Total Costs of All factors of Production (labor electricity,etc)
(It does not include Raw Material Costs)
= Total Value Addition .
Tax is imposed on this Value Addition.
Duty liability is cacluated periodically (monthly or quarterly) and not invoice vise
Matching of purchase and sale invoices is not done here,
Hence, there can be evasion of taxes
Note:-This method is normally used with Income Variant.
It is the most common method
=Tax on Sales Bills
Tax on Purchase Bills
Hence, tax is payable at each stage and there is less chances of loss of revenue.
If at any stage the transaction is kept out of the books, still there is no loss of revenue.
The Government can recover the full tax at the next stage.
This method is also called the 'Tax Credit Method' or 'Voucher Method'.
There are chances of tax evasion by producing fake invoices. Hence, proper measures shall be taken to avoid fake invoices.
Cost subtraction method
In this method, tax is calculated as follows
Direct Subtraction Method
Taxable turnover = (Sales excluding taxes-Purchase excluding taxes)
Tax = Taxable turnover*Tax Rate
Intermediate Subtraction Method
Taxable turnover =(Sales including taxes-Purchase including taxes)
Tax= Taxable turnover*Tax Rate
This method is suitable for Gross Product Variant.
Tax cannot be shown in Invoice
Duty liability is calculated periodically (monthly or quarterly) and not invoice vise
Briefly answer the following questions:-
(a) Which is the most popular and common method for computing VAT liability and at what
stage is the tax imposed under this method?
(c) What are the items aggregated in the addition method to calculate the VAT payable?
When is this method mainly used?
(a) Invoice method is the most common and popular method for computing the tax liability
under the VAT system. Under this method, tax is imposed at each and every stage of
sale on the entire sale value, and the tax paid at the earlier stage is allowed as set -off.
(c) Under addition method, all factor payments (excluding value of material) and profit are
added to arrive at the value addition on which VAT rate is applied to compute the VAT
payable. This method is mainly used with income variant of VAT.