VAT Rates in India

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vat rate

Most progressive governments have adopted Value Added Tax, or VAT, as a means of raising revenues. It is an indirect tax, which means that the party that pays the tax isn’t the party that pays it in to the government.

Nearly all items (barring a few, such as agricultural produce) attract VAT at varying rates. This includes finished goods as well as the raw materials that go into the finished goods. For example, in Maharashtra, VAT on liquor is 60% whereas the VAT on the ingredients to make that liquor will vary. Therefore, the manufacturer of the liquor will be paying VAT to all his suppliers (at varying rates) and ultimately collect VAT from his customers (at 60%). The manufacturer will ultimately recover the VAT already paid to suppliers from the VAT collected from customers and pay the rest to the government.

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Illustration:
Let us assume that a manufacturer has three suppliers: A, B and C.

Let us assume that A, B and C must be paid at a rate of 4, 5.5 and 20%, respectively.

Therefore, on bills of Rs. 100, Rs. 1000 and Rs. 2000, the total VAT to be paid will be Rs. 4 + Rs. 55 + Rs. 400 = Rs. 459.

Let’s assume that the sale price of the items using the above-mentioned supplies is Rs. 8000.

At 60%, the VAT to be collected is Rs. 4800.

Therefore, at the time of VAT payment, the manufacturer must only pay Rs. 4800 – Rs. 459 = Rs. 4341 to government, and not Rs. 4800.

This is also known as input tax credit.

VAT Rates Across India

As opposed to service tax, VAT is overseen by state governments and any change often generates substantial controversy. That said, there is an Empowered Committee that there is no substantial difference between VAT rates in one state and another. Minor differences in VAT rates, VAT registration procedure, due dates for VAT payment, however, do exist.

VAT rates in India differ in every state and are based on the type of goods sold. Entrepreneurs must, therefore, be aware of regulations in all states they operate in. With e-commerce, this is becoming particularly challenging. VAT rates in India can be divided into three main categories, which are common for many states:

VAT Exempt or NIL VAT Rate

The government does not tax all items. There are many on which there is no VAT levied. These are usually items that are commonly practised by the unorganised sector of the economy or essential items, such as sale, condoms, plastic bangles, brick, khadi, aids used by handicapped persons, and agricultural tools.

1% VAT Rate

Given the cost of these items, and the amount even a 4% to 5% VAT rate couldd increase the price by, many precious stones and metals, including gold, silver, platinum, and jewellery made of these metals attract a VAT rate of 1%.

4% or 5% VAT Rate

Most essential items used by the middle classes, such as cotton, drugs, coffee, tea, coir, some spices attract a VAT rate of 4% or 5%. Some states, such as Maharashtra, have recently increased this rate to 5.5%.

General VAT Rate

Of course, given the number of goods and raw materials supplied, it is diffcult to cover all goods in a particular schedule. Therefore, the government has a general VAT rate, which is around 12.5%. This rate applies to all goods that are not found in any of the listed categories. In some states, this 12.5% goes up to 13% or 14%.

20% or higher

Cigarrettes and alcohol, both Indian and imported, attract the highest VAT rate, typically. In Maharashtra, they are taxed at a whopping 60%.

Since enforcement of VAT and collection of it comes under the purview of state governments, different states have different VAT rules and implementation guidelines. Hence, the procedure for tax implementation, rates of VAT, timelines for VAT payment and VAT return filing, all differ from one state to another.

At present, VAT has been implemented in all the states and union territories of India except Andaman and Nicobar Islands and Lakshadweep Island.

VAT as Indirect Tax

Any manufacturer or trader with an annual turnover of over Rs. 5 lakh (Rs. 10 lakh in some cases) must have a VAT registration. Once this is done, VAT must be collected from all customers, on local as well as imported goods. As VAT is collected by manufacturers and paid to government, it is an indirect tax.

India is among many nations to have VAT. In fact, we are among the last to introduce it as a form of taxation. The main reason for its introduction is that it is difficult to exploit, as it keeps track of payments made at every step of the way and, therefore, reduces tax evasion. However, it can also be cumbersome to follow (with different rates across the country, regular return filing, etc), which is why it is soon to be replaced by the goods and services tax or GST.

Reasons for VAT

1. With VAT, every stage of production is taxed, making it difficult for suppliers to fudge numbers. This ensures better compliance and fewer loopholes for businesses to exploit. Before the introduction of VAT, tax evasion was rampant in India.
2. VAT and service tax are the most important instruments for raising government revenue, which helps reduce India’s fiscal deficit troubles.
3. VAT is a very popular method of taxation across the world. However, India’s implementation of it has been, as with other things, controversial, as it is not uniform across states.

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    A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.

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