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VAT-IPCC
SUDHIR SIR KEE CLASS-2
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CA SUDHIR HALAKHANDI:-Good Morning Students once Again in your IPCC VAT class. Now today we are taking the following portion of your syllabus regarding VAT :-
1. Inception of VAT internationally.
2. Different variants of VAT
3. Different Methods of calculating of VAT.
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1. HISTORY OF VAT
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RAKSHIT: - Sudhir Sir, Please tell us how this tax was first introduced in the world and then tell us when it was introduced in some of important countries of the world.
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CA SUDHIR HALAKHANDI: - Yes first see the word and concept of Vat was referred and proposed by Dr. Wilhelm Von Siemens in Germany in 1919 and he referred this concept as improved turnover tax and in 1921 the same type of concept was also suggested by Professor Thomas S. Adams in USA. Again in 1949 VAT was recommended in JAPAN.
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SHRUTI: - Sir, It means was introduced in west so many years back?
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CA SUDHIR HALAKHANDI: - Students please listen and understand what I am saying very carefully because this is the theoretical section of the VAT and you can do better by understanding of the same. Here I said that these three gentlemen started the discussion on VAT in Germany (1919), USA (1921) and Japan (1949) and the overall world came to know something about VAT from these three initial discussions and references.
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AJAY: - Oh! Sir it was only discussion then when first VAT was introduced in any country of the world?
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CA SUDHIR HALAKHANDI: - in 1954 and first country was France. See the discussions were started from Germany, USA and Japan but France took the lead and introduced VAT in 1954 and till 1960 remain the only country in the world to have the VAT in their taxation system. Ivory coast was the second country to introduce VAT in 1960 followed by Senegal in 1961 and Denmark in 1967.
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Preeti: - What about other countries sir?
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CA SUDHIR HALAKHANDI: - Till today more than 130 countries have introduced VAT worldwide including India. I am giving you a chart of intial introduction of VAT.
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S.NO.
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NAME OF COUNTRY
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YEAR IN WHICH VAT INTRODUCED
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1.
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France
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1954
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2.
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Ivory Coast
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1960
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3.
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Senegal
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1961
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4.
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Denmark/Brazil
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1967
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5.
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Netherlands
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1969
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6.
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Sweden
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1969
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7.
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Luxembourg
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1970
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8.
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Belgium
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1971
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9.
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Ireland
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1972
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10.
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Italy
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1973
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11.
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United Kingdom
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1973
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12.
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Austria
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1973
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13.
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Portugal/Spain
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1986
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14.
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Greece
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1987
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15.
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Finland
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1994
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Students you need not to remember the entire list but please remember some of the important countries and their year of implementation to make your answer more scoring. Yes please remember France and 1954 and other will depend on your capacity.
AJAY: - What about Asian Countries Sir?
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CA SUDHIR HALAKHANDI:- Yes Ajay , Republic of Vietnam took the lead in Asian countries and introduced VAT in 1973 but within one year it was taken back and reintroduced in 1999 followed by South Korea (1977), China (1984), Indonesia (1985) , Taiwan ( 1986) , Philippines ( 1988 ) Japan (1989) , Thailand (1992), Singapore (1994) and Mongolia (1998)
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ROHAN: - And sir, When the South Asian countries prepared for introduction of VAT.
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CA SUDHIR HALAKHANDI: - Pakistan in 1990 followed by Bangladesh (1991), Nepal (1997) and Sri Lanka (1998). In India Vat in true sense was introduced in 2005 and at present it is working throughout the country very well.
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DIFFERENT VARIANTS OF VAT
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CA SUDHIR HALAKHANDI: - Students, I have a talk with you in my previous class regarding the calculation of Tax etc. by giving an example of Manufacturer, wholesaler and retailer. Exactly in our country the VAT has been introduced in the same manner but there is some more form of VAT which we will discuss here. Are you ready?
