Value Added Tax

Value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. Being a state law, vat varies from state to state. The general concept which is seen in every state is as follows:

  • Vat rates on sales are generally classified in 5 categories: A- Nil, B- Special rate generally around 1 or 2 %, C- generally covers raw material 4 or 5%, D- Petroleum Products and liquor 20% and above, E- residual 12.5%.
  • Setoff of purchases are allowed.
  • Setoff related to capital goods varies from state to state. In Maharashtra, it is allowed in the year of purchase.
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