VALUE ADDED TAX DEPARTMENTUNION TERRITORY ADMINISTRATION OF

DAMAN & DIU AND DADRA & NAGAR HAVELI.

FREQUENTLY ASKED QUESTIONS1. GENERALQ. What is Value Added Tax (VAT)?A. VAT!s a multi-point tax on value addition which is collected at

different stages of sale with a provision for set-off for tax paid atthe previous stage/tax paid on inputs. ,

Q. What is meant by 'Sale' under UT's VAT Law?A. Sale includes»

a. The conventional sale i.e. Transfer of property in goods;b. Supply of goods by a society, club, firm, and company to its

members;

c. Transfer of property in goods involved in execution of workscontract;

d. Delivery of any goods on hire purchase or any other systemof payment by instalments;

c. Transfer of right to use any goods, whether or not for aspecified period; and

f. Supply of good or other articles by the restaurants, hotels etc.,

by way of or as a part of service.Q. Who is a dealer?A. 'Dealer' means any person who carries on business in UT's and

includes-(i) any person who, for the p,urposes of or in connection with or

incidental to or in the course of his business buys, sells, goodsdirectly or otherwise, whether for cash or for deferred payment orfor commission. remuneration or other val uablc consideration;

(ii) any department of the Central Government or a StateGovernment, a local authority, Panchayat, Municipality,Development Authority, Cantonment Board and each autonomousor statutory body or an industrial, commercial, banking,insurance or trading undertaking whether or not of the CentralGovernment or any of the State Governments or of a localauthority, ifit buys, sells, supplies or distributes goods, in the courseof specified activities which may be prescribed from time to time;

(ill) a factor, commission agent, broker, del credere agent, or any othermercantile agent by whatever name called, who carries on thebusiness of buying, selling, supplying or distributing goods onbehalf of any principal, whether disclosed or not;

(iv) an agent ofa non-resident (where such non-resident is a dealerunder any other sub-clause of this definition);

(v) a local branch of a firm or company or association of persons,outside UTs where such firm, company, association of persons is

adealer under any other sub-clause of this definition;

(vi) a club, association, society, trust, or cooperative society, whetherincorporated or unincorporated, which buys goods from or sellsgoods to its members for price, fee or subscription, whether ornot in the course of business;

(vii) an auctioneer, who sells or auctions goods belonging to anyprincipal, whether disclosed or not and whether the offer of theintending purchaser is accepted by him or by the principal or anominee of the principal;

(viii)a casual trader; or

(ix) any person who, for the purposes of or in connection with orincidental to or in the course of his business disposes of any goodsas unclaimed or confiscated, or unserviceable or scrap, surplus,old, obsolete or as discarded material or waste products by wayof sale;

Q.A.

Will multi point tax lead to cascading?VA! eliminates cascading by providing for set off for taxes paidon inputs and only taxing value addition, tax on sales would beshown separatelywhile issuing tax invoice or calculating tax liability.

Q. What will happen to the Central Sales Tax Act?A. CST Act would remain as it is. No VAT on inter-State Sales

shall be levied and the Central Statutory Forms, i.e, Form C,D,F:H etc., shall also continue. However, in future, it is proposed thatthe tax rate for sale against C form shall be gradually reducedfrom present 4% to 0%.

Q. Are there any Statutory Forms under the VAT?A. .There are no statutory forms in VAT,it is an invoice based system

wherein input credit is allowed at the strength of tax invoice.

Q. VAT would increase the cost of compliance.A. Cost of compliance would come down due to self-assessment

dealers would not have to approach the Department for statuto;forms or for assessment.

Q. VAT requires extensive computerization, which traderscannot afford.

A. The document and papers that the dealers are maintaining underthe present regime would suffice, in fact documentation needsshould decrease due to self assessment and elimination of forms.

Q. Cost of doing business would go up as dealers will have topay tax on their purchases.

A. If we assume that the average length ~ftjme required for settlingof amounts receivable and payable is the same as the length oftime for remitting tax and processing any refund, no additionalcost is imposed on trade or industry.

Q. Prices would go up due to VAT and consumer would suffer.A. As against three slabs of 4, 8 & 12% in the present regime VAT

would have only 2 major slabs of 4 & 12.5%; some commoditiesfalling under 8% slab would come down to 4% slab thereby causing a downward pressure on prices. Further, input credit and creditallowed for purchase of capital goods should reduce the effectiveselling price.

