VAT (Value Added Tax)
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What is VAT?(Value Added Tax)
Ø It is a local sales tax collected under a different system
Ø It is a multi point tax with a facility of set off for tax paid
on purchases.
Ø It is collected on each stage of the production distribution
cycle.
Ø It based on the destination principle.
Ø The final and total burden by the domestic consumer.
What are the salient features of VAT
Ø Simplicity
Ø Transparency
Ø No cascading effect
Ø A few rates of tax
Ø Self assessment
Ø lesser Interaction with Dept.
Ø Less incentive to tax evasion
Ø Uniform treatment
(I.e. no incentives to new entrants)
System before VAT.
Ø L.S.T is collected either at first point or last point
Ø F.P.T. has inbuilt cascading effect
Ø It increases the price of commodities by more than tax.
Assume Govt. Wants to Collect 10% of tax on base price of a commodity i.e. 10% on 1000=Rs. 100/-
First Point Tax Rs.
Base Point Of Mr. A 1,000
Tax at 10% 100
Purchase price of Mr. B 1100

Margin added by B @50% 550

Selling price of B to C 1650

Margin added by C 825
2,475
Tax nil
Consumer pays 2,475
------------------------------------------
Last point Tax Rs.
B price of Mr. A 1,000
No tax at this level ----
Purchase price of Mr. B 1,000
Margin added by B @50% 500
Selling price by B to C 1,500
Margin added by C 750
2,250
Tax at last point 100
Consumer pays 2,350
System before VAT contd……
Ø FPT is irrational and cascading
Ø It also entails double taxation in the event of interstate sale
Ø LPT is rational but evasion prone.
Ø Difficult and costly to achieve high compliance .
Ø More uncertainty and collection is postponed till the last sale.
Ø Multiplication of rates resulting in classification disputes.
VAT Addresses all these anomalies
Ø It mitigates the disadvantages of both first and last point tax
Ø Also partakes of the advantages of both.
HOW…….
TAXING UNDER VAT

Example:
Value Tax Net tax payable

Selling price of Mr. A 1,000 +100 100
(1) Tax at 10%

Purchase price of B 1,000 +100 100
Margin of Mr. B 500
1,500
(2)Tax @10% 150 50
Margin Of C 750
2,250
(3)Tax @10% on 2,250 225 75 75(225-150)
Note:-Rs. 225 is 10% Rs.2,250 is equivalent to 10% last point tax;
Here consumer price is Rs. 2,475(2250+225)
Conditions:-
You have to use the goods for –
1. Sale/Resale
2. Interstate sale /Export
3. Raw material/capital goods in manufacturing
4. Packing
Procurement/purchase from registered dealer
Local purchases
No input tax credit for :-
Raw material used for manufacturing of exempted goods
Interstate purchases
Purchase of goods for consumption
Purchase from unregistered dealer
Tax Invoice:-
An important document to claim input tax credit
While making a sale to registered dealer in Haryana . Tax invoice is to be issued.
On the strength of such tax invoice, the purchasing dealer can claim input tax credit.
Otherwise ,for consumer sale , Retail invoice is to be issued. No input tax credit can be claimed on the strength of a retail invoice.
Retail invoice to be issued in case of interstate sales.
THE NEW TAX REGIME-
Simplifications
Advantage of set-off
Absence of declaration form;
Abolition of compulsory assessment ;and
Existence of mainly 3 rates
Arguably this will make the new tax structure transparent and simple to comply with by the industry and trade . The cascading tax burden and economic distortions will also be significantly reduced.
The new VAT tax Regime will thus help industry & trade and also help the Govt. and people.
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