Scope and Rates
India has a federal structure with both federal and state specific indirect tax levies on sale of goods. India introduced (in the period 2003–2006) VAT to replace the erstwhile sales tax regime on sale transactions within the state. The last state to switch over to the VAT regime with effect from 1 January 2008 was Uttar Pradesh. In tandem with the above state VAT regime exists another regime namely central sales tax (CST), which is levied on sale of goods occasioning movement across states. Sale by one taxable person to another taxable person across states is charged to CST at the rate of 2 percent, subject to the condition that the purchaser is able to issue statutory declarations and fulfills other specified conditions. Alternatively, CST is charged at the VAT rate applicable in the originating state. The current tax regime does not envisage recovery of CST incurred on procurement of goods and hence results in a cost.
VAT is levied on the sale of goods made by a taxable person in the course of a business carried on by the said person. Sale has been defined as transfer of property in goods for valuable consideration. Mere supply of goods may not be charged to VAT. Import of goods into India is not subject to VAT. Rendition of services is also not subject to VAT, as services in India are governed at a federal level by an independent legislation that is, service tax.
Sale includes transfer of property in goods involved in execution of a works contract, transfer of the right to use goods, and delivery of goods on hire purchase. A works contract generally means a contract which involves use of labor and transfer of material in the course of execution of the contract.
A taxable person is liable for VAT after turnover of his/her business reaches the threshold prescribed by the relevant state VAT legislation.
VAT is generally charged at standard rates, namely 4/5 percent or 12.5/15 percent, depending upon the nature of goods. The categories of goods eligible for exemption and subject to VAT at 4/5 percent, 12.5/14.5 percent, or higher rates vary across states. Further, an additional tax/ surcharge ranging from 0.1 percent to 1 percent is being levied in certain states such as Punjab, Haryana, Kerela.
The definitions and scope of such categories of goods also vary across states. Certain categories of goods that are by and large common across states are illustrated herein under.
VAT is charged at 4/5 percent on several categories of goods, including:
- agricultural implements not operated manually or driven by animals
- communication equipment like PBX or EPABX, etc.
- intangible goods like patent, copyright, etc.
- capital goods
- chemical fertilizers
- drugs and medicines
- iron and Steel
- IT products (including hardware, software, telecommunication equipment, etc.)
- industrial inputs (mainly certain basic chemicals and minerals)
- processed meat, fish, vegetables, and fruits
- sports goods
- transformers and transmission towers.
Most other categories of taxable goods are subject to VAT at 12.5/15 percent.
However, the aforesaid rates/categorization is very generic and can vary with the changes being brought by the respective state legislations.
Yes. There is a reduced rate of 1 percent for certain categories of goods, including:
- precious stones such as diamonds, etc.
- articles or ornaments made of the above.
The export of goods is zero rated.
There is an extensive list of exempt categories of goods, including:
- agricultural implements operated manually or driven by animals
- aids and implements used by handicapped persons
- books, periodicals, and journals
- electric energy
- fresh milk, pasteurized milk, butter milk, and curd
- fresh plants, samplings, and fresh flowers
- fresh vegetables and fruits
- meat, fish, prawn, and other aquatic products when not cured, or frozen, eggs, and livestock
- paddy, rice, wheat, pulses, salt, and flour
Note: It is not possible to recover VAT incurred on inputs used for manufacture of goods which are exempt from VAT.
Certain categories of goods are charged to higher rates of 20 percent or above, including:
- petroleum products such as diesel, petrol, lubricants, aviation turbine fuel, etc.
- natural and other gasses used as fuel
- liquor and beer.
Note: except for resale, it is generally not possible to recover VAT paid on procurement of such goods.
Yes, other indirect taxes include:
- Service tax (see Service Tax Essentials)
- Customs duty
- Entry tax/Octroi
- Other local levies including Stamp duty, Entertainment tax and Luxury tax.
