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
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|
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 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.