Wednesday, December 14, 2011

Value Added Tax - VAT - Help needed

Value Added Tax - VAT - Help needed

So, I'm going to drive home my brand new car this Saturday and for someone poorer by lakhs of rupees, I'm happy. However, a close look at the cost break-up, shocked me when I saw that I was paying about Rs. 95000 as VAT on my car. To make matters worse, I do not really understand VAT.

I tried reading up online but all I could gather was that it is a state level tax that is levied at each stage during the production chain based on the increase in value at that stage and that manufacturers are given "Tax Credit" for any input taxes borne by them. However, I still cant gather how it really works.

If I take an example of a manufacturer, say Honda (What with the "New"lol: City being launched today) pays Rs 5 tax on raw material worth Rs. 100. This is then processed into a final product that is sold for Rs. 200. Lets say that the product is made in Haryana (as an example they levy 5% VAT) and sold in Maharashtra (Eg. 10% VAT)
When I purchase this product in Maharashtra, how much VAT do I pay - 5% or 10%? Also, is the VAT I'm paying going to Honda and then on to a state government (if so - which? Haryana or Maharashtra?) or is this amount directly going to Maharashtra government? If it goes to Maharashtra government, how does the tax credit for the Rs. 5 tax paid on the raw material (if it is paid to Haryana govt) set off? Also, net-net is it that there is no effect of VAT on Honda?

I'm thoroughly confused about how VAT works and would really appreciate if someone could explain it in layman terms.

No comments:

Post a Comment