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Value Added Tax And Its Application In India

A guide to understanding Value added tax – its evolution, applicability, features, states & goods covered, input tax credit, rates, and filing VAT return.

What is VAT?

Value added tax is a tax applied to the incremental value of goods and services added in every stage of production or distribution cycle. Firstly, the amount of value addition is identified, and then tax is levied on the same. It is applicable only to the interstate purchases and sales. The application of VAT has helped traders, businessmen and government by encouraging transparency in the sale of goods and services at the minutest level.

The then Finance Minister, P. Chidambaram released a white paper in January 2005, asking for a commitment by the states for implementation of the State VAT laws from 1st April, 2005.

Guiding Authority – Each state has its own VAT laws guided by an Empowered Committee, working under the Ministry of Finance for proper implementation and levying. This is needed so that a uniform structure can be maintained in the country.

Who PAYS? – Categorized as an indirect tax, value added tax is borne by the end consumer, whose liability can be easily transferred along the cycle, reducing the tax burden from the head of a particular individual.

Why is it Important? – The main agenda behind formulation was to eliminate the presence of double taxation and the cascading effect from the applicable Sales Tax structure in India. It was also required to boost compliance, apply uniformity and put India in a better place for global trade.

Input Tax Credit – It provides for taking the credit of the input tax paid on the goods purchased and utilizes the same for the payment of output tax on the goods sold. If the input tax is more than the output tax, the credit is available for carrying forward. Also, a refund of the same can be claimed at the end of the second year. Requirement for claiming input tax credit:

  • The dealer must be registered.
  • A tax invoice must be issued having the TIN number of the dealer along with a proper serial number, a date and sign.
  • Sales must have crossed the applicable limit.

Let us study the following example for better understanding of VAT payment and Input tax credit:

Particulars Amount
Amount of Inputs purchased @4% 200000
Amount of goods sold @ 12% 100000
Tax paid on Inputs(Input Tax) 8000
Output Tax Payable 12000
VAT payable after utilizing tax credit (Output Tax – Input Tax) 4000


Registration – For dealers, it becomes compulsory to register if the turnover exceeds INR 5 lakhs (INR 10 lakhs in some states). An 11-digit VAT TIN number is issued which also identifies the state where the registration was done.

Goods Covered under VAT – All goods except liquor, lottery tickets, petrol, diesel and other motor spirits, are covered under the taxability of VAT and are eligible for credit benefit.

States Covered – Haryana was the first state to implement the VAT procedures. A few states opted out initially but as on today, VAT has been affected in all the states and UTs except Andaman & Nicobar Islands and Lakshadweep Island.

VAT Rates – Different states apply different VAT Rates as per their implied laws. There are two sets of rates that are applicable for most goods: 4% or 5% and 12.50%. Some basic necessity goods are exempted such as wood, salt, etc. Goods like precious stones, gold, bullion, jewellery, etc. come under a VAT rate of 1% or 2%.

VAT Return – VAT return can be e-filed either monthly or quarterly by the dealers. The last date for filing the return is 20th of the following month. A challan is created for the VAT payment. This challan needs to be paid by 15th of the next month in which VAT becomes payable. The returns are scrutinized on their own, making the process self-assessable by the dealers. The credit of VAT can also be utilised for the payment of CST tax.

VAT is a part of the existing indirect tax structure which will be replaced by the Goods & Services Tax (GST)