VAT And Sales Tax What You Should Know?

Value added tax when it had come into place was supposed to be the answer to the issue which sales tax had created. One tax - to replace the many state sales taxes. However, the very issue it was supposed to solve became its irony. Today V.A.T. rates across states are different. Further differences arise due to product classifications, exemptions and concessions like composition schemes. This law came into force on 01.04.2005.

Sales Tax:

Sales tax is charged on sale across stated or interstate sale by the central or union government as per entry 92A of list I of the union list. Sales tax was charged on intra state (within the state) sale by states (which is essentially V.A.T. now) by the respective state where point of sale arose as per entry 54 of List II of the constitution’s state list.  Sales tax can be imposed on only intra state sale by the state government.

V.A.T. is a tax on sale of goods levied at each stage of production so as to reduce the anomaly of double taxation. It allows for input tax credit for tax paid at the prior stage of production. The tax is borne by the consumer ultimately. It is not payable on interstate branch transfers or interstate sale. It also gives the option of composition scheme for dealers who have sales of less than a particular thresh hold in a year at a reduced rate. A VAT invoice is essential such that input tax can be claimed and also enables taxation at multi points of or various levels on the value addition. The transfer of right to use in a lease transaction is also subject to value added tax . Interstate sale is possible even if buyer and seller are of the same state if the sale causes the goods to leave the state as a result of such sale.

VAT vs. Sales Tax:

The input tax generated from interstate sale is not eligible for credit under VAT procedures. This basically means that if a registered dealer (registered dealers alone can claim input tax credit) pays tax on purchases made from another state on raw materials he needs to sell the final goods in that state itself for claiming credit of the tax paid on the purchase of raw materials. If he sells goods in another state and is allowed input tax credit, then it would mean a loss in revenue for the state of sale since this state is not the one where the purchase of raw materials had taken place or the tax on same was paid to.

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