Value Added Tax (VAT)

VAT or Value Added Tax is a type of Indirect tax that is charged by the Central Government on the sale of services and goods to the consumers. VAT is paid by the producers of services and goods, but it is finally imposed on the consumers who purchase the services and goods when they pay for it.

Studying Value Added Tax will be helpful for UPSC IAS Exam preparation. Mains GS paper-3 Indian Economy.

Table of Content

• What is Value Added Tax?
• Features of Value Added Tax
• Why was Value Added Tax introduced?
• Disadvantages of Value Added Tax
• Has GST totally subsumed Value Added Tax?
• Difference between Value Added Tax and GST
• Conclusion
• Frequently Asked Questions (FAQs)

What is Value Added Tax?

• Value-added tax (VAT) is a type of indirect tax levied on goods and services for value added at every point of production or distribution cycle, starting from raw materials and going all the way to the final retail purchase.
• Value Added Tax was introduced on April 1, 2005.
• Under it, the amount of value addition is first identified at each stage, and then tax is levied on the same.
• Ultimately, the end consumer has to pay the complete Value Added Tax while buying goods; buyers at earlier stages of production receive reimbursements of tax they have paid.
• Because the consumer bears the entire tax, Value Added Tax is also a consumption tax.

Features of Value Added Tax

State-Level Administration:

• In India, each state is responsible for managing the VAT rather than being managed by the national government.
• This contributes to the tax system’s adaptability and responsiveness to regional economic conditions while also giving state governments a source of income.

Rate System:

• Due to the different rate systems used in India, different VAT rates are applied depending on the kind of products and services sold.
• As necessary products and services are taxed at a lower rate than luxury goods and services, this helps to ensure that Value Added Tax is applied fairly and equally.

Comprehensive Coverage:

• A wide range of products and services, including manufactured commodities and even intangibles like intellectual property, are subject to VAT in India.
• This contributes to VAT being a thorough and equal type of taxation, as everyone pays the same proportion of their income, regardless of their purchasing habits.

Self-Assessment:

• A self-assessment system governs Value Added Tax in India, where enterprisesare in charge of determining their own Value Added Tax liabilities and paying the appropriate amounts to the government.
• This ensures that Value Added Tax is collected more effectively and lessens the administrative burden on the government.

Credit System:

• India has a credit mechanism for Value Added Tax, allowing businesses to deduct the tax paid on inputs from the tax charged on outputs.
• As a result, businesses pay less for Value Added Tax, making it a more effective method of taxes.

Centralised Registration:

• Businesses in India must register for Value Added Tax with the central tax authority rather than with specific state authorities.
• This helps to make sure that tax is collected efficiently and effectively, lowering the risk of tax evasion and fraud.

E-Filing:

• In India, Value Added Tax returns are submitted electronically, lessening businesses’ administrative load and securing effective tax collection.
• Businesses can view their Value Added Tax records online anytime, making managing their tax responsibility simpler when filing electronically.

Supports Small Businesses:

• Value Added Tax in India helps small enterprises by providing a simple and effective tax structure that is concise to deal with.
• Small enterprises can refund the VAT they paid on inputs, which lowers their tax burden and boosts their competitiveness.

Why was Value Added Tax introduced?

• The main aim behind the introduction of Value Added Tax was to eliminate the presence of double taxation and the cascading effect from the then existing sales tax structure.
• A cascading effect is when there is tax levied on a product at every step of the sale.
• The tax is levied on a value which includes tax paid by the previous buyer, so the consumer ends up paying tax on already-paid tax.
• No exemptions can be made under the Value Added Tax system.
• Levying tax at each stage of the production process ensures better compliance and fewer loopholes to exploit.
• In the Value Added Tax system, the amount of tax would be known at each and every stage of goods of sale or purchase which will increase the transparency.

Disadvantages of Value Added Tax

• Though it was brought in to eliminate the cascading effect of taxes, it has not been able to do so fully.
• It is not possible to claim input tax credit (ITC) on service under VAT.
• Different Value Added Tax rates and laws in states made it one of the most complex taxation systems.
• VAT is inherently regressive, higher proportion of a low-earning person’s income would be subject to VAT than that of a high-earner’s income.

Has GST totally subsumed Value Added Tax?

• To completely eliminate the cascading effect of taxes and to make the indirect tax structure simpler, the union government introduced the Goods and Services Tax (GST) in 2017.
• Though GST replaced VAT on most goods, some goods are still not covered under the new regime.
• VAT continues to be the tax levied on certain goods like liquor and cigarettes which do not fall within the categories of consumer goods under the umbrella of GST.

Difference between Value Added Tax and GST

Basis of Comparison	VAT	GST
Commencement	2005	2017
Regulations and Rates of Taxation	VAT rates differ for every state in India, and also vary according to goods and services in different categories. Since it is a state-wise tax, the rules of taxation of each state apply and could differ from one state to another.	The rate of GST is standard all over India. Regarding rules of taxation, there are four kinds of acts which apply to different kinds of transactions in which GST is applied.
Regulatory Authority	The VAT is collected by the state government and this is the regulatory authority that governs the VAT for each state in India.	In the case of GST, the State GST and the Central GST are collected from each sale. The tax is then divided between the central and state government in question.
Compliance	In the case of the movement of goods, compliance is different from one state to the other.	Where GST is concerned, the movement of goods does not impact the GST since this is uniform all over the country.
The Collection of Tax	The responsibility of tax collection rests with the state of the seller.	The responsibility of tax collection rests with the state that is consuming goods and services.

Conclusion

Value Added Tax is a complex yet efficient kind of taxation that is employed by countries all over the world. The transparency of value-added tax benefits consumers since they can simply see how much tax they are spending and hold businesses accountable for the revenue they collect. Although GST has largely replaced VAT, some products are still subject to the value-added tax and are not included in the range of GST. Petroleum products and items with alcohol are two examples of such goods. VAT is a strong and adaptable tax system that successfully increases revenue and ensures tax compliance.

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FAQs (frequently asked question)