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Steps For e-Filing VAT Returns In India & Its Benefits

In this article we shall discuss how VAT returns can be filed online in India.

The simple difference between direct tax and indirect tax is that direct tax is a tax you pay on income earned. And an indirect tax is a tax you pay on expenditure. When you spend on purchasing a product, the seller collects sales tax from the buyer and pays it to the government. But there was a gaping hole in the system of indirect taxation that was discovered by economists. It was leading to something called a cascading effect which led to collection of more tax than the value of the actual GDP. 

The cascading effect is the practice of taxing the total sale value of products at every stage of the manufacturing process. What gets overlooked through this practice is that the total sale value of a product consists of taxes and duties paid by the manufacturer while purchasing the raw materials. So a portion of the tax charged is nothing but tax on taxation, or in other words, ‘double taxation’. So the amount of tax collected doesn’t accurately represent the true gross domestic product of the economy. It is inflated to the extent of the tax collected on tax.

This inflated taxation or ‘double taxation’ can cause a bubble from an economic standpoint, causing a distortion in the valuation of an economy. This in turn can blind side the policy makers while formulating economic policies which can create a breeding ground for recession. 

In order to mitigate the effects of the cascading effect a new system of taxation was introduced wherein tax would be calculated only on the amount of value added by the manufacturer at each step of the process. So the manufacturer can deduct the amount of tax already paid on raw materials and calculate tax on the remaining value of the selling price, reducing the tax liability of the manufacturer and enabling them to sell the products at a more competitive price than before. This would in turn spur the purchasing power of 

VAT Under GST

With the introduction of GST, all indirect taxes have been brought under one uniform umbrella. All expenditure on goods and services is taxed as GST. So along with excise duty, customs duty and service tax, VAT also had to go. But there are two things that still keep VAT relevant.

Firstly, the system of input credit has been integrated into the GST regime for the same reason VAT was introduced in the first place; to mitigate the cascading effect in taxation. So, for instance when a manufacturer purchases raw materials, he will pay GST on it. The amount of GST paid is then credited to the manufacturer’s GST account ledger. This is called ‘Input Credit’ And when the manufacturer sells the finished product and collects GST from his buyer, the amount collected is debited to the GST account ledger. Since this amount has to be deposited with the tax authorities, it is called ‘GST liability’. But before the manufacturer deposits the GST liability with the government, the debit and the credit side of the ledger are offset against each other. If the liability is greater than the input credit, then the difference between the two is deposited with the government. If it is the other way round, then the manufacturer is not required to make any deposit with the authorities and the surplus of credit over the liability can be used to offset any future liabilities as well. This entire system is identical to the VAT system making it relevant in that sense.

The second reason why VAT remains relevant is that not all goods have been brought under the ambit of GST as yet. The way GST works is that a central GST council is responsible for assessing and collecting GST revenues. The council then disburses the amounts due to the various states periodically. Three products however have been excluded from GST. These are alcohol for human consumption, petroleum and petroleum products and electricity. These three items are the largest contributors of revenue in the case of most states. And allowing the states to collect tax from these three sources directly will ensure that states don’t suffer a cash crunch in between two periods of GST disbursements. Since the tax on these items cannot be categorised under GST, they still continue to be charged with VAT at the state level. And because of this there are still certain businesses that continue to file VAT returns.

Let us now take a look at the procedure for filing VAT returns.

Prerequisites For E-Filing VAT Returns

The following are the requirements for the purpose of filing VAT returns.

  • TIN Number: The tax identification number (TIN), which is the 11-digit number furnished by the state tax department. This number can help you track any payments or e-payments made and previously filed returns.
  • Login Details: On registration, you would have received a User ID and password from the Tax Directorate office. In case this is your first VAT payment, you will need to change your password before you can proceed.
  • e-Filing Software: All state departments have issued software for e-filing of VAT returns. A download option for this software can be found once you have logged in. This software will allow you to process data into XML. This can be uploaded to the online portal of Directorate of Commercial Taxes of the state you’re in.
  • VAT Receipts: Of course, you will need the details and challan numbers of every one of the VAT receipts, against which you have made payment or e payments in the previous month.