Q. VAT is anti poor.A. Items that are consumed by the poor are exempt. Besides the

scheme of higher threshold and compounding for dealers havingturnover upto Rs. 25 lakhs after paying notion tax of 1% on theturnover would take care of all such dealers from whom poorsource their requirement.

Q. Will input tax credit be available on capital goods used inthe execution of works contract?

A. Yes input tax credit will be available on capital goods purchasedlocally after 1.4.2005 for execution of works contract in subjectto conditions. However, in case a dealer, after availing tax credit,transfers the assets/Capital goods, on which he had availed taxcredit, put Union Territory for executing other works not liable tobe taxed in Union Territory, the credits so allowed shall bereversed, tax shall have to be paid on such transfer of capitalgoods/assets. The tax so payable shall be equivalent to unutilizedportion of tax credit allowed by the Department less tax payableat usual rates on such transfer or sale.

Q. Is there any restriction on leasing out machines purchased forown use? If no, what will be it's tax implications under VAT'!

A. There is no restriction on leasing out machines bought for own use.

2. IMPOSITION OF TAXQ. How do Icalculate my tax liability?A. Calculating tax liability under VAT is very simple. If a dealer is

selling any item of 4% tax and he sells goods worth Rs. 1,000/-.Amount of tax pal able will be Rs. 40/- But same goods he hadpurchased fOJ Rs. 900/- and at that time he hac; already paidRs. 36/- so the net tax payable by him will be 40-36= 4 and hewill pay to the Government only Rs. 4 on the sale ofRs. 1000/-(@4% tax rate). The tax payable by him is tax rate multiplied byvalue addition, in the instant case (1000-900) X 0.04.

,Q. Whether it is possible to avail credit for taxes paid/~n"input

if goods are sold interstate or are exported?A. Purchases intended for inter-State Sale as well as exports are

eligible for tax credit. .

Q. If the input is used partly for making taxable goods andpartIy for exempted goods, whether input tax credit willbe available?

A. Where goods have been partly used for making the taxable sales(or inter-State sales) and partly for making exempt goods, theamount of the tax credit shall be reduced proportionately.To illustrate, X purchased machinery for Rs. 1,00,000/- plus taxofRs. 12,500/- for manufacture of taxable as well ~s exemptedgoods. At that time, he estimated that the machinery wouldproduce 80% taxable goods. In such case, his input tax creditwill be restricted only to 80% ofRs. 12,500/- i.e., Rs. 10,000/-.

Q. What is input Tax?A. Input tax means tax on goods purchased by a dealer in the course

of his business. The eligible purchases would include any goodspurchased hy a dealer for re-sale or for use in the manufacture orprocessing or packing or storing of other goods or any other usein business including capital goods excluding exceptions prescribedin sixth schedule of the Act.

Q. When can one claim input Tax Credit?A. Input tax credit is the credit for tax paid on inputs. Dealer has to

pay tax after deducting Input tax which he had paid from total taxcollected by him.

Q. What proof is required to claim input tax credit?A. Input tax credit can be claimed only on purchases from VAT

Registered Dealers. The original "Tax Invoice" is the proofrequired to claim input tax credit

Q. How is input tax credit t() be claimed? Is there anyrequirement of a "one to one" correlation between inputtax and output tax?

A. There is no need for a "one to one" correlation between input tax. credit and output tax. Quite a large number of small businessesare under the misconception that input tax has to be adjustedagainst output tax on a bill to bill basis.

The operation of the.input tax mechanism is very simple. The deale):will be eligible to take credit of eligible input tax in a tax period asspecified on the entire purchases. The dealer would charge VATat the prescribed rate of tax as is being done in the present systemoflevy of sales tax. The VATor Output Tax payable is compiledon a monthly basis as is done now. The dealer can adjust theinput tax eligible on the entire purchase in the tax period againstthe output tax payable irrespective whether the entire goodspurchased is sold or not. For example, if the input tax credit in aparticular month is Rs. 1,0001-, the output tax payable is Rs. 5001-,the excess input tax ofRs. 500/- can be carried forward to thenext tax period. Assuming no further input tax credit in thefollowing month and that the output tax payable is Rs. 700/- thedealer will pay Rs. 200/- alongwith the monthly return.

