Support for Indian VAT, CST and Service Tax in Adempiere


Adempiere comes up with comprehensive support for taxation and considers VAT & CST as just one more type of tax. While this is alright for a large scale ERP implementation, the smaller players start expecting explicit support (off-the-shelf) for VAT & CST. As part of this article, I intend to cover how you can cater the need of VAT & CST for your business using Adempiere and if you want more flexibility then what kind of customization or configuration will be required.

Definition & Expectations

VAT

Value Added Tax (VAT) is a form of consumption tax that the seller charges from the buyer (for them it is a tax on the purchase price) for the value added into the product, services or material. The “value added” by a business is the sale price charged to its customer (buyer), minus the cost of materials and other taxable inputs. In VAT the collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases (and / or sells) products. The end-consumers (personal or business) of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer.

Important points

– With VAT, the consumer psys, and the government receives, the same as with sales tax.
– Businesses collecting VAT have less profits overall (in terms of % of total turnover) than businesses collecting sales tax
– All buyers pay VAT
– If the buyer is a company, they deduct the VAT

VAT Rates

The VAT rates/classifications, which describes the nature of the business activity and the type of transaction on which taxes are being applied, are different for each State in India. Typically small businesses expect following classifications to be available off-the shelf:

Applicable for Purchase
– Input VAT @ 4%
– Input VAT @1%
– Input VAT @ 12.5%
– Purchases – Capital Goods @ 4%
– Purchases – Exempt
– Purchases from Composition Dealers
– Purchases – From Unregistered Dealers
– Inter-state Purchases

Note that – NOT ALL THE purchase VATs are INPUT VAT. Hence, there must be a way to indicate if a VAT is an input VAT or not.

Applicable for Sale
– Output VAT @ 1%
– Output VAT @ 4%
– Output VAT @ 12.5%

While business is fine to select appropriate tax at the time of raising the invoice, they do expect ERP solutions to take care of following:

–       Ability to generate VAT Computation Report – Depending on the Input VAT paid during purchases and the output VAT collected on sales, the VAT Refundable (or Payable if negative) is calculated as the difference between Input VAT and Output VAT. Business needs this report on montly basis to be able to file return with their respective state government.
–       Automatic Handling of Returned Goods – When the goods consisting of VAT gets returned, the system shall perform corresponding posting to ensure that VAT amount is correctly adjusted and accounted while filing tax return with the government. The return can be on Sales as well as Purchase.
–       VAT Return (monthly return) Form – The system shall generate VAT return form in the similar format as recommended by respective state government. For example – for Andhra Pradesh government, you can find return form on www.apvat.info/vat-returns/web-form-vat-200.xls.
–       Payment or Refund or Carryforward ot credit related to VAT – The system shall allow business to manage settlement with the government to give them exact detail of VAT liability at any given moment.
–       Tax RegisterThis register shows all the invoices and total of taxes applied on invoice lines in a format where different taxes are shown as separate column in cross tab format.

CST

Inter-state Purchases attract Central Sales Tax (CST), which is not set-off against Output VAT on sales within the state or Output CST in inter-state sales. The CST paid is treated as a part of procurement cost. CST is payable on inter-State sales @ 2%, if C form is obtained. No CST if form H or I is obtained from purchaser. Otherwise, CST rate is same as applicable for sale within the State.

The business has a need to maintain following
–       For all the purchase on Form C (or H / I), they have a need to issue corresponding form to the buyer
–       For all the sales on Form C (or H / I), they have a need to collect corresponding form to the buyer
–       In case any buyer is not able to supply form then additional tax need to be collected from the buyer and paid to the government
–       In case the business is not able to issue the form to the supplier then the system shall allow business to pay additional tax
–       The forms are issued by government department in a lot. The business has a need to

    • Maintain the inventory of these forms and track which form was issued against which invoice.
    • See a report which will show form receivables (from buyer) and forms issuable (to purchaser)

Following image shows the overall expectation with respect to forms associated with taxes:

Service Tax

The Service Tax is payable on gross amount charged for taxable services provided or to be provided, excluding material cost.  The service tax is administered by the Central Excise Department. The liability to pay service tax has been placed on the “service provider”. From 24.02.2009 the rate of service tax is 10% on gross value of the taxable service plus 2% Education Cess on the service tax amount and 1% Secondary Higher Education Cess on the service tax amount. The service tax is not applicable for customers outside India.

While invoicing to the customer the customer may ask business to mention the service tax category. Also, while most of the times customers are okay to see the consolidated tax line, sometimes they ask you to show separate calculation for cess (primary education cess and secondary education cess).

The Government has divided services into various accounting heads and corresponding interests are also captured under separate accounts. Following image shows sample list of accounts:

Accounting Head

At the time of paying the service tax, you need to select right set of service account heads and allocate the amounts correctly. Often one company will be registered with the authority to cater 1-2 services. Education cess is applicable on all the service taxes.