If you have these handy, you’re ready to start filing your return. Depending on the number of VAT receipts, this could take 2 to 6 hours.

Steps For E-Filing VAT Returns

  • Login: With the user ID and password, you can login to the portal of the Directorate of Commercial Taxes for your state. As VAT is within the purview of state governments, each of them has its own VAT e-filing portal. However, the procedure for all of them is the same.
  • Form 14D: To file the return, you need to download the zipped Form 14D file. On unzipping the file, you’ll find a PDF version of the form. This form is the one you need to fill completely, along with the annexures.
  • Complete Form: The information you need to fill in the form will be contained in the VAT receipts, so you shouldn’t be nervous about filling in the form. Depending on the number of transactions, this can take you a couple of hours or a whole day.
  • Generating XML: On running the completed Form 14D through the software you downloaded from the Directorate of Commercial Taxes, you will be able to turn this PDF into an XML file within minutes. Only Form 14D needs to be in XML, not the annexures, as only it needs to be digitally processed.
  • Correcting Mistakes: The e-Filing system is an intelligent piece of software. It can instantly spot mistakes you’ve made once you upload the form. You will need to rectify these errors and resubmit until it is all correct.
  • Acknowledgement: Once accepted by the e-Filing system, an acknowledgement receipt will be generated. This is proof that you have filed your VAT returns for the month.

Benefits Of Filing VAT Returns Online

As with doing everything else online, e-filing your VAT returns has several improvements over manual filing. What’s more, is that all the benefits will only increase as your business grows.

  • Saves Time: While manual filing can take a couple of days in case your business has many transactions, particularly if the VAT rate differs, online filing can be completed in a matter of hours.
  • Real-time Feedback: As soon as you upload the form in XML to the e-filing portal, you will know whether there are any discrepancies. If there are errors, then you will be informed how they can be resolved. The state portals also have a fairly exhaustive set of FAQs, in case you’re stuck.
  • Acknowledgements Saved: Paper receipts can easily be misplaced. However, in case of an inspection, you can’t say you’ve lost them. Dealers who tend to file their returns online exclusively, tend to even be asked to produce papers on fewer occasions (“are rarely asked to produce paper receipts” OR “can also be asked to produce paper receipts”), as the information is easily accessible by the state tax department.
  • Precaution: Your account on the e-filing portal is where the government will reach you. This can be in regards with any information that is pending from your side. So in case you are unclear about what you still need to do to complete the procedure, all you need to do is login. If the portal does not ask for any documents or clarifications, you’re done.

Common Issues With E-Filing VAT Returns

And when there are benefits, there are trade offs as well. Let us look at some of the issues you need to keep in mind while filing your VAT returns.

  • Downtime: State government websites often have problems, particularly the smaller states. Users often complain of a downtime with the Odisha and Meghalaya Commercial Tax websites.
  • Monthly Procedure: Every month, even small businesses need to spend almost a whole day simply filling their VAT returns online. Even though the Internet has made it much easier to comply, the monthly filing of the form has caused many small merchants to form groups to petition for an easier process.

Conclusion

The Indian taxation system has been defined as the most complex taxation system in the world. There are several reasons for this. First and foremost there is the size of the population. Then comes the fact that a large chunk of the population is either below poverty line or hovering just above it. Taxing this section of the population kills the purchasing power of the masses which can in turn cause massive recession. And finally, the sheer diversity of the taxpayer population requires every tax policy to be framed taking several groups and their interests into account. So when it comes to matters of taxation, it is always advisable to seek the counsel of a tax consultant who has been trained and has experience in matters of taxation and its relevant provisions. If you have any queries or tax related requirements, feel free to get in touch with us and our team of experts will get in touch with you to assist you with your requirements.

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