What is the full form of VAT?
The full form of VAT is Value Added Tax.
It is an indirect consumption tax imposed on the purchase of Goods and Services. It is generally defined as the value of tax accessed addition to the products.
VAT is also known as Goods and Services Tax. It is employed in more than 160 countries that are permanent members of the United Nations.
VAT was first implemented by Germany and France during the First World War as a general consumption tax.
Later in the 20th century, Dr Wilhelm Von Siemens, a German Industrialist designed the modern version of the VAT.
In the subsequent years, many European countries implemented the VAT.
Different countries had different beliefs and purposes behind the implementation of VAT. Some European countries used VAT to reduce sales tax whereas America used it as a better alternative to corporate taxes.
VAT Objective and working
The main objective of the VAT tax-payer-friendly system is to reform the traditional system of Sales Tax Law with frustrating effects of double taxation and to reduce the tax burden of consumers.
Let us understand the concept of Sale Tax with the help of a Small Example illustrating the Chain of Sale Tax of the Factory to the Consumer.
S.P = 100
S.T = 4%
Total Collection = 104
C.P = 104
Profit = 20
S.P = 124
S.T = 4.96
Collection = 128.96
C.P = 128.96
Profit = 20
S.P = 148.96
S.T = 5.94
Collection = 154.9
|Expensive to Consumer|
In the given table, the factory owner sells its packets to the distributor, where definitely he has to collect the sale tax.
Suppose the cost of the packets is Rs 100 and the sale tax will be 4%. Therefore factory owner will collect Rs 4 for Rs. 100 i.e. 104 from the distributor.
S.P = 100
S.T = 4
Total collection=104, which is not the income of the factory owner because Rs 4 is collected as an indirect tax which is given to the state government. Because the state government has the authority of collecting sale tax.
This same process of sale tax will be implemented on wholesaler, retailer, and consumer which in turn increase expense.
In this whole process, there are cascading effects of tax due to which goods are becoming extremely expensive for the final consumers and the main objective of the government is to facilitate services beneficial to the general people of the country not only to the businessman.
To overcome the cascading effects of taxes the concept of VAT was introduced by the government. In VAT, Tax is only imposed on the value addition.
Role of VAT
The Role of VAT can be understood from these 3 points:
1 It scales down the incidence of non-compliance.
2 VAT represents the money collected by the government for maintaining the economic stability of the country.
3 It eliminates multiple taxes imposed on goods such as surcharge, turnover tax etc. on goods.
Benefits of VAT
Here are some of the benefits of VAT:
- It eliminates cascading effect
- Minimize exemptions
- Very transparent
- Simple to administrate
- Lessen litigation
- Permits a reliable information technology support system for an objective of automated e-filing or returns
- Inflation occurrence
- Expand investment
Disadvantages of VAT
There are not many disadvantages of VAT but still, it has 2 disadvantages:
VAT is considered on consumption rather than income which means it doesn't matter how much one earns, VAT is equal for all sections of the society. However, it also has some disadvantages which make it hateable.
Many people around the world consider it a regressive tax that places an excessive burden on low-income consumers.