Value Added Tax (VAT)

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Value Added Tax (VAT)

Post by rajathadri on Fri Jul 02, 2010 4:39 pm

VAT is the new method of raising tax on the sale/purchase of goods within a state. It is the replacement for sales tax.

Most state governments have accepted the VAT system.

Let us understand VAT with the help of an example.

A retailer purchases an article from a manufacturer for Rs 1000. The rate of sales tax is 10%.

The sales tax paid by the retailer = 10% of 1000 = Rs 100

If he sells the article for Rs 1200, then

Tax recovered on the sale = 10% of Rs 1200 = Rs 120

“The difference between the tax paid on the sale value and that paid on the purchase value is deposited with the government as VAT.”

Hence, in the above example,

VAT = Tax recovered on sale − Tax paid on purchase

= Rs 120 − Rs 100 = Rs 20

Here, the value added by the retailer is Rs 1200 − Rs 1000 = Rs 200

Tax on the added value = 10% of Rs 200 = Rs 20

This is the reason why it is called value added tax (VAT).

The difference between sales tax and value added tax is that sales tax is realized at single point only, while value added tax is realized at different stages.



Let’s look at the following video to better understand the concept of VAT.



[[VIDEO:3018]]



Let us now solve some problems to understand the concept of VAT more clearly.

Example 1

A shopkeeper sells an article to a consumer at the list price of Rs 2200. The rate of sales tax is 6%. The shopkeeper deposits a VAT of Rs 24 to the government. If the shopkeeper purchases the article from the wholesaler, then find the tax paid by the shopkeeper to the wholesaler.

Solution:

List price of the article = Rs 2200

Tax paid by the consumer = 6% of Rs 2200 = Rs 132

VAT paid by the shopkeeper = Rs 24

We know that

VAT = Tax recovered on the sale − Tax paid on the purchase

Rs 24 = Rs 132 − Tax paid on the purchase

Tax paid on the purchase = Rs 132 − Rs 24 = Rs 108

Thus, the tax paid by the shopkeeper to the wholesaler is Rs 108.

Example 2

A manufacturer sells an almirah to a wholesaler for Rs 6000. The wholesaler sells it to a retailer and earns Rs 1200 as profit. The retailer sells it to a customer at a profit of Rs 800. If the rate of VAT is 7%, then find the amount of tax deposited with the state government as VAT.

Solution:

Tax collected by the manufacturer = 7% of Rs 6000 = Rs 420

The wholesaler earns a profit of Rs 1200.

Hence, the value added by the wholesaler is Rs 1200.

VAT paid by the wholesaler = 7% of Rs 1200 = Rs 84

The retailer earns a profit of Rs 800.

Hence, the value added by the retailer is Rs 800.

VAT paid by the retailer = 7% of Rs 800 = Rs 56

VAT deposited with the state government

= Rs 420 + Rs 84 + Rs 56 = Rs 560

Example 3

A wholesaler sells an article to a retailer at 25% discount on the list price. The retailer sells the article to a customer at 15% discount. The rate of sales tax is 10% and the list price of the article is Rs 12000. Find the profit earned and VAT paid by the retailer.

Solution:

List price of the article = Rs 12000

Discount given by wholesaler = 25%

Purchase price for the retailer

= Rs 12000 − 25% of Rs 12000

= Rs 12000 − Rs 3000

= Rs 9000

Discount given by the retailer = 15%

Sale price for the retailer

= Rs 12000 − 15% of Rs 12000

= Rs 12000 − Rs 1800

= Rs 10200

Profit earned by the retailer

= Rs 10200 − Rs 9000

= Rs 1200

Tax paid by the retailer to the wholesaler = 10% of purchase price = 10% of Rs 9000

= Rs 900

Tax recovered by the retailer from the customer

= 10% of sale price

= 10% of Rs 10200

= Rs 1020

VAT = Tax recovered on sale price − Tax paid on purchase price

= Rs 1020 − Rs 900 = Rs 120

Thus, the profit earned by the retailer is Rs 1200, while the VAT paid by the retailer is Rs 120.

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rajathadri
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