What is Value-added tax (VAT)?

Value-added tax (VAT)

What is Value-added tax (VAT)?
What is Value-added tax (VAT)?
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. VAT 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 VAT while buying goods; buyers at earlier stages of production receive reimbursements of tax they have paid. Because the consumer bears the entire tax, VAT is also a consumption tax.
State-wise VAT laws: Each state has its own VAT laws for proper implementation and levying. Different states apply different VAT rates according to their implied laws.
Why was VAT introduced?
The main aim behind the introduction of VAT 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 VAT system. Levying tax at each stage of the production process ensures better compliance and fewer loopholes to exploit.
Disadvantages of VAT
VAT also has some disadvantages. 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 VAT rates and laws in states made it one of the most complex taxation systems.
Has GST totally subsumed VAT?
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 July 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 such goods.

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