Value Addition Tax

[ VAT ]
 VAT

Back Ground

In the existing Sales Tax structure, there were problems of double taxation &
multiplicity of taxes ( Single Point, Multiple Point or Last Point taxation ),
resulting in a cascading tax burden.

Also, several States used to levy multiplicity of taxes, such as Turnover tax,
surcharge on sales Tax, Additional Surcharge etc. With introduction of VAT,
these other taxes have been abolished. As a result, overall tax burden is
rationalised and prices in general will fall.
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Back Ground …...

The Tax structure has become simple which has improved tax compliance and
also enhanced revenue growth of State.

The VAT is therefore, helping common people, traders, industrialist and also
the Government. It is indeed move towards more efficiency, equal
competition and fairness in taxation regime.
 VAT

What is VAT ?

It is nothing but multipoint Sales Tax.

It is collected only on value addition at each stage.

Tax paid by the dealer on its purchase of goods & capital goods are eligible for
set off against payment of VAT. [ Input Tax Credit ]

[ Remember, A dealer can not claim the input tax credit if the purchase of goods
and capital goods are not meant for the business. ]
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CST & VAT

Central Sales Tax ( CST ) is charged by seller of goods when there is inter-State
sale. ( i.e. Sales made to dealer/consumer in other states.) In this case goods
moves from one State to another State. On the other hand, VAT is charged by the
seller of the goods, when he makes sales within the state.

[ Remember : No input tax credit is available when CST is paid. In other words,
inter-State purchase of goods are not vatable. ]
 Input Tax Credit
On Purchases
Purchases Made Within State Purchases Made from outside State

Paid VAT Paid CST

Tax Money remains in the State Tax Money goes in the Seller’s State
of buyer & Seller.

Therefore, Input Credit is available to Buyer

Therefore, Input Credit is NOT available to
Buyer
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Summary

The principles of VAT are common for the whole country.

Tax is levied at the point of sale.

VAT system are intra-State sale { within the State } while CST system are inter-
State sale { outside State }.

Union Territories are also treated as states.

VAT is implemented by giving set-off of the tax suffered by the Purchases.

{Input Tax Credit }
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Variants of VAT
( Various Approaches for Input Credits )

A] Gross Product Variants :

➢Tax is levied at the point of sale.

➢Input Credit is available only for purchases of raw materials.

➢No input credit for capital goods used for manufacturing.

➢VAT Calculation =[ VAT collected from Sales - VAT paid on Purchase of

R.M.]
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Variants of VAT
( Various Approaches for Input Credits )

B] Income Variants :

➢Tax is levied at the point of sale.

➢Input Credit is available for purchases of raw materials as well as

depreciation on capital goods.

➢Credit can be availed on a pro-rata basis as & when depreciation is charged

on capital goods.
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Variants of VAT
( Various Approaches for Input Credits )

C] Consumption Variants :

➢Tax is levied at the point of sale.

➢Input Credit is available both for purchases of raw materials as well as on

capital goods.

➢No need to examine whether the goods are capital goods or not.

➢VAT Calculation =[ VAT collected from Sales - VAT paid on Purchase of R.M
& on Capital Goods.]
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Methods for Computation of Value Addition

There are several methods to calculate value addition for levy of tax. The three
commonly used methods are as under :

A.Addition Method :

➢Value addition is arrived at by aggregating all factory payments plus profits.

( like Rent, Electricity, hire charges, interest, wages, depreciation etc.)
➢No Scope for matching of sales invoice with purchase invoice.
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Methods for Computation of Value Addition...

B. Invoice Method :

➢The tax is levied on full sale price & credit is given for the tax paid on
purchases made. Effectively tax is levied on value addition only.

➢Without proper purchase invoice the dealer can not avail input credit so
dealer will take due care to collect all invoice.

➢It’s easy & simple method of computation of value addition.

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Methods for Computation of Value Addition...
C. Subtraction Method :

➢ Under this method, the purchase price is deducted from selling price and tax is paid on the net
amount only i.e.value added.

➢ (i) Direct Subtraction Method : Tax is levied on difference between aggregate value of sales
excluding tax & aggregate value of purchase excluding tax.

➢ (ii) Indirect Subtraction Method : Tax is levied on difference between aggregate value of sales
including tax & aggregate value of purchase including tax.

➢ This method is unpopular & cumbersome. It is sometime practically impossible to when various
inputs are used in manufacture of numerous output. It is also not preferred by dealers as their
margin gets disclosed.
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❖ Advantages of VAT :
➔Easy to administer & transparent.

➔Less litigation

➔Tax Credit on Purchase of Capital Goods as well.

➔No Cascading effect.

➔Self Assessment.

➔Stringent against tax avoidance.

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❖ Limitations of VAT :
➔Detailed Record maintenance.

➔Increase in manpower & investment

➔No credit for tax paid on inter-State purchases.

➔Break in chain in composition scheme.

➔Audit under VAT.

➔Delay in refund of taxes.

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❖ Ineligible purchase of Input Credit :
➢ Exempted Goods.

➢ Imported Goods

➢ Inter-state purchases.

➢ Goods received as Free Samples & not for sale.

➢ Purchases which is utilised to manufacture exempted goods.

➢ Purchases where Tax is not shown separately.

➢ Purchase invoice not available.

➢ Purchases from Unregistered Dealer/ Under composition Scheme.

➢ Goods Purchased but are destroyed by fire/stolen/lost.

➢ Goods received on Consignment sales or stock transfer from other state.

➢ Goods purchased & returned within the specified period.

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