“VAT is an important source of revenue for governments, but it also affects the prices businesses charge their customers. Every business needs to understand the full implications of VAT in order to remain competitive.” – Bill Gates
Table of Contents
What is VAT?
Value-Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that has already been taxed. The end consumer ultimately bears the cost. It is typically applied to most goods and services that are bought and sold.
How VAT works?
In India, Value Added Tax is an indirect tax that is calculated as a percentage of the sale price of goods or services and is collected at every stage of the production or distribution process. It is required when a business reaches a turnover of more than INR 20 lakh (1.2 million USD) or more. It is applicable to any business that is registered as a dealer under the VAT Act.
It is collected by the government from manufacturers, wholesalers, retailers, and service providers and is a major source of revenue for the government. The rate of it varies from state to state and is usually between 5% and 15%.
It is usually calculated based on the difference between the cost of the goods or services sold and the cost of the goods and services purchased. This difference is known as the taxable value. It helps to promote a fair and transparent system of taxation as it ensures that all stakeholders in the supply chain are paying the appropriate amount of tax.
Features of VAT in India
Let’s have a look at the features of VAT in India.
- Registration: All businesses that have a taxable turnover of more than Rs. 20 lakhs (for the states of Jammu & Kashmir, Uttarakhand, and Himachal Pradesh, the registration threshold is Rs. 10 lakhs) are required to register for VAT.
- Compliance: Businesses must comply with the provisions of the State VAT Act and regulations by filing returns and paying taxes as per the prescribed dates.
- Rates: The rate of VAT varies from state to state and from product to product.
- Input Tax Credit: Input Tax Credit (ITC) is allowed to be claimed by registered dealers on the purchase of goods and services used in the course of business.
- Exemptions: Certain goods and services are exempted from VAT.
- E-filing: Many states allow businesses to file their VAT returns electronically.
- Refunds: Businesses can claim refunds on excess VAT paid or on goods exported out of the state.
How is VAT calculated?
VAT is calculated by multiplying the cost of the goods or services by the VAT rate.
The calculation is based on the number of taxable goods or services purchased. For example, if a customer purchases a taxable item for Rs X, the VAT is calculated as follows:
Taxable Amount: Rs X
VAT Rate: 10%
VAT Amount: Rs X x 10% = Rs Y
Total Amount: Rs X + Rs Y
What is the VAT registration process in India?
Offline Registration process:
The offline Value Added Tax registration process in India is as follows. Let’s have a look at them.
- Obtain a Permanent Account Number (PAN): Any business entity looking to register for VAT must first obtain a Permanent Account Number (PAN) from the Income Tax Department.
- Apply for VAT Registration: After obtaining the PAN, the business has to fill out a VAT registration form and submit it to the local sales tax office.
- Submit Necessary Documents: The business has to submit documents such as PAN card, address proof, identity proof, etc.
- Get Approval: The sales tax office will approve or reject the registration application after verifying all the documents provided.
- Receive VAT Registration Certificate: Once the registration application is approved, the business will receive a VAT registration certificate from the sales tax office. This certificate must be kept safe as it is required for filing returns.
Online Registration Process:
The online Value Added Tax registration process in India is as follows:
- Visit the official website of the Goods and Services Tax Network (GSTN) portal (https://www.gst.gov.in/).
- Create an account by registering on the GSTN portal using your PAN, email address and mobile number.
- After registering, a Temporary Reference Number (TRN) will be generated which you must use to proceed further.
- Log in to the GSTN portal using the TRN.
- Complete the online application form and upload the necessary documents.
- On successful submission of the form, an application reference number will be generated.
- You will be asked to verify your application using an Electronic Verification Code (EVC) sent to your registered email address or mobile number.
- Once the verification is complete, your VAT registration will be processed and a Certificate of Registration will be issued to you.
VAT vs Sales Tax
Value Added Tax and Sales tax are both taxes that are applied to the sale of goods and services.
| VAT | Sales tax |
| It is a consumption tax that is applied to the sale of goods and services at each stage of the supply chain | Sales tax is a transaction tax that is applied to the sale of goods and services at the end of the supply chain |
| It is paid by the seller to the government | Sales tax is paid by the customer directly to the government |
| The rates are consistent across the country. | Sales Tax rates vary from one state to another. |
VAT rates in India
Below given are the VAT rate chart in India. Let’s have a look.
- 0%: Essential goods like grains, pulses, milk, bread, fresh fruits and vegetables, salt, jaggery, books and newspapers, etc.
- 5%: Products like coal, kerosene, aviation turbine fuel, and so on.
- 12%: Processed food items, Ayurvedic medicines, footwear, apparel, and others.
- 18%: Household items like furniture, electronic items, mobile phones, and more.
- 28%: Vehicles, luxury items, aerated drinks, and so on.
How does VAT help trade, consumers, and the government?
VAT helps trade, consumers, and the government in several ways.
➡️Value Added Tax (VAT) helps trade by incentivizing exports and discouraging imports since goods exported are exempt from VAT while those imported are subject to it.
➡️It helps consumers by providing a more transparent taxation system, since VAT is passed onto the consumer in the form of higher prices, providing a clear indication of the amount of tax paid.
➡️It helps governments by providing a more reliable revenue stream than other forms of taxation since it is collected at each stage of production and is difficult to evade.
VAT returns
In India, Value Added Tax is a multi-point tax imposed on the supply of goods and services at each stage of the supply chain, from production to the point of sale. It is typically administered by the state governments and collected by the state governments.
VAT returns must be filed on a regular basis. The filing frequency and due dates vary from state to state. In most states, the returns are filed on a monthly or quarterly basis. The due date for filing VAT returns is typically the 20th day of the month following the reporting period. For example, the VAT return for March must be filed by April 20th.
➡️ The Value Added Tax return must include information about the sales and purchases made in the period, the amount of tax collected, and any adjustments or refunds.
➡️ This information must be reported on the appropriate form and must be submitted along with the payment of any taxes due.
➡️ The returns must also be supported by invoices, other relevant documents, and evidence of payment.
➡️ The returns must be filed within the prescribed time period in order to avoid any penalties and interest.
It is a complex and challenging tax system, but it is an important source of revenue for governments around the world. It can also be beneficial for businesses, as it can help to reduce the costs of doing business. Ultimately, the decision to implement Value Added Tax depends on the economic, social, and political needs of a country.
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Frequently Asked Questions
What is VAT?
VAT (Value Added Tax) is a type of indirect tax levied on the value added to goods and services at each stage of the supply chain. It is applied to the sale of goods and services in most countries and is typically collected at the point of sale.
How does VAT work?
VAT is a multi-stage tax system in which businesses charge VAT on the sale of goods and services and can reclaim the VAT they have paid on their own purchases. The tax is collected by businesses and then passed on to the government.
Who pays VAT?
VAT is paid by the consumer at the point of sale. The seller collects the VAT and is responsible for paying it to the government.
