The Structure of VAT and its Implementation Process

• Area of Tax
• Tax Rate
• Registration
• Tax Invoice
• Abbreviated Tax Invoice
• What happens when sold goods are returned by customers?
• Discount on Sales
• Goods Given as Gifts to Customers
• If the Goods Purchased Decrease in Number or are Damaged
• Accounts Regarding VAT
• Tax Return
• Payment of Tax
• The System of Penalty and Punishment
• Appeal
• Miscellaneous

 

Area of Tax

VAT is a tax levied to replace sales tax, contract tax, entertainment tax and hotel tax. This tax is levied on all goods and services produced and imported in the country, apart from those fixed by the law as non-taxable goods and services. The tax exempt goods and services are listed in the Schedule 1 of the VAT Act 2052. Such goods include basic agricultural products and the materials used in them, social welfare services, equipment meant for use of the disabled, passenger transport services, goods and services related to education and culture, postal stamps, revenue stamps, bank notes, cheque books, financial and insurance services, purchase and sale of houses and land, betting, casinos, and lotteries.

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Tax Rate

According to the VAT Act 2052, there is provision for imposing zero percent tax on exports and a single positive rate on other goods and services on which tax is to be levied. This rate has been fixed at 13%.

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Registration

There is provision under section 10 of the VAT Act 2052, for businesses already in operation at the time of commencement of VAT, to apply for registration within 90 days of the act’s promulgation. Similarly, after the commencement of the Act, a provision has been made for applying for registration prior to the commencement of a business by a person interested to establish a business. Businessmen indulging in business of goods and services that are free from VAT need not register for the purpose of this tax. Similarly, even small business persons engaged in taxable transactions of goods and services but undertake imports of up to Rs. 10,000/- at one transaction or have annual transactions of up to Rs 2 million need not compulsorily register for the purpose of VAT. The seller himself must be aware whether he has to register for the purpose of VAT or not. In other words the seller must first and foremost determine whether he does or does not transact taxable business. If he/she is not engaged in taxable business then there is no need for him/her to fulfill any formalities. If he/she is carrying out taxable business, then it should be assessed whether or not the annual transaction is more than 2 million (or more than Rs. 10,000/- in one import transaction). If the taxable annual business is less than the stipulated amount, then it is not compulsory for the person to register although he/she can do so voluntarily. If the taxable annual transaction figure is more than the above-stated amount then the person must apply for registration through the concerned Inland Revenue Office under section 10 of the VAT Act 2052. After applying, the seller receives the VAT registration certificate and the identification (registration) number.

* If a person involved in transactions under Rs. 2 million exceeds this amount in any month he/she must apply for registration to the Inland Revenue Office within 30 days from the date on which Rs. 2 million was exceeded, and after receiving the registration number must commence collecting tax on sales.

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Tax Invoice

A VAT registrant must provide a tax invoice to the customer on the sale/supply of goods or services. The tax invoice is a very important component of VAT. One cannot deduct the amount that is not mentioned in a tax invoice.

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Abbreviated Tax Invoice

• A registered person who deals in retail sales can apply to the tax officer to waive the need to issue a tax invoice. If the application is found to be appropriate, the tax officer can give clearance to the applicant to issue an abbreviated tax invoice instead of tax invoice as stated in Schedule 6 of the VAT Act. While selling several goods of low costs instead of mentioning each item, they can be referred to as “some goods” and an abbreviated tax invoice can be issued.
• Those receiving an abbreviated tax invoice cannot deduct the taxes incurred.
• In transactions of good and services above Rs 5,000/- (inclusive of tax) an abbreviated tax invoice cannot be issued.

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What happens when sold goods are returned by customers?

A customer can return all or some goods that had been sold, and in such cases the seller can refund or credit the tax collected. In such cases a ‘credit note’ which includes the details stated below must be prepared.

• In the statement ‘credit note’ must be mentioned.
• The name and registration number of the receiver.
• The date on which the credit note has been issued.
• It must be mentioned whether it is account adjustment, tax deduction or refund.
• If the number of invoice is more than one, then the date must be mentioned on the first and last invoice.
• A short summary of goods.

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Discount on Sales

In section 12 (3) of the VAT Act it has been stated that discount, commission or other business rebates given in the price of goods or services shall not be included in the tax amount. Such discounts must be given with business objectives and this should be clearly mentioned in the invoice.

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If the Goods Purchased Decrease in Number or are Damaged

Sometimes it is natural for some goods to be damaged, catch fire or are pilfered. It is necessary to be always alert that such losses do not occur. But if such incidents do occur then the Inland Revenue Office must be intimidated in time if proper proof can not be established. Genuine losses are recognised by the office and accounts can be settled accordingly.

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Goods Given as Gifts to Customers

Such practice is found everywhere. It is a general business practice to award the customer free gift items in the purchase of goods of certain value or quality. In such cases the process of VAT will be as follows.
 

Name of Goods	Quantity	Price per item	Total Amount
Telephone set	50 nos.	Rs.2,000	Rs.1,00,000
Given as gift	1	Rs.2,000	Rs.2,000
Total sets
Price paid			Rs.1,00,000/-

The established price for the purpose of VAT will be: 1,00,000/51 = Rs. 1,960.78 per set

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Accounts Regarding VAT

For the purpose of VAT, a general type of account can be maintained. In this context, a purchase book, sales book and VAT accounts must be maintained as described below.

1. Purchase Book

A registered taxpayer must keep record of goods and services purchased or imported on a monthly basis. The date of purchase of goods and services, invoice number, name and registration number of the supplier have to be stated. In the same way the total cost, the taxable amount, tax-free amount, and the tax paid should be stated.

