Value Added Tax (VAT) & Sales Tax

Value Added Tax (VAT)

 

  • VAT is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/ distribution chain.
  • The term 'value addition' implies the increase in value of goods and services at each stage of production or transfer of goods and services.
  • VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer.

 

The State Governments, through Taxation Departments, are carrying out the responsibility of levying and collecting VAT in the respective States. While, the Central Government is playing the role of a facilitator for the successful implementation of VAT.

The entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, needs to issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice is to be signed and dated by the dealer or his regular employee, showing the required particulars. For identification/ registration of dealers under VAT, the Tax Payer's Identification Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first two characters represent the State Code and the set-up of the next nine characters can vary in different States.

Sales Tax

Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax.

Sales Tax is a levy on purchase and sale of goods in India and is levied under the authority of both Central Legislation (Central Sales Tax) and State Governments Legislations (Sales Tax). The government levies Sales Tax principally on intra-state sale of goods. States also levy tax on transactions which are "deemed sales" like works contracts and leases.

In addition to Sales Tax, some states also levy additional tax, surcharge, turnover tax and the like. Ordinarily, Sales tax is recovered from the buyer as a part of consideration for sale of goods.

Sales tax is paid by every dealer on the sale of any goods made by him in the course of inter-state trade or commerce, despite the fact that no liability to tax is raised on the sale of goods under the tax laws of the appropriate state.

Sales Tax ID number

A state Sales Tax ID number is essentially a business version of your Social Security number, under which you collect and pay tax for any service or product you sell, which in turn, qualifies for taxation in your state.

The rule of thumb for Sales Tax is that most services are exempt and most products are taxable except for food and drugs, though recent history reflects that states have been gradually adding to the list of services that are taxable.