Addition, Invoice & Subtraction method

Methods for computation of VAT

1.       Addition Method or Income Approach

                     i.            Aggregate all factor payments (like wages, rent, interest etc.) including profits to arrive at the total value addition.

                   ii.            Apply the rate of VAT on the aforesaid amount to calculate the tax.

2.       Subtraction Method or Product Approach

Determine Value addition from either of the following methods:

                     i.            Direct Subtraction method

Total value of sales

Less: Total value of purchases

(both exclusive of tax)

                   ii.            Intermediate subtraction method

Total value of sales

Less: Total value of purchases

(both inclusive of tax)

Apply the rate of tax on the amount calculated in step 1

3.       Invoice Method or Tax Credit Method or Voucher Method

                     i.            Compute the tax to be imposed at each stage of sales on the entire sale value

                   ii.            Set-off the tax paid at the earlier stage. (i.e., at the stage of purchases in set-off)

                  iii.            The differential amount (i.e. Step 2 – Step1) is required to be paid

Illustration

Inputs used for the production of output ‘P’ are ‘X’ and ‘Y’ respectively. The following are details of inputs:

The following are the details of Sales and the rate of VAT applicable for the output ‘P’ is 12.5%

Solution

A.      Computation of VAT at each stage following Invoice Method

B.      Computation of VAT at each stage following Subtraction Method

In the above illustration, total collection under Invoice method and subtraction method differs due to differences in rates of inputs and outputs.

File also attached here

thank u:)

Mr Deepak Gupta thanks for sharing