HOW VAT WORKS

[abhishreshthaa]

INTRODUCTION. TO VAT


MEANING:


VAT is an indirect tax on consumption.

Generally, it is a tax on the value of every transfer (or change in hands) of goods from the original producer to the ultimate consumer.

It is a tax on the value added by each transferor in the chain.

The value addition is the difference (not just the profit) in the value of goods.


ADVANTAGES:

• Eliminates cascading effect of tax

• Simple tax structure

• Improves compliance

• Transparency


METHODS FOR LEVY AND\OR COLLECTION OF VAT:

Primarily, there are tow methods:

• The invoice or tax credit method

• The subtraction method


Invoice method:

The tax is calculated and separately charged on each sale and accordingly shown in the invoices.

The difference between the tax payable on sale and the tax paid on purchase (as per the invoice) is VAT.


Subtraction method:

The tax is calculated on the aggregate value of sales and purchases by applying the rate of tax as applicable to the goods.


The difference of tax on sale value and purchase value is VAT.

 

[jitendra05]

INTRODUCTION. TO VAT


MEANING:


VAT is an indirect tax on consumption.

Generally, it is a tax on the value of every transfer (or change in hands) of goods from the original producer to the ultimate consumer.

It is a tax on the value added by each transferor in the chain.

The value addition is the difference (not just the profit) in the value of goods.


ADVANTAGES:

• Eliminates cascading effect of tax

• Simple tax structure

• Improves compliance

• Transparency


METHODS FOR LEVY AND\OR COLLECTION OF VAT:

Primarily, there are tow methods:

• The invoice or tax credit method

• The subtraction method


Invoice method:

The tax is calculated and separately charged on each sale and accordingly shown in the invoices.

The difference between the tax payable on sale and the tax paid on purchase (as per the invoice) is VAT.


Subtraction method:

The tax is calculated on the aggregate value of sales and purchases by applying the rate of tax as applicable to the goods.


The difference of tax on sale value and purchase value is VAT.

Hey abhi, many thanks for explaining about the working process of value added tax and i am sure it is going to help many business man. Well, as we know that value added tax is a kind of indirect tax and i am also sharing a document for more detailed information on vat.