Get Value Added Tax Act (VAT) Notes / ebook:
In previous post we have given Central Sales Tax Notes
and 5 heads of income i.e.
Today we are providing Value Added Tax (VAT) ebook / Notes for CA , CMA, CS & for other Taxation students.
Value Added Tax (VAT)
Meaning of Value Added Tax:
VAT is a multipoint levy of sales tax that enables the person to claim set off of tax which he pays on the purchases. The system of VAT is so designed that the final levy and burden of the tax on the goods is borne by the final consumer of the goods.
Levy of Value Added Tax:
VAT is levied at every stage of production. It is levied only on the value added by the last seller. The seller is accordingly liable to pay tax on the net value added to the gross value as reduced by the value of intermediate materials purchased.
How is VAT different from the Sales Tax?:
|Sales Tax||Under VAT|
|1. Tax levied at the stage of the first sale or at the final stage||1. Tax levied and collected at every point of sale|
|2. Successive sales (resale) of goods on which tax is already paid do not attract tax||2. Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale|
|3. Dealers reselling tax paid goods do not collect any tax on resale and file NIL returns||3. Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition)|
|4. Computation of tax liability is complex||4. It is transparent and easier|
|5. Sales Tax is not levied at the time of purchases against statutory forms but there is misuse of such forms resulting in tax evasion.||5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale|
|6. Returns and challans are filed separately and the dealers have to give numerous details||6. The returns and the challans are filed together in a simple format after self-assessment done by the dealer himself|
|7. A large number of forms are required||7. At the most a few forms are required|
|8. Tax on goods only||8. Tax on goods and services both.|
|9. Assessment done by the department||9. Self-assessments by dealers|
|10. Penalty for defaulters/evaders not strict||10. Penalties will be stricter|
(2) For sale in the course of inter State trade or commerce; i.e. Goods are sold to any other State or Union Territory of India;
(3) To be used as—
(i) Containers or packing materials;
(ii) Raw materials; or
(iii) Consumable stores,
and the goods so manufactured by the use of the above raw-materials, packing materials are sold within the State or in the course of inter State trade commerce;
(4) For being used in the execution of a works contact;
(5) To be used as capital goods required for the purpose of manufacture of taxable goods;
(6) To be used as—(a) Raw materials;
(b) Capital goods;
(c) Consumable stores; and
(d) Packing materials/containers
and goods so manufactured by the use of above items are sold in the course of export out of the territory of India.
Calculation of Value Added Tax:
Value Added Tax is calculated by deducting tax credit from tax collected during the payment period.
Further, every time the VAT is charged, it is not an expense to the person who pays it, but just an advance to the government via the supplier. This is true for all except the final customer who cannot claim the VAT deduction. Actually, he is the only one who pays the full amount.
Methods of Computation of Value Added Tax:
(A) Invoice method/Tax credit method:
Tax credit method involves payment of tax by the seller i.e. manufacturer or dealer at full selling price and credit of tax is allowed, which he has paid at the time of purchase. Thus, the tax is levied on full sale price, but credit is given of tax paid on purchases and effectively, tax is levied only on ‘Value Added’ only.
It’s an easy and simple way to ensure that tax is paid. It helps elimination of cascading effect of tax on consumers.
(B) Subtraction method:
Under subtraction method, the purchase price is deducted from selling price and tax is paid on the net amount only i.e. value added. Thus, when the tax is paid on net amount, dealer’s margin is disclosed.
This method is unpopular and cumbersome. It is practically impossible when various inputs are used in the manufacture of numerous outputs. It is also not preferred by dealers as their margin gets disclosed.