Value Added Tax (VAT)

by Monika Dadool 01-Mar-19

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VAT stands for Value Added Tax is an indirect consumption tax imposed on the purchase of Goods and Services. We can generally define it as the value of tax accessed addition to the products.


Why VAT?

The main objective of 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 Small Example illustrating the Chain of Sale Tax of Factory to the Consumer.

Factory Owner
>>Distributor
>>Wholesaler
>>Retailer
>>

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, factory owner sales its packets to distributor, where definitely he has to collect sale tax.

Suppose the cost of the packets is Rs 100 and sale tax will be 4%. Therefore factory owner will collect Rs 4 for Rs. 100 i.e. 104 from distributor.

S.P = 100 

S.T = 4

Total collection=104, which is not the income of 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 is 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

a) It scales down the incidence of non-compliance.

b) VAT represents the money collected by the government for maintaining economic stability of the country. 

c) It eliminates multiple taxes imposed on goods such as surcharge, turnover tax etc. on goods.


Real time example

Printer cost = Rs 14000

Vat @ cost= Rs 1750

Total cost= 15750


Benefits of VAT

a) It eliminates cascading effect

b) Minimize exemptions

c) Very transparent 

d) Simple to administrate

e) Lessen litigation

f) Permits a reliable information technology support system for an objective of automated e-filing or returns.


Disadvantage of VAT

a) Inflation occurrence

b) Expand investment 


List of some goods not included in the VAT

a) Petrol

b) Diesel

c) liquor

d) Lottery tickets 


Different techniques included for the implementation of VAT are given below:

a) Additional method

b) Subtraction method

c) Immediate subtraction method

d) Invoice method

e) Direct subtraction method


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