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Urgent query

ANOOP (student) (428 Points)

14 October 2011

KINDLY SOMEONE TELL ME....

ABOUT THE VARIANTS OF VAT...PLEASE ITS VERY URGENT...

KINDLY EXPLAIN EACH VARIANT IN THE SIMPLEST POSSIBLE WAY......PLS

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8 Replies

CS RAJESH C.CHOUDHARY (ASSISTANT MANAGER) (14607 Points)
Replied 14 October 2011

DEAR ANUP,

(a) Gross Product Variant

In case of Gross Product Variant, tax is levied on all sales but deductions for taxes on all purchases of raw materials and components (i.e. inputs) are allowed. However, no deduction is allowed for taxes paid on capital inputs with the result that in this variant of VAT, capital goods carry a heavier tax burden as they are taxed twice.

(b) Income Variant

In case of Income Variant, tax is levied on all sales but deductions towards purchases of raw materials and components (i.e. inputs) as well as depreciation on capital goods are allowed. Those following this variant of VAT hold incentives by classifying purchases as current expenditure to claim set-off. In this variant, gross investment minus depreciation i.e. net investment is taxed. The depreciation to be provided is dependent on the life of an asset as well as on the rate of inflation, therefore there are many difficulties connected with the variant in measuring depreciation.

(c) Consumption Variant

In case of Consumption Variant, tax is levied as all sales but deduction on all business purchases including capital assets is allowed. Thus, gross investment is deductible in calculating value added. The economic base of the tax, under Consumption Variant of VAT is equal to the total private consumption. This variant of VAT does not distinguish between capital and current expenditures hence there is no need to specify the life of assets or depreciation allowances for different assets. This form is neutral between the methods of production; there will be net effect on tax liability due to the method of production (i.e. substitution capital for labour or vice versa). The tax is also neutral between the decision to save or consume.

The consumption variant of VAT is most popular and widely used variant among the three variants of VAT. The reasons behind the preference of this variant over the other are as under:

(a) This variant is tax neutral as it does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability.

(b) This variant relieves all exports from taxation while imports are taxed which is harmonious with the destination principle i.e. if the destination of goods is foreign country, it should not be taxed in India.

(c) The consumption variant is convenient from the point of administrative expediency as it simplifies tax administration as it distinguishes between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand.

(d) It does not cause any cascading effect.

ALL THE BEST.