Q. Will i';put tax credit be available on all purchases for thebusiness?

A. Generally, input tax credit will be eligible on all goods purchasedfor resale, raw material and packing materials for use in themanufacture of goods and even capital goods.

Only goods purchased from VAT registered dealers in the Statewill be eligible for input tax credit. Input tax credit will not beavailable on Inter State purchases.

The purchases on which you cannot claim a credit for yourinput tax are:

• Autombiles, including commercial vehicle, unless you are inthe business of dealing in such automobiles.

• Spare parts for repair and maintenance of automobiles unlessyour business is dealing in such automobiles;

• Petroleum products unless one is dealing in petroleum

• Goods used for personal consumption or gifts;

• Air-conditioning units unless you are in the business of dealingin such units".

Q. Can input tax credit be availed on use of petroleumproducts?

A. No. Tax on petroleum products cannot be availed as input credit.The input tax credit on petroleum products is covered bySchedule IV. It provides that in the following circumstances theinput tax credit on Petroleum products and natural gas be takenas NIL.

• When used as fuel• When exported out of state

The second condition is more appropriate for trader dealers.In case they decide to stock transfer petroleum products out ofstate without sale, input tax on these products, if already availedon these products will have to be considered NIL

Q. What is the applicable rate of tax on Packing materials asOutputs?

A. Packing material or containers are always sold with some goodspacked or contained it. No separate rate of tax is applicable onsale of such packing material/container. The rate of tax applicableto the goods packed in such packing material will be the rate oftax applicable on this packing material. Where such goods areexempted from tax, the sale of packingmateriaVcontainer will alsobe exempt from tax.

Example: spark plugs packed in plastic bags are taxed @ 12%.Thus rate of tax applicable on sale of this plastic bag is 12%. Incase of these spark plugs are purchased by some other dealere.g. autornaker company, the applicable rate is 4%, thusapplicable rate of tax on plastic bags in which such plugs arepacked will be only 4%.

Q. Can input credit on packing material be availed on use ofpetroleum products?

A. The eligibility of input tax credit on packing material also dependson the item packed therein. Incase items packed therein are dealtin the circumstances that input tax credit is not eligible therein, inputtax credit will not be available on such packing material as well.

Q. Is there any restriction of availing of input tax dependingon the manner of disposal of goods say as free gifts or onstock transfer?

A. Yes. Input tax credit will be available on output tax payable onsales within the State and on Inter State Sale. Restricted inputtax credit is available on stock transfer/consignment dispatchesto outside the State.

Q. Will input tax credit be available on Inter State Purchases?A. Input tax credit will not be available on Inter State purchases,

U.T. Administration cannot be expected to give credit for the taxpaid in another state.

Q. ~i1~ input tax credit be available for the entire tax paid onelIgible purchases.

A. Input tax credit will be available on the entire VAT paid onpurchases. (except interstate purchases).

Q. What proof is required to claim input tax credit?A. Input tax credit can be claimed only on purchases from VAT

Registered Dealers. The original tax invoices is the proof requiredto claim input tax credit. The invoices must be preserved carefullyto be produced in audit proceedings.

Q. Are all dealers eligible to claim input tax credit?A. All VAT registered dealers can claim Input Tax Credit on the

el,igiblepurchases. However, those opting for compounding scheme,where-by all dealers whose GTO is upto 25 lakhs can pay 1%tax on their GTO and are not eligible to claim input tax credit.

Q. What is the procedure for adjusting input tax paid againstthe output tax payable?

A. In the return filed for the Tax Period there will be a column forinput tax credit, which will have to be filled in. The tax invoices insupport of the claim of input tax credit will have to be preservedand may have to be shown, if so desired by the Department.

Q. How can dealer adjust the input tax against output tax whenhe m.akes t~xable and exempt supplies? Will the input taxcredit relatlDg to exempt supplies lapse?

A. If the purchases are used partly for making taxable supplies, inputtax credit shall be allowed proportionate to the extent they arcused for that purposes, However, no input tax credit is allowedfor the portion of purchases that was used for making exemptgoods.

