Value-Added Tax (VAT) is a type of indirect tax that is levied on goods and services and the payment is made to the government indirectly. The VAT tax imposed is defined as a multi-stage tax that is levied at each step of production of goods and services that involves in sale/purchase. The VAT is collected by state governments and each state has its own VAT laws. Currently, it is applicable to some of the key products such as Petrol, Diesel and Alcohol.
Now let’s understand the concept of VAT briefly.
What is Value-Added Tax (VAT)?
VAT is an indirect tax that is implied on the goods and services for the value added starting from raw materials to the final retail purchase. Under this taxation system, the amount of value addition is first figured at each stage and then the tax is implemented on the same. Hence, the end-consumer has to pay the VAT completely while he/she wishes to purchase goods and services. In this way, VAT is also known as Consumption Tax.
Need of Value-Added Tax (VAT)
VAT was introduced on April 1, 2005 under the Congress government regime. The prime motto to introduce the VAT was to eliminate the double taxation system and abolish general sales tax laws. Under the VAT system, there are no exemptions. However, before the introduction of VAT, there was a cascading effect of taxes under which the tax was levied on a product at each step of sale. Further, the tax was levied on the value which included the tax paid by the previous buyer. Hence, consumers ended up paying a tax on already paid tax which thereby created a double taxation on the goods and services. To eliminate this, VAT was introduced and was brought into the effect.
Example of VAT
Any person having an annual turnover of more than Rs.5 lakhs by supplying goods and services is liable to register for VAT payment. Let’s understand the concept of VAT through Value Added Tax example given below-
Suppose Shyam is the owner of the restaurant and spend ₹5,00,000 on purchasing of raw materials. A 10% input tax was imposed on raw materials. Hence, the total input tax incurred by Shyam becomes 10% of ₹5,00,000, i.e. ₹50,000.
Now after selling the food using those raw materials, he made a whopping earning of ₹10,00,000. If we consider the total output tax to be 10% of the earnings, then the total output tax becomes 10% of ₹10,00,000, i.e. ₹1,00,000.
With the above given VAT example, we can figure out the VAT payable Shyam by simply deducting input tax from output tax. Therefore, VAT = ₹1,00,000 – ₹50,000, i.e. ₹50,000.
There is a simple formula to calculate VAT Tax by subtracting output tax from input tax.
VAT= Output Tax- Input Tax
Input Tax: It is the tax paid by the seller of the goods and services for purchasing raw materials
Output Tax: It is the tax received by seller at the time of sale of goods and services.
Advantages of Value Added Tax (VAT)
As VAT is levied at the multiple stage of production of goods and services, it comes under the purview of state governments. India, being the diversified country, here VAT Tax differs from state to state.
Below given are some of the advantages of VAT:
- There is no exemption under the VAT Tax system. This means there are lesser chances of loopholes to be exploited along with ensured better compliance
- In VAT system, equal tax rate is applicable to similar types of goods and services
- VAT system offers transparency and uniform tax payment process to the VAT taxpayers
- VAT helps in strengthening the tax policy and solves the fiscal policy deficit of any country
- VAT is globally accepted means of tax policy that helps in strengthening a good relation with other countries.
Disadvantages of Value Added Tax (VAT)
VAT has some disadvantages also. Let’s check it out-
- As VAT was introduced to eliminate the cascading effect of tax, it has not been able to do that completely
- Taxpayers cannot claim input tax credit on credit under VAT
- Different VAT rates and laws in states have made the taxation system more complex
- Input of CST cannot be adjusted against VAT and vice-versa
Modified Value-Added Tax
Modified Value-Added Tax (MODVAT) was introduced in India in the year 1986. Initially, it covered few limited commodities to start off. MODVAT was used as a modified version of VAT where manufacturers of specific goods who were dependent on other manufacturers were offered excise credit on the raw materials, thereby eliminating double taxation.
The current status of MODVAT in longer in force now. MODVAT used to be the part the Indian Tax System for around 15 years, but after that it was replaced by CENVAT (Central Value Added Tax). Although government used MODVAT platform to make small changes in VAT and then restructuring it to the CENVAT. However, many people use the term MODVAT and CENVAT till date, but the former is not in force in its current state.
Value Added Tax (VAT): FAQs
There are different categories of tax rate implemented in the states of India. Starting from Nil, it has 1%, 4%-5%, and 12%-13% tax rate system in India.
If a trader wishes to get registered for VAT, he is supposed to below given documents-
· PAN Card Photocopy
· Proof of Address of the business
· Proof of Identity of all the promoters
· Extra security deposit of some kind
The process of VAT collection is categorised into four categories i.e.-
The basic concept of VAT was originally proposed by Dr.Wilhelm Von Siemens who was an industrialist of German origin.
Any trader having a business turnover of more than ₹5 lakhs qualifies to implement VAT.