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 undergoes multiple stages of taxation during the production of goods and services, it falls under the surveillance of the respective state government where the business is established. This is one of the main reasons why in India taxation system differs slightly from one state to another.

The key features that indicate the benefits of VAT in India are as follows:

• There are no exemptions under VAT system.
• Tax imposition at each step of production process ensures a better policy with fewer chances for exploitation.
• The tight enforcement of VAT is an important aspect of a solid taxation procedure of a country as it helps in lessening fiscal deficit of India to some length.
• VAT is a taxation system which is applied everywhere in the world, as a result it will help India to integrate further into the global trade practices.

Formula for Calculating VAT

There are two variants of VAT Calculations:

VAT Law

As per the VAT law, one cannot 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 must be serially numbered and issued in a serial number format.

The invoices must 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 is different from the date when the invoice was issued.
• Name and address details of the party to whom the goods are being supplied.
• A description of the commodity, its quantity and the price of the goods or service which is being supplied.
• Rate and the amount of VAT levied on the goods and services.
• A receipt indicating if the supply is done via cash or on credit.
• For sale that is over Rupees 50,000, the customer's PAN must be produced.

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

Additional Attributes of VAT System in India

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