Page 234 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Unit 14: Value Added Tax

It is collected fractionally, via a system of deductions whereby taxable persons can deduct from Notes
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.
In other words, it is a multi-stage tax, levied only on value added at each stage in the chain of
production of goods and services with the provision of a set-off for the tax paid at earlier stages
in the chain. The objective is to avoid ‘cascading’, which can have a snowballing effect on prices.
It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked,
resulting in higher revenues to the government.

Over 130 countries worldwide have introduced VAT over the past three decades and India is
amongst the last few to introduce it.
India already has a system of sales tax collection wherein the tax is collected at one point (first/
last) from the transactions involving the sale of goods. VAT would, however, be collected in
stages (instalments) from one stage to another.

The mechanism of VAT is such that, for goods that are imported and consumed in a particular
state, the first seller pays the first point tax, and the next seller pays tax only on the value-
addition done – leading to a total tax burden exactly equal to the last point tax.

14.1 Value Added Tax (VAT)

Value Added Tax (VAT) is a multi point sales tax with set off for tax paid on purchases. It is
basically a tax on the value addition on the product. The burden of tax is ultimately born by the
consumer of goods. In many aspects it is equivalent to last point sales tax. It can also be called as
a multi point sales tax levied as a proportion of Valued Added.
All over the world, VAT is payable on the goods and services as they form a part of national
GDP. More than 130 countries worldwide have introduced VAT over the past 3 decades; India
being amongst the last few to introduce it.

It means every seller of goods and service providers charges the tax after availing the input tax
credit. It is the form of collecting sales tax under which tax is collected in each stage on the value
added of the goods. In practice, the dealer charges the tax on the full price of the goods, sold to
the consumer and at every end of the tax period reduces the tax collected on sale and tax charged
to him by the dealers from whom he purchased the goods and deposits such amount of tax in
government treasury.

Notes VAT is a multi-stage tax, levied only on value that is added at each stage in the cycle
of production of goods and services with the provision of a set-off for the tax paid at
earlier stages in the cycle/chain.

14.1.1 Difference between VAT and CST

Under the CST Act, the tax is collected at one stage of purchase or sale of goods. Therefore, the
burden of the full tax bond is borne by only one dealer, either the first or the last dealer.
However, under the VAT system, the tax burden would be shared by all the dealers from first to
last. Then, such tax would be passed upon the final consumers.
Under the CST Act, the tax is levied at a single point. Under the VAT system, the retailers are not
subject to tax except for the retail tax.

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