Commercial Mathematics

Value Added Tax

1
introduction
Every State Government needs money for the development of the state as well as to meet
its non-development expenses like payment of salaries to its employees, health, education
etc. In order to collect revenue (money), State Government levies tax on the sale of goods
within the state. This tax is called sales tax. A customer has to pay sales tax on the goods
bought by him or her.
Value added tax is just the replacement of sales tax. The same sales tax is collected by
State Governments. The only difference is that it is collected in stages rather than at one
point from the sale of goods. In this chapter, we shall learn computation of value added
tax including problems involving discounts, list price, profit, loss, basic/cost price including
inverse cases.

1.1 Value Added Tax

Value added tax (abbreviated ‘VAT’) is a method of realising tax on the sale of goods.
Value added tax is a form of sales tax only. The same sales tax is collected by State
Governments. The only difference is that it is collected in stages rather than at one point
from the sale of goods. In value added tax, the first seller pays the first point tax (to the
Government) and subsequent seller (s) pays tax (to the Government) on the value added
by them—leading to a total tax exactly equal to the last point tax (paid by consumer).
VAT is a system of collecting sales tax which reduces the scope of under evaluation and
tax evasion. It provides a broad base tax system.
For example:
(i) Let the rate of sales tax be 6%.
Suppose a trader buys a fan from a factory owner for ` 1000, then the tax paid by
the trader (to the factory owner) = 6% of ` 1000 = ` 60. So the factory owner will
pay ` 60 to the Government as tax on the sale of the fan.
If the trader sells the fan to a consumer for ` 1250, then the tax paid by the consumer
(to the trader) = 6% of ` 1250 = ` 75.
Note that the dealer has added ` 250 in the value of the fan, so he will pay tax to
the Government only on the added value i.e. 6% of ` 250 = ` 15.
∴ Total tax paid to the Government
= ` 60 (by factory owner) + ` 15 (by trader)
= ` 75 = tax paid by consumer.

Note that the Government collects the same tax at two stages.
 (ii) Let the rate of sales tax be 5%.
Producer → Trader 1 → Trader 2 → Consumer
Sale Price ` 500 ` 600 ` 800
↓ ↓
Tax charged by producer by trader 1 by trader 2 Tax paid
by consumer
↓ ↓ ↓ ↓
` 25 ` 30 ` 40 ` 40
Tax paid by producer by trader 1 by trader 2
to Govt. ` 25 ` 5 ` 10
Total amount paid by the consumer = ` 800 + ` 40 = ` 840.
∴ Total tax collected by the Government = ` 25 + ` 5 + ` 10 = ` 40
= tax paid by the consumer.
Note that the Government collects the same tax at different stages.
Note
The symbol @ means at the rate of.

1.1.1 Some terms related to VAT

1. Dealer. Any person who buy goods for resale is known as a dealer (or trader). A dealer can
be a firm or a company.
2. Turnover. The total amount received as sale value of goods (excluding tax) by a dealer during
any fixed tax period is called turnover.
3. Input tax. The tax paid by a dealer on his/her purchases of goods for resale (subject to tax
under VAT) during any fixed tax period is called input tax. The input tax is calculated on
all taxable purchases at the applicable tax rates.
4. Output tax. The tax charged by a dealer on his/her sales of goods (subject to tax under VAT)
during any fixed tax period is called output tax. The output tax is calculated on the taxable
turnover at the applicable tax rates.
5. Adjustment of output tax. The output tax is reduced under the following circumstances
:
(i) When a particular sale has been cancelled.
(ii) When a part of the goods are returned by the dealer to the previous seller.
(iii) When a particular sale is reduced due to offer of discount previously agreed between
the dealer and the previous seller.
(iv) When some goods are converted into complimentary goods (i.e. as free samples)
with the mutual consent of the dealer and the previous seller.
(v) When whole or part of the value of goods owed by the next buyer has been written
off by the dealer as bad debt.

1.1.2 Computation of VAT

To compute VAT, proceed as under :
(i) Calculate the output tax.
(ii) Calculate the adjustment output tax (if any).
(iii) Calculate the input tax.
(iv) Net tax (VAT) to be paid by the dealer during any fixed tax period
     = output tax – adjustment output tax (if any) – input tax.

