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Old 14th December 2011, 18:22   #1
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Unhappy Query on "Value Added Tax" for a new car

So, I'm going to drive home my brand new car this Saturday and for someone poorer by lakhs of rupees, I'm happy. However, a close look at the cost break-up, shocked me when I saw that I was paying about Rs. 95000 as VAT on my car. To make matters worse, I do not really understand VAT.

I tried reading up online but all I could gather was that it is a state level tax that is levied at each stage during the production chain based on the increase in value at that stage and that manufacturers are given "Tax Credit" for any input taxes borne by them. However, I still cant gather how it really works.

If I take an example of a manufacturer, say Honda (What with the "New" City being launched today) pays Rs 5 tax on raw material worth Rs. 100. This is then processed into a final product that is sold for Rs. 200. Lets say that the product is made in Haryana (as an example they levy 5% VAT) and sold in Maharashtra (Eg. 10% VAT)
When I purchase this product in Maharashtra, how much VAT do I pay - 5% or 10%? Also, is the VAT I'm paying going to Honda and then on to a state government (if so - which? Haryana or Maharashtra?) or is this amount directly going to Maharashtra government? If it goes to Maharashtra government, how does the tax credit for the Rs. 5 tax paid on the raw material (if it is paid to Haryana govt) set off? Also, net-net is it that there is no effect of VAT on Honda?

I'm thoroughly confused about how VAT works and would really appreciate if someone could explain it in layman terms.
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Old 14th December 2011, 18:49   #2
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Default Re: Value Added Tax - VAT - Help needed

As far as I know interstate VAT has not been implemented in India. For interestate sales there is only CST (Central Sales Tax). VAT credit as of now can only be taken on purchases from your own state.

For example, I am a manufacturer who buys raw material from a vendor (from inside Karnataka) for Rs. 100 + 5% VAT = Rs. 105. Then I process that raw material and sell it to my customer at Rs.200 + 10% VAT = Rs. 220. Now in this process I can take what is known as an input credit on the VAT amount that I paid to my raw material vendor (Rs. 5) So when I pay my VAT collected to the government I only have to pay Rs. 15 (Rs.20 - Rs.5). This is what VAT is in lay man's terms.

The above scenario is not applicable where CST (interstate purchse/sale) is concerned. If I had bought that raw material let's say from Maharashtra then I would have paid my vendor the CST amount on which I cannot take any credit like I can in VAT.

And I'm sure the more knowledgable folks can give you a better understanding.
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Old 14th December 2011, 19:00   #3
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Default Re: Value Added Tax - VAT - Help needed

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Originally Posted by vikram_d View Post
As far as I know interstate VAT has not been implemented in India. For interestate sales there is only CST (Central Sales Tax). VAT credit as of now can only be taken on purchases from your own state.

For example, I am a manufacturer who buys raw material from a vendor (from inside Karnataka) for Rs. 100 + 5% VAT = Rs. 105. Then I process that raw material and sell it to my customer at Rs.200 + 10% VAT = Rs. 220. Now in this process I can take what is known as an input credit on the VAT amount that I paid to my raw material vendor (Rs. 5) So when I pay my VAT collected to the government I only have to pay Rs. 15 (Rs.20 - Rs.5). This is what VAT is in lay man's terms.

The above scenario is not applicable where CST (interstate purchse/sale) is concerned. If I had bought that raw material let's say from Maharashtra then I would have paid my vendor the CST amount on which I cannot take any credit like I can in VAT.

And I'm sure the more knowledgable folks can give you a better understanding.
Thanks Vikram. So if I have understood you right, the manufacturer pays Rs. 15 to the government (from your example) and then recovers this amount from the end customer, right? Does this mean that the manufacturer is not affected by the rate of VAT?

Can someone throw light on the interstate example? If the manufacturer cannot claim credit for the CST paid, how is the VAT payable computed (considering that no tax credits are now possible)

Last edited by vinod332002 : 14th December 2011 at 19:01.
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Old 14th December 2011, 19:04   #4
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Default Re: Value Added Tax - VAT - Help needed

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Originally Posted by vinod332002 View Post
Thanks Vikram. So if I have understood you right, the manufacturer pays Rs. 15 to the government (from your example) and then recovers this amount from the end customer, right? Does this mean that the manufacturer is not affected by the rate of VAT?

Can someone throw light on the interstate example? If the manufacturer cannot claim credit for the CST paid, how is the VAT payable computed (considering that no tax credits are now possible)
Like I said there is no credit that you can take on CST.

In my example above if I had bought the raw material from Maharashtra, then I would have paid Rs.5 as CST (assuming the tax rates are the same) and then I would have sold the product to my customer and paid Rs. 20 as VAT to the government. In this case I have effectively paid Rs. 25 as tax as against Rs.15 which I did in case of VAT (that is i bought the raw material in my state).

Also when you are paying the VAT and CST amounts to the governement they are paid separately. For example in one month I collected Rs.1000 as VAT from my Karnataka customers and Rs.1000 as CST from my interstate customers, I have to pay Rs. 2000 to the government and show the break up of these amounts.

Last edited by vikram_d : 14th December 2011 at 19:18.
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