(a) A final consumer Shital paid value added tax Rs. 39,000 while purchasing consumable goods. The goods was imported by ABC Ltd and sold to retailer. Make up 20 percent on cost price was included…

(a) Calculation of Import Price and Total VAT Paid to the Government

Given:

• Final consumer (Shital) paid VAT = Rs. 39,000 on consumable goods.
• 20% VAT on cost price was included at all levels (import, wholesale, retail).
• Goods were imported by ABC Ltd and sold to a retailer before reaching the final consumer.

Assumptions:

• The VAT rate in Nepal is 13% (as per the VAT Act, 2063).
• The 20% on cost price refers to the markup (profit margin) added at each stage, not the VAT rate.
• The VAT is applied on the selling price (not cost price) at each stage.

Step 1: Understanding the VAT Chain

The goods pass through three stages before reaching the final consumer:

1. Import Stage (ABC Ltd – Importer)
2. Wholesale Stage (Retailer’s Supplier)
3. Retail Stage (Final Retailer to Consumer)

At each stage, the seller adds a 20% markup on cost price and then charges 13% VAT on the selling price.

Let:

• Import Price (C₀) = Cost price at import stage (to be found).
• Selling Price at Import (S₁) = C₀ + 20% of C₀ = 1.2 × C₀
• VAT at Import (V₁) = 13% of S₁ = 0.13 × 1.2 × C₀ = 0.156 × C₀

The importer pays V₁ to the government and charges it to the next stage.

Step 2: Wholesale Stage (Retailer’s Supplier)

• Cost Price (C₁) = S₁ + V₁ = 1.2 × C₀ + 0.156 × C₀ = 1.356 × C₀
• Selling Price at Wholesale (S₂) = C₁ + 20% of C₁ = 1.2 × 1.356 × C₀ = 1.6272 × C₀
• VAT at Wholesale (V₂) = 13% of S₂ = 0.13 × 1.6272 × C₀ = 0.2115 × C₀

Total cost to retailer = S₂ + V₂ = 1.6272 × C₀ + 0.2115 × C₀ = 1.8387 × C₀

Step 3: Retail Stage (Final Retailer to Consumer)

• Cost Price (C₂) = S₂ + V₂ = 1.8387 × C₀
• Selling Price at Retail (S₃) = C₂ + 20% of C₂ = 1.2 × 1.8387 × C₀ = 2.20644 × C₀
• VAT at Retail (V₃) = 13% of S₃ = 0.13 × 2.20644 × C₀ = 0.2868 × C₀

The final consumer pays:

• Selling Price (S₃) + VAT (V₃) = 2.20644 × C₀ + 0.2868 × C₀ = 2.49324 × C₀

But the consumer only pays VAT = Rs. 39,000 (not the total price). However, the question states that the final consumer paid VAT Rs. 39,000, meaning V₃ = Rs. 39,000.

Thus: $$0.2868\times C_0=39,000$$ $$C_0=\frac{39,000}{0.2868}=\text{Rs. 136,000}$$

i. Import Price of the Importer = Rs. 136,000

Step 4: Total VAT Paid to the Government

The government collects VAT at each stage:

1. V₁ (Import Stage) = 0.156 × 136,000 = Rs. 21,136
2. V₂ (Wholesale Stage) = 0.2115 × 136,000 = Rs. 28,684
3. V₃ (Retail Stage) = Rs. 39,000 (given)

Total VAT to Government = V₁ + V₂ + V₃ = 21,136 + 28,684 + 39,000 = Rs. 88,820

ii. Total VAT to Government = Rs. 88,820

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(b) Value Added Tax (VAT) is Based on Added Value of Goods and Services

Explanation:

Value Added Tax (VAT) is a multi-stage consumption tax applied on the value added at each stage of production and distribution of goods and services. Unlike a sales tax (which is levied only on the final sale), VAT is charged only on the increase in value at each transaction.

Key Features of VAT:

1. Tax on Added Value (Not Total Value):

   • VAT is calculated only on the profit or markup added by a business at each stage, not on the entire selling price.
   • Example: If a manufacturer buys raw materials for Rs. 100, adds Rs. 50 as labor and profit, and sells for Rs. 150, VAT is applied only on Rs. 50 (added value), not Rs. 150.

2. Input Tax Credit Mechanism:

   • Businesses can deduct (credit) the VAT paid on inputs (purchases) from the VAT collected on sales.
   • This ensures that only the final consumer bears the VAT, while businesses act as tax collectors for the government.

3. Multi-Stage Taxation:

   • VAT is levied at each stage of production and sale (import, manufacturing, wholesale, retail).
   • Each seller charges VAT on their selling price but can claim credit for VAT paid on purchases.

4. Neutrality and Efficiency:

   • VAT is neutral because it does not distort production decisions (unlike excise taxes on specific goods).
   • It is efficient because it is collected at the point of sale, reducing tax evasion.

5. Prevention of Cascading Tax:

   • Unlike a sales tax (where tax is stacked at each stage), VAT ensures that only the final consumer pays tax on the final price, not on intermediate transactions.

How VAT Works in Nepal (Example):

Suppose a product goes through three stages:

1. Manufacturer buys raw materials for Rs. 100 (VAT Rs. 13) and sells to a wholesaler for Rs. 150.

   • VAT on sale = 13% of 150 = Rs. 19.5
   • Net VAT paid to government = Rs. 19.5 – Rs. 13 (input credit) = Rs. 6.5

2. Wholesaler buys for Rs. 150 (VAT Rs. 19.5) and sells to a retailer for Rs. 200.

   • VAT on sale = 13% of 200 = Rs. 26
   • Net VAT paid = Rs. 26 – Rs. 19.5 = Rs. 6.5

3. Retailer buys for Rs. 200 (VAT Rs. 26) and sells to a consumer for Rs. 250.

   • VAT on sale = 13% of 250 = Rs. 32.5
   • Net VAT paid = Rs. 32.5 – Rs. 26 = Rs. 6.5

Total VAT collected by the government = Rs. 6.5 + Rs. 6.5 + Rs. 6.5 = Rs. 19.5 This is equal to 13% of the final selling price (Rs. 250), ensuring fairness.

Advantages of VAT:

• Reduces tax evasion (businesses must register and file returns).
• Encourages formal economy (businesses prefer registered transactions).
• Simple and transparent (applied uniformly across stages).
• Revenue-neutral (government collects tax only once, from the final consumer).

Conclusion:

VAT is designed to tax only the value added at each stage, ensuring that tax burden is borne by the final consumer while businesses act as tax collectors. This system prevents tax cascading and promotes economic efficiency. In Nepal, VAT is applied at 13% (standard rate) and 0% (for essential goods like basic food items) to balance revenue collection and consumer welfare.