VAT And Sales Tax Calculation in India Last Updated : 09 Apr 2020

VAT or value added tax has recently been subsumed by the Goods and Services Tax, also known as GST. Earlier VAT was paid by the original producer when the said goods or services reached the end consumer!

Taxation is the process of an authority levying tax on various goods, services and transactions. Taxation is one of the foremost powers held by the government, at the state as well as central level.

VAT or Value Added Tax :

VAT is tax on consumption of goods and services which is paid by the original producer when these goods and services are transferred to their ultimate consumers. VAT forms an essential part of the GDP of any country and as such is an extremely important type of tax. Every seller of goods and provider of services charges VAT from customers which in turn is paid to the government.

VAT is a multi-stage tax levied on the value added at each stage of production of goods and services.

Any person who makes an annual turnover of more than Rs.5 Lakhs by supplying goods and services is supposed to register for VAT payment. VAT is an indirect form of tax that is levied at various stages of production of goods as well as services. VAT is imposed on imported goods and local goods both. Since VAT is transparent and neutral, it has emerged as a vital instrument of revenue for the government.

Main Features of VAT :

  • Uniform rates are applicable to goods in the tax system. For example, televisions of a particular brand sold in West Bengal will have the same VAT as those sold in Himachal Pradesh unless controlled by the respective state governments
  • VAT is levied at successive stages of production and distribution of goods and services
  • It is collected at each stage of sale of goods and as such the end user does not need to pay the whole VAT amount
  • VAT alleviates the cascading effect and as such related economic distortions
  • VAT introduces fairness and uniformity in the process of taxation
  • VAT ensures better tax compliance and reduces chances of tax evasion
  • Transparency in sale of goods and services is encouraged by VAT

VAT Calculation :

Before we start calculating VAT, let us know what exactly VAT is.

VAT = Output Tax – Input Tax

Output Tax is the percentage of selling price received by the seller on the selling of his final product.

Input Tax is the percentage of cost price paid by a buyer for raw materials required to produce his final goods or services

Suppose Ravi is a carpenter who bought wood for Rs.1000 and paid an input tax of 10% = Rs.100

Ravi made a wooden table out of the purchased wood and sold it for Rs.2000. On this he collected an output tax of 10% on the selling price = 10% of 2000 = Rs.200

So, final VAT payable comes out to be Output Tax – Input Tax = Rs.200-Rs.100 = Rs.100

VAT and Sales Tax Calculation Chart

VAT/Sales Tax is one of the major revenue generator for the Indian government and is charged against the purchase price of a certain type of goods and services. This rate often changes every year, depending on the policy decision taken by the finance ministry.

Here is a tabular column that lists out the VAT percentage as was seen in 2016 an individual is expected to pay:

Year VAT Tax Rate
2016 15%

VAT and Sales Tax Calculation Examples

Here’s another example for how VAT is calculated.

Mr.A runs an ice cream parlour and often buys raw materials from wholesale dealers to run the business. He spends Rs.1,00,000 to buy the ingredients, which basically is considered as an input and is tax at 10%. In this case,

Input Tax = 10% of Rs.1 lakh = Rs.10,000

After running the business with great enterprising knowledge, he makes sales worth Rs.5,00,000.Again, there is an output tax to be paid for this as well, which stands at 10%.Here,

Output Tax = 10% of Rs.5 lakh = Rs.50,000

Going by the formula for VAT, i.e.,Output Tax - Input Tax, which is, Rs.50,000 - Rs.10,000 = Rs.40,000.

Therefore, Rs.40,000 is the VAT Mr.A is required to pay for his business.

Sales Tax :

Sales tax is levied on sale of goods and services which have been produced or imported. If the same goods and services are re-sold without any value addition, then sales tax is not levied again. Sales tax is levied under the authority of both Central government as well as state governments. This tax is levied basically on trading of goods within the states. Works of contracts and leases are also liable to pay sales tax.

Features of Sales Tax :

  • It is a form of consumption tax. This means that tax is collected when goods or services are actually purchased
  • Easy to calculate as the tax amount is charged as a percentage of the final value of goods or services
  • Compliance rate is average and sales tax is easy to collect
  • Sales tax is collected by the seller from the buyer at the time of purchase of goods and services
  • Sales tax is determined by states, cities and local municipal authorities and as such varies geographically
  • Sales tax is collected completely by the end purchaser and the seller does not pay any part of it

Difference between VAT and Sales Tax

Although VAT and Sales tax are both parts of the taxation system in India. There are several features that differentiate the two categories of taxes. Here is a list of how these taxes are distinct from each other.

  • VAT is to be paid by both producer as well as consumer while sales tax is levied entirely on consumers
  • Calculation of VAT is complex because of various layers of buying and selling transactions involved while that of sales tax is straightforward
  • VAT is levied on various stages of production while sales tax is applicable on the final value of purchase
  • VAT is able to avoid evasion successfully while sales tax is easy to fiddle with
  • VAT model increases the cost of production to business which in turn can lead to a higher burden on purchasers whereas sales tax is easily handled
  • VAT tends to profit the government's more rather than sales tax. This is because tax from each and every wholesale transaction also reaches the government unlike sales tax where just the end amount of tax is levied

Quick Fact: VAT and Sales Tax both have been designed as an added arm to the income taxation procedure and have been done away with in many states for certain necessities such as food and clothing.

