Value Added Tax (VAT)

Introduction

• Every commodity goes through different stages of production and distribution before reaching the consumers. Some value additions are done at each stage of the production and distribution chain. Value Added Tax (VAT) is an indirect tax levied on each stage of value addition in each stage of economic activity.
• VAT was first implemented in India in 2005 for replacing the existing sales tax. In June 2014, it was implemented in all the states of the country, except the Lakshadweep Islands and the Andaman and Nicobar Islands. 
• VAT is calculated by deducting input tax (charged to the customer by a dealer) from output tax (tax paid by the dealer for  purchase).

Features of VAT

• The VAT was levied at every stage of a product every time a certain value was added to the product.
• Since the VAT method of tax collection is imposed and collected at different stages of value addition that is why it is a multipoint tax collection.
• It is called a consumption tax because the tax is ultimately paid by the final consumers. 
• VAT minimizes the likelihood of tax evasion and promotes compliance.
• VAT is simpler to administer than Goods and Services Tax (GST).

Cascading Effect of VAT 

• One of the most significant drawbacks of the VAT system was its cascading effect. As tax was added at every stage, the end consumer was required to pay a higher fee on top of already paid tax.
• As a result, the Government introduced a new direct tax regime GST in 2017. While GST has mostly replaced VAT, it is still applicable to some goods that are not covered under the new regime. 
• GST has successfully eliminated the cascading effect, but the VAT system has some benefits.

Current Status of VAT in India

• While GST has replaced VAT, there are still a few products that are not covered under GST, and they continue to levy VAT. 
• Some examples of such products are petroleum products and items that contain alcohol.