VAT is enforced and collected by state governments and hence there is parity in rules and implementation guidelines of VAT. As a result, the procedure of implementation, rates, and timelines of payment and return filing of VAT differs from state to state. Broadly speaking, VAT in India can be categorized into four heads:
- Nil VAT rate: under this head, no VAT is levied on products. These items are sold in unorganized sector and are very basic in nature or are in natural form, for example, salt, khadi, etc.
- 1% VAT rate: under this head, VAT is levied at a rate of 1% on price of goods. It is mostly levied on goods of expensive nature. It is kept this low because if these (expensive) are sold at higher VAT, the final price of the goods may increase drastically. Under this category there are goods like gold, silver, diamond, precious stones, etc. Most Indians states follow this rate only for expensive items.
- 4-5% VAT rate: under this category, VAT is levied at a rate of 4 to 5 percent. This head includes a large number of goods that are of daily use in nature, for example, cooking oil, medicines, tea, other FMCG items like soaps, etc.
- General VAT rate: this rate varies from 12 to 15 percent. The goods which do not fall under any category listed above are treated under this head where a higher amount of VAT is levied. The goods that are luxurious in nature or the goods, consumption of which is needs to be decreased due to ill effects, need to be levied a higher rate of tax, fall under this category, for example, liquor, cigarettes, etc.