Sales Tax versus Value Added Tax

How sales tax is calculated?

Assume the business chain: Raw Material Supplier → Manufacturer → Retailer → Consumer

Let Raw Material Supplier Price = Rs 100

Cost of Raw Material to Manufacturer = Rs 100

Let Selling Price charged by the Manufacturer = Rs 120

Cost to Retailer = Rs 120

Let Selling Price charged by the Retailer = Rs 150

The Actual Selling Price charged = Rs 150 + 10% ST on Rs 150 = Rs 150 + Rs 15 = Rs 165

Tax Collected by Retailer and submitted to the Government = Rs 15

Overall Tax Collected = Rs 15

Raw Material→(Rs 100)→Manufacturer→(Rs 120)Retailer→(Rs 165)→Consumer

Important:

1. Tax is collected by retailer only and submitted to the government.
2. Each chain member has to ensure that the next member is not a consumer by verifying his business documents.

How value added tax is calculated?

Assume the business chain: Raw Material Supplier → Manufacturer → Retailer → Consumer

Let Raw Material Supplier Price = Rs 100

Tax Collected by Raw Material Supplier and submitted to the Government = Rs 10

Cost of Raw Material to Manufacturer = Rs 100 + 10% VAT = Rs 100 + Rs 10 = Rs 110

Let Selling Price charged by the Manufacturer = Rs 120

Actual Selling Price charged by the Manufacturer = Rs 120+10%VAT=Rs 120+Rs 12=Rs 132

Tax Collected by Manufacture and submitted to the Government = Rs 12 - Rs 10 = Rs 2

Cost to Retailer = Rs 132

Let Selling Price charged by the Retailer = Rs 150

The actual Selling Price charged by the Manufacturer =Rs 150+10% VAT=Rs 150+Rs 15=Rs 165

Tax Collected by Retailer and submitted to the Government = Rs 15 - Rs 12 = Rs 3

Overall Tax Collected = Rs 10 + Rs 2 + Rs 3 = Rs 15

Raw Material→(Rs 110)→Manufacturer→(Rs 132)→Retailer→(Rs 165)→Consumer

Important

1. Tax is collected by each member and submitted to the government.
2. The responsibility of ensuring sales to non-consumer is void.
3. Accounting of VAT paid to govt. to the predecessor and collected from next member has to be done by each chain member. Thus costing on account of accounting increases at each chain level.