What is Value Added Tax and How It is Calculated

Are you wondering what the full form of VAT Tax is? It stands for value-added tax. It is one of the most crucial forms of tax that is levied on goods. Note that GST has replaced all the indirect tax on goods since 2017.

However, there are still goods not covered under the new regime and VAT continues to be collected for numerous goods. Read on to have a better understanding of value-added tax (VAT) and how it works.

What is Value Added Tax

It is a type of indirect tax that the Central Government levies on sold goods. VAT is collected starting from manufacturing till the sale is completed by the retailer. It works in such a way that the consumer at the end of the supply chain pays a higher tax amount. 

Value-added tax is a multi-point check system for collecting tax at each point of purchase. 

• When dealers collect the tax amount from the consumer, they pay back to the government
• Before paying the government, they deduct the tax paid for the purchase, which eliminates the tax-on-tax effect
• The VAT law changes depending on the state and Union Territory 
• There are certain gods that are exempt from VAT 
• The list of goods and their threshold limit varies from state to state

Also Read: Direct Tax vs Indirect Tax

Understand How it Works

Knowing what is VAT and having a brief knowledge of input and output tax can give you a clear idea of how value-added tax works. 

Input Tax

• It is the tax amount paid by the dealers during their purchases
• VAT is not only applicable to goods that are purchased for resale
• It is also applicable to capital purchases such as machinery and equipment
• Most of these purchase comes under value-added tax (VAT) application
• However, in most cases, companies can claim VAT credit

Output Tax

• It is the tax amount paid by the consumer while purchasing taxable goods from dealers
• Anyone registered for VAT can collect the tax amount; it may be an individual, business or partnership
• If you make a sale more than the prescribed limit of ₹5 lakhs or ₹10 lakhs, depending on the state, you should opt for VAT registration

The registration of VAT means enrolling your company in the list of corporations that are eligible for tax returns. It is mandatory for all manufacturers involved only in the production of goods and services to register for value-added tax (VAT). 

VAT is different from sales tax, and is charged at various stages of the production process. On the other hand, sales tax is charged at the end user purchase of goods and services. 

Pros and Cons of VAT

Pros

• VAT doesn’t have loopholes like other taxes
• It offers better incentives in comparison to a progressive tax, therefore increasing income

Cons

• Possibility of tax evasion
• It can cost more to consumers at lower income levels due to the passing along of costs
• Businesses have to pay higher tax amounts due to such a tax regime

Also Read: What is Advance Tax?

Calculation VAT

Using a simple calculation formula, you can calculate value-added tax:

VAT= Output Tax – Input Tax

For example, say a dealer pays a value-added tax of 10% on the purchased goods at ₹100. Then, s/he sold the product at ₹150 to you, collecting a VAT of ₹15 from you. Then, the input tax here is ₹10, and the output tax is ₹15. Hence, the dealer has to pay only ₹5 as VAT while purchasing the goods. 

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FAQs on Value Added Tax 

Can I claim VAT back on business expenses?

Yes, you can claim VAT on business expenses after registering your business for VAT.

Are there any exemptions from VAT?

The VAT law changes depending on the state and union territory. Depending on the VAT law, some goods and the threshold limit for exemption are exempted from VAT.

Where can I find more information or get help with VAT issues?

You can get information from the Goods and Services Tax, CBIC, and Government of India and register any complaint related to VAT issues.

What happens if I miss the VAT return deadline?

In case of delays in filing the return, you shall be liable to pay ₹100 per day, for which the maximum amount is calculated quarterly.