What is VAT?
VAT is a tax, which is charged on the ‘increase in value’ of goods and services at each stage of production and circulation. It is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and it’s introduction has not resulted in either increased prices to final consumers or reduced in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost thereof -that is , the difference between the output and the input.
Features of VAT:-
1. Tax levied and collected at every point of scale.
2. Tax collected at every point of scale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the time of purchase of goods will be deducted from the amount of tax paid at the next sale.
3. Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition)
4. It is transparent and easier.
5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale.
6. The returns and the challans are filed together in a simple format after self-assessment done by the dealer himself.
7. At the most a few forms are required.
8. Tax on goods and services both.
9. Self-assessments by dealers.
10. Penalties will be stricter.
The Objectives of VAT
The following are the Objectives of VAT
- To lower the cost of production and investment in the economy by allowing business to claim credit for the tax charged on their business inputs, including raw materials, parts, machinery and equipment.
- To increase the competitiveness of Indian industry by removing the cascading effect of the erstwhile sales tax system.
- To remove the multiple tax which were prevalent in the Indian tax system.
- To promote the self-regulated mechanism VAT provides the benefit of self-assessment in every registered dealer irrespective of the turnover.
- Yo encourage and result in a better-administered system that defers tax evasion.
- To bring revenue neutrality in the long run under VAT regime.
- To ensure that all barriers to inter-state trade and commerce should be removed and a unified national market is created and also ensure that there is simplicity and transparency in the system.
- To keep proper records of sales and purchases made by tax payers.
- To avoid the problem of under valuing, at all stages of production and distribution are subject to a tax.
- To encourage the tax payers by the input tax credit method ensuring better tax compliance.
- To prevent exemption and impose tax at each stage of value-addition to products under the VAT system.
- To help in fiscal consolidation for the country in bringing a steady source of revenue reducing the debt burden.
- To generate a trail of invoices that supports effective audit and enforcement strategies.
The Advantages and Disadvantages of VAT?
VAT being a broad tax levied at multiple stages is generally perceived as an explicit replacement of State sales tax for raising additional revenue for the Government.
1. Easy to Administer & Transparent:-
This system of charging tax is easy to administer because of its simplicity. It also reduces the cost of compliance by the dealers and is transparent, as tax is to be charged in every bill and there will be no local statutory forms.
2. Less Litigation:-
There will be no litigation with respect to allow ability of items, as under VAT no items will be specified in the registration certificate of the dealer. The dealer will be allowed to purchase any of the items of his choice in which he intends to deal.
3. Tax Credit on purchase of Capital Goods:-
The dealer will be allowed to purchase capital goods for manufacturing after paying sale tax and will be entitled to get set off sales tax paid on such purchases from his sales tax liability, which will arise on the sales made by him.
4. Abolition of Statutory Forms:-
There are no forms under VAT. Therefore, all problems related to forms automatically get resolved.
5. Self Assessment:-
Dealers are not required to appear before the Assessing Authority for their yearly assessment, as under VAT there is provision for self assessment.
6. Deterrent against Tax Avoidance:-
It will act as deterrent against tax avoidance. Under the present system, tax is charged either on first point basis or at last point basis hence the incentive to evade tax is high.
7. No Cascading Effect:-
It does not have cascading (tax on tax) effect due to system of deduction or credit mechanism, sick VAT does away with cascading, it avoids distorting business decisions.
8. Effective Audit & Enforcement Strategies:-
The input credit method by generating a trail of invoices is argued to be system that encourages better compliance since the purchaser seeks an invoice to get input tax credit.
9. Minimum Exemption:-
The system will be more effective because of minimum exemptions.
10. Removal of Anomaly of First Point Taxation:-
VAT eliminates the limitations of single point tax either at first point or last point. In the case of last point goods, the temptation to evade tax is high.
Limitations of VAT:-
1. Detailed Records:-
Like any other system VAT is also not free from all evils. Many small dealers maintain only primitive accounts and it is very difficult for them to keep proper and detailed records required for VAT purposes.
2. Cause Inflation:-
It is also argued that VAT causes inflation. It’s impact will depend on various factors such as inventory holding period, demand supply position of that particular product, number of intermediaries etc.
3. Refund of tax:-
Credit of tax paid on inputs/capital goods is available to be utilized against tax liability which will be calculated on the sale of final product. VAT credit can not be available of no tax is payable on final product being exempt or taxable at lower rate.
4. Functional Problems:-
The functional problem of VAT is that input tax credit is allowed on the basis of the invoices issued by the dealer. In respect of invoices where tax at the earlier stage is charged and collected, but not remitted to the State by the concerned dealer, the dealer who has paid the tax and who is entitle to take credit for the tax paid should not be made to suffer.
5. Increase in Investment:-
Dealer will be making purchase after paying tax therefore investment in stock will go up the extent of tax paid. Under old system the dealer was making purchases against statutory forms, hence was not liable to pay tax on it’s purchases.
6. Not Credit for Tax paid on Inter-state Purchase:-
The biggest problem of introduction of VAT is the non-availability of credit for tax paid on interstate purchases in initial years. It will also result in some cascading effect, which goes against the basic spirit of VAT.
7. Audit under VAT:-
Most of the states introduced VAT on 1,4,2005 and they have incorporated audit provisions in the Legislation itself. Audit under VAT is important for better and effective implementation of the VAT system.