12 Understanding ICSE mathematics – x

 Illustrative Examples
Example 1. Manufacturer A sells a washing machine to a trader B for ` 12500. Trader B sells
it to a trader C at a profit of ` 800 and trader C sells it to a consumer at a profit of ` 1300. If the
rate of VAT is 8%, find
(i) the amount of tax (under VAT) received by the State Government on the sale of this machine.
(ii) the amount that the consumer pays for the machine.
Solution. (i) Amount of tax collected by manufacturer A = 8% of ` 12500
8
= `   
× 12500  = ` 1000.
 100 
Since the trader B earns a profit of ` 800, the value added by the dealer B
= ` 800.
∴ Amount of VAT to be paid by B = 8% of ` 800 = ` 64.
As the trader C earns a profit of ` 1300, the value added by the dealer C
= ` 1300.
∴ Amount of VAT to be paid by C = 8% of ` 1300 = ` 104.
∴ The amount of tax (under VAT) received by the State Government
= ` 1000 + ` 64 + ` 104
= ` 1168.
(ii) The value of the machine paid by the consumer
= the price charged by A + profit of B + profit of C
= ` 12500 + ` 800 + ` 1300 = ` 14600.
Tax paid by the consumer = 8% of ` 14600
8
= `   
× 14600  = ` 1168.
 100 
∴ The amount paid by the consumer = ` 14600 + ` 1168
= ` 15768.
Example 2. A shopkeeper buys an article whose printed price is ` 4000 from a wholesaler at a
discount of 20%. The rate of sales tax (under VAT) on the article is 8%. If he sells the article to a
consumer at the printed price plus tax, find
(i) the price of the article inclusive of sales tax at which the shopkeeper bought it.
(ii) the amount of sales tax (under VAT) paid by the shopkeeper.
(iii) the amount of tax (under VAT) received by the Government.
(iv) the amount which the customer pays for the article.
Solution. (i) Printed price = ` 4000, rate of discount = 20%.
20 
Amount of discount = `   4000 ×  = ` 800.
 100 
∴ The price of the article which the shopkeeper paid to the wholesaler
= ` 4000 – ` 800 = ` 3200.
Sales tax paid by the shopkeeper to the wholesaler
8
= 8% of ` 3200 = `   
× 3200  = ` 256.
 100 
∴ Price of the article inclusive of sales tax at which the shopkeeper bought it
= ` 3200 + ` 256 = ` 3456.
(ii) Since the shopkeeper sells the article at the printed price of ` 4000, the value added
by the shopkeeper
= ` 4000 – ` 3200 = ` 800.

Value Added Tax 13

 ∴ The amount of sales tax (under VAT) paid by the shopkeeper
= 8% of ` 800 = ` 64.
(iii) The amount of sales tax (under VAT) received by the Government
= ` 256 + ` 64 = ` 320.
(iv) The value of the article paid by the consumer = ` 4000
Sales tax paid by the consumer = 8% of ` 4000
8
= `   
× 4000  = ` 320.
 100 
∴ The amount which the customer pays for the article
= ` 4000 + ` 320 = ` 4320.
Example 3. A dealer buys an article at a discount of 30% from the wholesaler, the marked
price being ` 6000. The dealer sells it to a shopkeeper at a discount of 10% on the marked price. If
the rate of VAT is 6%, find:
(i) the price paid by the shopkeeper including the tax.
(ii) the VAT paid by the dealer. (2016)
Solution. Marked price of the article = ` 6000.
The rate of VAT = 6%.
(i) As the dealer sells the article to a shopkeeper at a discount of 10% on the marked
price,
the selling price of the article by the dealer (excluding tax)
10   90
= `  1 −  × 6000 = ` 

× 6000 
 100  100 
= ` 5400.
∴  Cost price of the article to the shopkeeper = ` 5400.
Sales tax paid by the shopkeeper = 6% of ` 5400
6
= `  
× 5400  = ` 324.
 100 
∴  The price paid by the shopkeeper including the tax
= ` 5400 + ` 324 = ` 5724.
(ii) As the dealer buys the article at a discount of 30% on the marked price,
30
∴  the cost price of the article to the dealer = `  1 − 
 × 6000
 100 

