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VAT- A Businessman's Snapshot

In this section the reader will be made aware of VAT laws that are important from the point of view of a Businessman. The primer below will also have short notes on scheme for small dealers and VAT credit. To access Primer on VAT, please click here.
  1. VAT – A Businessman’s Snapshot
VAT is a tax levied by the state government on the value addition to goods by an entity (called a ‘dealer’ in most state legislations), who is engaged in the manufacturing or in the distribution process. VAT is payable on the sale of goods to the State Government. In this discussion, we take the example of the Karnataka VAT Act as a sample, to explain the key concepts in a VAT statute. The key concepts remain similar for all VAT statutes, although the details such as the thresholds for tax liability, timelines for compliance, etc. may differ. You can look up the VAT legislation aspects for a particular state to find out about the compliance requirements there.
Applicable Law VAT Act of the concerned state. e.g. Karnataka Value Added Tax Act, 2003[1]
Taxable Event Levied when taxable goods are sold, on the ‘value addition’ to the goods
Which entities is the tax payable by? Applicable to entities who qualify as ‘dealers’ as per the law of the concerned state. Broadly speaking, a person engaged in the business of buying, selling supplying or distribution of goods is covered within the ambit of a ‘dealer’.
Rate of VAT  
Usually, each state classifies items into a few categories. All items that fall under one category have the same rate of VAT. Usually these items are categorised together under schedules to the VAT Act. For example, in Karnataka, goods could be exempted or VAT may be levied at 1 per cent, 4 per cent or 20 per cent VAT. To determine the rate of VAT, you will have identify which schedule your product can be classified into, as per the schedules of the VAT legislation in the concerned state. The rates of VAT under the Karnataka VAT Act are specified in different schedules for various articles under separate schedules, as below:
Rate of Tax Schedule of the Karnataka VAT Act Examples
Exempted goods First Schedule Petrol, glass bangles, lottery tickets, etc.
Goods on which 1% VAT is leviable Second Schedule Bullion, jewellery and articles of gold, silver and noble metals
Goods taxable at 4% Third Schedule Sports goods, spices, tractors, etc. This category contains 78 entries.
Goods taxable at 20% Fourth Schedule Narcotics and molasses
Compliance Requirements
(i.e. registration, accounts, record keeping, audits, invoicing)
Registration A dealer is required to obtain registration under certain circumstances, which may vary from state to state.
The most common categories of dealers who are required to register under the Karnataka Value Added Tax Act, 2003, are:
  • Dealers whose total turnover is likely to exceed INR 2,00,000
  • Dealers who bring taxable goods from outside the state (irrespective of the value of goods purchased)
  • Non-resident dealers or their agents must register after their first sale irrespective of value of the taxable goods sold
  • Dealers who who sell goods in interstate trade or commerce or dispatch taxable goods to a location outside the State (he is liable to register after the first sale or dispatch and must report such liability at the end of the month in which such sale or dispatch takes place).
Apart from the categories described above, any other dealer can opt for voluntary registration.
Accounts & Record Keeping Under the Karnataka VAT Act, every dealer who is liable to pay VAT I required to maintain accounts in Kannada/ English/ Hindi (or in any other language prescribed by the State Government). Further, books of account and other records (including tax invoices) relating to purchases and sales must be retained for 5 years after the end of the year to which they relate.
Audits Under the Karnataka VAT Act, every dealer whose taxable turnover in a year exceeds twenty five lakh rupees must get his accounts audited by a Chartered Accountant or a tax practitioner, subject to any conditions that are prescribed and submit a copy of the statement of accounts to the prescribed authority.
Invoicing Sale of a product on which VAT is payable must be made with a tax invoice (containing details prescribed under the act and rules made pursuant to it) which is marked as an original by the dealer. The dealer must retain a copy. Failure to provide a tax invoice or issuing false invoices is liable to penalty under the act.
Invoicing is also important for obtaining ‘input tax credit’ (see note 2 below). Input tax credit is only available if a tax invoice has been issued under the Karnataka VAT Act, or a debit/ credit note in relation to a sale has been issued. Invoices must be issued only in genuine cases of taxable sale.
Filing Returns Under Section 35 of the Karnataka VAT Act, a dealer must furnish a return in the prescribed format within 20 days after the end of each month, along with the tax amounts due. The state government can prescribe a different deadline for the payment of tax amount.
Return can also be filed electronically as per the procedure available on the following link::
  1. Scheme for small dealers
Small businesses can pay VAT in a simpler way – through a mechanism known as the ‘composition scheme’, which simplifies their record keeping requirements. Under the Karnataka VAT Act, the rate of VAT for payment under the composition scheme is 5% of his total turnover (and not on the basis of value added to the products). The scheme is applicable to the following categories of dealers:
  • Whose total turnover in four consecutive quarters is less than INR 15 lakhs; or
  • Who is a hotelier, restaurateur or caterer.
The dealer must report to the prescribed authority that he intends to pay tax under the composition scheme and furnish a return to the authority.
Note that input tax credit is not available for dealers who pay tax under the composition scheme (see below for details on the input tax credit scheme).
  1. VAT credit
Under VAT system, tax is imposed only on the amount of value addition made by a dealer. The value addition is the difference between the value of the finished product and the value of the input. The VAT payable on the finished product can be adjusted against the VAT paid on the raw material and set-off. This is known as ‘input credit’. For example, if a dealer purchases goods priced at INR 100 (plus VAT at 5%), his cost is INR 105. Let’s suppose he sells these goods at INR 150, and intends to pass on VAT burden to his customer. So, the output tax at 5% amounts to INR 157.5. As INR 5 has already been paid, he can claim credit in respect of that amount and is only required to pay balance INR 2.5.

Note: Input tax credit is not available on all kinds of inputs. Under the Karnataka VAT Act, input tax credit cannot be availed in respect of goods which are exempted from VAT (see Schedule 1 of the act for a list of exempted goods), goods specified in the Fifth Schedule (including capital goods, motor vehicles, furniture and electronics items) to the act and goods notified by the Government/ Commissioner of Commercial Taxes.

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