Value Added Tax (VAT)
(Value Added Tax (VAT) has been subsumed in GST)
Value Added Tax (VAT) was introduced as tax reform to overcome the problems associated with prevalent sales tax structure. The sales tax structure is associated with the problems of double taxation and multiplicity of taxes resulting in cascading tax burden. For instance, in the sales tax structure, before a commodity is produced, inputs are first taxed, and then after the commodity is produced with input tax load, output is taxed again This causes an unfair double taxation with cascading effects. VAT also abolishes multiplicity of taxes like turnover tax, surcharge on sales tax, additional surcharge, etc.
What is VAT?
Value Added Tax (VAT) is a multi-point system of taxation. Tax is levied on value addition at each stage of transaction in the production/ distribution chain The term 'value addition' implies the increase in value of goods and services at each stage of production or transfer of goods and services. VAT is a tax on the final consumption of goods or services and is ultimately borne by the consumer. VAT allows 'Input tax credit (ITC)' for tax paid at earlier stage, which can be appropriated against the VAT liability on subsequent sale.
The design of VAT with input tax credit is based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above specified amount, needs to issue to the purchaser serially numbered tax invoice with the prescribed particulars For identification/ registration of dealers under VAT, the Tax Payer's Identification Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first two characters represent the State Code and the set-up of the next nine characters can vary in different States.
Benefits / Advantages of VAT
The main objective of VAT has been the rationalization of overall tax burden and reduction in general price level. It seeks to help common people (consumers), traders, industrialists as well as the Government. It is a move towards more efficiency, equal competition and fairness in the taxation system. The main benefits of implementation of VAT are:-
- Minimizes tax evasion as VAT is imposed on the basis of invoice / bill at each stage. The tax evaded at first stage gets caught at the next stage;
- A set-off is given for input tax as well as tax paid on previous purchases;
- Abolishes multiplicity of taxes;
- Promotes competitiveness of exports;
- Replaces the existing system of inspection by a system of built-in self-assessment of VAT liability by the dealers and manufacturers;
- Tax structure becomes simpler and more transparent;
- Improves tax compliance;
- Generates higher revenue growth; etc.
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