9/10/2014 Value Added Tax (VAT)

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Value Added Tax (VAT)

Value Added Tax (VAT) was introduced as tax reform to overcome the problems associated with prevalentsales tax structure. The sales tax structure is associated with the problems of double taxation andmultiplicity 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 alsoabolishes 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 oftransaction in the production/ distribution chain. The term 'value addition' implies the increase in value ofgoods and services at each stage of production or transfer of goods and services. VAT is a tax on the finalconsumption 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. Everyregistered 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 numeralsthroughout the country. Its first two characters represent the State Code and the set-up of the next ninecharacters 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 atfirst 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 bythe dealers and manufacturers;

Tax structure becomes simpler and more transparent;

Improves tax compliance;

Generates higher revenue growth; etc.

For further details / clarifications / queries, please visit http://business.gov.in/taxation/vat.php