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VAT and e-Filing FAQ
 
VAT and E-Filing Frequently Asked Questions


1. What is VAT?

VAT is a consumption tax, charged on most goods and services traded for use or consumption in the EU. It is levied on the "value added" to the product at each stage of production and distribution. The "value added" means the difference between the cost of inputs into the product / service and the price at which it is sold to the consumer. VAT is charged when VAT-registered (taxable) businesses sell to other businesses (B-2-B) or to the final consumer (B-2-C). VAT is intended to be "neutral" in that businesses are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and have to show the VAT charged to customers on the invoices.In the EU, there is a minimum standard VAT rate of 15%, above which Member States are free to set their own national VAT rates. Member States decide how to spend the revenue they receive from VAT receipts, except for a small percentage of this total which is paid towards the EU budget.


 
2. How does the current EU VAT system work?

Currently, a transitional system is in place for VAT on intra-EU transactions (see below). Under this system, when it comes to cross-border sales between businesses, VAT is collected in the Member State of destination (i.e. where the goods are sent to or where the recipient of services is established), in line with the rate and conditions of that country.

This means that the supplier of goods or services does not charge VAT, but the recipient is responsible for paying it. Both the supplier and recipient must conform to special reporting obligations. It should be noted that there are many exceptions to these rules. For example, VAT on transport is paid where the transport occurs and VAT on cultural events occurs where the show takes place.

The rules for intra-EU transactions differ from purely domestic transactions, where the supplier charges VAT and is responsible for paying it to the Treasury. The divergence between domestic and intra-EU rules for VAT poses problems for the Single Market, as it creates additional burdens for businesses operating cross-border and exposes the VAT system to fraud.

For goods or services provided to private individuals (i.e. business to customer), the taxation is the same for intra-EU transactions as it is for domestic transactions i.e. the VAT is paid by the supplier in the Member State where the sale occurs or where the supplier is established. However, there are certain supplies for which different rules apply e.g. distance sales, new means of transport, certain services etc.



3. How much revenue is raised through VAT every year in the EU?

In 2008, total VAT receipts in the EU were around EUR 862 billion. VAT receipts accounted for 21.4 % of the national tax revenues of EU Member States (including social security contributions), a rise of 12% since 1995. It is thus a major source of revenue for national budgets and in many Member States it is the main source. VAT receipts represented in 2008 on average 7.8% of the GDP of a Member State, a figure that has increased by almost 13% from 1995. Since the recession, the share of VAT revenues as part of total receipts has probably grown further in most EU countries.


4. Why is there an EU minimum VAT rate?

A minimum EU VAT rate was established to coincide with the creation of the EU Single Market, which meant that fiscal controls at internal borders were no longer carried out. This minimum rate helps to avoid substantial variations in Member States’ VAT rates which could lead to distortions of competition between high and low rate countries and put the smooth functioning of Single Market at risk. The minimum level for the VAT rate has been fixed at 15% since 1992, with regular review of this rate. Member States are free to set their own rate at or above this minimum.



5. What are the rules with regard to reduced VAT rates, and what type of goods and services can benefit from these rates?

EU rules allow Member States the option of applying one or two reduced rates to a restricted list of goods and services, which are set out in Annex III to the VAT Directive. The reduced rate cannot be less than 5%, and the list of eligible goods and services must be strictly interpreted.

Some examples of goods eligible for a lower rate include: foodstuffs, medicines, medical equipment for the disabled, books on all physical means of support, newspapers, periodicals, passenger transport, admission to shows, theatres, museums, etc.

Some examples of services eligible for a reduced rate include: the transport of passengers and their accompanying luggage, admission to shows, theatres, circuses, fairs, amusement parks, concerts, museums, zoos, cinemas, exhibitions and similar cultural events and facilities, renovation of housing as part of a social policy, etc.

In addition, there is a multitude of derogations on the application of zero rates, super-reduced rates (lower than 5%), and reduced rates for products or services not usually eligible. This makes the whole system complicated and open to misinterpretation.

