Business Mathematics and Basic Statistics · Ch 3 — Sales Tax, VAT and GST
Value Added Tax (VAT) — Output Tax, Input Tax and Net Payable
Value Added Tax (VAT) — Output Tax, Input Tax and Net Payable
Value Added Tax (VAT) replaced the old single-point Sales Tax system in Indian states, precisely to remove the cascading (tax-on-tax) problem described in §1. VAT is a multi-stage tax — charged at every point of sale in the supply chain — but, unlike the old Sales Tax, it is designed so that only the value added at each stage is effectively taxed, not the whole sale price all over again.
This is achieved through the mechanism of input tax credit:
- Output Tax — the VAT a dealer collects from the buyer on the dealer's own sale, computed exactly like Sales Tax: .
- Input Tax — the VAT the dealer has already paid to their own supplier when purchasing the goods being resold, computed the same way on the purchase price.
- Net VAT Payable — the amount the dealer actually remits to the government, after claiming credit for the input tax already paid:
If input tax exceeds output tax in a given period, the excess is typically carried forward to be set off against future output tax, rather than simply lost.
The Value-Added Shortcut
Because both the output tax and the input tax are usually computed at the same rate per cent, the net VAT payable can equally be found directly from the value added — the difference between the sale price and the purchase price — without separately computing output and input tax first:
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— the VAT a dealer collects from the buyer on the d …
The VAT already paid by a dealer to their supplier on the goods purchased; creditable against the deale …
, equivalently — the …