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STUDENTS: - Yes sir!!!!!!!
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CA SUDHIR HALAKHANDI:- There are three widely know format of VAT which can be described as under:-
1. Gross product variant – GPR
2. Income Variant.
3. Consumption Variant.
See the most popular one is consumption Variant and India has also implemented this type of VAT in which tax is collected on the entire sales amount and credit of tax is given on all material and capital goods i.e. business inputs consumed for making this sale.
In case of Gross product variant but the deduction is given only with respect to the inputs excluding the capital goods.
In case of Income variant the tax is collected on all the sales but credit is given on all the inputs and depreciation part of the capital goods.
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VIREN: - Sir, Please say something about the basic difference in these three and also tell us why the third one i.e. consumption variant is most popular.
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CA SUDHIR HALAKHANDI: - The basic difference is the input credit of tax paid on capital Goods. In gross product variant input credit is not allowed on capital goods and in Income variant the input credit is allowed on tax paid on depreciation part of the capital goods but in true sense these two does not reflect the logical effect of VAT hence the third one in which the input credit is allowed on all the inputs i.e. material and capital goods is the most popular and logical variant of the VAT and the same is applied in most of the countries including India.
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3. METHODS OF COMPUTATION OF VAT
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CA SUDHIR HALAKHANDI: - Now students!!! This is the last part of today’s VAT class. This is related to the different methods of calculation of VAT. Here also , broadly we have three methods of calculation of VAT and these are :-
1. Addition Method.
2. Invoice Method.
3. Subtraction Method.
Further the Subtraction method has two more parts :-
(i). Direct subtraction Method.
(ii). Intermediate subtraction Method.
Here also see the discussion is only of theoretical importance because the most logical system is invoice system and most of the countries including India have already implemented VAT on this system. But see this is the part of your syllabus hence you have to understand all the methods.
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AJAY: - As far as I understand from the present system of VAT introduced in India the output tax is calculated on the basis of Sales invoice and further the input credit is also calculated on the basis of purchases invoice including the purchases invoice of capital goods eligible for input credit. Am I right sir?
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CA SUDHIR HALAKHANDI: - very well informed and intelligent student!! You have done my work and you are quite right. The concept is exactly the same. It is logical, practical and less cumbersome and easy to calculate. This is the invoice method of calculating the tax payable under VAT and it is very popular system hence implemented by most of the countries including India. Let us understand this method with the help of an example :-
Sales Invoice :-
Sales price Rs. 10000.00
Vat 12.5% Rs. 1250.00 (Output Tax)
Total 11250.00
Purchase Invoice :-
Purchase price Rs. 9000.00
Vat 12.5% Rs.1125.00(Input Tax)
Total
Tax Payable = Output Tax – Input Tax
1250- 1125= Rs.125
Cross check = 12.5% on value addition of Rs. 1000.00 = Rs.125.00
Since whole the calculation is based on Invoice system hence the method is called the Invoice method.
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VARUN: - Sir, How can we describe the addition Method
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CA SUDHIR HALAKHANDI: - Calculate all the value additions i.e. labour Expenses and profit. See here in that if the labour is Rs. 100 .00 and expenses are Rs.500.00 and rest of the amount from value addition is the profit of the dealer in the previous example we have seen in the invoice method. The value addition is Rs.1000.00 which is the difference between the sale and purchase price and see here that difference between the sale and purchase price is not always the profit of the dealer because after purchasing the goods he has to put some expenses like labour and others on it. Now here add all the expenses and profit say Rs. 100.00 + 500+ 400.00(Profit) = 1000.00 and calculate 12.5% of Rs.1000.00 and this amount is Rs. 125.00 and this is the tax payable by the dealer.
Since the tax is payable on addition of all expenses and profit hence this is called addition method of calculation of tax.
This is not very popular version because the calculation and payment of tax is not matched with the invoices received (Purchases) and invoice issued (Sales) hence the check of Tax evasion is not possible.
