What is Value Added Tax?
VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against the VAT liability on subsequent sale.
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All over the world, VAT is payable on goods and services as they form a part of national GDP. More than 130 countries worldwide have introduced VAT over the past 3 decades; India being amongst the last few to introduce it.
It means every seller of goods and service providers charges the tax after availing of the input tax credit. It is the form of collecting sales tax under which tax is collected in each stage on the value-added of the goods.
In practice, the dealer charges the tax on the full price of the goods, sold to the consumer and at every end of the tax period reduces the tax collected on sale and tax charged to him by the dealers from whom he purchased the goods and deposits such amount of tax in the government treasury.
Advantages of Value Added Tax (VAT)
The advantages of VAT include the following:
If the tax is considered on a retail level, it offers all the economic advantages of a tax of the entire retail price within its scope. The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers.
Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value-added at the last stage.
Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is picked up at a later stage. Even if it is not picked up later, the government will at least have collected the VAT paid at previous stages. Whereas if evasion takes place at the final/last stage the state will lose only tax on the value added at that particular point.
VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption type. VAT gives full credit for tax included on purchases of capital goods.
Coordination of VAT with Direct Taxation
Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate income taxes. Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection.