In this article we will discuss how VAT works under the GST regime and the rates at which VAT is charged in India.
Introduction
VAT stands for Value Added Tax. It is an indirect tax levied on sale of goods and services. It was introduced in 2005 to replace Sales tax and was eventually replaced with Goods and Services Tax (GST) in 2017. Before we go into the specifics of VAT we need to understand how Sales Tax works in India.
The constitution of India has two lists when in the context of taxation: the Centre List and the State List. The Centre list consists of items that are the prerogative of the central government and any revenue collected from the taxing the commercialization of these items will be counted as revenue of the Centre which is to be used for the welfare and development of the country as a whole. Similarly, the State List consists of items that are the prerogative of the State and any revenue collected from taxing the commercial profits of these items is counted as that state’s revenue and is to be used for the welfare and development of that particular state.
In 2017, GST was introduced as a brand new tax regime abolishing separate taxes for separate business activities and bringing all indirect taxes under one umbrella. This move abolished the VAT system, although it functions on the tax credit system that was introduced with VAT.
The GST regime involves centralised collection of indirect taxes and redistribution of the taxes to the various states commensurate with their respective contributions. However, there are three items that have been excluded from the GST regime and the revenue earned from these items are collected and utilised by the respective state governments directly. These items are:
- Petroleum and related products
- Alcohol
- Electricity.
These were excluded as these items generate the most amount of revenue for the exchequer of almost all states and although shifting these items under the GST regime is imminent, moving them immediately might cripple the cash flow of state governments given that the GST earned by the state in the form of GST is accrued with the tax authorities and remitted to the respective states periodically.
Sales Tax vs VAT vs GST
When VAT replaced sales tax, it brought in a completely different system of tax calculation with it. This is because VAT was brought in to address a completely different problem than the problem that GST registration was brought in to solve. VAT was brought in to mitigate the cascading effect that was inherent to the existing Sales Tax regime. Under the original sales tax regime, sale of goods were taxed at a flat rate at every stage of production. Given that the price of goods includes the cost of taxation, any further tax levied upon that product leads to tax on tax or double taxation. With VAT the tax levied on each stage of production is levied only on the value added by the business to the original material.
So let’s say A buys certain raw materials at ₹ 50 per unit. He pays sales tax at the rate of 5% on the raw materials which amounts to ₹ 2.50 and adds up to ₹ 52.50 per unit inclusive of taxes. He then processes the raw materials at a cost of ₹ 10 per unit and adds a markup of ₹ 20, hence pricing the goods at ₹ 82.50 before taxation. He charges sales tax to his customer at 5% as well, which amounts to ₹ 4.12. So the consumer buys the product at ₹ 86.62. A will then deposit ₹ 4.12 with the government as sales tax collected. This is how taxation worked under the old regime.
Under the VAT regime, when A pays ₹ 52.50 units for the raw materials, ₹ 2.50 will be credited to his VAT account as VAT credit. And when he sells the goods, ₹ 4.12 is debited his VAT account as VAT liability. The two are set off against each other and A deposits ₹ 1.62 per unit as tax to the government for the value added by him to the raw materials hence getting relief for the tax he has already paid while buying the raw materials.
This system removed the problem of inflated taxation. However, the problem that caused the replacement of VAT with GST was that there was a separate tax for everything. There was sales tax, service tax, excise duty etc. GST was brought in to streamline the entire tax structure bringing all taxes related to the sale of goods and services under one umbrella. However, the tax credit system of VAT remains as such in GST and taxation takes place only on the value added at each stage of the sale.
Reasons For VAT
- 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.
- VAT and service tax are the most important instruments for raising government revenue, which helps reduce India’s fiscal deficit troubles.
- 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.
VAT Rates
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. There is an Empowered Committee to ensure that there is no substantial difference between VAT rates from one state and another. Minor differences in VAT rates, VAT registration procedure, due dates for VAT payment, however, do exist.
Smart tax planning made easy! Our GST Calculator Online is designed for accuracy and efficiency. Take the first step to financial empowerment now!