70
= `  
× 6000  = ` 4200
 100 
Selling price of the article by the dealer = ` 5400.
∴  The profit of the dealer = S.P. – C.P.
= ` 5400 – ` 4200 = ` 1200.
Thus, the dealer has added ` 1200 on the sale of the article.
∴  VAT paid by the dealer = 6% of ` 1200
6
= `  
× 1200  = ` 72.
 100 
Example 4. A manufacturer marks an article at ` 5000. He sells this article to a wholesaler at
a discount of 25% on the marked price and the wholesaler sells it to a retailer at a discount of 15%
on the marked price. If the retailer sells the article without any discount and at each stage the sales
tax is 8%, calculate the amount of VAT paid by:
(i) the wholesaler (ii) the retailer. (2010)

14 Understanding ICSE mathematics – x

 Solution. Marked price of the article by manufacturer = ` 5000,
discount given by the manufacturer to a wholesaler = 25% of marked price.
 25 
∴ Selling price of article by manufacturer = `  1 −  × 5000
 100 

75
= `  
× 5000  = ` 3750.
 100 
Discount given by the wholesaler to a retailer = 15% of marked price.
 15 
∴ Selling price of article by wholesaler = `  1 −  × 5000
 100 
85
= `  
× 5000  = ` 4250.
 100 
(i) Profit of the wholesaler = S.P. – C.P.
= ` 4250 – ` 3750 = ` 500.
Since sales tax on the article at each stage is 8%,
∴ VAT paid by the wholesaler = 8% of ` 500
8
= `  
× 500  = ` 40.
 100 
(ii) The cost price of the article which the retailer paid to the wholesaler = ` 4250.
As the retailer sells the article at marked price without any discount, selling price
of the article by the retailer = ` 5000.
∴ Profit of retailer = S.P. – C.P.
= ` 5000 – ` 4250 = ` 750.
∴ VAT paid by the retailer = 8% of ` 750
8
= `  
× 750  = ` 60.
 100 

Example 5. A wholesaler buys a TV from the manufacturer for ` 25000. He marks the price of
the TV 20% above his cost price and sells it to a retailer at a 10% discount on the marked price.
If the rate of VAT is 8%, find the:
(i) marked price.
(ii) retailer’s cost price inclusive of tax.
(iii) VAT paid by the wholesaler. (2015)
Solution. The cost price of a TV which the wholesaler paid to a manufacturer = `
25000.
(i) As the wholesaler marks the price of the TV 20% above his cost price,
20
the marked price of the TV = `  1 + 
 × 25000
 100 
120
= `  
× 25000  = ` 30000.
 100 
(ii) As the wholesaler sells the TV to a retailer at a discount of 10% on the marked
10
price, selling price of the TV by the wholesaler = `  1 − 
 × 30000
 100 
90
= `  
× 30000  = ` 27000
 100 
Sales tax paid by the retailer to the wholesaler on TV
8
= 8% of ` 27000 = `  
× 27000  = ` 2160
 100 
∴ Retailer’s cost price inclusive of tax = ` 27000 + ` 2160 = ` 29160.

Value Added Tax 15

 (iii) Profit of wholesaler on the sale of TV = S.P. – C.P.
= ` 27000 – ` 25000 = ` 2000.
The value of TV added by the wholesaler = ` 2000,
∴ VAT paid by the wholesaler = 8% of 2000
8
= `  
× 2000  = ` 160.
 100 

Example 6. The list price of an article is ` 3000. A shopkeeper sells the article to a consumer
at the list price and charges sales tax at the prescribed rate of 8%. If the shopkeeper pays a VAT of
` 32 to the State Government, at what price inclusive of sales tax did the shopkeeper buy the article
from the wholesaler?
Solution. Let the profit of the shopkeeper be ` x, then the value of the article added by
the shopkeeper = ` x.
As the VAT paid by the shopkeeper is ` 32 and the rate of sales tax = 8%,
8
∴ 8% of ` x = ` 32 ⇒ × x = 32 ⇒ x = 400.
100
∴ The profit of the shopkeeper = ` 400.
∴ The price of the article which the shopkeeper paid to the wholesaler
= ` 3000 – ` 400 = ` 2600.
Sales tax paid by the shopkeeper to the wholesaler on the article
8
= 8% of ` 2600 = `   
× 2600  = ` 208.
 100 

∴ The price of the article inclusive of sales tax which the shopkeeper paid to the wholesaler
= ` 2600 + ` 208 = ` 2808.

