Here is simple definition and explanation of VAT


VAT or Value Added Tax is a consumption tax which is levied at each stage of production based on the value added to the product at that stage. VAT is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages.

Why Shift to VAT
In case of sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a 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. In the VAT, a set-off is given for input tax as well as tax paid on previous purchases.

In the sales tax structure that existed in India and still exists in some states, there was multiplicity of taxes such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes have abolished. In addition, Central sales tax is also going to be phased out. As a result, overall tax burden will be rationalised, and prices in general will also fall. Moreover, VAT will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. The tax structure will become simple and more transparent. That will improve tax compliance and also augment revenue growth.

Criticisms of VAT