I want to start selling, should I register and charge VAT (Value Added Tax)?

Recently, a reader who is about to start an online business asked me this question... At that moment I didn't know the answer, so today that I visited my Chartered Accountant decided to clarify this (also because I'm thinking of a new venture on these lines).

A company is only required to register for VAT if its turnover for sales of goods is above Rs. 5 lakhs (Rs. 500,000). Thus, while your turnover is below that, you need not register for it, nor charge your customers for this.

Certainly, you can register for it even before if you want to. It will cost about 20 to 30,000 Rupees, and eventually you will recover this money from the government at the end of the Financial Year as a settlement when you file your income returns.

If you are starting your business, my advice is that you wait and only when you see things are moving on well and you are getting close to Rs. 5 lakhs turnover, then approach your C.A. for VAT registration. Surely your clients will appreciate it.

Note that Sales tax and VAT are one and the same thing.

But VAT is separate from Service tax. Even if your company's turnover for services is above 10 lakhs and you are registered for Service tax, this is completely independent and does not affect VAT.

According to my CA they will unite these two in the future into one (called Goods and Sales Tax, GST), with benefits for tax deductions... But this may not happen until 2012 or 2013.

When is Service Tax applicable for a Private Limited company ?

The very basic information: if your turnover is less than 10 lakh Rupees (Rs. 10,00,000) you do not need to charge Service Tax to your clients, thus you don't even need to have a number for it, i.e. you don't need to register yourself for this purpose.

But I was gladly surprised to discover some time ago that even if your total turnover is great than 10 lakhs you may still not need to charge Service Tax! And it all depends on what services you are providing.

There are certain services that according to the fiscal law they are not liable to Service Tax, thus if you are providing those services, you (and your clients) need not worry about this hassle.

Even better, it could be that your company is providing more than one service, some of them taxable and others not. As long as those that are not taxable do not exceed 10 lakhs, you need not charge Service Tax.

It's important that you confirm with your Chartered Accountant that you need not register for Service Tax, and in turn, he will have to do some thorough research about this issue. Also, remember that rules change every year and something that was not taxable last year, may become taxable the next one so be careful and keep an eye on this.

Just in case you are into this business... IT services do have Service Tax. But Translations and Interpretations don't! At least for this year...