VAT can be abbreviated as Value Added Tax. It is a form of indirect imposition of tariffs while using a product or service. Tax is paid by every individual, corporation, institution or company in a nation for aiding the functional management of a country. The tax money collected is used by the government for various purposes like developing healthcare services, helping the economically backward people, improving the nation’s infrastructure, funding for new schemes by the government, rural development, providing social security, payment of national debt interest, defence development and more.
The taxes paid by every individual to the government majorly falls under two categories.
Direct tax involves the in-person payment of tax by an individual to the government. It includes corporate tax, banking tax, income tax, etc.
Indirect tax is a type of tax where an intermediate party is present to collect the tax from individuals and pay it to the government. This includes sales tax, service tax, customs duty, Goods and Service Tax (GST), etc. The value-added tax falls under this category.
VAT is a tax paid to the government for the products, services and goods used by an individual indirectly. It is a multi-point tax applied to persons. The tax burden is the proportion of tax to be paid by an individual based on their income and utilities. It is the responsibility of a person to pay taxes. In VAT, the tax burden can be transferred from one person to another until it reaches the final consumer.
VAT came into effect in 1986 in India. It was named MODVAT at the time of establishment. MODVAT stands for Modified value-added tax. This means that VAT was a pre-existing concept that was updated with time including different factors. VAT was once a part of sales tax but evolved out as a new concept to overcome the shortcomings of sales tax. Sales tax was causing many problems in the tax collection system so the Central Government of India introduced VAT as a separate tax system. Some of the problems existing the previous tax system were:
VAT is categorised into two types.
Input VAT is a type of tax that is applicable for products, goods and services brought by individuals that are accountable for VAT. A VAT registered individual, corporation or institution can obtain a deduction in VAT input concerning the VAT output.
Output VAT is a type of VAT that is applied for sales of goods, products or services. This is calculated to the sales and the final customer requiring the goods and services. VAT registration is required for the VAT output taxing.
VAT tax collected by the Government of India varies between the range of 5% to 28%. Based on the rates it is classified into the following types:
The highest percentage tax ever reported in India is the Goods and Services Tax which accounts for 28%. It includes automobiles, cement, chocolates, air conditioning systems, etc.
The 18% tax is imposed on telephone, restaurants, TV, gaming centres, banking, insurance, etc.
The Second Standard VAT rate is applicable for Intellectual Property rights, mobile phones, construction, food and related articles.
5% VAT is included for medicine, tea, coffee, jewellery, precious stones, beverages, sugar, transportation, etc.
The Goods and Services that hold zero tax are the National flag, newspapers, postal services, books, agriculture, silk, cotton, salt, milk and related products.
Two principles are needed for the implementation of VAT.
Value-added tax plays a vital role in enhancing a nation’s economy. VAT plays a key role in increasing the import and export of goods and services to the country. It is a uniform system that applies to every structure that deals with the provision of goods and services. Applying VAT on products, goods and services has played an important role in maintaining a controlled and organised economic system. The amount gathered as VAT is also used by the government for various developmental purposes.
Profile
Settings
Refer your friends
Sign out