Cess

As part of ERP solution the customer always ask for ability to generate “G.A.R.-7 Service Tax Payments” report. Which expect you to mention correct amount against different accounts for which the business need to pay the tax. There are situations where one company is providing service as well as availing service. In such cases the input tax shall be adjusted against the output tax and the business shall be able to compute net tax liability.

Like any other taxes, business expect following reports for Service Tax

–      Tax Payable

–      Input Credit Report

Existing Implementation in Adempiere

The existing Adempiere implementation allows you to do following

  1. Define Tax Category and associate the tax category with Products & Charges
    1. Actual Taxes are derived from products and charges
    2. A tax category can have different rates, which the accountant should be able to apply depending on to who and where the product / charge is shipped
    3. Define a normal tax and use them at the time of sales / purchase activities
    4. Define Composite Tax – using parent tax selection allows you to define hierarchy / composite tax, which effectively allows you to apply multiple taxes on the document / lines. By indicating the tax as “Summary Level”, you can define a branch (which cannot be considered as end-node) in a tree hierarchy.
    5. Allows you to specify if the tax
      1. rate applied on the sale / purchase would require any certificate
      2. will be used for sales or purchase or both
      3. will be considered as input tax or not (by selecting / deselecting “Sales Tax” checkbox)
      4. will be applicable for specific PIN code ranges – very handy if the tax is applicable only in some part of the country
    6. The accounting tab of Tax Rate window allows you to override the default accouts for taxes to be able to post the tax portion of your transactions in your most suitable accounts.
    7. The Tax Declaration window allows you to see all the tax entries for a selected period and their posting against configured accounts. With significant constraints, this can be roughly used to derive your overall tax liability.

That is pretty much what Adempiere provides you off the shelf. In case you don’t expect high level of tallying and you are willing to do few things manually, this may be enough for you to manage your taxes.

Customization Needs

Tax Category & Tax Rates

  • Currently all the taxes are being shown while selecting taxes at invoice line / ordeline level. While business often expect the filtering to happen based on taxes associated with the tax category liked with the product.
  • The definition of cess (e.g. education cess and secondary education cess) is not directly supported. Note that cess gets applied on top of calculated tax.
  • As of now the system doesn’t explicitly ask for the form name against which the invoice was issued. The “Tax Rate” tab of “Tax Rate” window does ask for if the tax rate requires certificate, but it doesn’t indicate which certificate(s).
    • At the time of PO, Quotation and Invoice it will be required to indicate the certificate which is expected to be able to avail the tax rate mentioned as part of this tax definition. Otherwise, default tax rate will be applicable which if often much higher.

CST Gaps

Tax Settlement & Reports

  • The existing implementation doesn’t have a clear and direct way to settling liability with the Government or viewing tax liability reports. Based on Tax Declaration detail, you can view overall tax liability and create corresponding charge and assign payment / receipt to that as and when you pay / receive money from Government.
  • The different type of taxes require a company to be registered with different local authorities and these registration details are required on documents. Currently Adempiere doesn’t have anything to capture details of all the certificates / registration.
  • Also, most of the taxes require generation of Challans – and obviously Adempiere being targeted for  the world community cannot (and should not) support such specific needs.

References

–      www.apvat.info/
–      http://en.wikipedia.org/wiki/Value_added_tax
–      http://adempiere.com/VAT
–      http://www.adempiere.com/Sponsored_Development:_VAT_Enhancements
–      http://www.adempiere.com/Tax_declaration
–      http://www.dateyvs.com/cst07.htm
–      http://www.servicetax.gov.in/st-proc-home.htm

Conclusion

I hope this article gives the business user & implementers the exact view of what they can expect (with respect to VAT and CST) from the off-the-shelf system. As usual the Adempier’s power keeps amazing business community and the implementers alike. Also, ever evolving framework like Adempiere will be able to bridge these minor gaps pretty soon. At Walking Tree we help you achieve your ERP needs by implementing Adempiere for your business. In case you need more support on this topic or ERP then send a note to us on sales@walkingtree.in.

We are also running a poll for you to select the Most Effective ERP. Do take that poll to help yourself as well as others to decide the most suitable ERP for their business.

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Posted in ADempiere, EagleRP
3 comments on “Support for Indian VAT, CST and Service Tax in Adempiere
  1. vishwas says:

    I have business in maharashtra, I have uploaded CST form and after a weak the error sent in my email is
    “Interstate purchase against form C shown in your return are not shown/do not tally with your corresponding VAT returns.”
    what does this means, & what have to be done. ?

  2. Pit36 says:

    Amazing issues here. I am very satisfied to peer your post.

    Thank you a lot and I am looking ahead to touch you. Will you please drop me
    a e-mail?

  3. Walking Tree says:

    Following links contains a sample GAR7 Service Tax form:
    http://www.cbec.gov.in/gar7st-challanfrnt.pdf

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