VAT: Rates and Calculation

What is Value Added Tax?

• Value Added Tax is a consumption tax levied on the sale of goods and products. Tax is levied at every point of sale where value is added.
• Under the VAT system, the seller is responsible for collecting VAT from his customers and depositing it with the Government.

Let’s understand the concept of VAT with the following example:

You buy raw material for stitching shirts at a price of INR 112. Let’s say the amount of Value Added Tax included in this price is INR 12. You paid the seller INR 112 inclusive of INR 12 as price of the raw material. For you, INR 12 will be considered input VAT. In other words, you will get input tax credit of INR 12.

Now you manufacture shirts out of the raw material bought and you sell each shirt for INR 220. Suppose the rate of VAT on shirts is 10 %. The amount of VAT you need to collect from your customer will be 10 % of 220 i.e. INR 22. This amount of INR 22 collected will be output VAT for you.

One of the salient features of VAT is that allows set off of VAT paid on inputs against VAT payable on output. It means that as a seller, the amount of VAT to be deposited with the Government by you will be the difference between your output VAT and input VAT.

Therefore, the amount of VAT payable by you will be “Output VAT-Input VAT”. This comes out to be 22-12 = 10.

On a cursory observation, it can be seen that because of the input tax credit system, the total amount of VAT paid to the Government is INR 12+10 i.e. INR 22.

Thus, input is taxed only once and this helps avoid the cascading effect of tax that would have taken place in case there was no input tax credit system.

To simplify matters, the entire process of calculation of VAT is represented in the below picture.

1. Input: Cloth

      Price Paid (Incl. VAT): 112

      Amont of VAT: 12

      Input VAT: 12

2. Output: Shirt

      Selling Price: 220

      VAT Collected from Customer @ 10 %: 22

      Output VAT: 22

3. VAT Payable to Govt: Differnce between Output VAT and Input VAT

      VAT Payable: Output VAT-Input VAT

      VAT Payable: 22-12= 10

      Total VAT paid: 12+10= 22

Do I Have to Pay Value Added Tax?

Whether you are liable to pay Value Added Tax or not depends on the goods/products you are selling and on the state in which your business is established.

If your annual sales turnover is above the specified annual turnover, you need to get registered under as well as pay VAT. The threshold limit is different in every state. For example, in Delhi, the annual turnover threshold is INR 20 lakhs and if you cross this limit, you will be liable to collect and pay VAT to the Government.

There are certain exempted goods on which no VAT is payable. Most essential commodities are exempt from VAT. The particulars and description of these goods varies according to each state and has been provided in the VAT schedule pertaining to that state.

Therefore, unless your turnover is below the specified threshold limit or the goods you are trading in are specifically exempted, you are liable to pay VAT.

What is the Rate of Value Added Tax?

In India, VAT is a state subject and therefore VAT rates are decided by the states. Further, different goods are taxed at different rates.

However, as a general rule, VAT payable on goods can be classified into 5 categories on the basis of rate of VAT applicable on them:

• Exempt Goods: These are the goods which are specifically listed as exempted in the state VAT schedule and no VAT is payable on them in any case.
• NIL Rated Goods: These are the goods on which VAT is not payable under certain specified circumstances.
• 1 %:In majority of states, this rate is applicable on bullion, gold/silver articles and jewelry and precious stones like diamonds, emeralds, pearls etc.
• 4%: This rate is usually applicable to essential commodities, agricultural implements, intangible goods like copyrights, patents etc. in some states and other goods mentioned in the schedule.

Please note that items like agricultural implements are exempt in some states and taxable @ 4 % in some.

• 5%: This is known as the residual rate. Any item on which VAT is payable but which is not covered under any of the categories mentioned above falls under this category.

Further, some states provide a ‘Negative List’. No input tax credit can be availed on the goods mentioned in this list. For example, Tobacco is listed as a negative good as per the Seventh Schedule of Arunachal Pradesh VAT.

In some states, certain specified goods are taxable at an even higher rate. For example, in the state of Bihar, items like fuel, spirits etc. are taxable at a minimum rate of 20% and the current rate of tax hovers between 20% and 41%.

In Delhi, items like liquor, lottery tickets and Aviation Turbine fuel are taxed at 20%.

How are Exempt and NIL Rated Goods Different from Each Other?

Exempted Goods

• No VAT is payable on goods mentioned in this category
• No Input tax credit is available
• E.g: Certain essential commodities like milk

NIL Rated Goods

• VAT is payable except under certain circumstances
• Input Tax credit is available and can be utilised against VAT payable on sales made within India
• E.g: VAT is not payable in case of exports or sale to Export Oriented Undertakings

The specific rate of tax applicable to the goods/products you are selling can be determined by checking the VAT schedule of the state in which you are trading.

Author: This blog is written by  Ms. Pragya Chaturvedi, student of Faculty of Law, University of Delhi , a passionate blogger & intern at  Aapka Consultant.

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