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Value Added Tax

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What is VAT?

Consumption tax levied on any value that is added to a product

Total tax levied at each stage is a constant fraction of the valueadded at each stage

French Tax Authority, was first to introduce VAT on April 10,

1954

130 countries are implementing VAT

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Before VAT(CST)

Sales taxes are charged on final sales to consumers

Increase with the number of passages between the producerand the final consumer

Very high sales taxes and tariffs encourage cheating and

smuggling

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VAT System-Example

A widget manufacturer spends 1.00 on raw materials and

uses th

em to make a widget. Th

e widget is sold wh

olesaleto a widget retailer for 1.20. The retailer then sells thewidget to a consumer for 1.50.Calucate tax paid with 10%sales tax and 10% VAT.

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Example 2

Raw material worth 100 were purchased for

producing final goods worth 200 in a month.If

tax rate on raw material is 4% and on final

goods is 10% then calculate the CST & VAT

effects.

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VAT in India

In April 2005,21 out of 28 states in India began implementingVAT

Intended to bring uniformity in tax structure through out thecountry

These states saw at least 25% increase in revenue from new

tax system in that fiscal

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Benefits of VAT

Brings uniformity in tax structure

Increases Governments revenue

Benefits such as VAT credit are given to manufacturers ,traders and consumers

Tax burden is sh

ared at all stages of value addition orproduction

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Limitations

Costlier to administer and collect when compared to Centralsales Tax

Different classes of goods are taxed at different rates

VAT as a Proportional Tax is beneficial where as RegressiveTax places burden on poor

At each stage ,the sale should carry an invoice

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Goods and Services Tax (GST)

Global perspective

Indirect taxationsystem in morethan 150countries

Basic structure

Indian perspective

Framework andtax structure,

Taxes to besubsumed,

Goods/services tobe taxed, and

Tax rate

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GST rates for a few major economies

Country Standard rate (%)Austria 20.0

Australia 10.0

Belgium 21.0

Denmark 25.0

France 19.6

Germany 16.0Italy 20.0

Mexico 15.0

Netherlands 19.0

Portugal 19.0

South Africa 14.0

South Korea 10.0

Spain 16.0

Sweden 25.0

Switzerland 7.5

UK 17.5

Source: Edelweiss research

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Benefits Of G.S.T

Simple and unified tax structure will boost investments.

Elimination of disparity in taxing of goods and services.

Improvement in tax compliance.

Avoiding double taxation.

Focus on business and not tax planning.

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Challenges Ahead

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Agreement of centre and state for levy and administration of duties.

Rate of taxes; goods to be exempted.

Constitutional amendment

Revamping tax administration.

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Likely impact of GST on various sectors

Automobiles

Pharmaceutical

FMCG Alcohol & Cigarettes

IT/ITes

Telecommunication

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FAQs

How will the GST work?

Will prices go up after the implementation ofGST?

How can the burden of tax under GST fall?

How will GST benefit the exporters?

How will be Inter State Transaction ofGoods & Services be taxed under GST ?