16.75 CST 4.00

LOVELY PROFESSIONAL UNIVERSITY 203