Q. What amount will be available as input tax credit in casemachinery is used for manufacture of taxable goods and alsomanufacture of exempted goods?

A. The input tax credit will be available on proportionate basis.

Q. Is Commissioning of plant a condition for availing the inputtax credit?

A. No there is no condition of commissioning of machine for making

the input tax credit which is available on plant and machinery on

its purchase.

Q. Do I have to sell all the goods that I have purchased toavail input tax credit for the taxes paid on all my purchases?

A. Taxes paid on all your purchases can be set ofT against your

liability of tax on sales made by you and any excess caneither be

carried forward or you can claim refund.

Q. Will input tax credit be available on components used infabricating the machine in house?

A. Yes,there is no bar on availing input tax credit on components and

other parts used in fabricating machine in house, provided this

machine is not used solely for the manufacture of exempted goods.

Q. Is there any tax liability on scrapping any capital asset onwhich input tax credit has been availed? What will be thetax lmp licarion on sale of such scraped machines?

A. Tax would be levied on the sale of scraped machines. However,

the tax liability is subject to set of against any credit that may beavailable in your account.

Q. What is to be done by the purchasing dealer in case ofdownward revision of prices after the sale of goods to him?

A. In respect of reduction in prices of goods already purchased by a

dealer, such purchasing dealer shall issue to the selling dealer a

duly signed debit note as soon as the amount of such

de-escalation, whether interim or final, is settled between two.

Q. What information should be contained in such debit note?

A. The debit note issued by the purchasing dealer shall necessarily

contain the following particularsr-

a. DateofDN.

b. Name of the dealer (with TIN where applicable) issuing DN.

c. Name of the seller (with TIN where applicable) to whom DN

is issued.

d. Description quantity and amount of de-escalation in respect of

goods whose value de-escalates.

e. Tax if any, relating to the amount of de-escalation.

Q. In which tax period such debit note be accounted for by thepurchasing dealer?

A. In case the agreement of sale provided for de-escalation in the

prices of goods sold under the agreement and prices of goods

could not have been determined at the time of their original sale,

the purchasing dealer in such cases will adjust his purchases,

reverse the proportionate input tax credit on the basis of such

debit note in the tax period inwhich such debit note is raised by him

Q. Will output tax reduction be available to selling dealer ondebit note raised on him?

A. In case input tax credit has been reversed by the buying dealer,

the selling dealer will be permitted to reduce the output tax

liability to that extent on the basis of such debit note. Such tax

credit will be available in the tax period in which such debit note

is received by him.

Q. What should be done by a purchasing dealer to return therejected goods to the seller? What happens in case ofsuch dealer is not registered under State VAT Act ?

A. In case the buying dealer is registered under VAT Act, he shall

on returning the goods issue to the selling dealer duly signed

delivery cum debit note (DDN).

In case the buying dealer rejecting the goods is not a registered

dealer under some other state and who did not issue the DDN

in respect of goods returned by him, the selling dealer may issue

a credit note in respect of goods so returned to him and deduct

the value of such goods from his gross turno~er.

The selling dealer, in the above respect, may be asked by the

authority to furnish evidence of the receipt of goods .back by

him, credit of the amount of such rejection of goods to the

account ofthe purchaser of goods and payment there of to him.

Q. What are tbe circumstances in which refund of input taxcredit is permissible?

A. Refund ofInput Tax Credit is normaUypermissible in the case

of a Zero Rated Sale. Zero Rated sales are specified in the VAT

Acts. At present, only Exports out ofthe country is likely to be

a zero rated.' The input tax credit relatable to the export saleswill be eligible for refund.

Q. Is input tax credit available on goods stock transferred?If ineligible will the input tax credit relating to the goodsstock transferred lapse?

A. VAT Acts provides for no input tax credit on goods dispatched

on stock transfer. However, if the goods have been purchased

locally on payment of tax and subsequently stock transferredafter taking input tax credit, the input tax credit shall have to bereversed to the extent of 4%.

3. SPECIAL REGIMEQ. Can input tax credit be claimed on stock of goods on the

date of implementation of VAT?

A. All taxed stock purchased between 1,04.04 and 31.3.05 will beeligible for input tax credit.

.Q. Will input tax credit be available on purchase of second handmachinery.

