This article is written by Arkadyuti Sarkar, a student of B.A. LL.B from Shyambazar Law College under the University of Calcutta. This article provides for a comprehensive explanation of VAT on Imports and Exports. 

Introduction

It has not been long since the Goods and Sales Tax, 2017 was introduced in India while substituting the Value Added Tax, in 2017.

The VAT system, accompanied by VAT rules was introduced in India on 1st April 2005 by replacing the existing Sales Tax system. Initially, some states like Gujarat, Tamil Nadu, Rajasthan, Madhya Pradesh, Jharkhand, Uttar Pradesh, and Uttarakhand refused to implement the VAT system but later agreed to its implementation.

By 2014, VAT was introduced in all the Indian States and Union Territories except Andaman & Nicobar Islands, Puducherry and Lakshadweep.

VAT and its Types

The Value Added Tax (VAT) is an indirect multistage tax that is charged as a proportion to the value-added on each stage commencing from the production of the good to its purchase by a consumer.

The following are the steps involved in the taxation of goods under the VAT system:

1. The raw materials, in general, pass through various stages and processes of the production and distribution, and its entire burden lies upon the final purchaser.
2. The first manufacturer’s output becomes the second manufacturer’s input who then further processes it prior to supplying it to the third manufacturer. This process continues until the emergence of the ultimate product.
3. The final good so produced goes to the distributor or wholesaler, who then sells it to the retailer.
4. The retailer then sells the product to the final buyer/consumer.

Usually, the manufacturer or retailer is capable of claiming tax credit but that is not the case for the final purchaser.

VAT is usually imposed by application of 3 methods

• Addition method

In this method, the VAT is levied on the value of addition made by a manufacturer/dealer, including the profits charged by him. Value of addition includes: 

• Wages;
• Salary;
• Power;
• Electricity;
• Rents;
• Depreciation in the value of capital goods,
• Manufacturing;
• Trading;
• Marketing expenses;
• Capital interests and so on.

• Credit invoice/invoice based method

This method is a widely used method in almost all nations excluding Japan. Here the sales transactions are taxed with the customer being informed of the VAT on the final transaction. The businesses may obtain a credit for the VAT paid on input materials and services.

• Subtraction/account-based method

In this method at the end of the reporting period, a business calculates the value of all taxable sales and deducts the sum of all taxable purchases and the VAT rate is applied to the difference. This method is presently used solely by Japan.

Features of the VAT system

1. VAT is an indirect multistage tax or multipoint tax.
2. VAT is levied upon value addition to the goods, i.e. (wages+interest+costs+profits).

The additional value is measurable by deducting the purchase price of inputs from the selling value of the goods.

• It is immaterial for the application of VAT whether the buyer is a dealer of goods or a consumer.
• VAT makes the promotion of neutrality, such as-

1. making a decision for the purchase of goods,
2. deciding the production techniques of goods,
3. deciding the nature of the organization.

• VAT is a single tax and there is an absence of any education cess or surcharge.
• VAT rates are mostly uniform throughout the nation.
• The invoice has an imperative document for VAT.
• VAT is inapplicable on a seller with less than 5 lacs of annual sales turnover.
• Under the VAT system, credit of input taxes is only permitted if proper records are kept and maintained with respect to various capital goods input.
• VAT has ensured transparency because it shows the amount of VAT paid to the buyer on sales.
• VAT helps in deciding its rates of fixation. It also shows the Government the amount of tax collected at each and every stage, initiating from the production to sales.
• VAT is inapplicable on exportation, but the exporter can obtain refundment of input tax credit.
• In VAT there is no scope of tax evasion and therefore it generates a higher amount of revenue, in comparison to other forms of taxation.

VAT Calculation

VAT = Output Tax – Input Tax.

Output tax is the percentage of the selling price accrued by the seller from the selling of the final good.

Input tax is the percentage of cost price paid by a buyer for acquiring essential raw materials for producing the final goods.

For example – John is a carpenter who purchased wood Rs 2000 and paid an input tax of 10% = Rs 200.

He made a wooden table out of the purchased wood and sold it for Rs 3000. On this, he collected an output tax of 10% on the selling price, i.e. Rs 300.

Therefore, the final VAT payable: Rs 300 – Rs 200 = Rs 100.

Advantages and Disadvantages of the VAT system

Advantages

1. Reduced tax evasion and increased tax compliance.
2. VAT is simple and thus brings certainty.
3. VAT is transparent as the amount of VAT levied is clearly displayed on the bill or invoice.
4. Cheaper exports in case of exportation.
5. VAT is refundable.
6. VAT has a better accounting system as the record of tax paid on purchases are required maintenance.
7. VAT is tax neutral as there is no distinction between labour-intensive industries and capital-intensive industries since the input of both capital products and purchases is available.

Disadvantages

1. Although mentioning in the invoices reduces tax evasion, yet it is still possible through the generation of fake invoices.
2. Increased compliance cost, because of the maintenance of purchase and sell records.
3. This system has distortion as it is improperly due to several exemptions/concessions.
4. VAT being a consumption-based taxation system leads to higher tax collection by the State consuming more rather than the State making higher production.
5. Being taxation on the expenses, it is regressive in nature. The poor are more affected by this as they incur more expenses compared to the rich. 

