Q: What is Value Added Tax?
Ans: Value Added Tax is a tax on value addition made by the subsequent seller on the inputs he purchased. It works on a macro economic principle i.e. the sale invoice - the purchase invoice as per standard economic norms is the value addition on which the tax is payable after deducting the tax paid on inputs purchased.
Q: What is Input Tax?
Ans: "Input" normally means goods purchased by a dealer in the course of his business. The purchases would include any goods purchased by a dealer in the course of his business for re-sale or for use in the manufacture or processing or packing or storing of other goods or any other use in business including capital goods under specified circumstances.
Q: What is Input Tax Credit?
Ans: Input tax credit is the credit for tax paid on inputs. Every dealer is liable for output tax on the taxable sale effected by him. The basic principle of VAT is that every dealer pays tax only on the value addition in his hands. Input tax credit is the mechanism by which the dealer is enabled to setoff against his output tax the input tax. Dealers are not eligible for input tax credit on all inputs. There are certain restrictions and conditions on the eligibility of input tax credit as may be stipulated in the respective State Acts. The restrictions and conditions are answered separately.
Q: How is input tax credit to be claimed? Is there any requirement of a "one to one" correlation between input tax and output tax?
Ans: There is no need for a "one to one" correlation between input tax credit and output tax. Quite a large number of small businesses are under the misconception that input tax has to be adjusted against output tax on a bill to bill basis and have been opposing the implementation of VAT stating that their profit margin would be known to the buyer and that account keeping would be impossible.
The operation of the input tax mechanism is very simple. The dealer will be eligible to take credit of eligible input tax in a month (or such tax period as may be specified) on the entire purchases. The dealer would charge VAT at the prescribed rate of tax as is being done in the present system of levy of sales tax. The VAT or Output Tax payable is compiled on a monthly basis as is done now. The dealer can adjust the input tax eligible on the entire purchase in the tax period against the output tax payable irrespective whether the entire goods purchased is sold or not. For example, if the input tax credit in a particular month is Rs. 10,000/-, the output tax payable is Rs.5,000/-, the excess input tax of Rs.5,000/- can be carried forward to the next tax period. Assuming no further input tax credit in the following month and that the output tax payable is Rs.7,000/-, the dealer will pay Rs.2000/- along with the monthly return.