2.1] Value Added Tax

Meaning

VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax-that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs. 1000 from another dealer and a tax of Rs. 100 has been charged in the bill, and he sells the same goods for Rs. 1250 on which the dealer will charge a tax of Rs. 125 at 10 percent, the tax payable by the dealer will be only Rs. 25, being the difference between the tax collected of Rs. 125 and tax already paid on purchases of Rs. 100. Thus, the dealer has paid tax at 10 percent on Rs.250 being the value addition in his hands.

Method:

VAT can be computed by using any of the three methods mentioned below:

• Subtraction Method: The tax rate is applied to the difference between the value of output and the cost of input.
• Addition Method: The value added is computed by adding all the payments that is payable to the factors of production (viz. wages, salaries, interest payments, etc.)
• Invoice Method: Also known as the tax credit method, it entails set-off of the tax paid on inputs from tax collected on sales.

In India, the Invoice method (tax credit method) is prevalent.

Applicable to

• VAT is applicable only to Registered Dealer. Dealer can get himself registered voluntarily or compulsorily.