A. Yes the requirement ofIaw in respect of purchase of second hand

machinery is the same as new machinery. If the purchase of seeond hand machinery otherwise satisfies all other requirement ofavailability of input tax credit, input tax credit will be available.

Q. What is composition scheme? What benefits it will have for 4. REGISTRATION & SECURITYsmall dealers? Q. Is voluntary registration permissible under VAT?

A. Yes. Any person, who is not required mandatory registrationA. If taxable quantum of a dealer does not exceed Rs. 25 lakhs in a ~nder the Act, ma~' apply for registration ifhe is a dealer; or he

year, and dealer does not import or export goods or makes InterIntends .from a particular date to undertake activities which wouldmake him ~dealer,

State sales or purchases goods from unregistered dealer, the dealer . Q. Ho.~ will VAT affed smail traden, would they also have tocan opt for composition scheme. Under this scheme he needs to register?

A. Threshold for registration is Rs. S lakh.pay only 1% of taxable turnover and he need not maintain

detailed accounts. Q. If a dealer is registered untler Sala Tas Act does be needa fresh r.gistratio ••? '

A. No; he needs to file some additional information in prescribed

Q. Will input tas credit be available on capital assets held byformat and registration shall be automatic. '

dealer OD the date of applicability of VAT? Q. Do dealer have to give fresh surety?A. Surety would need to be reconfirmed within 6 months.

A. No, input tax credit on capital assets held by a dealer on the date

of applicability of VAT shall not be available to a dealer.Q. Only cash surety will be required under VAT & surety bonds

will not be valid?A. No, pres~nt system of surety bond will be applicable alongwith

other options.Q. What is Fair market value and how it is to be calculated?

A. If sales or purchases are under or over invoiced, department canQ. Amendments in the Registration Certificate will be as

complicated as now?subject the same to fair market value assessment of consideration A. Amendments in the registration Certificatewill be simpler as it will

to account for or computing input or output tax liability. It shall bebe done based on dealer's application immediately.

recomputed on an armed length principle. Q. Surety will be fixed uniformly for Dew and old dealers.In ~act o!d dealers should be given different treatment?A. While fixing surety criteria distinction will be made between the

Q. Composition Scheme is not applicable to exporter/importers? dealers al.ready registered with DST Act and new Registrants.Act pr~vldes that in case of old dealers, surety be reduced

A. Under section 16, the composition scheme has not been made proportionately, .. -

applicable to the dealers who import or export goods to other

States.

Q. .~o crit~ria has been fixed for asking security'! .A. I here WIll he a transparent criteria based on credit rating and risk

assessment for demanding additional surety under section 25.

5. RETURNSQ. Will filing of returns be complicated?A. There is a simple return form where the dealer himself/herself

computes his tax liability.

Q. Revised returns cannot be filed?A. There is a provision to revise returns till 4 years of filing original

returns.

Q. Return periodicity will change?A. The periodicity offiling returns will remain same as isapplicable now.

6. PAYMENT OF TAX, ASSESSMENT& REFUNDS.Q. What is the due date for payment of tax?A. Tax shall be paid within 28 days of the conclusion of tax period.

Q. What are the provisions of assessment?A. There is no assessment under VAT.

Q. Will all Returns filed be picked up for audit or scrutiny?A. No, a transparent criteria will be evolved under which a small

number of cases will be picked up for deep scrutiny to checkmalpractices.

Q. If a dealer opts for composition scheme, can he claim creditfor input tax and issue tax invoice?

A. No, because he has opted for composition and paid the tax atlump sum rate.

Q. Is Input tax credit available on Inter State sale of goods?A. Yes. The Input Tax Credit available shall first be adjusted against

the output tax payable on the sale of goods. If excess credit isavailable the dealer may at his option adjust the credit against theCST payable and the balance input tax credit available can becarried forward to the next tax period.

Q. Cases for assessment can be opened even after 8 years?A. No, normally, assessment cannot be opened after 4 years offiling

the returns.

Q. In case of re-assessment by the Deptt. what is the remedyavailable to dealers?

A. In case dealer refutes the claims of the Department, regarding taxassessment/interest calculations/penalty, he has to simply file anappeal and his demand will be automatically stayed and he neednot deposit any stay amount provided admitted tax has been paidby him.

