VAT Full Form

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. 

Types of Taxes

The taxes paid by every individual to the government majorly falls under two categories. They are :

1. Direct tax.

2. Indirect tax.

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. 

What is a Value Added Tax?

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.

Why was VAT introduced?

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 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 in the previous tax system were:

• Double tax is also called multi-taxation

• Tax on tax

• RNR is abbreviated as Revenue Neutralisation Rate

Types of VAT

VAT is categorised into two types. They are:

1. Input VAT.

2. Output VAT.

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. 

The 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 rates

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:

• 28% denotes a Higher tax rate

• 18% signifies the First Standard rate of tax

• 12% symbolises the Second Standard rate

• 5% belongs to the reduced VAT rate

• 0% is no VAT rate

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. 

Principles of Value-Added Tax implementation

Two principles are needed for the implementation of VAT. They are:

1. Principles of origin: It is a principle in which the tax is applicable only for a particular country. It is within the territory tax. 

2. Principles of destination: It is the principle in which the tax varies based on the country the good or service is to be provided.

Advantages of Value-Added Tax

Some of the main advantages of VAT are:

• They are available in a simplified format

• It is easy to apply and access

• It can be automated and computerised

• Tax payment can be adjusted. 

• Transparent in nature

• It maintains equality 

• Reduces discrepancies and disputes

Conclusion

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.