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VAT EXPLAINED:
The shift to VAT heralds by far the most radical change in the system of sales tax administration in India. VAT is essentially a destination-based consumption tax. If follows the multi-point system of taxation, with credits granted for taxes paid on inputs in the preceding stages. Thus VAT is a tax only on the value addition at every stage of production and distribution. The following table illustrates this:
|
Description
|
Value
of Output
|
Tax
paid
|
|
Value
of input
|
100
|
10
|
|
Add:
|
|
|
|
Value
addition
|
50
|
|
|
Profit
mark-up 10%
|
16
|
|
|
|
166
|
|
|
Tax
@ 10%
|
16.6
|
|
|
Less:
Tax paid
|
10
|
|
|
Tax
paid to Government
|
|
6.60
|
|
|
|
|
|
Value
of Input
|
166
|
|
|
Add:
|
|
|
|
Value
Addition
|
46.4
|
|
|
Profit
mark up
|
24
|
|
|
|
234.4
|
|
|
Tax
@ 10%
|
23.44
|
|
|
Less:
Tax paid
|
16.60
|
|
|
Tax
paid to Government
|
|
6.84
|
|
Final
Price to Consumer
|
257.84
|
|
|
Total
Taxes paid
|
|
23.44
|
Thus while tax is collected at all stages of Sales/Purchase, the same is rebated at the next stage of sale. The only tax that does not get refunded is the tax collected on the ultimate sale to the consumer.
Thus VAT is clearly beneficial to both manufacturers/distributors and the eventual consumer.
While VAT computation can be done on a number of methods such as Addition method, Subtraction method, Input Credit Method, the most popular method is the Input Credit method, which the above illustration is based
on. |