 


6. What is the situation with regard to VAT exemptions? What is exempt and why?

Supplies falling under a category exempt from VAT are sold to the buyer, normally a final consumer, without any VAT being applied to that sale. Exemptions from tax include for example, certain activities in the public interest (medical care, school education etc.) or certain insurance and financial services. Reasons behind the exemptions vary, at the time the exemptions were granted some activities were only carried out by public authorities, for some other it was very difficult to determine the taxable basis, for some others the VAT was too much of a burden, administratively or financially.

However, as the supply is exempt from VAT, deduction of the VAT paid on the inputs is not possible. For example, postal services are at present exempt from VAT. So if someone sends a parcel using the Post Office he is not charged VAT, but the Post Office has paid VAT on its inputs: the vans it uses, the post boxes it buys, and all the other things. It cannot reclaim or deduct this VAT. So a part of the value of the stamps you bought to send the parcel represents paying this "hidden" VAT.



7. Why does the VAT system need to be reviewed?

Value added tax (VAT) is a major source of revenue for national budgets, and is likely to be proportionally even more so as the economic crisis and aging populations take their toll on other taxes (such as labour and capital). Many Member States have recently increased their VAT rates as part of their consolidation efforts. Consumption taxes are considered, in general, to be a more stable revenue source, and more growth-friendly, than certain other taxes such as profits and income.

However, the VAT system currently in place is not well-fitted for today’s society. It was designed over 40 years ago, when services, modern technologies and globalisation had a far less prominent role in the economy than they do today. There are numerous shortcomings in the current VAT system which create obstacles to the Internal Market, cause burdens for businesses and prevent Member States from benefitting from the true potential of this tax.

While fundamental idea behind VAT is to have a broad-based, globally applied consumption tax, the wide and divergent use of reduced rates and exemptions by Member States means that only part of final consumption is being taxed at the standard rate. Moreover, inconsistencies in the application of reduced VAT rates also lead to distortions of competition within the Internal Market. Finally, the current VAT system is relatively vulnerable to fraud and a significant part of the VAT is lost this way.

Taking into account the above weaknesses, the VAT system needs to be reviewed to ensure that it is as efficient, robust and flexible as it can possibly be. A reform of the VAT system could greatly contribute to delivering on the EU’s 2020 Strategy, strengthening the Internal Market and supporting Member States’ budget consolidation.


8. What is difference between VAT and Sales Tax?

VAT is levied on goods and services while sales tax is imposed generally on goods. Contrary to sales tax VAT has no cascading effect. VAT is a multistage tax, levied only on the value added at each stage in the chain of supply of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. Thus, VAT eventually becomes a single point tax.


9. What will be scope of VAT?

VAT will cover supply (including import) of both goods and services at uniform rate of 15 percent unless exempted under the VAT law. The businesses whose annual turnover is less than Rs.7.5 million will be out of VAT net.


10. How VAT will be helpful in documentation of economy and improve revenue collection?

Generally, all the commercial activities involving production and distribution of goods and provision of services are brought under tax net giving tolerance for a pre-fixed registration threshold level. This results in documentation of every body in the supply chain. Those who are not registered in the chain are not in a position to claim or deduct tax paid at purchase levels. VAT promotes economic documentation with the help of its in-built invoice-based credit mechanism. Tax invoice is blood line of VAT-induced documentation. VAT has self-enforcing features and documents business transactions through tax invoicing.


11. What will be impact of VAT on food prices?

In Pakistan, most of the processed packaged/branded food items are already chargeable to sales tax. Basic food items being out of VAT net, there will be no tangible price increase in food items usually sold in processed packaged/branded form. Consumer prices of the food items which are currently being charged to sales tax on retail price basis are likely to fall because VAT will be charged on actual sale or open market price, not on printed retail price basis. Retailers will be in position to discount their prices to attract consumers.


12. What is difference between goods and services?

Goods are tangible supplies (materials, commodities and articles) and services are intangible supplies. VAT will regulate mixed supplies on the basis of their contractual character. Under VAT, services means anything that is not goods, immoveable property or money. However, actionable claims, money, stocks and securities are not included in goods.


