Value Added Tax

Posted in Finance, Accounting and Economics Terms, Total Reads: 1396

Definition: Value Added Tax

It is the tax which is added by the value adders along the stages of a value chain system.  It came into existence to cover up for the deficits in the structure of sales tax.

The sales tax could be charged by a seller from a buyer if he was an end user. However there was a lot of ambiguity related to it as most buyers refused to being consumers of that product which however could not be verified.

The businesses pay the difference in  taxes paid during the purchase and those collected from the end consumer

The end buyer cannot get  tax deductions on his buying  since he cannot sell the product further .

The government is also benefitted since it has in effect transferred the responsibility of collecting taxes from the state to the businesses. VAT is charged for both goods and services unlike sales tax.


Calculate the  taxes  payable  for a  dealer  for a who had purchases worth 1,50,000 and    value added worth  Rs  20,000 .The total profit calculated on the transaction is  15000 .The VAT rate is 12.5 %

Puchase price = 1,50,000

Tax paid on purchase price is  12.5* 1,50,000/ 100

= 18,000

Selling price = 1,50,000 + 20,000 +15,000

= 1,85,000

= Tax paid on selling price =  1,85,000 * 12.5 /100

= 23,500

Net tax to be payable = 23,500 -18,000


Hence, this concludes the definition of Value Added Tax along with its overview.

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