Example 7. A shopkeeper buys an article whose list price is ` 450 at some rate of discount from
a wholesaler. He sells the article to a consumer at the list price and charges sales tax at the rate of
6%. If the shopkeeper has to pay a VAT of ` 2·70, find the rate of discount at which he bought the
article from the wholesaler.
Solution. Let the amount of discount be ` x.
As the shopkeeper sells the article at the list price, the profit of the shopkeeper = ` x.
∴ The value of the article added by the shopkeeper = ` x.
As the shopkeeper pays a VAT of ` 2·70 and rate of sales tax = 6%,
∴ 6% of ` x = ` 2·70
6
⇒ × x = 2·70 ⇒ 6x = 270 ⇒ x = 45.
100
∴ The amount of discount = ` 45.
45
∴ Rate of discount =  
× 100  % = 10%.
 450 

Example 8. Ms. Chawla goes to a shop to buy a leather coat which costs ` 735. The rate of the
sales tax (under VAT) is 5%. She tells the shopkeeper to reduce the price to such an extent that she
has to pay ` 735, inclusive of VAT. Find the reduction needed in the price of the coat.
Solution. Let the reduced price of the leather coat be ` x.
5 
Sales tax (under VAT) on ` x = `   x ×
x
   = `  .
100  20

21
∴ Amount paid by Ms. Chawla = `   x +  = `   x.
x
 20  20

16 Understanding ICSE mathematics – x

 21 20
According to given, x = 735 ⇒ x = × 735 = 700.
20   21
∴ The reduced price of the leather coat = ` 700.
Hence, the reduction needed in the price of coat = ` 735 – ` 700 = ` 35.

Example 9. The price of a bicycle is ` 2420 inclusive of sales tax (under VAT) at the rate of
10% on its listed price. A buyer asks for a discount on the listed price so that after charging the
VAT, the selling price becomes equal to the listed price. Find the amount of discount which the seller
has to allow for the deal.
Solution. Let the listed price of the bicycle be ` P.
10 P
Sales tax (under VAT) = 10% of ` P =  of ` P = `  .
100 10
P 11
∴ Selling price = ` P + `   = `   P.
10 10
11
According to given ,  P = 2420 ⇒ P = 2200.
10
∴ List price of the bicycle is ` 2200.
Let the amount of discount be ` x.
∴ The reduced price of the bicycle = ` (2200 – x).

2200 − x
Sales tax (under VAT) = 10% of ` (2200 – x) = `  .
10
2200 − x
∴ New selling price = ` (2200 – x) + ` 
10
11
= `   (2200 – x).
10
11
According to given,  (2200 – x) = 2200
10
10
⇒ 2200 – x = 2200 ×
11
⇒ 2200 – x = 2000 ⇒ x = 200.
∴ The amount of discount = ` 200.

Example 10. A shopkeeper buys an article at a rebate of 30% on the printed price. He spends
` 40 on transportation of the article. After charging sales tax (under VAT) at the rate of 7% on the
printed price, he sells the article for ` 856. Find his profit percentage.
Solution. Let the printed price of the article be ` P.
Sales tax (under VAT) is charged at 7% on the printed price,

7 7P
amount of VAT =  of ` P = `  .
100 100
7P 107P
∴ The selling price = ` P + `   = `  .
100 100
107
According to given, P = 856 ⇒ P = 800.
100
∴ The printed price of the article = ` 800.
As the rebate is 30% on the printed price,
30 
cost price of the article = ` 800 ×  1 − 
 100 

