Decoding and calculating VAT

The Importance and Benefits of VAT

Before the launch of Value Added Tax (VAT) in India, the taxation system was exploited by businessmen and enterprises who found weaknesses in the taxation system and began evading taxes. This is when VAT came into India to reduce tax evasion and introduce transparency for equally distributing the tax burden amongst everyone.

Since Value Added Tax underwent multiple stages of taxation during the production of goods and services, it fell under the surveillance of the respective state government where the business was established. This was one of the main reasons why in India the taxation system differed slightly from one state to another.

The key features that indicated the benefits of VAT in India were as follows:

• There were no exemptions under the VAT system.
• Tax imposition at each step of the production process ensured a better policy with fewer chances for exploitation.
• The tight enforcement of VAT was an important aspect of a solid taxation procedure of a country as it helped in lessening the fiscal deficit of India to some length.
• VAT was a taxation system which was applied everywhere in the world, and it helped India to integrate further into global trade practices, eventually paving the way for GST.

Formula for Calculating VAT

There were two variants of VAT Calculations:

VAT Law

As per the VAT law, one could not sell any goods in the absence of a sales document. This referred document could be a simple cash memo, cash sale, bill for the cash transactions etc. As per the VAT law, all the tax invoices had to be serially numbered and issued in a serial number format.

The invoices had to produce the following confirmation:

• Name of the taxpayer, address, and Taxpayers Identification Number(TIN).
• A serial number of the invoice.
• Date of when the invoice was issued.
• Date when the goods were supplied if it was different from the date when the invoice was issued.
• Name and address details of the party to whom the goods were being supplied.
• A description of the commodity, its quantity and the price of the goods or service which was being supplied.
• Rate and the amount of VAT levied on the goods and services.
• A receipt indicating if the supply was done via cash or on credit.
• For a sale that was over Rupees 50,000, the customer's PAN had to be produced.

But, in the case of a retailer who primarily supplied taxable goods to unregistered parties, the retailer was required to provide a simplified tax invoice.

Additional Attributes of VAT System in India

• The government bodies of the respective state were authorized to collect the Value Added Taxes. Upon collection, the fund was transferred to the central government.
• VAT was subjected to rules and guidelines under the state government which is why the price of the same commodity could vary from one state to another.
• Necessities like salt, oil etc. were not imposed a VAT as they were a daily requirement of the consumers.