If a taxable person effects taxable sales within India in excess of the prescribed VAT registration threshold, the said person will be required to register and account for VAT in the state from where such sales are made. The registration threshold varies across states and range between approximately USD 25 to USD 25,000 (assuming USD 1 = INR 50). However, in most states, if a person brings goods from outside the state for sale in the state, the threshold limit in such cases is zero. Certain states provide for a voluntary registration even if a taxable person is below the registration threshold.
However, no registration threshold has been prescribed for a taxable person effecting interstate sales. Accordingly, a taxable person is liable to register and account for VAT/CST after effecting first interstate sale transaction.
Yes. There are penalties for failing to register for VAT promptly which vary across states. The penalties are calculated based on the net tax due for the period commencing when the business should have applied for registration and ending on the date of application. The penalties can be reduced/ waived on establishing a reasonable cause for late registration.
An overseas company is not liable to register for VAT in India unless it has an office in India which is engaged in business of sale of goods. However, there is no restriction per se on overseas company to apply for a voluntary registration.
No. Registration is required where sale is effected in India and there are penalties for failing to register for VAT promptly which vary across states. However, where there are direct sale from outside India that are not liable to VAT, registration would not required.
No. There is no provision for VAT grouping. In fact, a taxable person is liable to register and account for VAT separately in each state from wherever he/she makes taxable sales in excess of VAT registration threshold. However, a taxable person is entitled to apply for single registration and file consolidated return for various branches within a particular state of operation.
A registered taxable person is liable to file VAT returns in the respective states. The frequency of VAT returns filing varies across states. Further, depending on the category of the taxable person/turnover or tax liability incurred during the preceding year or expected during the current year, the VAT return filing could be monthly, quarterly, or half-yearly.
Failure to furnish timely VAT returns and settle outstanding VAT payments may result in penalty and interest. The provisions for the imposition of penalties and interest vary across states and depend upon the duration of delay and the amount of net tax involved. The amount of penalty can be waived/ reduced on demonstration of reasonable cause for delay. However, charging of interest in case of delay in deposit of VAT due is mandatory.
Yes, VAT legislations of most of the states require filing of an annual return within six to ten months from the completion of the relevant financial year.
There are no specific exchange rate rules.
No. Only registered taxable persons can recover VAT on goods procured from within the state where he/she is registered.
No. Refunds are available only to registered taxable persons within the state.
Yes. Generally, VAT can be recovered on goods procured from within the state for resale, or use in manufacture or processing or packing of goods for sale. In addition, VAT can also be recovered on capital goods such as plant and machinery used in manufacture of goods.
- Exempt supplies: the VAT paid on supplies which relate to exempt sales is not recoverable. Where VAT relates to both taxable and exempt sales, the taxpayer can recover proportionate VAT subject to appropriate apportionment.
- Negative list: various state VAT legislations provide for a negative list of items on which VAT cannot be recovered (except on resale). The lists of such negative items vary across states and include:
- motor vehicles
- petroleum products or natural gas used as fuel
- air conditioners installed in office
- office equipment and consumables.
International Supplies of Goods and Services
Export of goods out of India is zero rated. A taxable person can claim refund of VAT paid on inputs used in export of goods, subject to the prescribed requirements. Alternatively, subject to conditions, a taxable person can also purchase goods for export without payment of VAT.
Similarly, export of services from India is exempt from service tax, (a separate federal levy on provision of notified services), subject to conditions.
No VAT is payable on importation of goods into India. However, customs duty may be payable on such imports.
No VAT is payable on importation of services into India. However, service tax may apply under the reverse charge mechanism.
A tax invoice is issued when sales are made to another registered taxable person. While the precise format/ content requirements differ across states, in this regard a tax invoice should broadly contain the following information/details:
- name, address, and registration number (VAT number) of the seller
- the word TAX INVOICE mentioned at a prominent place
- name, address, and VAT number of the buyer
- date of the invoice
- a pre-printed serialized number
- description, quantity, volume, unit price, and VAT rate of each item
- total gross amount payable, excluding VAT
- amount and nature of any discount offered
- total amount of VAT payable
- a signature of the selling dealer or his/her authorized representative
- where exempt or zero-rated supplies are included in the invoice, each such item should be distinguished separately.
