Tax Credit Method : Value Added Tax (VAT) India
Tax Credit Method : Value Added Tax (VAT) India
Gross Tax payable by a firm is calculated by applying VAT rates to the sales of the firm. This is sum total of tax figures appearing in sales invoices issued by the firm during the tax period. The net tax payable by the firm is then calculated by subtracting from the Gross tax the sum total of taxes paid by firm on earlier stages. Tax paid by firm on earlier stages is the sum total of tax shown on the purchase invoices during the tax period. This net tax is payable by the firm.
The tax credit method (known as Invoice method also) is almost universally preferred. The subtraction method is a simple method and looks like tax credit method, but tax credit method has following advantages over subtraction method.
1. It acts as a self-policing mechanism.
2. Audit control is much better, helps in controlling tax evasion.
3. Offers flexibility in applying varying tax rates to different commodities.
4. Useful in giving tax benefits to exports. 1-6 Scope of VAT
The value added tax being implemented in India is in replacement of State Sales tax, thus does not cover in its scope the following:
1. Export of goods out of territory of country.
2. Sales and Purchases made out of state.
3. Inter state sales and purchases.
Other than the above, firms having a basic threshold limit (Rs. One lac in Haryana) are being kept out of purview of VAT mainly because of administrative reasons.
Special treatment has been given to following items by putting them in exempted category by almost every state.
1. Vegetable and food items (important items for low income families)
2. Agriculture implements (Important sector of economy)
3. Basic Education items like books etc. (Important for society in general).