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Addition, Invoice & Subtraction method

Deeps (Article Assisstant) (2485 Points)

04 November 2009

Anybody pl. help me out by providing illustration to "Explain three commonly used methods for computation of VAT."?

Thanks in advance

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(Guest)

Methods for computation of VAT

1. Addition Method or Income Approach

i. Aggregate all factor payments (like wages, rent, interest etc.) including profits to arrive at the total value addition.

ii. Apply the rate of VAT on the aforesaid amount to calculate the tax.

2. Subtraction Method or Product Approach

Determine Value addition from either of the following methods:

i. Direct Subtraction method

Total value of sales

Less: Total value of purchases

(both exclusive of tax)

ii. Intermediate subtraction method

Total value of sales

Less: Total value of purchases

(both inclusive of tax)

Apply the rate of tax on the amount calculated in step 1

3. Invoice Method or Tax Credit Method or Voucher Method

i. Compute the tax to be imposed at each stage of sales on the entire sale value

ii. Set-off the tax paid at the earlier stage. (i.e., at the stage of purchases in set-off)

iii. The differential amount (i.e. Step 2 – Step1) is required to be paid

Illustration

Inputs used for the production of output ‘P’ are ‘X’ and ‘Y’ respectively. The following are details of inputs:

Input	Vat Rate	Invoice Price (Inclusive of vat)
Product X	12.5%	90000
Product Y	4%	52000

The following are the details of Sales and the rate of VAT applicable for the output ‘P’ is 12.5%

Name of Seller	Name of Purchaser	Invoice Price (Rs.)
A	B	153000
B	C	225000
C	D	360000
D	E	450000
E	Consumer	540000

Solution

A. Computation of VAT at each stage following Invoice Method

Particulars

(1)

Invoice

(2)

Net of VAT

(3)

Output VAT

(4) = (2-3)

Input tax Credit

(5)

Net Payable

(6)

Inputs for A

- Product X ( @ 12.5%)

- Product Y ( @ 4%)

90000

52000

80000

50000

10000

2000

10000

2000

142000

130000

12000

Particulars (1)	Invoice (2)	Net of VAT (3)	Output VAT (4) = (2-3)	Input tax Credit (5)	Net Payable (6)
Sale by A to B	153000	136000	17000	12000	5000
Sale by B to C	225000	200000	25000	17000	8000
Sale by C to D	360000	320000	40000	25000	15000
Sale by D to E	450000	400000	50000	40000	10000
Sale by E to Consumer	540000	480000	60000	50000	10000
Total Vat Payable					60000

B. Computation of VAT at each stage following Subtraction Method

Particulars	Invoice	Material Value	Vat	Input Tax Credit
1	2	3	4	5 = 4*12.50/112.50
On Input	142000	-	-	12000
Sale by A to B	153000	142000	11000	1222
Sale by B to C	225000	153000	72000	8000
Sale by C to D	360000	225000	135000	15000
Sale by D to E	450000	360000	90000	10000
Sale by E to Consumer	540000	450000	90000	10000
Total VAT Payable				56222