News About VAT and Sales Tax

  • VAT being charged Prior April 1, 2014 Received with positivity by state Government and Builders

    Decision taken by the Haryana government to charge 1% VAT from developers as well as builders for the time before April 1, 2014 is being raised as a positive sign for all the stakeholders in the situation. Not only will it help recover taxes restricted through litigations faster but the scheme is being called, ‘Haryana Alternative Tax Compliance Scheme for Contractors, 2016’ which according to the Government will also benefit residents.

    The scheme, according to the government provides conclusiveness and removes the unpredictability of tax that is payable. This scheme suggests that contractors must apply within 90 days of the scheme being rolled out. The contractor henceforth has to pay 25% of the total tax that is payable and the rest 75% may be paid in the following quarters through equal installments.

    21 September 2016

  • BLC approves state VAT Amendment Bill for Bihar

    Bihar Legislative Council (BLC) has approved no less than six statutes that entails the Bihar VAT Amendment Bill of 2016. The aim is to garner a hike of .50 per cent to the current rate, through which the government will earn at least INR 1200 Cr more in this financial year compared to the preceding one. There will be a .50 percent escalation for products that do not come under the Bihar VAT Act of 2005, standing at 15 percent. The Minister of Commercial Taxes, Mr. Bijendra Prasad Yadav assured that this new rate will not impact the masses at all as products used and employed by them do not come under this list.

    8 August 2016

  • New VAT Act In Delhi Introduces Advance Tax On Imported Items

    The Delhi Assembly has notified the Value Added Tax (Amendment) Bill, 2016 as an Act –the first one to be made into a law since the AAP government took charge of Delhi in February 2015.

    Under the new Act, imported goods being brought into Delhi after customs clearance, and meant for sale, will fall under the purview of advance tax. Those who import goods into Delhi for the purpose of sale have to pay a certain amount of VAT as advance tax.

    It also allows the government to launch amnesty schemes for small penalties, creation of special courts for VAT cases and introduction of steps towards e-communication and monitoring.

    20 July 2016

  • Odisha reduces VAT on pulses for the next 3 months

    Considering the soaring prices of pulses in the state, the Odisha CM has reduced VAT on pulses. It is an experimental move which will be in place for the next 3 months beginning in July. The idea is to capture any downward movement in the price of pulses and then capitalize on the same by varying VAT. The decision came at the backdrop of protests made by the Odisha Byabasahi Mahasangha against the rising dal prices in the state.

    90% of pulses in Odisha are imported from other states due to low production of pulses in the state. The traders association were earlier unhappy with the inaction of the government and have now welcomed the decision.

    05 July 2016

  • State Government told to reduce VAT

    In a bid to keep the rising prices of pulses in check, and to dissuade hoarders, state governments have been told by the Centre to do away with VAT, mandi fees and other local taxes levied on pulses. The notification by the Centre was made on Saturday, and was done in hopes of thwarting hoarders from driving up the prices in their respective states. The Centre claims that doing away with these fees and taxes could result in a 5 per cent to 7 per cent reduction in the price of pulses. Food and consumer affairs minister Ram Vilas Paswan stated that based on panel recommendations, a buffer stock of nine lakh tonnes of pulses should be created against the current buffer of 1.5 lakh tonnes. He also stated that doing so would aid in greater strategic intervention. Currently the gap between demand and production of pulses is anticipated to grow to seven million tonnes over 2016, with a further rise in prices expected. On Saturday the average price of pulses per kilogram stood at Rs 170 for Urad, Rs 140 for Arhar and Rs 70 for Chana.

    15 June 2016

  • Non-Subsidised LPG Costs Rs. 21 More Now

    Prices of aviation turbine fuel and non-subsidised cooking gas has been hiked. While the aviation turbine fuel went up by 9.2 percent, cooking gas saw a rise of Rs. 21 per cylinder.

    Jet fuel prices rose, for the fourth consecutive month, by Rs. 3,945.47 per kilolitre to Rs. 46,729.48 per kilolitre in Delhi. Non-subsidised LPG, which consumers have to buy after they exhaust their quota of 12 cylinders in a year, now costs Rs. 548.5 in Delhi, up from Rs. 527.5.

    The cost of subsidised LPG is Rs. 419.18 per cylinder in Delhi.

    Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum change the prices of jet fuel and non-subsidised LPG cylinders on the first day of every month, based on the average international price in the previous month.

    The prices will differ according to different airports due to vary in local sales tax and value added tax.

    3 June 2016

  • Goa Government Slashes VAT on fuel to counter price hike

    The prices of fuel, petrol and diesel have gone up drastically in the international markets. This has influenced the price of these fuels in the Indian market too. The current government had taken advantage of the lower prices of fuel and had charged heavy excise duty on the same. However, with the current hike in rates the government has decided to cut down on the Value Added Tax or VAT being levied on petrol.

    For the state of Goa, the change in VAT from 22% to 20% has been effected from 20th May, 2016 midnight. The main motto of the current state government is to keep the price of petrol below Rs.60 per litre in the state.

    20 May 2016

  • Evasion of VAT and State Tax offences should attract PMLA Charges

    Vice Chairman of Special Investigation Team, SIT said that cases of state tax offenses should be treated with seriousness and offenders should be charged under the Prevention of Money Laundering Act. The union government has widened the category of offences under the PMLA and has asked authorities to take strict action against offenders.

    Probe agencies working to gather data related to tax offences has revealed astonishing figures wherein 97000 people have been found to be directors in more than 20 companies when the provisions of the Company Act clearly state that no person can be director in more than 20 firms and that doing so is an offence.

    6 May 2016

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