Full Form of VAT : Value Added Tax

What is it about?

No:1. VAT is one of the several types of taxes levied by the respective governments of a country for funding various public expenditures.
No:2. Value-added tax abbreviated as VAT also known as Goods and services tax is levied incrementally i.e. it is charged at each stage of production, distribution, or sale of goods or services to a consumer be it individual or businesses.
No:3. For example, a consumer of Coffee pays VAT for procurement, distribution, and processing of coffee beans.
No:4. It is a destination-based taxation system meaning it changes depending upon the location of the consumer.
No:5. More than 160 countries which are permanent members of the United Nations employ VAT as one of the taxes.

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History of VAT

No:1. Implementation of VAT was first done during world war I years by Germany and France in the form of general consumption taxes.
No:2. The modern version of VAT was design independently by Dr Wilhelm Von Siemens, German industrialist in the early 20th Century.
No:3. Following this many European countries Like France and Netherlands implemented VAT in the subsequent years.
No:4. The beliefs and purpose behind the implementation of VAT were different in countries, for example, Europeans used VAT to reduce sales tax while Americans found VAT to be a better version of corporate taxes.

Methods of VAT Computation

No:1. Credit Invoice or Invoice-Based Method

a). In this method sales, transactions are taxed and businesses receive credit for VAT paid on input material and services.
b). VAT payable= Tax on sales Bill – Tax on purchase bill

No:2. Subtraction or Accounts-Based Method

a). In this method, a business calculates the value of all taxable sales then subtracts the sum of all taxable purchases and the VAT rate is applied to the difference obtained.
b). Taxable Turnover= Sales excluding taxes-purchase excluding taxes
c).  VAT Payable = Taxable turnover* tax rate

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