Question

# A wholesaler purchased electric material for Rs. 1,50,000. He sold it to a retailer for Rs.1,80,000. Retailer sold the same material to customer for Rs. 2,20,000. Find the M-VAT payable atevery stage of trading at the rate of 12.5%.

Hint: The M-VAT paid is always calculated on the difference of the selling price and purchasing price of the product, which means to say the tax is calculated on the profit generated.

Firstly, the wholesaler purchased the electric material for Rs. 1,50,000 and sold that at a price of Rs.
1,80,000 to the retailer. Therefore,
Purchase price of wholesaler= $Rs.\text{ }1,50,000$
Selling price of wholesaler = $Rs.\text{ }1,80,000$
Tax rate = $12.5%$
Profit made by wholesaler = Selling Price – Purchase Price
\begin{align} & =Rs.180000-Rs.150000 \\ & =Rs.30000 \\ \end{align}
Therefore, tax paid by the wholesaler = 12.5% of Rs. 300000
\begin{align} & =\dfrac{12.5}{100}\times 30000 \\ & =12.5\times 300 \\ & =Rs.3750 \\ \end{align}
Secondly, the retailer purchased the electric material for Rs. 1,80,000 from wholesaler and sold that
at a price of Rs. 2,20,000 to customer. Therefore,
Purchase price of retailer= $Rs.\text{ }1,80,000$
Selling price of retailer = $Rs.\text{ 2},20,000$
Tax rate = $12.5%$
Profit made by retailer = Selling Price – Purchase Price
\begin{align} & =Rs.220000-Rs.180000 \\ & =Rs.40000 \\ \end{align}
Therefore, tax paid by the retailer = 12.5% of Rs. 400000
\begin{align} & =\dfrac{12.5}{100}\times 40000 \\ & =12.5\times 400 \\ & =Rs.5000 \\ \end{align}
Now customer has purchased the electric material but didn’t sold, it means he has not generated
any profit so there is no need to calculate the M-VAT payable by the customer.
Therefore, M-VAT payable at every stage of trading at the rate of 12.5% is Rs. 3750 and Rs. 5000.

Note: The chances of doing mistakes are if trying to calculate the tax on individual selling and
purchasing prices but not subtracting them afterwards.