Value added tax (VAT) is a state-level indirect tax imposed on the sale of goods and services when these goods are ultimately sold to the consumer. Hence, it’s an important component of Gross Domestic Product (GDP) of our country. Value added tax (VAT) is implemented in all states and union territories of India except for Andaman and Nicobar Islands and Lakshadweep Island. Here are some of the benefits of having indirect value added taxation system in India:
Advantages of Value Added Tax:
- To eliminate line of tax evasion
- To evade under valuation at all phases of production and distribution
- To uplift the existing system and create a well regulated system
- Help the nation to harmonize better in the WTO regime
- Result in better tax compliance by generating series of invoices that supports fruitful audit.
- Keep away with cascading tax burden
- To discourage the detrimental tax rate war and trade deviation among the states
How does it work?
Value added tax (VAT) is a multi-point taxation process with tax being imposed on ‘value addition’ at each phase of the production/distribution chain. Value added tax is collected at different stages of sale with the provision to set-off for tax paid on inputs (i.e. taxes paid at the preceding stages) as the intention is only to tax only the proportion of value added. Focus is to eliminate the tax burden by ensuring only the ‘additional value’ is taxable. This will ultimately reduce the possible cost for the consumer.
Let’s understand this with an example of TV manufacturing. Manufacturer has to buy various raw materials and other inputs from various suppliers. Value added tax (VAT) is levied from the manufacturer when he makes payment to suppliers and also for the amount that he pays to the distributors. This way, VAT is levied on the incremental value at various phases of manufacturing of TV. As an end user, value added tax (VAT) must be paid by the consumer (as applied to him) when he buys it from the showroom. Now, the manufacturer pays the differential amount to the government and keeps the remaining as an offset against the tax paid in the initial phases. Ultimately, VAT is paid by the consumers to the government through producers/manufactures of goods and services.