13. In which cases can VAT be reclaimed?

In order to avoid VAT accumulation for goods and services within the Common Market, a “harmonised” VAT system was introduced in the EU (Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes - Common system of value-added tax: uniform basis of assessment). The consequences in relation to your registration are roughly outlined below:
As a tourist of an EU member country, you cannot reclaim VAT because you are in the role of the (domestic) end consumer. Only non-EU residents can get a refund of VAT paid on merchandise bought in Germany. Tourist services e.g. accompanying persons’ tours or pre- and post-Congress tours will normally be considered non-business expenses and you will incur the German VAT rate on them.


14. Which VAT rate is applicable?

The general rule is that the VAT rate of the destination country is applied to goods, the VAT rate of the country of origin to services. For all payments to connection with the FileNet EMEA UserNet 2006, the German VAT rate is applicable. Business expenses you will incur in connection with the Conference in Germany may include differing VAT rates. Taxis and local transports, take-away food and books, just to mention some, incur a reduced VAT rate of 7 per cent. This should be explicitly stated in the invoice.


15. Why pay the GST or VAT?

The rationale behind both of these levies is same: both are consumption taxes which discourage consumption and promote savings. The savings lead to investment, capital formation and consequent economic growth. Economic growth provides improved living standards. Thus the VAT and GST both discourage consumption today for a better consumption tomorrow. Both call for a sacrifice now to get the promise of reward in future. Both of these levies also serve a supplementary purpose: both lead to documentation of economy and a shift from import duties to domestic taxes which is a big challenge at least in the developing countries.


16. Who pays GST or VAT

GST and VAT both travel with price. In a domestic transaction, seller of goods/ services receives the price and the buyer pays it. GST or VAT is paid with price by buyer to the seller. The seller collects the tax and deposits it in the government treasury. The government officials in the tax department just watch that the buyer pays the right amount of tax and seller faithfully deposits the amount so received in the government exchequer. In case of import, importer
incurs the liability of both seller and buyer. He pays the tax and also deposits it in the treasury.
Both GST and VAT however make a provision to shift the liability to pay the tax. Under both GST and VAT, Federal Government may by a notification in the official gazette specify the goods in respect of which the liability to pay tax would be of the buyer of goods/ services. What difference would such a notification make? To the extent of goods so specified, the buyer instead of seller will have to face the consequences of non payment of tax.


17. How VAT differs from Sales Tax?

Sales tax is single point levy as against multiple point levy under VAT with set off provisions being available for tax paid at earlier stage. Thus, in sales tax no tax is being levied on the value additions on subsequent sales.


18. How does VAT work?

Under VAT tax is paid at each stage of Sale,  the value addition is taxed and setoff of the tax paid in the State at the earlier stage (input tax) is granted against subsequent sales (output tax). Thus VAT eliminates tax cascading.


19.How is the tax liability of a dealer calculated under VAT?

The net tax payable by a VAT dealer under the VAT Act would be equivalent to the total of the output tax, purchase tax and reverse tax after reducing there from, the amount of input tax credit available.


20. What is input tax?

"input tax" means tax paid or payable by a registered dealer in the course of
business, on the purchase of any goods made from a registered dealer.


21. What is output tax?

"out put tax" means the tax charged or chargeable under this Act by a
registered dealer in respect of the sale of goods in the course of his business.


13. Who is liable to pay tax under the proposed VAT Act?

Every  Manufacturer of goods having annual turnover exceeding rupees 2 lakhs Importer of goods (i.e. dealer who brings goods into the State)  Dealer having an annual turnover above rupees five lakhs  Dealer registered under CST Act  Any person having occasional transactions in notified goods  Any person other than a casual trader and a registered dealer carrying on business temporarily for less than 120 days are liable to pay tax.


14. What is the VAT rate structure?

The VAT Rates are: 1% - gold, silver, precious metals, gems & precious stones , 4% - essential goods & primary raw materials, 12.5% on goods not covered in any schedule & 20% or more  on.


15. What is the VAT rate levied on?

The applicable VAT rate is generally levied on the taxable turnover of the dealer. However, the State Government has the power to notify certain goods in respect of which the tax payable shall be based on the weight, volume measurement or unit of goods sold.


