VAT (VALUE ADDED TAX) VAT is a kind of tax which is levied on sale of goods and services when these commodities are ultimately sold to the consumer. It.

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Presentation transcript:

VAT (VALUE ADDED TAX) VAT is a kind of tax which is levied on sale of goods and services when these commodities are ultimately sold to the consumer. It is an indirect form of tax paid to the government by customers. VAT is levied both on local as well as imported goods.

OBJECTIVES OF VAT Eliminate multiplicity of taxes. Avoids double taxation. Easy calculation and simple. To increase the government revenue. Prevents distortions in trade and economy through uniform tax rate. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

ADVANTAGES OF VAT Simple to administer as compared to other indirect tax. Based on value added and not on price. Transparent. Deterrent against tax avoidance. Less litigation. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

DISADVANTAGES OF VAT Relatively complex to understand. Risky calculation. Costly to implement. Inflation increases. Have to maintain detailed records. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

CALCULATION OF VAT VAT is actually calculated as the difference between input tax and output tax. VAT=Output tax – Input Tax Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

EXAMPLE Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw materials. Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs. 5,000. Now after selling the food made by using the purchased raw materials, Ram was able to make Rs. 1,00,000. Supposing 10% output tax, output tax becomes Rs. 10,000. So, final VAT payable by Ram comes out to be Rs. 10,000-Rs.5,000=Rs.5,000. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

METHODS OF VAT Addition method Subtraction method Tax-credit method Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

ADDITION METHOD This method is based on identification of value-added by summation of all the elements.(i.e wages, profits, rent and interest) Example: Wages=25, Rent=25, Interest=250, profit=25. Value added= wages+rent+interest+profit Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

SUBTRACTION METHOD Estimates value-added by means of difference between outputs and inputs(i.e T=t(output-input)) Example: Sales=250, Purchases= 25 Value added =Sales- Purchases Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

SUBTRACTION METHODS Direct subtraction method Intermediate subtraction method Indirect subtraction method Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

TAX-CREDIT METHOD Indirect subtraction method entails deduction of tax on sales for each tax period. Example: Tax on sales=35, Tax on purchases=10 Value added= tax on sales – tax on purchases. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018

COMPARISION OF VAT AND GST Many countries have VAT/GST and a sales tax. Sales tax are not necessarily imposed at every stage of supply chain and imposed only on the consumer. VAT/GST is imposed at every stage of the supply chain. Unit V– Income Tax Act, Legal Aspects of Business – Mr.K.Mohan Kumar, AP/MBA 9/11/2018