Page 254 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Unit 14: Value Added Tax

Miscellaneous Notes

Coverage of Goods under VAT

In general, all the goods, including declared goods are covered under VAT and get the benefit of
input tax credit.
The few goods which are outside VAT are liquor, lottery tickets, petrol, diesel, aviation turbine
fuel and other motor spirit since their prices are not fully market determined. These will continue
to be taxed under the Sales-tax Act or any other State Act or even by making special provisions
in the VAT Act itself at uniform floor rates decided by the Empowered Committee.

Stock Transfer

Inter-State transfers do not involve sale and, therefore they are not subjected to sales-tax. The
same position continues under VAT.

However, the tax paid on:
(i) inputs used in the manufacture of finished goods which are stock transferred; or
(ii) purchases of goods which are stock transferred

will be available as input tax credit after retention of 4% of such tax by the State Governments.

Compensation for Losses

Although the introduction of VAT may, after a few years, lead to revenue growth, there may be
a loss of revenue in some States in the initial years of transition. Some of the State Governments
were resistant to introduce VAT account of this reason.
The Government of India therefore agreed to compensate for 100 per cent of the loss in the first
year, 75 per cent of the loss in the second year and 50 per cent of the loss in the third year of
introduction of VAT. The loss would be computed on the basis of an agreed formula. This
position was not only reaffirmed by the Union Finance Minister in his Budget Speech of 2004-05,
but a concrete formula for this compensation has also been worked out after interaction between
the Union Finance Minister and the Empowered Committee. However, in the first year of
introduction, only a few States have claimed such compensation.

Imports into the VAT Chain

Presently States do not have powers to levy a tax on imports. It is also essential to bring imports
into the VAT chain. This will need a constitutional amendment. Because of the availability of
set-off, not only cascading effect would be reduced but tax compliance would also improve. The
Empowered Committee is discussing this issue with the Government of India. Source: http://
220.227.161.86/18950sm_finalnew_idtl_service_cp10.pdf

Self Assessment

Fill in the blanks:
12. All ..................................... transactions that are carried on within a State by individuals
companies will be covered under VAT.

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