Calculation of VAT:
Difference between input tax and output tax is VAT.
Tax received by the seller for the sale of goods and services is known as output tax whereas the tax paid by seller for the required raw materials for production is known as input tax.
Suppose Mr. Tom owns a bakery where raw material cost is Rs 10000 @ 10% input tax and sales are Rs 40000 @ 10% output tax.
Here input tax comes to be 10000 * 0.10 = 1000 and,
Output tax comes out to be 40000 * 0.10 = 4000.
Hence VAT payable by Mr. Tom comes out to be 4000 – 1000 i.e. 3000
India was known for tax evasions where most businessmen find easy loopholes for tax evasion. It was basically due to the poor taxation policy adopted. However India adopted VAT in the very late stage but after adoption, the things really changed. Introduction of VAT has minimized tax evasion and rendered uniformity and transparency to the tax collection.
VAT is basically levied at multiple stages of production which comes under the purview of state governments and hence VAT in India differs from state to state.