What is VAT and why it is compulsory?

VAT - in India

VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands.

Purchase price - Rs 100
Tax paid on purchase - Rs 10 (input tax)
Sale price - Rs 120
Tax payable on sale price - Rs 12 (output tax)
Input tax credit - Rs 10
VAT payable - Rs 2

VAT levy will be administered by the Value Added Tax Act and the rules made there-under.

VAT can be computed by using either of the three methods detailed below

* The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.
* The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).
* Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales.

Value added tax (VAT) is tax on exchanges. It is levied on the value added that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason VAT is neutral with respect to the number of passages that there are between the producer and the final consumer.

VAT is an indirect tax, in that the tax is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer). To avoid double taxation on final consumption, exports (which are, by definition, consumed abroad) are usually not subject to VAT or VAT which led to such consequences is refunded.

VAT was invented by a French economist in 1954. Maurice LaurГ©, joint director of the French tax authority, the Direction gГ©nГ©rale des impГґts, as taxe sur la valeur ajoutГ©e (TVA in French) was first to introduce VAT with effect from 10 April 1954 for large businesses, and extended over time to all business sectors. In France, it is the most important source of state finance, accounting for approximately 45% of state revenues.

Personal end-consumers of products, consumers and services cannot recover VAT on purchases, but businesses are able to recover VAT on the materials and services that they buy to make further supplies or services directly or indirectly sold to end-users. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. VAT was invented because very high sales taxes and tariffs encourage cheating and smuggling. It has been criticized on the grounds that it is a regressive tax.

Because who the hell would pay an optional 17% sales tax? :)

It's a Value Added Tax (koff) and it basically hits up consumers to provide revenue to their government.

Dear Suresh,
you have asked two different questions, First what is VAT?
VAT is a schema of indirect taxation like sales tax, excise, customs etc (not direct taxation like income tax and wealth tax) in which assessee is given credit of the tax paid by him on the inputs. So, effectively, he pays tax only on the Value Added by him to the product or service under assessment.

In traditional system of indirect taxation, same value is taxed over and again, which is called cascading effect of taxation. For example, suppose Sales Tax is 10%

Now, Suppose Mr. A produces a product and its cost is 100 Rs, when he sell it to B, A will charge RS 100 for product and Rs 10 for sales tax

Now, Mr. B sell this product to Mr. C at 200 rs, then B will charge Rs. 200 for product and Rs. 20 for Sales Tax

So, total sales tax amounting to Rs. 30 was paid by A and B

However, in the system of VAT when B sells its product at 200 Rs, his VAT liablity would be Rs. 20, but he will reduce Rs 10 paid by him as tax on the purchase of the product. Thus he will pay Rs. 10 only as tax. Thus in VAT, total tax comes to Rs.20 (Rs. 10 paid by A + Rs. 10 paid by B)

Major benefits of VAT are:-
1) it shaves out the cascading effect of taxation
2) it makes the product more cheaper, by reducing cascading effect
3) Tax free Exports are ensured
4) Tax administration is much simpler

However, with VAT system, paper work gets incerased tremendously.

Your second question is Why it is compulsory?
So, Suresh, every law has its roots in our Constitution. Government can not levy a tax (and thus deprive a person of its property and wealth) which is not supported by Constitution.

Constitiution has empowered Union Government and State Governement to levy various taxes and do varoious functions under Union List and State List, and both form of governance do their own job only as specified under their respective lists.

So, VAT is complusory, because it has the authority of law.

Hope you have got your answers.

Thanks and regards
Sharad Aggarwal
Pursuing CA Final

VALUE ADDED TAX which is applicable to anything you buy, the purpose of this tax is to make sure Revenue authority or Income Tax Department ,whatever you call it in a country, is able to collect the advance tax on all purchases made.

Value added tax (VAT) is tax on exchanges. It is levied on the value added that results from each exchange. It differs from a sales tax because a sales tax is levied on the total value of the exchange. For this reason VAT is neutral with respect to the number of passages that there are between the producer and the final consumer.

it is a Value Added Tax.

VALUE ADDED TAX. TO GENERATE TAX BY THE GOVT.

it is a tax, and it is compulsory because the govment needs money to pay themselves and pay for pork so they get reelected.

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