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Value Added Tax

 Value Added Tax-VAT   

Value Added Tax


The Value Added Tax is a multistage tax levied on the value addition. Under state Value Added Tax system tax is charged on sale value of goods and credit is given for tax paid on purchase price of inputs. Value Added Tax is collected at each stage of production and distribution process, and in principle, and its entire burden falls on the final consumer, who does not get any tax credit.

The original Value Added Tax system or worldwide VAT system:

Under the original Value Added Tax system or worldwide VAT systems, all traders, manufacturers and service providers charged VAT and claim set off of the Value Added Tax. In these countries, there is no sales tax, service tax and excise duty.

Methods of Value Added Tax:

  • Invoice method:- Under this method, tax is imposed at each stage of sales on the entire sales value and tax paid at the earlier stages is allowed as set off. Under this method, purchase invoice must be produced to claim tax credit. Thus, if at any stage, the transaction is not recorded in books, still there is no loss of tax revenue to the government. The department can recover the full tax at the next stage. Thus, the possibility of tax evasion is reduced to minimum. This system is also known as cross checking.The invoice method is widely used in most VAT countries because of its inherent advantages in calculating tax liability. First, it makes crosschecking of tax paid at earlier stages more amenable, as dealers are required to mention the amount of tax on invoices. Second, tax burden being dependent upon the tax rate at the final stage, dealers at intermediate stages do not have any incentive to seek special treatment in tax rate. And finally, it facilitates border tax adjustments. If exports are zero-rated, it is very easily done with this methods.
  • Addition method:- This method aggregates all the factor payments including profit to arrive at the total value addition on which the rate is applied to calculate the tax.
  • Cost subtraction method:- Under this method, the tax is charged only on the value added at each state of sale of goods. Since the total value of goods sold is not taken into account, the question of grant of claim for sett off or tax credit does not arise. This method is generally applied where the tax is not charged separately.





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