VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the value of the goods, added by the transferor. It is the tax in relation to the difference of the value added by the transferor and not just a profit.
Across the globe, VAT is payable on the goods and services, which are part of the national GDP. It means that tax is applicable at every stage of the value added of the goods.
VAT In India
Post liberalization, it can be said that Value Added Tax in India is one of the most important constituent of tax reforms.VAT can also be referred to as a multi point destination based system of taxation, such that tax is charged at every step of transaction in the supply chain.VAT is actually a state subject in India, acquired from Entry 54 of the state list, for which states are sovereign in making decisions. With the help of tax departments in their respective states, state governments ensure the levy of VAT. The Central government is instrumental in guiding the state government with respect to execution of VAT.
The department of revenue under the Ministry of Finance is given the power to have control with respect to direct and indirect taxes, through two statutory boards, i.e. Central Board OF Direct Taxes (CBDT) and the Central Board Of Customs and Central Excise (CBEC).The sales tax division of department of revenue is responsible for levying VAT. India had a problem of double taxation. Goods were taxed before manufacture once and then again after manufacturing. To avoid such double taxation, which had a negative impact on the economy, VAT was introduced.
Method Of Collecting VAT
VAT can be collected in two different methods. In method one, tax is charged both on the basis of the tax which is paid on purchase and the tax that is payable on the sale(shown separately in the invoice).Finally the difference between the tax paid on purchase and the tax paid on sale according to the invoice is VAT.
In the other method tax is collected and charged on the cumulative value of the tax paid on sale and purchase, by applying the rate of tax applicable to the goods. Which means the difference between the sale price and purchase price is VAT.
Benefit Of VAT
The chief benefit for execution of VAT is: