CONCEPT OF VAT 

Prepared for the use of tax-payers.

 

 

For details, please refer to the Orissa Value Added Tax Act, 2004 and  Orissa Value Added Tax Rules, 2005.

  

Introduction:

          Value Added Tax (VAT) is a form of sales taxation.  It is a multi-point tax with provision for granting set off or credit of the tax paid on purchases against the tax payable on sales.  In simple terms Value added means the difference between the sale price and purchase price.  Goods pass through various stages in the manufacturing and distribution chain till it reach the consumer.  At each stage, some value is added.  VAT works on the principle of tax on the value addition at each such stage. 

                  Guide to Value Added Tax

 

1.

What is Value Added Tax?

            VAT is a form of sales tax collected at each point of sale of goods in the production and distribution chain with a provision to set off or credit the tax paid on purchase of such goods against the tax payable on its sales.  Thus, tax is essentially collected, on the value addition at each point of such sale.

            VAT is payable, when there is sale of taxable goods;

        by a registered dealer assigned with TIN,

        within the State,

        in course of business of the dealer.

2.

What are taxable goods?

            There are four schedules i.e., A, B, C and D to the Orissa Value Added Tax Act, 2004.  Schedule A describes the goods, which are exempt from tax. Schedule B and C describe goods, which are subject to levy of tax and therefore, termed as taxable goods.  When the sales are in respect of taxable goods, such sales are called taxable sales.

 

3.

 What are the rates of tax under VAT?

            There are three rates of tax under VAT, i.e., 1%, 4% and 12.5%.  Goods described under part-I of schedule B are subject to tax @ 1%, those described under Part-II of schedule B are subject to tax @ 4% and the remaining goods (other than those described under schedule A and schedule C ) are subject to tax  @ 12.5%.  Goods as specified under schedule A are exempt from tax and those specified under schedule C are demerit goods subject to tax @ 20% at the first point of sale in a series of sales and are out of the scope of VAT.

4.

What is output tax?

            VAT charged on the sale of taxable goods by a registered dealer assigned with TIN is the output tax.

 

5.

What is zero rate sale and how does it differ from exempt sale?

            When there is sale of taxable goods and such sale is not subject to levy of tax under the Orissa Value Added Tax Act, 2004, the sales are called zero-rate sales.  In other words, the rate of tax of such sales under the Act is Zero.  Sales in course of inter-state trade or commerce and sales in course of export out of the territory of India are zero-rate sales.  Sales in such transactions come under the purview of Central Sales Tax Act, 1956 and are not taxable under OVAT Act. Exempt sales are sale of goods exempt from tax.

            Input tax credit is available when the sales are zero rated, where as such credit is not available when the sales are exempt from tax.  When goods are exempt from tax, no tax is payable on its purchase and hence there is no input tax available for credit.

 

6.

What is input tax?

            Input tax is the tax paid on purchases by a registered dealer in the course of his business for,

        resale, or

        use in the execution of works contract; or

        use in processing or manufacturing, where such goods;

      directly goes into the composition of the finished products,

      are used as packing materials for packing of goods for sale,

      are consumables directly used in the process of manufacturing,

      are capital goods (other than those described in schedule D) used directly in the process of manufacturing.

 

7.

What is input tax credit?

            Input tax credit is the setting off or adjustment of tax paid on purchases against tax payable on sales.

 

8.

 Whether all tax paid on purchases is eligible for input tax credit?

            No.

            Only the tax paid by a registered dealer assigned with TIN on purchases made from another registered dealer assigned with TIN, inside the state, is eligible for input tax credit.

            Tax paid in other States and central sales tax paid on purchases are not eligible for input tax credit.

 

9.

What is the evidence to claim input tax credit?

            Tax Invoice issued by the selling registered dealer to the purchasing registered dealer is the evidence for claim of input tax credit.

10.

How input tax credit is claimed?

            Input tax credit is claimed in the return furnished for each tax period i.e., a month.

            Tax paid on purchases, which is eligible for credit, is deducted from the tax payable on sales according to the return furnished for any tax period and the balance is paid along with such return.  In other words, the amount of credit is retained by the dealer and the balance of the output tax is credited to government treasury.

11.

What happens when the deduction of the input tax eligible for credit from the output tax results in zero-balance or negative balance?

 

            The net tax payable by a dealer for ay tax period is arrived at by deducting input tax eligible for credit from the output tax at the end of that tax period.

            If the deduction results in zero-balance, then no tax is payable and if it results in negative balance, the balance amount is refundable, but carried forward for adjustment to the subsequent tax period(s)

       

  FOR FURTHER INFORMATION OR CLARIFICATION, PLEASE CONTACT LOCAL OFFICE.

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