As mentioned before, VAT is applicable only to three items: Petroleum products, Alcohol for human consumption and electricity. The rates are as follows
Petroleum products
| State/UT | Petrol | Diesel |
| Andaman & Nicobar Islands | 6% | 6% |
| Andhra Pradesh |
31% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess an d Vat thereon |
22.25% VAT + Rs.4/litre VAT+Rs.1/litre Road Development Cess and Vat thereon |
| Arunachal Pradesh | 20% | 13% |
| Assam | 32.66% or Rs.22.63 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre | 23.66% or Rs.17.45 per litre whichever is higher as VAT minus Rebate of Rs.5 per Litre |
| Bihar | 26% or Rs 16.65/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax) | 19% or Rs 12.33/Litre whichever is higher (30% Surcharge on VAT as irrecoverable tax) |
| Chandigarh | Rs.10/KL cess +22.45% or Rs.12.58/Litre whichever is higher | Rs.10/KL cess + 14.02% or Rs.7.63/Litre whichever is higher |
| Chhattisgarh | 25% VAT + Rs.2/litre VAT | 25% VAT + Rs.1/litre VAT |
| Dadra and Nagar Haveli and Daman and Diu | 20% VAT | 20% VAT |
| Delhi | 30% VAT | Rs.250/KL air ambience charges + 16.75% VAT |
| Goa | 27% VAT + 0.5% Green cess | 23% VAT + 0.5% Green cess |
| Gujarat | 20.1% VAT+ 4% Cess on Town Rate & VAT | 20.2% VAT + 4 % Cess on Town Rate & VAT |
| Haryana | 25% or Rs.15.62/litre whichever is higher as VAT+5% additional tax on VAT | 16.40% VAT or Rs.10.08/litre whichever is higher as VAT+5% additional tax on VAT |
| Himachal Pradesh | 25% or Rs 15.50/Litre- whichever is higher | 14% or Rs 9.00/Litre- whichever is higher |
| Jammu & Kashmir | 24% MST+ Rs.5/Litre employment cess, Reduction of Rs.0.50/Litre | 16% MST+ Rs.1.50/Litre employment cess |
| Jharkhand | 22% on the sale price or Rs. 17.00 per litre , which ever is higher + Cess of Rs 1.00 per Ltr | 22% on the sale price or Rs. 12.50 per litre , which ever is higher + Cess of Rs 1.00 per Ltr |
| Karnataka | 35% sales tax | 24% sales tax |
| Kerala | 30.08% sales tax+ Rs.1/litre additional sales tax + 1% cess | 22.76% sales tax+ Rs.1/litre additional sales tax + 1% cess |
| Ladakh | 24% MST+ Rs.5/Litre employment cess, Reduction of Rs.2.5/Litre | 16% MST+ Rs.1/Litre employment cess , Reduction of Rs.0.50/Litre |
| Lakshadweep | Nil | Nil |
| Madhya Pradesh | 33 % VAT + Rs.4.5/litre VAT+1%Cess | 23% VAT+ Rs.3/litre VAT+1% Cess |
| Maharashtra – Mumbai, Thane , Navi Mumbai, Amravati & Aurangabad | 26% VAT+ Rs.10.12/Litre additional tax | 24% VAT+ Rs.3.00/Litre additional tax |
| Maharashtra (Rest of State) | 25% VAT+ Rs.10.12/Litre additional tax | 21% VAT+ Rs.3.00/Litre additional tax |
| Manipur | 32% VAT | 18% VAT |
| Meghalaya | 20% or Rs15.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) | 12% or Rs9.00/Litre- whichever is higher (Rs.0.10/Litre pollution surcharge) |
| Mizoram | 25% VAT | 14.5% VAT |
| Nagaland | 25% VAT or Rs. 16.04/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess | 16.50% VAT or Rs. 10.51/litre whichever is higher +5% surcharge + Rs.2.00/Litre as road maintenance cess |
| Odisha | 32% VAT | 28% VAT |
| Puducherry | 23% VAT | 17.75% VAT |
| Punjab | Rs.2050/KL (cess)+ Rs.0.10 per Litre (Urban Transport Fund) + 0.25 per Litre (Special Infrastructure Development Fee)+24.79% VAT+10% additional tax on VAT | Rs.1050/KL (cess) + Rs.0.10 per Litre (Urban Transport Fund) +0.25 per Litre (Special Infrastructure Development Fee) + 15.94% VAT+10% additional tax on VAT |
