What is Value-Added Tax?

Introduction

Value-Added Tax, commonly known as VAT is an indirect tax charged on goods and services by the state government. The VAT Tax is applicable to products such as petrol, diesel and alcohol that are not covered or taxable under the Goods and Services Tax Act.

What is Value-Added Tax?

A Value-Added Tax (VAT) is a consumption tax that was introduced on April 1, 2005, with an intention to unify tax rates for goods and services across India. From suppliers and manufacturers to distributors and retailers all collected VAT from customers at multistage based on the cost of the product. However, the Goods and Services Tax (GST), which was introduced on July 1, 2017 to centralize taxes and eliminate the concept of tax on tax, has replaced several existing state taxes.

We, as customers, are paying VAT to the government through retailers, producers, and distributors. It is considered applicable when the buyer and seller of the goods and services are from within the same state. Yes, every state in the country has a different VAT law.

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Features of Value Added Tax

VAT is applicable only on goods and not on services provided by sellers.

The Value added tax is collected by the seller state.

The tax collected is held by the state in which the sale is made.

VAT tax is valid at the time of sale of goods.

A mandatory registration is required from a seller if the seller’s annual turnover exceeds Rs. 5 lakh

The dates for filing returns are 10^th, 15^th, and 20^th of the following month for the previous months.

The only payment method available is offline.

How is VAT Calculated?

VAT is calculated as the difference between output tax and input tax. Output tax is the tax received by the seller for the product sold by him. Input tax is the tax paid by the seller for the raw materials procured by him to make the product.

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Why was GST implemented?

The Goods and Services Tax in India was implemented to eliminate a few drawbacks that came with the VAT regime:

The tax-on-tax effect increased the cost of the product for the end user. GST has eliminated the cascading effect on taxation with application of GST only once on the product and service.

VAT was subjective to each state in which taxes varied from one state to another. For which GST was introduced with a single tax rate for specific goods and services across India.

While the VAT regulations changed with each state, GST has reduced compliance burden with a single regulation.

Conclusion

The Government of India is integrating with global trade practices through its tax system. It is also improving transparency and uniformity of the tax payment process in the country.

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