Meaning of Value Chain in VAT system

What is Value Chain in VAT system under Indian Tax


This post explains about Value Chain in VAT system.

Value Chain

A value chain is a high-level model developed by Michael Porter used to describe the process by which businesses receive raw materials, add value to the raw materials through various stages or processes to create a finished product, and then sell that end product to customers. Companies conduct value-chain analysis by looking at every production step required to create a product and identifying ways to increase the efficiency of the chain. The overall goal is to deliver maximum value for the least possible total cost and create a competitive advantage.

Relevance of Value Chain in VAT System:

Addition method:

 This method aggregates all the factor payments (excluding value of material) including profits to arrive at the total value addition on which the tax rate is applied to calculate the tax. This type of calculation is mainly used with income variant of VAT.  A drawback of this method is that it does not facilitate matching of invoices for detecting evasion as tax liability is calculated periodically and not invoice-wise.

Invoice method:

This is the most common and popular method for computing the tax liability under VAT system. Under this method, tax is imposed at each stage of sales on the entire sale value and the tax paid at the earlier stage (on purchases) is allowed as set-off.  Thus, at every stage, differential tax is being paid.   The most important aspect of this method    is that at each stage, tax is to be charged separately in    the invoice.

This method is very popular in western countries.  In India also, this method is followed under the State Level VAT and the Central Excise Law. This method is also called the 'Tax Credit Method' or 'Voucher Method'.

Cost subtraction method:   

Under this method, tax is charged only on the value added   at each stage of the sale of goods.  Since, the total value of goods sold is not taken into account, the question of grant of claim for set-off or tax credit does not arise.  Further, under   this method tax cannot be shown separately in invoice and tax liability can only be calculated periodically.   Since, tax payable on a product is not known, end-use based exemption cannot   be given under this method.

The information on Value Chain in VAT system is detailed above.   Comment below your thoughts on Value Chain in VAT system


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