Calculation of VAT: Example 2: (Rate of tax assumed is 10%) : Calculation of VAT: Example 2: (Rate of tax assumed is 10%) With Sales Tax With VAT Assume A & B are both manufacturers. Tax revenue with Sales Tax = Rs. 25; with VAT = Rs.14.
Slide 3: Calculations with VAT(Example 2)- Explained
‘B’ will purchase goods from ‘A’ @ Rs. 110, which is inclusive of duty of Rs. 10.
Since ‘B’ is going to get credit of duty of Rs. 10, he will not consider this amount for his costing.
He will charge conversion charges of Rs. 40 and sell his goods at Rs. 140.
He will charge 10% tax and raise invoice of Rs. 154 to ‘C’. (140 plus tax @ 10%).
In the Invoice prepared by ‘B’, duty shown will be Rs. 14. But, ‘B’ will get credit of Rs. 10 paid on the raw material purchased by him from ‘A’.
Thus, effective duty paid by ‘B’ will be only Rs. 4.
‘C’ will get the goods at Rs. 154 and NOT at Rs. 165 which he would have got in absence of VAT.
Thus, in effect, ‘B’ has to pay duty only on value added by him.
Slide 8: NOTES
Examples 4, 5 & 6 show various possible impact on final prices under VAT.
Unlike in the theoretical examples, in India, sales tax was generally charged only once - at the time of sale to distributor.
Since no credit was available for sales tax, Distributors and Retailers used to include sales tax in the cost of product, while computing mark-up.