2. Sales Book

A sales book is similar to the purchase book. In a sales book the price of goods and services sold, the tax levied on them, etc should be stated on a monthly basis.

3. VAT Account or Book

VAT account or book shows the position of the tax paid on purchase, tax collected on sales and the tax payable to the Government by the taxpayer.

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Tax Return

Each registered taxpayer must furnish the tax return to the Inland Revenue Office within 25 days of the expiry of the months. The return should include the following:

• The amount of VAT collected.
• The amount of tax incurred or paid on purchases.
• The difference between the two will ascertain whether tax can be deducted or refund can be claimed.
• Only specified forms must be used.
• Even if the amount has not been received from the customer on credit sales the tax has to be paid from the date the invoice was issued.
• Deduction of tax must be made although the goods may have been bought on credit.
• In cases where the exporter’s monthly sales comprise of more than 50% exports to foreign countries then a refund of the incurred taxes can be claimed.

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Payment of Tax

The amount of tax collected on all sales need not be paid to the Government. If the tax incurred on purchases in less than the tax collected on sales then only the difference amount has to be paid to the Government. In other words, on the VAT return form, which must be submitted every month to Inland Revenue Office, the tax incurred must be deducted and the balance tax amount must be paid to the Government. A voluntary registrant must furnish the statement within 25 days after completion of four months to the Inland Revenue Office.

• A registrant must submit each month’s taxes within 25 days after the month has expired. A voluntary registrant must submit the taxes within 25 days after completion of four months of transaction.
• The seller is imposed a penalty of 5% on the monthly tax amount if the tax is not paid within the time stipulated in the act.
• If the tax due is not paid for a further one month, an additional 5% penalty must be paid.

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The System of Penalty and Punishment

According to section 29 of the VAT Act, the Tax Officer can impose the following penalty under the following circumstances.

• If a person already involved in business when the Act was introduced does not apply for registration within 90 days or a person establishing business after the commencement of the Act does not apply while starting business then the due tax amount of each tax period and Rs. 10,000/-
• If a registered person does not keep the certificate where it can be seen by all, does not use his VAT Identification number in work regarding income tax, excise duty and customs or if there is any change in the particulars submitted at the time of registration and the changes are not notified to Tax Officer within 15 days, then Rs. 1000/-each time.
• If a tax invoice is not issued as per specification then the due tax amount and Rs. 2000/-
• If an unregistered person collects tax then the collected tax and a penalty of 100% on this amount.
• If the accounts are not updated then Rs. 10,000 and if the accounts is not allowed to be inspected Rs. 5000/- each time.
• If the purchase and sales book certified by the Tax Officer is not used and if the records are not kept secured up to the specified time period then. Rs.10000/-
• If self-assessment is not carried out each month and the due tax amount paid within 25 days of the completion of the month then a 0.05% on the amount due as tax each day or Rs. 1000/- for each tax period; which ever is higher.
• As per section 23 of the VAT Act, if obstruction is caused or objection made in the process of inspection and investigation by the Tax Officer of the business place Rs. 5000/- each time.
• If under invoicing is found in the bill then Rs. 2000/- for each invoice or penalty according to section 23 (2) of the Act; whichever is higher.
• If there is a violation of the Act and regulation apart from the conditions mentioned above Rs. 1000/- each time.

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Appeal

According to section 12 of the Act, appeal can be filed within 35 days after the order has been received to the revenue tribunal.

• While making an appeal, from among the total established tax amount, the part that is undisputed should be paid.
• 50% of the disputed tax and penalty amount must be deposited or a bank guarantee of this amount must be submitted.

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Miscellaneous

1. Can goods be sold or not if the purchase price is more than sale price?

• Yes it can be done. The market price is controlled by many factors. Price changes occur  owing to market competition, demand of goods etc. Under such circumstances, the price  of goods can decrease or increase. The Inland Revenue Office does not interfere in such  cases. The price established by the tax-payer is accepted as the last price.
• There are many businesspersons who deal in the same kind of goods. It has been observed that out of 50 business people, the sale price of 49 people varies by only 10 to 15%. But if the sale price of only one person is between 40 to 50% less than the price of others, then according to section 12 (6) of the Act, the Inland Revenue Office can investigate and ascertain the actual price.

2. If the invoice issued has a ‘tax inclusive price’ how does one find out how much tax has been collected?

• In such cases, the tax amount can be calculated by multiplying the total cost price by the tax fraction. An examples is given below:

Tax rate / Tax rate + 100 =  fraction in tax

If the tax rate is 13% then:

13/13+100 = 13/113

If total sales is Rs. 1,10,000/- then:

110000 X 13/113  =  Rs. 12,655
              
The tax during that tenure is Rs. 12,655/-

3. While selling goods and services that are taxable and tax exempt how does VAT function?

• Tax deduction cannot be made on tax- exempt goods or services and goods for personal consumption.
•  If both taxable and non-taxable transactions are carried out, then the portion of goods and services on which tax has to be paid has to be separated.
• Tax deduction must be made on only taxable goods or services.

4. What is the responsibility of the taxpayer?

• Each registered seller must collect taxes by issuing an invoice on the sale of goods and services to the customer.
• If the tax amount collected is more than the tax incurred on purchases then the balance tax amount after deducting the tax incurred has to be paid to the Government.
• If the tax incurred on purchases is more, then the difference can be deducted from the tax amount due in the following month.
• If after deductions for 6 consecutive months, the tax incurred on purchases still cannot be adjusted then the excess amount can be claimed as refund.
• After the completion of each month one should carry out a self-assessment of the tax amount due and a return should be furnished to the Inland Revenue Office within 25 days. If tax is to paid then one should deposit the amount in the bank within the stipulated date and submit the voucher.
• While preparing the tax return calculations should be done on the basis of the purchase and sales bill.

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