What are the Features of Value Added Tax (VAT)

While Goods and Services Tax (GST) has now mostly replaced VAT, the indirect tax was known to offer a host of benefits too. Read this post to understand some of the most important features and advantages of VAT.

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. The VAT was levied at every stage of a product every time a certain value was added to the product.

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.

Let us have a look at some of the essential features and advantages of VAT:

Greater Transparency

VAT can be defined as a multi-stage production or consumption tax. It applies to all the different stages at which the value of the product is increased throughout the manufacturing and distribution process. As a result, tax evasion becomes very difficult. It helps in promoting increased taxation transparency when implemented successfully.

Input Tax Credit

The input tax credit is one of the most prominent features of VAT. If the seller of a particular product has already paid taxes, the purchaser of the same product will have this seller-paid tax available as an input tax credit. This credit can be deducted from the purchaser's tax liability. This input tax credit is available for inter as well as intrastate transactions. This means that even if inputs are purchased from a particular state, the tax credit will be available while selling those products outside the state.

Multiple VAT Rates

As VAT is a state tax, there are many different types of VAT applicable to different kinds of goods. They can be broadly divided into four categories: Zero VAT Rate, 1% VAT Rate, 4%-5% VAT Rate, and General VAT Rate.

Zero VAT rate is mostly applicable to products that are obtained naturally and sold in their raw form. 1% rate is generally on products such as jewellery made from gold and silver. Under the 4%-5% category, there are daily-use products such as medicines, tea, coffee, etc. Goods that are not categorised under the categories are added to the General VAT category, and the state government is free to fix their VAT on such goods.

In some states, this rate can be as high as 15%. Products such as tobacco, cigarettes, and liquor are generally in this category.

Exports and Audits

If you are exporting products out of India, you can get a VAT refund. With this feature, all the taxes you pay within your state will be refunded to you in full. Even for stocks that are transferred to another state, all the input tax paid above 4% is eligible for input tax credit. For enhanced transparency and prevention of tax evasion, the tax authorities also audit a fixed number of dealers every year. The audit is conducted in a way that every dealer is assessed once every five years. Dealers who are found to be not paying appropriate taxes are audited every year.

Current State 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.

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