| Rajasthan | 36% VAT+Rs 1500/KL road development cess | 26% VAT+ Rs.1750/KL road development cess |
| Sikkim | 25.25% VAT+ Rs.3000/KL cess | 14.75% VAT + Rs.2500/KL cess |
| Tamil Nadu | 13% + Rs.11.52 per litre | 11% + Rs.9.62 per litre |
| Telangana | 35.20% VAT | 27% VAT |
| Tripura | 25% VAT+ 3% Tripura Road Development Cess | 16.50% VAT+ 3% Tripura Road Development Cess |
| Uttar Pradesh | 26.80% or Rs 18.74/Litre whichever is higher | 17.48% or Rs 10.41/Litre whichever is higher |
| Uttarakhand | 25% or Rs 19 Per Ltr whichever is greater | 17.48% or Rs Rs 10.41 Per Ltr whichever is greater |
| West Bengal | 25% or Rs.13.12/litre whichever is higher as sales tax+ Rs.1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax) | 17% or Rs.7.70/litre whichever is higher as sales tax + Rs 1000/KL cess – Rs 1000/KL sales tax rebate (20% Additional tax on VAT as irrecoverable tax) |
Electricity
| State | Tax Rate (applicable as percent of total bill amount) | Duty Rate (applied as Rs per unit of electricity consumed) |
| Andhra Pradesh | 0 | 0.06 |
| Arunachal Pradesh | N.A | N.A |
| Assam | 0 | 0.09 |
| Bihar | 0 | 0.15 |
| Chattisgarh | 7 | 0.1 |
| Goa | N.A | N.A |
| Gujarat | 20 | 0 |
| Gujarat-Torrent-Ahd | 20 | 0 |
| Gujarat-Torrent-Surat | 20 | 0 |
| Haryana | 0 | 0.1 |
| Himachal Pradesh | N.A | N.A |
| Jammu and Kashmir | N.A | N.A |
| Jharkhand | N.A | N.A |
| Karnataka | 5 | 0 |
| Kerala | 7 | 0 |
| Madhya Pradesh | 0 | 0.63 |
| Maharashtra | 15 | 0 |
| Mumbai-Reliance | 15 | 0.15 |
| Mumbai-Tata | 15 | 0.15 |
| Mumbai-BEST | 15 | 0.15 |
| Manipur | N.A | N.A |
| Meghalaya | N.A | N.A |
| Mizoram | N.A | N.A |
| Nagaland | N.A | N.A |
| National Capital Region | 5 | 0 |
| Odisha | N.A | N.A |
| Punjab | 13 | 0.1 |
| Rajasthan | 0 | 0.4 |
| Sikkim | N.A | N.A |
| Tamil Nadu | N.A | 0.1 |
| Tripura | 6 | |
| Uttar Pradesh | 5 | 0 |
| Uttarakhand | 0 | 0.15 |
| West Bengal | N.A | N.A |
| Chandigarh | 0 | 0.09 |
| West Bengal-Kolkata-CESC | N.A | N.A |
Alcohol
In most states Alcohol is taxed at the highest rate possible. Taxation on alcohol differ from state to state. The minimum VAT rate for Alcohol in India is at 20%. But some of the states have very high rates of taxation on alcohol as a measure to control the consumption as a measure of general well-being and welfare. Some of the states with the highest VAT rates on alcohol are Maharashtra which charges a whopping 65% VAT on sale of liquor and Tamil Nadu which taxes alcohol at 58%.
Conclusion
Regulatory requirements such as taxation can be a bit cumbersome for businessmen whose attention is solely focused on growth and profitability. With tax rates changing year on year depending on the budget and the economic climate, it is very difficult for a business owner to divide attention between the business and the regulatory formalities. This is why it is important to engage with a tax expert who can guide and assist you with your tax related requirements. If you have any further queries on VAT or any other tax related query, get in touch with our team of experts today and they will resolve all your queries and assist you with your requirements.