7. RECOVERY OF TAX, INTEREST & PENALTIESQ. Dealers will have to maintain invoices and detailed

accounts?A. They would only be required to maintain invoices and normal

documents that they are doing in any case under the presentregime.

Q. Penalties will be imposed without giving an opportunity whichis against the basic law of natural justice?

A. Under section 33 penalties are not imposed but notice ofassessment or penalty will be served upon the dealer and onceappeal is filed, the imposition of penalty is automatically stayed.

8. AUDIT, INVESTIGATION & ENFORCEMENT

Q. VAT provides for compulsory audit for the dealers?A. No specific audit for VAT is necessary. However, it is

mandatory for all those firms whose turnover exceeds 40 lakhsto get their accounts audited as per IT Act and the saiffe audftreport would suffice for VAT Act also.

Q. Provision of audit and scrutiny would lead to harassment?A. Scrutiny would only be undertaken in small number of cases

after detailed assessment of the profile of the trade and trader;it would be based on analysis of risk of evasion probability andpropensity of evasion through MIS and source basedinformation.

Q. Audit can take place of any person and. there is nolimitation period?

A. Only cases where evasion and avoidance are suspected are tobe picked up for audit. Honest taxpayers need not worry.However, there will be a clear and transparent criteria for auditto avoid selective targeting without justification.

Q. It is not clear as to what will be the place for audit?A. The business premises of the dealer will be the place for audit.

Q. VAT gives unfettered powers for inspection of records,enter premises and seize records and goods?

A. powers under VATare similar to power available under the Sales'Tax Act.

Q. Auditing will cause inconvenience to dealers?. A. Audit is a friendly interaction to seek clarification about

information submitted by a dealer in a self-assessment regimelike VAT.

Q. Does VAT give sweeping powers for conducting audit?A. Since dealer will not come for assessment so in exceptional cases

where additional information is required, the Department haspowers to ask for additional information or carry out audit.

9. APPEAL AND DISPUTED QUESTIONS.Q. What wilfbe the procedure or filing appeal in assessment?

A. The assessment of tax, interest and penalty can be disputed,however, no appeal against an assessment shall be entertainedunless the amount of tax, penalty, interest not in dispute is paid.Disputed demand will be considered stayed automatically oncethe same is appcale .

Q. There are certain orders which are not appealable?A. Orders where action has either not been completed or notices to

show cause or orders related to internal administration of thedepartment appealable

Q. There is a provision that tax be paid before filing appeal?A. Provision is to deposit admitted tax, interest, etc. prior to filing

appeal because stay is automadc. So only admitted tax is to bepaidr disputed amount will be automatically stayed.

Q. There is only one opportunity of appeal before one can goto liibunal?

A. In a self-assessment regime one opportunity is adequate.Moreover, it would check unnecessary litigation.

Q. Who can appear before any authority in proceedings?A. 1. Any person authorized in writing bearing a signature as a

regular employee.

2. Legal persons or a CA or Low Accountant or CompanySecretary otherwise not disqualified.

3. Value added tax Practitioners not otherwise disqualified.

10. ACCOUNTS & RECORDSQ. What is an Invoice?A. Invoices are crucial documents for administering VAT because

they record each supply of goods, whether taxable or exemptThey are to be issued by all registered dealers for each of theirsales. An invoice establishes the tax liability of the supplier as ~ellas the deduction (credit) to the registered purchaser. There aretwo kinds of invoices that can he issued under VAT: (a) TaxInvoice: and (h) Retail Invoice.

Q. Issue of tax invoice is a complicated process?A. Tax invoice will be simpler to retail invoice except that word tax

invoice will be written and amount of tax charged will be

indicated separately.

Q. There will be a need to print the name & Address ofprinters on tax invoice which is draconian?

A. Under section 50(2) (g) to print the name and address of printer

is essential, it is only to check fake invoices and misuse of

invoices by unscrupulous elements.

Q. If original tax invoice is lost, no duplicate can be issued?

A. .No, duplicate tax invoice can be issued.

Q. Large number of records needs to be preserved?

A. Copies of tax invoices received and issued need to be kept by a

registered dealer. This record is to be kept till 7 years.

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