Taxes – Value Added Tax (VAT), Service Tax

By | October 25, 2015
  • Article 265 of the Constitution of India says that ‘no tax shall be levied or collected except by the authority of law‘. In India , the Parliament is the only authority to enact the law in the country.
  • Direct Tax: This the tax whose impact and incidence is on the same person and shifting to tax burden is not possible. It means that the one who pays the direct tax, also bears the burden of the tax. Examples of direct taxes are personal income tax, corporate tax, wealth tax, gift tax, interest tax, securities transaction tax, fringe benefit tax, banking cash transaction tax, etc.
  • Indirect Tax: These are the taxes which are paid by some person of the tax on to some other person i.e. tax impact and tax incidence is on two different persons. Examples are customs, central excise, sales tax (VAT), service tax, etc.
  • Ad Valorem Tax: It is a kind of indirect tax in which the goods are commodities are taxed as per its value. VAT is an example of Ad Valorem Tax.
  • Specific Tax: It is the tax which is imposed on the basis of special attributes of the commodity. for example, the length, the breadth, the weight is used in the international trade or in case of import and exports.
  • Minimum Alternative Tax (MAT): It is the minimum tax which a company has to pay even if it is not having any income or non zero income. It came into force to curb the problem of the tax aversion by the companies showing zero income, hence paying no taxes. With effect from April, 2000 MAT was imposed at a flat rate of 7.5% on book profit as computed under the Companies act without allowing for any deductions or adjustment. Union Budget 2006-07 has increased the rate of MAT to 10% of book profit.

Value Added Tax (VAT):

  • Value Added Tax (VAT) is the tax levied on the value added at various stages of the output of commodity.
  • The value added id measured as the difference between the gross value of output and that of the intermediate goods purchased for the purpose of final disposal.
  • For the calculation of VAT, the tax credit method is used under which a firm is allowed to deduct the VAT paid by it on its purchase from other units from the VAT which the firm has to pay. Sale invoice has to be shown for the same.
  • The decision to introduce VAT arrived at during the conference of Chief Minister of States/UTs held in 1999, and afterwards in 2000 & 2001.
  • An empowered committee of State Finance Ministers was constituted in July 2000 to monitor the progress of introduction of VAT
  • VAT came into effect from 1st April 2005, except in BJP ruled States and Uttar Pradesh, Tamil Nadu & Puducherry. In all, 25 States/UTs implemented VAT in 2005-06.
  • Chhattisgarh, Madhya Pradesh, Jharkhand, Gujarat and Rajsthan implemented VAT with effect from April 1, 2006.
  • As per the preconditions to implementation of VAT, if any loss is suffered by any state due to ¬†implementation of VAT, it will be compensated by the centre in the following manner:
    1. 100 % compensation in 1st year.
    2. 75% compensation in 2nd year.
    3. 50% compensation in 3rd year.
  • In 2005-06, maximum loss was suffered by Kerala States out of 25 states who implemented VAT in 2005-06 got losses due to it.
  • The design of VAT as recommended by the empowered committee and adopted by States from April 1, 2005 in uniform across the States. It broadly put forward at three rate structure:
    1. 4 percent for 250 commodities (mainly agro-based products and industrial inputs).
    2. 12.5 percent for 217 other items.
    3. 1 percent for gold and precious metals.

Service Tax:

  • Service Tax was introduced in India for the first time in 1984-85. Budget at a 5 percent Union Service Tax on three specified services, namely telephone, general insurance and stock brokage. At present nearly 100 services are under its ambit. The Union Budget 2006-07, has increased service tax rate to 12 percent plus surcharge application thereon.
  • Service tax is the union List of the Seventh Schedule of the Indian Constitution.