VAIANTS OF VAT

GROSS PRODUCT VARIENT:

Levy: Tax is levied on all sales i.e.,every sale is taxed(multi-point tax system)

Deduction: Deduction is allowed on all raw materials. IN other words, the manufacturer can take credit of tax paid on the raw materials purchased by him and set off such credit against the tax payable on his products,

      But deduction is not allowed on the capital goods.In other words, the manufacturer cannot take credit of tax paid on capital goods purchased by him for being set off against the tax payable on his products.

Merits:set off of tax paid on raw materials is  allowed.Cascading effect is prevented. Pressure on working capital decreases and the manufacturer finds sufficient money to buy raw materials.

Demerits: Set off of tax paid on capital goods is not allowed.Hence, the cascading effect is not prevented since the pro rata cost of capital goods (which oncludes tax also) forms part of the price of the products sold and gets, notionally, taxed again. Pressure on working capital increases.Consequently replacement of capital goods gets delayed.

INCOME VARIANT:

Levy: Tax is levied on all sales i.e., every sale is taxed (multi point tax system).

Deduction:Deduction is allowed on all raw materials. In other words, the manufacturer can take credit of tax paid on the raw materials purchased by him and set off  such credit against the tax payable on his product.

                Deduction is allowed only on the depreciation of capital goods and not on the capital goods as such. In other words , credit cannot be taken in one shot when capital goods are purchased. However credit can be availed on a pro rata basis as and when depreciation is charged on the plant and  machinery.

Merits: In the previous method  deduction is totally denied on capital goods. Here deduction is allowed on the basis of the depreciation suffered by the capital goods from time to time. In other words , credit on capital goods is allowed in a phased manner. There is no denial of availment. There is only deferment in availment.

Demerits:No doubt credit is allowed on depreciation factor. But how to calculate depreciation? There are different methods of depreciation. further the life of all capital goods is not the same. Hence there will be difficulties in prescribing a uniform depreciation formula for all capital  goods.

CONSUMPTION VARIANT:

Levy: Tax is levied on all sales i.e., every sale is taxed (multy point tax system).

Deduction:Deduction is allowed on raw materials as well as capital goods. In other words manufacturer can take credit on raw materials and capital goods i.e., on all purchases and set off such credit against the tax payable on his products.

Merits:

•  credit is available on all purchases-raw materials as well as capital goods. Deduction is allowed in full. No cascading effect at all. The system is tax neutral. There cannot be a better system for the manufacturer.

•  100% availability of tax credit on all goods saves working cajpital from erosion substancially. The manufacturer finds enough money to buy new capital goods.

•  No need to calculate depreciation  on capital goods.Undoubtedly tax administration becomes quite covenient.

•  No need to examine whether the goods are capital goods or not.

•   No wonder this system is almost  universally followed.

Demerits: All the income earned by Government by way of taxes on raw materials and capital goods gets completely lost when set off fully against the taxes due to government on the products made and sold. This system is  "Revenue Neutral" . Demerits lies in government's inability to retain the taxes collected on raw materials and capital goods. For the manufacturer it is a merit only ; no demerit at all.