16. Is there any composition scheme for small dealers?

Yes. Dealers (other than manufacturers and importers)  whose turnover does not exceed rupees fifty laks and purchases goods from a registered dealer may opt for payment of tax on its turnover at such rates as may be notified by the State Govt.


17. Under what circumstances is purchase tax payable?

Purchase tax is payable when a dealer purchases goods other than exempt goods in the circumstances where no tax is payable on their sale price at the time of such purchase and the dealer disposes of these goods for a purpose other than the following: n Sale within the State of Rajasthan  and Sale in the course of inter state trade or commerce n Export out of India n Use as packing material of goods other than exempted goods for sale n Use as raw material or processing material in manufacture of goods other than exempted goods, for sale in the State or CST sale or export out of India n Use as raw material in manufacture of goods for export out of India n Use in the State of Rajasthan as capital goods.


18. Who is required to be registered under the VAT Act?

Every n Manufacturer of goods having annual turnover exceeding Rs. 2 lakhs; n Importer of goods (i.e. dealer who brings goods into the State from outside the State); n Dealer having an annual turnover above rupees five lakhs; n Dealer registered under CST Act;


19. Whether existing registered dealers would require fresh registration?

Where a dealer is registered under the repealed Act he shall be deemed to have been registered under this Act from the date of commencement of this Act, provided he has submitted such information as has been required by the
Commissioner under the repealed Act by notification in the Official Gazette.


20. Under what circumstances will input tax credit not be available under VAT?

no input tax credit shall be allowed on the purchases.
(i) from a registered dealer who is liable to pay tax under sub-section (2) of
section 3 or who has opted to pay tax under section 5 of this Act; or
(ii) of goods made in the course of import from outside the State; or
(iii) where the original VAT invoice or duplicate copy thereof is not available
with the claimant, or there is evidence that the same has not been issued by
the selling registered dealer from whom the goods are purported to have been purchased; or
(iv) of goods where invoice does not show the amount of tax separately; or
(v) where the purchasing dealer fails to prove the genuineness of the purchase
transaction by producing the selling dealer or otherwise, on being asked to do
so by an officer not below the rank of Assistant Commercial Taxes Officer
authorised by the Commissioner.


21. When would the input tax credit be available and what proof is required to claim input tax?

Input tax credit can be claimed in the period in which the dealer receives the
original VAT invoice. However, no credit would be available after 3 months
from the date of such invoice. Moreover, in case where original VAT invoice is
lost, input tax credit may be allowed on the basis of duplicate copy of VAT
invoice.


22. What is VAT invoice?

VAT invoice  means an invoice issued by a registered dealer other than a dealer paying lump sum tax containing certain specific particulars such as:

• Pre -printed serially numbered running for the whole financial year beginning from 1st April of each year or the accounting year, if any other period is permitted

• The words ‘VAT Invoice’ in a prominent place; • Name and address of the
Selling Dealer

• TIN of the Selling Dealer

• Name, address and TIN (if registered) of the Purchaser

• Name, address and TIN (if registered) of the Consignee, if Purchaser is not the consignee

 • Marking of copies, Original/Duplicate/Triplicate, as the case may be

 • Description, quantity, volume and value of goods

 • VAT Rate and the amount of VAT;

 •  Signature of dealer or his/ her declared business manager.


23. How input tax credit would be available on closing stocks on the date of commencement of VAT Act if the goods are:

(a) Tax paid goods Input Tax credit shall be allowed on the goods other than
capital goods, provided that the dealer has submitted the details of such stock as required by the Commissioner.

(b) Exempted goods No credit shall be allowed even if the goods were taxable at the time of purchase or exempt in VAT.

(c) Incentive scheme purchased goods Credit would be granted only to the extent the incentive unit has charged tax.

(d) Sales returns after 01.04.2006 If such sales returns have been made within the time prescribed.

(e) Purchases from dealers paying lumpsum tax No set-off as such selling dealers would not be entitled to charge tax.

