What is Value Added Tax and How is it Calculated

While the Goods and Services Tax (GST) replaced the indirect taxes such as VAT in 2017, many different goods are still not covered under the new regime. VAT continues to be the tax applied to such goods. Check out this post to know what VAT is and how exactly is it calculated.

Taxes play a critical role in the economic structure of a country. Different types of taxes are levied on various goods and services at different stages. One of the most important types of tax on goods was VAT or Value Added Tax. As VAT was levied on every step throughout the value chain of goods, it resulted in a cascading effect, which impacted the inflation. The Government of India replaced such indirect taxes with GST in 2017 to achieve its "One Nation, One Tax" goal. However, while GST is now levied on most of the products and almost all the services, VAT is still applicable to the goods not covered under GST.

What is VAT?

Value Added Tax, popularly known as VAT, is levied on sold goods and not on services. The working of VAT is as such that the end consumer is required to pay high taxes. This was one of the biggest reasons why the VAT is now mostly replaced with GST. As per the VAT system, dealers are required to collect taxes on their sales, retain taxes on their purchase and pay the remaining balance to the tax authorities. As the consumers ultimately bear the taxes, it is also known as a consumption tax.

How Is VAT Calculated?

Now that you know VAT full form and what it is, let us have a look at how it is calculated. To understand the working of VAT, you first need to understand what is input tax and output tax.

• Input Tax

The input tax is the tax paid by the dealers for their purchases. Many of their purchases will have applicable VAT charges; however, they can claim VAT credit in most cases. Apart from purchasing raw materials and goods for resale, input tax also includes VAT that applies to capital goods like equipment and machinery.

• Output Tax

The output tax is the tax paid by the consumer when they purchase a taxable product from a dealer. Dealers can be a business, partnership, or even an individual registered for VAT. All the dealers who make sales higher than the prescribed limit of Rs 5 lakh in a year should register for VAT. Once they register, VAT is then chargeable on all their taxable sales.

Computation of VAT

While you can now find VAT calculator online, you should know what goes behind the calculation. A simple formula is used for computing VAT.

VAT= Output Tax – Input Tax

For instance, a dealer purchases goods of Rs 100 and pays a 10% VAT (Rs 10) on the same. You then purchase the goods at Rs 150 from the dealer, and s/he collects 10% VAT (Rs 15) from you. Here, the output tax is Rs 15 and the input tax is Rs 10. So, the dealer will only pay Rs 5 to the tax authorities as s/he paid Rs 10 as VAT while purchasing the goods.

VAT E-Filing

You can file the VAT returns online as well as offline. Most dealers prefer the online method as it is quick and easy. When you register for VAT, you receive a unique User ID and Password. This can be used for logging on to the VAT E-Filing portal online from where you can pay VAT. As VAT is a state government tax, every state has its own e-filing portal. However, the procedure for filing VAT is the same across all the states.

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