1. Value added tax in short VAT, was a tax introduced as early as 1919 by Dr.Wilhelm Von Siemens in Germany as a tax on improved turnover. Professor Thomas.S.Adams suggested this tax in USA as a sales tax with a credit or refund for taxes paid by the producer on goods bought for resale or for use in production of goods. However till 1953 no country introduced VAT. In the year 1954 France introduced it and since then many countries have adopted this progressive method of taxation.
2. Value added tax is a multi point tax. Tax already paid is allowed to be adjusted against tax payable.
Tax has to be paid when hotel Saravana Bhavan sells fried rice. The tax has already paid on the oil used to make fried rice is allowed to be adjusted against the tax payable on sale of fried rice.
A pen purchased say reynolds from the retail shop suffers tax at the hands of the retailer let us say Rs.2. The retailer when he purchased the pen from the wholesaler would have paid tax to the wholesaler say Re.1. This tax of Re.1 is allowed to be adjusted against Rs.2 the tax payable. Hence the balance tax to be paid by the retailer to Government. is Re.1.
3. There are three different types of VAT. They are:-
← Gross Product Variant
← Income Variant
← Consumption Variant
4. Under the Gross Product Variant taxes paid on purchases of raw materials and components alone is allowed as deduction. Taxes paid on capital goods is not allowed as deduction. This method is not in use, as it does not allow tax deduction of capital goods like plant & machinery on which the tax is large due to the price of the capital goods. This method is discouraged, as it does not take into account all the taxes paid by the buyer.
5. The income variant of VAT allows for deduction on purchases of raw materials & components as well as depreciation on capital goods. This method is also discouraged, as there is no one method by which depreciation can be calculated as depreciation always depends upon the life of the asset.
6. The consumption variant of VAT is the most popular method and is followed widely in many countries. This variant of VAT allows for deduction of taxes paid on all business purchases including capital assets.
7. Value added tax is a tax on value addition. To calculate the tax component there are several methods used. However there are three methods, which are most commonly used. They are:- ← Addition Method
← Invoice Method
← Subtraction Method
The subtraction method is again divided into two:-
← Direct subtraction method
← Intermediate subtraction method
Among these methods the most popular and widely used method is the invoice method.
8. ADDITION METHOD
This method of computing VAT is used under the income variant. Under this method all the payments including profit is aggregated to arrive at the total value addition and on this value addition the rate of tax is applied to calculate VAT. This is not a popular method, as this method does not facilitate the matching of invoices for detecting the tax evasion.
9. INVOICE METHOD
This is the most popular and commonly used method. In India this method is being followed both in Central Excise as well as State VAT. Under this method tax is charged on the sale value, which is reflected on the invoice issued to the buyer. The tax charged by the seller which is reflected on the purchase invoice is taken into account for set off thus the net tax payable will be tax on sales minus tax on purchases. Any excess tax paid on purchases is allowed to be carried forward for set off against future tax liabilities. This method is also called as Tax Credit Method or Voucher Method. Under the Central Excise Act this method is known as Cenvat Credit. Even though tax evasion...