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VAT Tax In India - Value-Added Tax Definition & Types

VAT is an acronym for the value-added tax levied on the selling of goods and services within a specific state. This is another form of indirect tax paid to the government by the producers at every stage of the supply, although the actual tax is paid by the end consumers of the products and services.

VAT Tax In India - Value-Added Tax Definition & Types

VAT is an acronym for the value-added tax levied on the selling of goods and services within a specific state. This is another form of indirect tax paid to the government by the producers at every stage of the supply, although the actual tax is paid by the end consumers of the products and services. It is worth noting that the seller and the buyer should be in the same state while purchasing or selling the goods, and services. It means that the value-added tax is only applicable to goods/services sold within a respective state.

What Is The Value-Added Tax In India?

Value-added tax is typically an indirect tax levied on the gross margin incurred from selling goods or services. VAT plays a crucial role in the betterment of the GDP. VAT is levied and collected at each stage, from the manufacturing of the products to their consumption by the end consumers. There are provisions for collecting the tax paid on purchases at each point of sale in this multistage tax system. Therefore, the system of tax on tax is eliminated as of now. Every state of India does have different VAT laws. Therefore, the list of the goods and services exempted and the exemption limit also differs from one state to another. Any individual whose annual turnover is more than Rs.5 lakh by supplying goods and services must register for value-added tax payment. However, Value-added tax is levied both on local and imported goods.

Value Added Tax Rates In India

The guidelines of value-added tax implementation can be distinctive. Value-added tax in India is classified into four categories which are mentioned below: Nil: This category defined those goods and services that are exempted from value-added tax. This category included mainly items that are very basic in need and supplied in the unorganized market such as salt, etc. 1%: VAT is charged at 1% for the items under this category. 1% VAT is typically applied to things that are relatively expensive. Because raising the rate of VAT will cause the cost of the commodities that belong under this category to significantly increase, VAT is only applied at 1% to pricey goods. Some examples of products that fall under this category include gold, silver, precious stones, etc. 4-5%: On several items used on a daily basis, VAT is imposed at a rate of 4% to 5%. Examples of items that attract VAT at 4-5% include cooking oil, tea, medicines, etc. General: Items that fall under the general category attract VAT at 12% to 15. This category mostly includes luxury goods like alcohol, cigarettes, and other alcoholic beverages.

How To Calculate VAT?

VAT has two components to calculate the value-added tax. One is output tax and the second is input tax. Output tax is the tax that the seller gets after offering his/her goods or services. Input tax is a tax that the sellers have to pay while purchasing raw items to manufacture their own goods or services. VAT = Output Tax – Input Tax To have a better understanding of the VAT calculation, let’s have an instance. Suppose, there is a restaurant owner named Sahil who purchases some raw materials for Rs. 60,000 and the input tax is 10% thus the input tax is Rs. 6,000. Now after selling the food made from the purchased raw material, Sahil was earning Rs. 1,50,000. Assuming that the output tax is also 10% then the output tax will be 15,000. So, the final VAT that Sahil has to pay will be 15,000-6,000 = 9000

VAT Registration

Having a VAT Registration is mandatory for all those manufacturers whose turnover is more than Rs. 5.5 Lakhs by offering their goods and services. These manufacturers are required to be registered in that specific operating state. Businesses must register for VAT before they may begin paying it. Each merchant receives their own 11-digit registration number upon registration, which is used for all communications pertaining to VAT and its filing. Documents required for VAT registration: We have mentioned below some of the essential documents to get the registration of VAT. Proof of identity of promoters Copy of PAN card An additional security deposit or surety Address proof of business

The Procedure For VAT Registration Online

Getting the registration of VAT online is simple and easy. However, there can be some differences among the VAT tax rates depending on the state. Following are the procedures for registering for VAT online. Visit the VAT website of your state and log in to register and log in to your account. Then click on the registration tab. Fill in your relevant information and upload documents. Then you will get a temporary value-added registration number. Once the verification process is complete you will get your permanent VAT registration number. You can check your VAT status online.

Advantages of VAT

VAT is a crucial tax process for countries. India was one of the last countries to levy the process of VAT tax. In India, there was a problem that most businessmen and enterprises had found loopholes to avoid taxes. Thus, the Indian Government also introduced VAT to minimize tax evasion and bring transparency to the taxation system. Following are some benefits of value-added tax. Value-added tax is accepted all over the world except in very few countries. This will help India to build better trade relations globally. There is no exemption provided under value-added tax that eliminates the tax evasion loopholes. VAT is levied at every stage of production which ensures better compliance. VAT is the tax that helps to reduce the prices of goods and services for the end user.

VAT Collection In India

The processes of VAT collection are divided safely into two categories depending on the method of collection of value-added tax.

Accrual-based Collection of VAT

Under Accrual-based collection, the revenue matches with the specific time period during which it was earned and the cost of raw materials to the time period during which they were made. VAT accrual-based collection is a more complicated method Compared to the cash-based collection of VAT. It helps you get details about the enterprises.

Cash-based Collection of VAT

Cash-based accounting, The main thing that is checked is the cash that is being organized and spent instead of checking the payment of the bills and business. Every time a payment is received, that day is noted as the date of funds receipt. Cash-based accounting is easy and simple compared to accrual-based calculation.

Invoice-based collection method of VAT

Under this method, sale receipts of the invoices are considered to calculate the applicable VAT. Whenever any seller sells his/her product or service, s/he offers an invoice including the details of the VAT collection. The invoice-based collection method is much simpler and thus it is accepted by all countries.

Account-based collection of VAT

Under the account-based collection method, sale receipts are taken into use, but the tax is calculated on the value added to the product or services. The value-added tax accounts for the discrepancy between revenues and permissible purchases. Value added is simply a difference between the revenue and allowable purchase.

Difference Between VAT and Sales Tax

The difference between sales tax and VAT tax is as follows- At each point in the sale of products, VAT is levied on the gross margin. The tax is levied and gathered at every stage, starting with the maker and ending with the retailer. As opposed to sales tax, which is only placed on consumers, VAT is paid by both producers of products and services as well as by consumers. Proper billing is ensured by claiming an input tax credit under VAT. In the VAT, lower rates of applicable tax are levied but tax higher rates of tax are levied in sales tax.

Frequently asked questions

Yes. The Value added tax or VAT in India is also levied on the goods and services such as oil, salt, etc. The common rate of VAT tax in many states is 4-5%.

Goods and Services Tax (GST) is a unified indirect tax system in India that has replaced various indirect taxes such as VAT, excise Duty, Service Tax, etc. However, VAT is an indirect tax system in India before the GST. It is a multistage tax levied on the production of goods and services.

Any business with an annual revenue of more than Rs. 5 lakh must register to pay VAT.

VAT returns in India must be filed on a monthly or quarterly basis, as determined by the state government. Failure to file VAT returns can result in penalties and interest charges.

Penalties for non-compliance with VAT in India may include fines, imprisonment, and/or seizure of goods. In addition, businesses may also be required to pay back taxes and interest charges for any period of non-compliance.

For more information on VAT in India, you can contact your state's commercial tax department or consult with a tax professional.

Krishna Gopal Varshney

β€œKrishna Gopal Varshney co-founder & CEO of Myitronline is amongst the top emerging startups of Asia and authorized ERI by the Income Tax Department. A dedicated and tireless Expert Service Provider for the clients seeking tax filing assistance and all other essential requirements associated with Business/Professional establishment. Connect to us and let us give the Best Support to make you a Success. ”

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