Value Added Tax 17

 7
= `   800 ×   = ` 560.
 10 
As ` 40 is spent on transportation,
the total cost price of the article = ` 560 + ` 40 = ` 600.
∴ The amount of profit = printed price – total cost price
= ` 800 – ` 600 = ` 200.
200 100 1
∴ Profit percentage =  
× 100  % = % = 33 %.
 600  3 3
Example 11. A manufacturing company M sells a computer to a distributor D for ` 22000
including sales tax. The distributor D sells it to a retailer R for ` 21750 excluding tax and the retailer
sells it to a consumer for ` 23400 plus tax. If the rate of sales tax (under VAT) is 10%, find
(i) the cost price of the computer for the distributor D.
(ii) the amount of tax (under VAT) paid by D.
(iii) the amount of tax (under VAT) paid by R.
(iv) the amount of tax received by the State Government on the sale of this computer.
Solution. (i) Let the cost price of the computer for the distributor D be ` x, rate of sales
tax = 10%.
x
∴ Tax charged by M = 10% of ` x = `  .
10
x 11x
∴ The selling price of the computer by M = ` x + `  = `  .
10 10
As the selling price of the computer by M = ` 22000 (given), we have
11x
= 22000 ⇒ x = 20000.
10
∴  The cost price of the computer for the distributor D = ` 20000.
x 20000
(ii) VAT collected by M = `  = `  = ` 2000.
10 10
Since the distributor D sold the computer for ` 21750,
tax collected by D = 10% of ` 21750
10
= `   
× 21750  = ` 2175.
 100 
∴ Tax to be paid by D = ` 2175 – ` 2000 = ` 175.
(iii) As the retailer R sold the computer for ` 23400,
tax collected by R = 10% of ` 23400
10
= `   
× 23400  = ` 2340.
 100 
∴ Tax to be paid by R = ` 2340 – ` 2175 = ` 165.
(iv) The amount of tax (under VAT) received by the Government
= ` 2000 + ` 175 + ` 165
= ` 2340.

Example 12. In the tax period ended March 2015, M/S Dhani Ram Textiles purchased Silk
Textiles worth ` 600000 taxable at 12·5%, Cotton Textiles worth ` 750000 taxable at 4% and
Handloom Textiles worth ` 185000 (tax exempted). During this period, the sales turnovers for
Silk Textiles, Cotton Textiles and Handloom Textiles are worth ` 850000, ` 687500 and ` 210000
respectively. However, the Silk Textiles worth ` 20000 were returned by the firm during the same
period. Calculate the tax liability (under VAT) of the firm for this tax period.

18 Understanding ICSE mathematics – x

 Solution. Calculation of input tax :

Tax rate Purchases Input tax

Silk Textiles 12·5% ` 600000 12·5% of ` 600000
= ` 75000
Cotton Textiles 4% ` 750000 4% of ` 750000
= ` 30000
Handloom Textiles ` 185000 NIL
exempted
Total input tax ` 105000
Calculation of output tax:

Tax rate Sales turnover Output tax

Silk Textiles 12·5% ` 850000 12·5% of ` 850000
= ` 106250
Cotton Textiles 4% ` 687500 4% of ` 687500
= ` 27500
Handloom Textiles ` 210000 NIL
exempted
Total output tax ` 133750
Calculation of Adjustment output tax:

Tax rate Return Adjustment output tax

Silk Textiles 12·5% ` 20000 12·5% of ` 20000
= ` 2500
Total adjustment output tax ` 2500

∴ Tax liability (under VAT) of the firm during the said tax period
= Total output tax – Adjustment output tax – Total input tax
= ` 133750 – ` 2500 – ` 105000
= ` 26250.

Exercise 1
1. A manufacturing company sells a T.V. to a trader A for ` 18000. Trader A sells it to a
trader B at a profit of ` 750 and trader B sells it to a consumer at a profit of ` 900. If
the rate of sales tax (under VAT) is 10%, find
(i) the amount of tax received by the Government.
(ii) the amount paid by the consumer for the T.V.
2. A manufacturer sells a washing machine to a wholesaler for ` 15000. The wholesaler
sells it to a trader at a profit of ` 1200 and the trader sells it to a consumer at a profit
of ` 1800. If the rate of VAT is 8%, find :
(i) The amount of VAT received by the State Government on the sale of this machine
from the manufacturer and the wholesaler.
(ii) The amount that the consumer pays for the machine. (2011)
3. A manufacturer buys raw material for ` 40000 and pays sales tax at the rate of 4%.
He sells the ready stock for ` 78000 and charges sales tax at the rate of 7·5%. Find the
VAT paid by the manufacturer.

Value Added Tax 19