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Variants of VAT


Value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the “value added” to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. There are 3 variants of VAT which are as follows –

Variants of VAT

Gross Product Variant                   Income Variant                         Consumption Variant

Tax is levied on all sales with deduction for tax paid on all business inputs (including capital goods).

Tax is levied on all sales & deductions for tax paid on inputs excluding capital inputs are allowed.

 

Tax is levied on all sales with set- off for tax paid on inputs & only depreciation on capital goods.

 

Now a detailed view of the following variants are being provided –

  1. Gross product variant: This allows deduction for taxes on all purchases of raw materials and components, but no deduction is allowed for taxes on capital inputs. That is tax on capital goods such as plant & machinery are not deductible from the tax base in the year of purchase and tax on the depreciated part of plant & machinery is not deductible in the subsequent years. Capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant & machinery is delayed due to this double tax treatment.
  2. Income variant: This allows deduction on purchase of raw materials and components as well as depreciation on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off.
  3. Consumption variant: This allows deduction on all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. It neither distinguishes b/w capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. This form is neutral b/w the methods of production; there will be no effect on tax liability due to the method of production (i.e. substituting capital for labour or vice versa). The tax is also neutral b/w the decision to save or consume.

About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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