(f) CST paid purchase No set-off as the tax has been paid in other
State and not in our State.

 (g) Imported goods No input tax credit

(h) Stock of adhat goods Set-off would be granted to the Principal who has the original invoice in his name. Agent cannot get set-off in such cases, as he is not the owner of the goods.


24. What is the difference between zero-rated and exempted goods?

In case of exemption no set-off of the input tax would be granted. Whereas, in case of zero-rating it is treated as a case that the goods are taxable but the rate of tax is zero, therefore, being taxable goods, input tax credit would be granted. Therefore the total input tax credit will be refunded e.g. in case of an exporter, exports would be zero rated.


25. What are the consequences for non-payment of tax?

Non-payment of tax would attract interest at such rate as may be notified and penalty up to 2 times the amount of tax evaded.


26.What are the consequences of non-filing of returns?

Any dealer who without reasonable cause, fails to furnish prescribed returns
within the time allowed, shall be liable to pay by way of penalty:

(i) in case the dealer is required to pay tax every month, a sum equal to Rs. 10 per day for the period during which the default in furnishing such return continues, but not exceeding in aggregate 20% of the tax so assessed.

 (ii) in all other cases, a sum equal to Rs. 5 per day subject to a maximum limit of Rs. 500 , for the period during which the default in furnishing of such return continued.


27. What is audit?

In view of the incorporation of self-assessment procedures and for promoting
compliance, the concept of audit has been introduced in the Act. Based on
certain pre decided criteria as well as random selection, cases will selected for audit.


28. What accounts are to be maintained by a dealer under VAT?

Every dealer is required to maintain an account of his business activities
including value and quantity of goods received, manufactured, sold or otherwise disposed of or held in stock. Further a manufacturer has to additionally maintain a stock book of raw materials used and finished goods produced.


29. Where are the accounts to be kept?

The accounts are required to be kept at the places of business as mentioned in the certificate of registration. In case of manufacturer, stock records have to be maintained at the place where manufacturing activity is carried on. In case of branches, accounts, registers and documents relating to the activities of the branch should be kept at the respective branch. However, final accounts, annual statements, registers and documents shall be kept at the principal place of business.


30. Are the accounts of a VAT dealer required to be audited?

A VAT dealer is required to get his accounts audited by a Chartered Accountant if his annual turnover exceeds rupees forty lakhs. The report of such audit is required filed within the prescribed time.


31.Is the non-disputed tax, interest and penalty required to be paid?

Yes, the non-disputed amount is required to be paid before you file an appeal. The bank challan needs to be attached to the appeal form as proof of payment.


32. What is the requirement with respect to the disputed tax, interest and penalty?

In case of appeal against an ex-parte assessment, you need to pay 5% of the disputed amount. In other cases, you need to pay 10% of the disputed amount. Please attach the bank challan to the appeal form as proof of payment. For the remaining disputed amount, you can either pay it or get a stay against its recovery. In case of latter, you need to file application for stay of recovery of disputed amount.


33. When can an appeal be filed?

An appeal can be filed against any order of an Assistant Commissioner, a
Commercial Tax Officer, an Assistant Commercial Tax Officer, a Junior Tax
Officer or Incharge of a check-post or barrier.


34. How must I code capital expenditure paid for from delegated revenue?

Most capital works will be paid for direct from your separate capital account. If you do pay bills through delegated revenue, you must code the gross cost, including the VAT element, to the relevant expenditure code.


35. What is e-Filing?

 e-File is the term for electronic filing, or sending your income tax return from tax software via the Internet to the IRS or state tax authority.

Two benefits of filing taxes electronically over mailing in your return are that you will receive a tax refund sooner and your tax data goes directly to IRS computers with a greatly reduced chance of human keying or document scanning errors. E-filed returns cost 20 times less to process compared to a paper return, which saves tax payers a lot of money.


36. What confirmation of payment will I receive?


Answer: Your confirmation will be your bank statement and your copy of your electronically filed tax return which includes your direct transfer authorization.



 37. Which software already incorporated VAT and eFiling system?

SalesMate + POS Software already incorporates VAT and eFiling system