Legal Question in Business Law in India

17.03.2014

Dear Sir / Madam,

What supplies are liable to VAT?

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.

Going by the above, for a sales Invoice raised as a result of a Works Contract, VAT is applicable thereon, whether it is a within State sale or an Interstate or outside State sale. For Sales Invoice other than that under a Works Contract, VAT is applicable for sales within the State and CST is applicable for sales outside the State.

Further reading :-

Are there any items that businesses cannot recover VAT on?

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.

Regards,