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What is Value Added Tax (VAT)?


is a tax levied on the purchase price of goods. The levy of value added tax, an indirect tax which is a kind of compensation tax, was introduced to offset the cascading effect of sales tax that heavily burdened the end-consumer of goods or service.

This tax is however imposed progressively on only the value added to the product and not on the overall product. Moreover, this indirect tax imposes tax uniformly across the value chain i.e. raw material provider, manufacturer, whole-seller and retailer. The rate at which VAT is imposed is dependent on the commodity type.

What is Value Added Tax (VAT)?

Computation of VAT: VAT calculation assuming uniform VAT rate of 15%. If a manufacturer of some goods, sources some raw material that is priced at Rs. 100 then the provider of raw material would pay Rs 15 as tax to the government. Thereafter, whole-seller would charge a margin amounting to 10% on 115 and pay a VAT amounting to Rs.19.

The product would then be sold to retailer at Rs. 145.5 who would then keep his margin of 10% for the product , making the cost of the good as Rs. 160. On, this he would be accountable to pay a VAT @15%, equating to Rs. 24. So, the final cost at which the product would be available to end-users would be Rs. 184.

Value Added Tax and its implications

1. Eliminates hassles involved in levy of sales tax: As, different functions across the value chain are independently held responsible for their share of VAT, the inefficiencies, higher prices due to double taxation as a result of previously imposed sales tax are eliminated.

2. Does away with tax avoidance : The imposition of VAT also helps to do away with the problem of tax avoidance on the part of several intermediaries on grounds of fake tax exemptions.


3. Facilitates tax compliance and renders easy tax computation : As, VAT is imposed for the value added to the product, different functions are held accountable so compliance is rendered easy. Furthermore, computation of VAT is also easy.

Read more about: tax indirect tax vat excise
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