Value Added TAX(VAT) MBA By_Riaz

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Submitted By Riaz Ahmed MBA(1 st Sem) VALUE ADDED TAX(VAT)



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Value Added Tax, popularly known as 'VAT', is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service Value added tax or VAT is a broad based tax levied at multiple stage with tax on inputs credited against output. The origin of VAT can be traced as far back as the writing of Dr. William Von Siemens who proposed the concept in 1918. In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April, 1954 . VAT is initially directed at large businesses, it was extended over time to include all business sectors . INTRODUCTION

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VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each stage of production and circulation . It is also chargeable on the value of all imported goods . It is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and its introduction has not resulted in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost there of that is , the difference between the output and the input. VALUE ADDED TAX

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VAT is more equitable way of taxing as well as all dealers share the tax. VAT is more transparent as easy procedures exist under it and only two rates are there. Simpler and easy communication and easy compliance. Credit for input taxation leading to cost efficiency. Better compliance through self policing. Avoids distortions in trade and economy due to uniform tax rates. NEED FOR INTRODUCING VAT

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Penalties will be stricter. Transparency will increase. Tax on goods and services both. At the most a few forms are required. Overall tax burden will be rationalized. There will be self assessment by the dealers. Tax levied and collected at every point of sale. There will be higher revenue Growth. Other taxes such as turnover tax, surcharge, additional surcharge etc. will be abolished. BENEFITS OF VAT

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VAT is calculated by deducting tax credit from tax collected during the payment period Example : (Rate of tax assumed is 10 %) Purchase Price Tax paid during purchase Selling Price Tax collected during resale Input tax credit (tax paid during purchase) VAT payable (output tax – input tax) Total tax collected y government At the time of purchase by the dealer At the time of resale by the dealer Total tax: Rs. 100 Rs.10 (input tax) Rs. 150 Rs.15 (output tax) Rs. 10 Rs.5 Rs.10 Rs.5 Rs. (10+5)=Rs.1 5 HOW TO CALCULATE VAT

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There are three Variants of VAT Gross Product Variant Income Variant Consumption Variant VARIANTS OF VAT

Gross product variant:

Gross product variant This variant allow deductions for all purchases of raw materials and components but no deduction is allowed for capital Goods. In this way capital goods, such as plant and machinery are not deductible from the tax base in the year. Capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of Plant and machinery is delayed due to this dual tax treatment.

Income variant:

Income variant Under income variant deductions are allowed for purchase of Raw materials and components as well as depreciation on capital goods. In practice there are many difficulties connected with specification of any method measuring depreciation which basically depends on the life of assets as well as on the rate of inflation

Consumption variant:

Consumption variant Under this Variant deduction is allowed for purchase , for all business purchase including capital assets. In other words, the economic base of the tax is equitable to total private consumption. It doesn’t distinguish between capital and current expenditure.

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Compulsory issue of tax invoice and retail invoice : Tax invoice is issued to a dealer/consumer who has to take input VAT Credit whereas retail invoice is meant for inter state sales or sale to a consumer who does not require input credit of VAT. Registration : There is a compulsory registration of the dealer if the aggregate turnover exceeds a certain specified limit. Composition scheme : A small dealer whose turnover does not exceed a specified limit (say in Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself at a small percentage of gross turnover and in this case buyer of goods with not get input VAT Credit. Tax payer identification Number (TIN ) : There will be a taxpayer’s identification number of 11 digit numerical which will Audit under VAT has been made compulsory by various States. GENERAL REQUIREMENT FOR VAT SYSTEM

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There are three methods for the computation of VAT Addition Method Subtraction Method Tax Credit Method METHODS FOR COMPUTATION OF VAT


ADDITION METHOD This method is based on the identification of value added, which can be estimated by summation of all the elements of value- added(i.e. Wages ,profits , rent and interest). The chief drawback of this method is that it does not require matching of invoices in order to check tax evasion.


SUBTRACTION METHOD T he subtraction method estimates value added by means of difference between outputs and inputs. This is also known as product approach and has further variants in the way subtraction is attempted from among (a) direct subtraction method (b) intermediate subtraction method (c) indirect subtraction method.


TAX CREDIT METHOD U nder tax credit method, the tax on inputs is deducted from the tax on the sales to arrive at the VAT payable by dealer. The indirect subtraction method entails deduction of tax on inputs from tax on sales for each tax period.

Comparative analysis of three methods by illustration:

Comparative analysis of three methods by illustration

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Methods Manufacturer Rs Wholesaler Rs Retailer Rs Total Economy Addition Method Wages Rent Interest Profit Value Added(a +b +c +d ) VAT(12.5% of e) 150 50 25 25 250 31.25 300 100 75 25 500 62.50 200 20 20 10 250 31.25 650 170 120 60 1000 125 Subtraction Method Sales Purchases Value Added(a-b) VAT(12.5% of c) 350 100 250 31.25 850 350 500 62.50 1100 850 250 31.25 2300 1300 1000 125 Invoice Method Sales Tax on Sale Purchases Tax on Purchases VAT(b-a) 350 43.75 100 12.5 31.25 850 106.25 350 43.75 62.50 1100 137.5 850 100.25 31.25 2300 287.5 1300 162.50 125

Items covered under vat:

Items covered under vat All business transactions that are carried on within a State by individuals/partnerships/ companies etc. will be covered under VAT. More than 550 items are covered under the new Indian VAT regime out of which 46 natural & unprocessed local products will be exempt from VAT Nearly 270 items including drugs and medicines, all industrial and agricultural inputs, capital goods as well as declared goods would attract 4 % VAT in India. The remaining items would attract 12.5 % VAT. Precious metals such as gold and bullion will be taxed at 1%. Petrol and diesel are kept out of the VAT regime in India.

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Easy to Administer & Transparent : This system is easy to administer because, Its simple. It reduces the cost of compliance. It is transparent. Tax is to be charged in every bill. No local statutory forms. Abolition of Statutory Forms : There are no forms under VAT. Therefore, all problems related to forms automatically get resolved. Self Assessment : Dealers are not required to appear before the Assessing Authority for their yearly assessments, as under VAT there is provision for self assessment . MERITS OF VAT

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Eliminates Multiple Tax : Set off will be given for the input as well as tax paid on previous purchase . Simple : It is simply based on transaction not on a base that required complicated definition like income or wealth . Lowering of Tax burden : VAT reduces tax burden and helps in reduce prices . Fairness : VAT is a move towards more efficiency, equal competition and fairness in the tax system . Higher Tax revenue : Higher revenue growth. MERITS OF VAT

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DEMERITS OF VAT Varying VAT rates : There are varying rates and some goods are out of VAT and composition schemes and exemption scheme are also available, thus 100% benefit of VAT is not gained. No credit against other tax : No credit is given against CST and VAT of other states thus 100% neutrality cannot be achieved. No difference between poor and rich : The poor man bear the tax burden on per with the rich is an unavoidable demerit of VAT. Increase in Tax administration Cost : Due to multi point tax system, every seller pay tax and every seller takes credit on inputs thus consequently the burden of details check of accounts of all dealers has increased.

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