Apart from the above, certain states have prescribed certain specific requirements such as name of the printer, time of sale, statutory declaration regarding nature of the transaction/seller, etc.
In case taxable sales are made to a non-registered person or taxable person outside the state, generally a retail invoice is issued. The retail invoice should also contain the above information/details except that the words retail invoice should be indicated prominently instead of tax invoice.
The invoices can be generated electronically. However, duly signed original invoice in paper form has to be issued by the taxable person to enable the purchasing taxable person to avail input VAT.
The invoice can be raised in foreign currency, provided equivalent INR amount is also mentioned on the invoice.
Transfers of Business
Yes, if a business is sold as a going concern, VAT may not apply, subject to certain conditions. For example, the business should be transferred as a whole and the purchaser should be able to carry on the business by stepping into the shoes of the seller. Where part of a business is transferred, then that part of the business should have independent and separate operations.
Options to Tax
The VAT legislation in India does not provide for an option to tax transactions. However, there are alternative schemes (viz. composition/ ad-hoc/ normal scheme) for valuation and payment of VAT in relation to works contract activities.
Head Office and Branch transactions
The transactions involving supply of goods between head office and a branch or vice versa are not subject to VAT, subject to conditions and furnishing of prescribed statutory declarations.
No. The VAT legislations generally in India do not provide for a relief for bad debts.
Most VAT legislation in India do not specifically provide for a general anti-avoidance provision. However the VAT authorities in India may challenge the genuineness of the transactions in order to ensure transactions are not undervalued or underreported in order to evade payment of VAT.
Various courts in India have examined this issue on several occasions. In view of the recent jurisprudence, the VAT authorities are required to restrict themselves to the relevant agreements/documentation only and produce legal evidence, in order to allege the transaction as an artificial device aimed at avoiding tax. The VAT authorities would not be permitted to allege the transaction as sham or a device intended to avoid tax solely on the basis of suspicion or hypothetical assessment of the underlying motive of the parties. Thus, the application of anti-avoidance principles has to be examined on the basis of specific facts of each case.
VAT legislations in India provide for penalties for non-compliance.
The penalties are generally computed on the basis of nature and duration of non-compliance and amount of tax involved. However, voluntary disclosure of non-compliance generally mitigates the penalty.
The delay in deposit of VAT attracts mandatory interest which varies across states and ranges from 15 percent to 24 percent per year.
How often do tax audits take place?
Provision of tax audits (viz. frequency, competent authority, etc.) vary depending upon the legislation (viz. VAT, service tax, excise duty). Further, generally while there is no prescribed frequency of tax audits, the relevant tax authorities of each legislation depending upon their internal prescribed criteria (such as turnover, total tax payments, comparatives with the industry, etc.) conduct the audit. For example, in the state of Delhi, special audit is required where the same is directed by the Commissioner.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
At present, there are no provisions of e-audits under VAT, service tax and excise duty legislations.
Is it possible to apply for formal or informal advance rulings from the service tax authority?
Depending upon the legislation, there are specified criteria (such as the transaction has to be proposed, party seeking advance ruling need to be an overseas entity, etc.) which needs to be fulfilled in order for a person to be eligible to obtain an advance ruling.
Are rulings and decisions issued by the service tax authorities publicly available in your country?
While these are publicly available through different websites, there is no standard link/database.
- VAT provisions differ depending on the state VAT laws. Some state VAT laws have comparatively more liberal provision than others
- input tax credit for VAT paid on goods used in providing services/manufacture of goods cannot be utilized against Service tax/Excise duty liability and vice-versa.
Under each legislation (viz. VAT, Service tax, Excise duty), depending upon specified goods, area, capacity, etc, indirect tax incentives (viz. reduced rates, exemptions and zero rating, etc.) are available.