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Methods Of Collecting And Charging The VAT

Generally, there are 2 methods that are followed while charging and collecting the VAT:

1. Invoice or tax credit method The tax is collected and charged separately on the basis of the tax that is paid on the purchase and the tax that is payable on the sale, shown separately in the invoice. Therefore, the difference between the tax paid on purchase and the tax payable on sale as per the invoice is the VAT.
2. Subtraction Method Under this method, the tax is collected and charged on the aggregate value of the tax payable on sale and purchase by applying the rate of tax, applicable to the goods. Therefore, the difference between the sale price and purchase price would be VAT. It means VAT is the tax which consumers ultimately face. It is collected at each stage. The tax earlier paid can be allowed as set off or credit. Therefore, it is called as Last Point Tax

Constitutional Framework Which Deals With The Levy Of Sale Tax

The states are empowered to impose sale tax on the goods that are subject to purchase or sale by enacting laws. The Parliament has enacted the CST Act and the states are in the process of enacting laws. The sale of goods or purchase includes:

1. the sale of goods, defined under the Sale of Goods Act.
2. transfer of goods used as otherwise in pursuance of the contract.
3. transfer of goods used otherwise in Works Contracts.
4. delivery of goods in pursuance to Hire Purchase Agreement or on installment.
5. transfer of right to use to goods on lease or otherwise.
6. supply of food by the club or body to its members.
7. supply of food articles or drinks for consumption.

The transaction referred above from (c) to (g) are considered to be deemed sale and power can be exercised to impose tax on such sale by the states. States are also empowered to provide levy, creating a liability to pay tax and other payment assessment and certain procedural formalities like maintenance of accounts, records, appeals and issue of declaration of Tax Invoice, Input Tax Credit, etc.

To determine the cost of tax on certain commodities, the VAT law maybe classified as prescribed goods and classified goods and computation of tax on the turnover of sale and the taxable turnover and assessment. Under VAT laws, tax is imposed on the sale or purchase of the goods. The states levy the rate of tax at the point of levy upon such goods. They are also empowered to prescribe modes and manners of set-off.

Levies Of Tax Under The VAT

1. Sale Tax or Output Tax including Deemed Sale within the state. It covers all kinds of transfer of goods, under the Sale of Goods Act including deemed sale that is transfer of goods by way of Works Contract delivery of goods on the basis of a hire purchase agreement or installment, etc.
2. Purchase Tax, including Deemed Purchase within the state. The tax paid on purchase of goods in certain circumstances.
3. Composition tax, that is in lieu of tax by way of lump sum tax. This means the amount paid by the dealers like retailers whose turnover is below the specified limit of the taxable turnover that is allowed to pay the amount at his option.