Wednesday, August 15, 2012

Value Added Tax (VAT): Basic Concepts / Features

  • It is a simplified Sales tax system:
    VAT is same as Sales tax but it is being levied in a different manner.VAT works on the principle that when raw material passes through various manufacturing stages and manufactured product passes through various distribution stages, tax should be levied on the 'Value Added' at each stage and not on the gross sales price.
  • It is a consumption tax because it is borne ultimately by the final consumer and not by companies. It is charged as a percentage of prices, which means that the actual tax burden is visible at each stage in the production and distribution chain.
  • This ensures that same commodity does not get taxed again and again and there is no cascading effect. In simple terms, 'value added' means difference between selling price and purchase price. VAT avoids cascading effect of a tax.
  • It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
  • Basically, VAT is multi-point tax, with provision for granting set off (credit) of the tax paid at the earlier stage. Thus, tax burden is passed on when goods are sold. This process continues till goods are finally consumed. Hence, VAT is termed as 'consumption based' tax. VAT works on the principle of 'tax credit system'.
  • Vat system not same in all States –
    The VAT system as introduced is result of deliberations of committee of representatives from 29 States. Each State has its own views and peculiarities. Hence, having uniform nationwide VAT is very difficult and some compromises/adjustments are inevitable. Vat law not uniform in all States
  • Each State has made changes as per their needs. Though basic concepts are same in VAT Acts of all States, provisions in respect of credit allowable, credit of tax on Capital goods, credit when goods are sold inter-state are not uniform. Even definitions of terms like business', 'sale', 'sale price', 'goods', 'dealer', 'turnover', 'input tax' etc. are not uniform. Schedules indicating tax rates on various articles are also not uniform, though broadly, the schedules are expected to be same.

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