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VIREN: - And what about last method “Subtraction Method” Sir?
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CA SUDHIR HALAKHANDI: - Yes this is the last method and it is called Subtraction Method. This method is very simple and in this method one has to pay tax directly on the difference between the sale and purchase price.
Direct subtraction Method:- Calculate the tax by applying the rate on difference between sale and purchase (exclusive of Tax)
Here see the Goods sold by a manufacturer to distributor is Rs. 5000.00 exclusive of tax and the distributor is selling it on Rs. 6250.00 exclusive of Tax then the difference in purchase and sale price is Rs. 1250.00 and if the rate of tax is 12.5% then the tax payable is 12.5% on Rs. 1250 .00 and comes to Rs. 156.25.
Intermediate subtraction Method:-
Calculate the tax by applying the rate on difference between sale and purchase (inclusive of Tax)
The system is used when no separate tax is mentioned in the bill but not very popular.
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RASJHMI: - Sir, What is the basic difference in the entire three systems sir? How they will affect the overall payment of tax.
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CA SUDHIR HALAKHANDI: - Here see the system are basically the same and if the rate of tax is the same then there will be no difference in overall payment of tax but see at present practically the rate of tax on input is not the same some inputs (Raw Material) are taxable at 4% though the output (The finished product) is taxable at 12.5% or vice versa and in that case the perfect result can only be ascertained form the Invoice system hence this system is most acceptable.
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VIREN: - Please explain sir, the concept of different rate and its effect with some more descriptttion.
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CA SUDHIR HALAKHANDI: - Yes see the result in invoice method, addition and subtraction method in case of tax rate is same is the same but if the rate is different then in case of invoice method the whole goods is taxable at the rate applicable on final product and if the raw material is taxable at less tax then the revenue (i.e. the Government) is compensated and if the raw material is taxable at higher rate than the final product then the Tax payer will get the benefit. Please try to understand this with the help of an example :-
Sale price Rs.10000.00 (Tax rate 12.5%- 1250.00)
Raw material – Rs.6000.00 (Tax Rate 4%- 240.00)
Labour – Rs.2000.00
Expenses- Rs.1000.00
Profit – Rs.1000.00
Invoice Method :-
Tax payable- Out put Tax- 1250.00- Input Tax 240.00= 1010.00
Now analyse this tax :- 12.5% on value addition of Rs. 4000.00= 500.00
Plus the difference of Tax on Rs.6000.00 @ 8.5% = 510.00
Total tax = 1010.00 (Same)
Government revenue- 240(Tax on raw material) + 1010Tax on finished goods= 1250.00
Here see the raw material was only taxed @ 4% hence additional tax has been imposed on it @ 8.5% to make it taxable at the rate of tax on final product.
You can your self make an example to understand the situation in case rate of tax on raw material is greater than the final product.
See here in addition system :- Add labour 2000+ Expense 1000.00 + Profit 1000= 4000.00 hence the tax payable is Rs. 500.00
The Government got Rs. 240.00 earlier on raw material hence total tax is Rs.740.00 and got the less tax of Rs. 510.00 (from invoice method – 1010 on final product + 240 on Raw material= 1250- 740= 510) and this Rs.510.00 is the tax @ 8.5% on Rs.6000.00 = Rs.510.00
You can see the same problem with subtractions method.
The Invoice system takes the care of this automatically but in case of addition and subtraction system this is the big drawback of these two systems hence the Invoice system is accepted by most of the countries.
Understood?????
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STUDENTS: -Very Well understood sir!!!!
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CA SUDHIR HALAKHANDI: - Now this is end of our today’s class students. In our next class we will take up –
1. Merits and demerits of VAT.
2. Input credit
3. Composition schemes for small dealers.
4. VAT in Indian context.
And after that in the last class – The procedural aspects of VAT including the penal provisions.
OK goodbye have a nice day.
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END
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