What is Value Added Tax?

VAT is a kind of tax levied on sale of goods and services when these commodities are
ultimately sold to the consumer. VAT is an integral part of the GDP of any country.

While VAT is levied on sale of goods and services and paid by producers to the
government, the actual tax is levied from customers or end users who purchase these.
Thus, it is an indirect form of tax which is paid to the government by customers but via
producers of goods and services.

VAT is a multi-stage tax which is levied at each step of production of goods and services
which involves sale/purchase. Any person earning an annual turnover of more than Rs.5
lacs by supplying goods and services is liable to register for VAT payment. Value added
tax or VAT is levied both on local as well as imported goods.

Value Added Tax is a broad-based commodity tax that is levied at multiple stages
of production. The concept is akin to excise duty paid by the manufacturer who, in turn,
claims a credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale
and both work in the same manner, according to the white paper on VAT released by
finance minister Chidambaram. The document was drawn up after all states, barring UP,
were prepared to implement VAT from April. It is usually intended to be a tax on
consumption, hence the provision of a mechanism enabling producers to offset the tax
they have paid on their inputs against that charged on their sales of goods and services.
Under VAT revenue is collected throughout the production process without distorting
any production decisions.

Features of Value Added Tax:

 Similar goods and services are taxed equally. So a similar television from all
brands will be taxed the same
VAT is levied at each stage of production and hence makes the taxation process
easier and more transparent
VAT reduces chances of tax evasion and fosters compliance
Encourages transparency in sale of goods and services at the tiniest level.
 Calculation of VAT:

VAT is actually calculated as the difference between input tax and output tax.
VAT = Output Tax Input Tax
Where output tax is the tax received by the seller for sale of his goods and services and
input tax is the tax paid by the seller for raw materials required to manufacture his
goods and services.

Example:

Suppose Ram owns a restaurant and spends Rs.50,000 towards obtaining raw
materials. Input tax is 10%, so input tax becomes 10% of Rs.50,000 = Rs.5,000
Now after selling the food made by using the purchased raw materials, Ram was able to
make Rs.1,00,000. Supposing 10% output tax, output tax becomes Rs.10,000
So, final VAT payable by Ram comes out to be Rs.10,000 Rs.5,000 = Rs.5,000

Why is VAT required and How is it useful?

India was one of the last few countries to introduce VAT as a form of tax. Taxation
process in India was believed to be exploited the most by businessmen and enterprises
which had found loopholes for evading taxes. VAT was introduced to minimize this
evasion and render transparency and uniformity to the tax payment process.

Value Added Tax is levied in multiple stages of production of goods and services and
comes under the purview of various state governments. Hence, VAT in India might
slightly differ from one state to another.
No exemptions under the VAT system. Levying tax at each stage of the production
process ensures better compliance and less loopholes to be exploited
VAT, when enforced properly forms an important instrument for tax consolidation of the
country and as such helps towards solving the fiscal deficit issue to some extent
Since, VAT is a globally accepted taxation system, it will help India integrate better into
global trade practices

VAT Implementation In Various State of India:

Since enforcement of VAT and collection of it comes under the purview of state
governments, different states have different VAT rules and implementation guidelines.
Hence, the procedure for tax implementation, rates of VAT, timelines for VAT payment
and VAT return filing, all differ from one state to another.
Despite state-specific implementations, VAT in India can be divided into four main
subheads.

NIL VAT Rate:

In a lot of states items that are very basic in nature are sold without levying any
VAT on them. These items are mostly those sold by the unorganized sector in
their most basic or natural form. Examples of this type of items are salt, khadi,
condoms etc.

1% VAT Rate:

For items which tend to be highly expensive, the percentage of VAT applicable
needs to be kept low since otherwise the VAT levied could be too high an
amount. For such items, VAT is kept as low as 1%. Gold, silver and other
precious stones as well as precious jewelry fall under this category of goods.
Most Indian states have fixed VAT for these items at 1% of the amount.

4-5% VAT Rate:

A large number of daily consumption goods have been put by several state
governments under this category of VAT. So VAT charged on goods like oil,
coffee, medicines etc. is around 4-5% for most states in India.

General VAT Rate:

General VAT rates apply to goods which cannot be segregated and put under
any of the above listed VAT categories. For goods like liquor, cigarettes etc. many
governments charge high VAT rates of 12.5% or 14-15%. Also, many state
governments follow a general rate of VAT for goods which cannot be categorized
to suit the above classification. Such goods are taxed at 12%, 13% or even 15%
in different states.