Vat information

VAT is a multi-stage tax that is levied on goods across each stage of transaction in the production/ distribution chain with credit given for tax paid at each stage of Value addition. The term 'value addition' denotes the boost in value of goods and services at each stage of production or transfer of goods and services.

The VAT is the most crucial tax reform measure that abolishes the double taxation system in India. The state level VAT has substituted the existing State taxes on purchase or sale of goods (excluding Entry Tax in lieu of Octroi). The Empowered Committee (EC) of State Finance Ministers had approved the introduction of VAT from April 1, 2005 in India.

VAT is a tax on the final consumption of goods or services and is finally borne by the consumer. There is provision for Input tax credit (ITC) against the VAT liability on subsequent sale. The input tax credit signifies the setting off the amount of input tax by a registered dealer against the amount of his output tax. ITC will not be applicable for inter-State purchases as VAT being applied intra-State VAT only and does not cover inter-State sale transactions.

The VAT is worked out after deducting the input tax credit from tax collected on sales through the payment period (say, a month). If in a month the tax credit surpass the tax payable amount on sales the excess credit is carried over to the end of next financial year. If at the end of second year any surplus of unadjusted input tax credit exists, the same will be eligible for refund.

There is provision of a threshold limit for registration of VAT. If the annual turnover of a business remains lower than Rs. 5 lakh, the business does not have to be registered for VAT and is exempted from payment of VAT. There is also provision for composition of tax liability up to annual turnover limit of Rs. 50 lakh.

The tax revenue of the 31 VAT States/UTs in 2006-07 has given rise to a growth rate of about 21 per cent over the tax revenue of 2005-06. During 2007-08, the tax revenue of 32 VAT States/UTs lead to a growth of 14.6 per cent during the first six months of 2007-08 (April-September) as compared to the corresponding period of last year.

In addition, the Central Government had declared a compensation package that will recompense the states for any revenue loss owing to VAT introduction at the rate of 100 per cent of revenue loss during 2005-06, 75 per cent during 2006-07 and 50 per cent during 2007-08.