Value Added Tax (VAT) is an indirect tax on goods, introduced in lieu of sales tax, to ensure transparency and greater compliance. The basic premise of VAT is to tax the “true value” added to the goods, at each stage of the transaction chain. This ultimately reduces:
- Tax paid to the government.
- Cost/tax passed onto the consumer.
VAT is a multi-point tax as against sales tax, which is a single-point tax. VAT removes the cascading effect of tax on tax, by allowing a set off for input tax, i.e. tax paid at earlier stage on purchases. It is an efficient, globally acceptable and easy to administer taxation system.
In order to relieve some small businesses of the need to keep detailed records, the law has made provision for a simpler method of accounting for VAT. The method of calculating, VAT payable is also made easier. Such a method is called a VAT Composition Returns.
The VAT Composition Returns states that “Small dealers with an annual gross turnover not exceeding 5 to 50 lakhs and subject to respective state act and rules, who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.”
This scheme is a special method of determining the tax liability for specified dealers whose turnover in the year before April 1, 2005 or in the current year exceeds Rs. 5 lakhs but does not exceed Rs.5