Home > Taxation > The Basics of Value Added Tax in India

The Basics of Value Added Tax in India

Introduced after much delay and opposition, Value Added Tax or VAT was introduced in India on April 1, 2005 at the rate of 12.5 %. This tax is designed to make accounting more transparent, cut trade barriers and boost tax revenues.Simply put, VAT is a transparent tax levied on sale of a product or service, borne by end-user or its consumer. In many ways VAT is equivalent to last point sales tax. VAT is charged at four different rates across all India at zero rate, 1%, 4% and a general rate of 12.5%. Most essential commodities are exempt from VAT or fall in the category of 4%.
 
How Does VAT work?
 
Application procedure: VAT is applicable on goods purchased locally within a particular state and cannot be imposed on goods purchased in the course of interstate trade. To claim a set-off (influx of credit), the tax invoice must be produced and tax should have been charged on the same.
 
VAT for Manufacturer: A manufacturer must purchase raw material after paying taxes in full while a declaration form seeking concessions cannot be issued by him. The taxes paid by him are reimbursed from the sale of the finished product.
 
Trader: The trader is to collect taxes from sales and the tax liability which is adjusted from the purchase of goods within that state.
 
Issue of Invoice: This is compulsory because no adjustments are made unless the original tax invoice is produced that confirms the taxes charged.
 
Registration: All businesses registered under the Central Sales Tax (CST) must register themselves under VAT too for which a certain amount of security money is required depending on the type of business.
 
Exception: Small businesses with a turnover below a certain limit which is decided by each state are exempted from paying VAT. Medium size business can opt for VAT or a composition system of tax on turnover.

Source: FLAME an initiative by IIFL

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Categories: Taxation
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