VAT Notes for icse x students

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Value Added Tax (VAT)
VAT is the new method of raising tax on the sale/purchase of goods within a state. It is the replacement for sales tax.

Most state governments have accepted the VAT system.

Let us understand VAT with the help of an example.

A retailer purchases an article from a manufacturer for Rs 1000. The rate of sales tax is 10%.

The sales tax paid by the retailer = 10% of 1000 = Rs 100

If he sells the article for Rs 1200, then

Tax recovered on the [Bad word deleted] = 10% of Rs 1200 = Rs 120

“The difference between the tax paid on the [Bad word deleted] value and that paid on the purchase value is deposited with the government as VAT.”

Hence, in the above example,

VAT = Tax recovered on [Bad word deleted] − Tax paid on purchase

= Rs 120 − Rs 100 = Rs 20

Here, the value added by the retailer is Rs 1200 − Rs 1000 = Rs 200

Tax on the added value = 10% of Rs 200 = Rs 20

This is the reason why it is called value added tax (VAT).

The difference between sales tax and value added tax is that sales tax is realized at single point only, while value added tax is realized at different stages.

To understand the concept of VAT more clearly, look at the following table.

Let us suppose that the rate of sales tax is 10%.

In case of sales tax
In case of VAT
For manufacture:

Purchase price = Rs 500

[Bad word deleted] price = Rs 1000
Tax paid = Nil

Tax charged = Nil
Tax paid = 10% of 500

= Rs 50

Tax charged = 10% of Rs 1000

= Rs 100

VAT = Rs 1000 − Rs 50 = Rs 50
For 1st dealer:

Purchase price = Rs 1000

[Bad word deleted] price = Rs 1100
Tax paid = Nil

Tax charged = Nil
Tax paid = Rs 100

Tax charged = 10% of Rs 1100

= Rs 110

VAT = Rs 110 − Rs 100

= Rs 10
For 2nd dealer:

Purchase price = Rs 1100

[Bad word deleted] price = Rs 1300
Tax paid = Nil

Tax charged = Nil
Tax paid = Rs 110

Tax charged = 10% of Rs 1300

= Rs 130

VAT = Rs 130 − Rs 110

= Rs 20
For Retailer:

Purchase price = Rs 1300

[Bad word deleted] price = Rs 1500
Tax paid = Nil

Tax charged = 10% of Rs 1500

= Rs 150
Tax paid = Rs 130

Tax charged = 10% of Rs 1500

= Rs 150

VAT = Rs 150 − Rs 130

= Rs 20

Tax deposited with the government = Rs 150
Tax deposited with the government as VAT = 50 + 50 + 10 + 20 + 20 = Rs 150
It is clear from this table that the sales tax is charged only by the retailers.

Under the VAT system, tax is charged at different stages and the sum of the taxes charged is deposited with the government.

Let us now solve some problems to understand the concept of VAT more clearly.

Example 1

A shopkeeper sells an article to a consumer at the list price of Rs 2200. The rate of sales tax is 6%. The shopkeeper deposits a VAT of Rs 24 to the government. If the shopkeeper purchases the article from the wholesaler, then find the tax paid by the shopkeeper to the wholesaler.

Solution:

List price of the article = Rs 2200

Tax paid by the consumer = 6% of Rs 2200 = Rs 132

VAT paid by the shopkeeper = Rs 24

We know that

VAT = Tax recovered on the [Bad word deleted] − Tax paid on the purchase

Rs 24 = Rs 132 − Tax paid on the purchase

Tax paid on the purchase = Rs 132 − Rs 24 = Rs 108

Thus, the tax paid by the shopkeeper to the wholesaler is Rs 108.

Example 2

A manufacturer sells an almirah to a wholesaler for Rs 6000. The wholesaler sells it to a retailer and earns Rs 1200 as profit. The retailer sells it to a customer at a profit of Rs 800. If the rate of VAT is 7%, then find the amount of tax deposited with the state government as VAT.

Solution:

Tax collected by the manufacturer = 7% of Rs 6000 = Rs 420

The wholesaler earns a profit of Rs 1200.

Hence, the value added by the wholesaler is Rs 1200.

VAT paid by the wholesaler = 7% of Rs 1200 = Rs 84

The retailer earns a profit of Rs 800.

Hence, the value added by the retailer is Rs 800.

VAT paid by the retailer = 7% of Rs 800 = Rs 56

VAT deposited with the state government

= Rs 420 + Rs 84 + Rs 56 = Rs 560

Example 3

A wholesaler sells an article to a retailer at 25% discount on the list price. The retailer sells the article to a customer at 15% discount. The rate of sales tax is 10% and the list price of the article is Rs 12000. Find the profit earned and VAT paid by the retailer.

Solution:

List price of the article = Rs 12000

Discount given by wholesaler = 25%

Purchase price for the retailer

= Rs 12000 − 25% of Rs 12000

= Rs 12000 − Rs 3000

= Rs 9000

Discount given by the retailer = 15%

[Bad word deleted] price for the retailer

= Rs 12000 − 15% of Rs 12000

= Rs 12000 − Rs 1800

= Rs 10200

Profit earned by the retailer

= Rs 10200 − Rs 9000

= Rs 1200

Tax paid by the retailer to the wholesaler = 10% of purchase price = 10% of Rs 9000

= Rs 900

Tax recovered by the retailer from the customer

= 10% of [Bad word deleted] price

= 10% of Rs 10200

= Rs 1020

VAT = Tax recovered on [Bad word deleted] price − Tax paid on purchase price

= Rs 1020 − Rs 900 = Rs 120

Thus, the profit earned by the retailer is Rs 1200, while the VAT paid by the retailer is Rs 120.

Subject: Re: VAT Notes for icse x students Tue Sep 07, 2010 7:04 pm

Hi Saif,
Tooooooooooooooooo good. Thanks for sharing.

Subject: Re: VAT Notes for icse x students Wed Sep 15, 2010 11:07 pm

Thanks for sharing..man