VAT: Tax Calculation, Difference from Sales Tax, Value addition

VAT is a tax charged by respective State Government on sales made in intra state transactions (within the state transactions). Example:

Dealer ‘A’ sold goods to Dealer ‘B’ for 1000; VAT – 10%

Sale Price – 1000

VAT – 1000*10% = 100

Final Price (Paid by Dealer B) – 1100/-

VAT Paid to Government by ‘A’ = 100/-

Dealer ‘B’ further sold same goods to Dealer ‘C’ for 1500 (adding 400 profit margin); VAT – 10%

Sale Price – 1500

VAT – 1500*10% = 150

Input Credit Available – 100 (VAT Paid on purchase made from Dealer ‘A’)

Final Price (Paid by Dealer ‘C’) – 1500+150 = 1650/-

VAT Paid to Government by ‘B’ = 150–100 = 50/- (because 100 has already been paid by ‘A’)

Conclusion: Cost to Dealer ‘B’ is 1000 not 1100 because ‘B’ will get credit of 100 paid on purchase. ‘B’, technically, added 500 as profit margin (1500–1000). VAT is 10%. Hence, 500*10% = 50 (VAT Paid by ‘B’). That is why it is called Value Added Tax. Because ‘B’ added value of 500.

Comparison Chart

BASIS FOR COMPARISON	CENTRAL SALES TAX (CST)	VAT
Meaning	Tax charged on the total value of the commodity, when the sale takes place is known as Sales Tax.	VAT is a tax charged at each level of the production and distribution chain whenever the value is added to the product.
Nature	Single point tax	Multi point tax
Tax Evasion	Can be possible	Cannot be possible
Cascading effect	Yes	No
Levied on	Total Value	Value Added
Account maintenance	Requires less effort because it is simple and easy to calculate.	Proper accounts should be maintained as it is comprehensive and complex to calculate.
Tax Burden	Falls on the consumer	Rationalized.
Input Tax Credit	Unavailable	Available
Area	Applies to the whole country.	Applies within the jurisdiction of the state.

Value Addition

Value Added is the extra value created over and above the original value of something. It can apply to products, services, companies, management, and other areas of business. In other words, value-added is the enhancement made by a company/individual to a product or service before offering it to the end customer.

Value can be added to, a product, a service, a process, or an entire business. Value can be added by way of providing better or extra services in the form of after-sales services and better customer support. Value can also be added by improving a product in some way, or by including extras with the product. For example, a retail seller of computers can add value by including software or computer accessories with the basic product, the computer.

Companies with strong branding can add value to their products or services simply by way of using the company’s logo to sell the product.