Variants of VAT
Variant of VAT means method of off-setting credit available on purchases with output tax. Broadly, there are three variants viz. Gross Product Variant, Income Variant and Consumption Variant. The details of these variants are as under:
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Variant
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Rule
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Pros and Cons
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Gross Product Variant
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Deduction for tax paid on all purchase of raw material and components shall be allowed. But, no deduction shall be allowed for tax paid at the time of purchase of capital goods
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a) Capital goods are taxed twice i.e., at the time of purchase and at the time of sale of goods produced using that capital goods by way of depreciation included in the value of output product.
b) These doubly tax treatment of capital goods cause delay in modernization and upgrading of plant and machinery.
c) The economic base of the variant is equivalent to Gross National Product (GNP)
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Income Variant
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Deduction shall be allowed for tax paid on:
a) Purchase of raw materials and components; and
b) Depreciation on capital goods
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a) Credit on capital purchases are allowed in the ratio of Depreciation over the life of the capital asset.
b) Computation of depreciation is also depending on different variant viz. the life of asset and rate of inflation. Thus, it is difficult to provide a specific method of depreciation.
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Consumption Variant
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Deduction for tax paid on all business purchases including capital assets shall be allowed
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a) There is no need to distinguish between current expenditure and capital expenditure. Further, life of assets, etc. is not required to specify.
b) Since tax paid on capital goods is also allowed to be set-off, hence its impact on investment decision is nil.
c) It is simple and easier. Chances of disputes between Government and the tax payer are less.
d) The system leads to loss of revenues to the Government.
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Note:
Generally, all the countries are following Consumption Variant for levying VAT. However, in our country, generally Income Variant is followed
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