Input Tax Credit (VAT) explained


The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit or rebate. The Input tax credit in relation to any period means setting off his Output tax. The value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period

Provision Illustrated:

Mr. Shri purchases input worth Rs. 22,00,000 and record sales of Rs. 27,00,000 in the month of January 2010. Input tax rate and output tax rate is 12.5 %. Compute Input tax credit.

Input procured within the State         (a) Rs. 22,00,000

Output Sold in the month                       (b) Rs. 27,00,000

Tax collected @ 12.5% on (b)               (c) Rs.   3,37,500

Input tax paid @ 12.5% on (a)               (d) Rs.   2,75,000

VAT payable during the month            (c)-(d)  Rs.62,500

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