VAT Rates in India

The VAT Rates in India differ based on the type of goods and from one State to another. Thus, it is important for the Entrepreneur to be aware of the State’s VAT regulation. However, VAT Rates in India can be categorized into 3 main parts, which have uniformity in many States.

NIL VAT Rate

In many states, the items sold by the unorganized sector in natural or unprocessed format, and basic goods for the poor are listed under the VAT exemption category. Some of the items capable of availing VAT exemptions in many States include-

• Aids used by handicapped persons,
• Glass or plastic bangles,
• Condoms,
• Firewood,
• Khadi,
• Salt, etc.

1% VAT Rate

In many states, 1% / 2% VAT rate is applicable to precious stones, metals like silver, gold, and platinum, bullions, jewellery, etc.

4% or 5% VAT Rate

Many states have adopted a VAT rate of 4% or 5% over a large number of products related to basic necessities. Some of the goods included in this category in many of the States including coffee, coir, cotton, edible oils, medicines, drugs, agricultural implements, etc.

General VAT Rate

In addition to the above VAT Rates, many states also have other VAT levels that rely upon the Goods. Very high VAT Rate of over 20% is generally levied for goods such as imported liquor, cigarettes, etc. Many states have a VAT rate of around 12.5% applicable to the goods which cannot be categorized under any of the previous heads. These categories of goods not falling in any of the other categories are usually taxed at 12.5% / 14% / 15% depending on the State levying it.

VAT on imports and exports

Customs Duty

Customs duty is the tax levied on the importation and exportation of a good or goods to or from India. The government uses this duty to generate its revenues, safeguard domestic industries and regulate the movement of goods in the economy.

The rate of customs duty varies based on the place of the production of a particular good and the purpose of its production.

The following are the different types of customs duty:

1. Basic customs duty – this duty is imposed on the value of the goods at a specific rate. The duty is fixed at a specified rate on an ad-valorem basis, i.e. its imposition is based on the transactional or proprietary value and is imposed during the time of transaction. The Central Government is entitled to the right of exempting any goods from the tax.
2. Countervailing duty – This duty is imposed by the Central Government when a Country is subsidizing the exporters who are exporting goods to India. This amount of duty equals the subsidy paid by them.
3. Additional Customs Duty – For equalizing the imports with local taxes like service tax, VAT and other domestic taxes, a special countervailing duty is imposed on imported goods. Hence, is imposed to bring imports on an equal track with the goods produced or manufactured in India. This is to promote fair trade & competition practices in our country.
4. Safeguard duty – For safeguarding the domestic industries from the effects of imported goods, the Government imposes safeguard duty on certain imported items. This tax is collected on the basis of the loss incurred by the domestic/ local industries.
5. Anti-dumping Duty – Often, large manufacturers from abroad may export goods at very low prices compared to the prices in their domestic market. Such dumping is often intended towards crippling the domestic industry or to dispose of the excess stock. This is known as goods dumping. 

For the prevention of these sorts of dumping activities, the Central Government can impose anti-dumping duty up to the margin of dumping on certain items, under Section 9A of Customs Tariff Act, if the dumped goods are being sold at a lesser price than its normal value. Levy of such anti-dumping duty is allowed as per the agreement under the World Trade Organization. Anti-dumping action can be taken solely if there is an Indian industry producing a resembling form of good.

Imports

Usually, goods are imported into India after the payment of the customs duty. Therefore VAT is inapplicable on imported goods until and unless such goods are being sold in the Indian Market.

For example – Mr Rajan, a resident of Tamil Nadu, imports a smartphone into India from the U.S.A, priced at Rs 30,000 INR. Now for the smartphone, if there is a customs duty of 20% then Mr Rajan shall have to shell out 36000 INR. However, if he wants to resell the smartphone in the market of his State where the VAT rate is 15 %, the selling price will amount to 41,400 INR. 

Exports

No VAT is charged on the exportation of goods from India as Customs duty is already levied on the products being exported outside India.

For example, If Mr Singh decides to export 10 kg of apples to the United Kingdom which costs a nominal price of 120 INR/ Kg then the price shall amount to 1200 INR. Now if there is a customs duty of 5 % on such export then the price shall amount to 1260 INR which he shall have to pay the customs. Here, no VAT shall be imposed on the apples as they are not going to be sold in the Indian Market. 

Conclusion

In recent times, as already mentioned before, the VAT system has been abolished in India as it had demerits like cascading effect, non-uniform rates in different states, additional sales tax, complicated calculation methods, and several other issues.

Thus, in the year 2017, all other forms of indirect taxation systems were abolished, and the Government of India implemented the Goods and Sales tax under the vision of ‘one nation one tax system.’

Following are some of the features of the Goods and Service Tax system-

1. Uniformity of taxation system all over India.
2. The tax is equally shared between a State and the Center.
3. No complicated computation method.
4. Certain types of commodities are categorized based on their nature and taxed.
5. There is a simple and easy online procedure.
6. As opposed to VAT, GST is applicable on both the goods and services.

References

1. Taxation Laws by S.S. Pal
2. https://howtoexportimport.com
3. https://cleartax.in
4. https://www.bankbazaar.com
5. https://www.indiafilings.com/learn/vat-rates-india/

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