Value-added taxation

in India
The value added tax was introduced as an
indirect tax into the Indian taxation system
from 1 April 2005. The existing
General Sales Tax Laws were replaced with
new Value Added Tax Acts and the VAT
Rules for proper
administration. Haryana became the first
State in the country that had adopted the
taxation on 1 April 2003. Few
states Gujarat, Rajasthan,Madhya
Pradesh, Chhattisgarh, Jharkhand, Uttarak
hand and Uttar Pradesh have opted to stay
out of VAT taxation system during the initial
introduction of VAT and have then adopted
VAT at a later date. As of 2 June 2014, VAT
has been implemented in all the states &
union territories of India

Why VAT is necessary

India, particularly the trading community, has
believed in accepting and adopting loopholes in any
system administered by the state or the Centre.
If a well-administered system comes in, it will close
avenues for traders and businessmen to evade
paying taxes. They will also be compelled to keep
proper records of their sales and purchases.
Many sections hold the view that the trading
community has been amongst the biggest offenders
when it comes to evading taxes.
Under the VAT system, no exemptions will be given
and a tax will be levied at each stage of manufacture
of a product. At each stage of value-addition, the tax
levied on the inputs can be claimed back from the
tax authorities.
At a macro level, there are two issues, which make
the introduction of VAT critical for India.
Industry watchers say that the VAT system, if
enforced properly, forms part of the fiscal
consolidation strategy for the country. It could, in
fact, help address the fiscal deficit problem and the
revenues estimated to be collected could actually

mean lowering of the fiscal deficit burden for the

government.
The International Monetary Fund, in its semi-annual
World Economic Outlook released on April 9,
expressed its concern over India's large fiscal deficit
at 10 per cent of the GDP.
Further any globally accepted tax administrative
system, will only help India integrate better in the
World Trade Organisation regime.

No extra paperwork for retailers

There are, however, sections of the VAT system
which ensure lesser paperwork for the retail
community. There will be no local statutory forms
under VAT. The existing sales tax system requires
dealers to maintain an account of sales and
purchases, and the VAT system also requires
maintenance of only such accounts.
Further, the Central Sales Tax Act would be
amended and there would be a single-page return
form common for local and central Acts. The return
would be required to be filed quarterly, as is being
done currently.

FEATURES OF VAT:
1. Tax levied and collected at every point of
sale.
2. Tax collected at every point of sale and the
tax already paid by the dealer at the time of
purchase of goods will be deducted from the
amount of tax paid at the next sale.
3. Dealers reselling taxpaid 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
amountof tax payable on sale.

Sales tax
A sales tax is a tax paid to a governing body for the
sales of certain goods and services. Usually laws
allow (or require) the seller to collect funds for the
tax from the consumer at the point of purchase.

Laws may allow sellers to itemize the tax separately

from the price of the goods or services, or require it
to be included in the price (tax-inclusive). The tax
amount is usually calculated by applying
a percentage rate to the taxable price of a sale.
When a tax on goods or services is paid to a
governing body directly by a consumer, it is usually
called a use tax.
Often laws provide for the exemption of certain
goods or services from sales and use tax.
Difference between vat and sales tax
Often referred to as the "goods and service tax", the
Value Added Tax is distinctly different from the sales
tax levied on exchanges. The Value Added Tax is a
form of indirect tax that is imposed at different
stages of production on goods and services. VAT is
levied on the import goods as well and the same rate
is maintained as that of the local produce. Most of
the European and non-European countries have
adopted this system of taxation. The transparent and

neutral nature of taxation has prompted VAT to

emerge as one of the robust revenue raisers in these
countries.
Sales tax, as compared to VAT is the percentage of
revenue imposed on the retail sale of goods. Unlike
VAT, sales tax is levied on the total value of goods
and services purchased.
The value added tax system, unlike the conventional
sales tax system, efficiently addresses the problems
of cascading and input tax credit that causes an
automatic hike in the consumer price level. The
incidence of cascading is avoided in VAT as the tax is
imposed on the value addition at every stage of
production. The final consumers are the ultimate
bearers of the burden. This indirect yet coherent
form of taxation involves transparency and is
therefore easily comprehensible. Understanding the
differences and details of these two different
approach can be challenging. You may require help
with taxes from accountants or tax professionals.

The economic effect of VAT falls on the final prices

of the goods and services while sales tax relies on the
final sale to the customers. The value added tax
system requires an effective accounting. To deal with
this disadvantage, the same tax is charged to each
member involved in the production of the goods and
services. The implementation of the tax remains
indifferent to the position of the member in the
production cycle or its position with respect to the
customers.

Difference Between VAT and Sales Tax

VAT vs Sales Tax
VAT and sales tax are two different forms of consumption taxes. However, they are different
in the methods in which they are levied on consumers. VAT VAT stands for Value Added
Tax. It is a form of indirect tax which is imposed on products or services at different stages
of manufacturing. The tax is paid to the government directly by the producer, and the cost is
passed on to the consumer. It is the consumer who has to finally pay for VAT. The value
added to any product may be calculated as the sales price minus the cost of supply and the
other taxable items. The value added tax is levied on imported goods as well as indigenous
products.
The VAT system effectively covers the issues regarding declining and input tax credits which
cause an increase in the price at the consumer level. The scope of skipping the tax payment
is the least possibility in this system as the tax is imposed at every level of the production of
goods. This system of tax payment involves much needed transparency and is easy to
comprehend. VAT is a form of consumption tax. One of the disadvantages of this system is
that it requires comprehensive handling of accounts. This type of tax structure is being used
all over the world but still not used in the United States. The VAT system of indirect taxes
may pose some limitations in reference to developing countries.

Sales tax Sales tax is levied at the time of the purchase of the products or services. The tax
is easily calculated, and the consumer knows very well how much he is going to pay for the
tax. The amount of sales tax may be calculated as a percentage of the taxable price of the
sale. The tax is collected from the consumer by the seller at the time of purchase. The seller
at a later stage transfers the tax to the responsible government agency. Sales tax is easy to
calculate as they are charged on the final amount. Sales taxes have stringent rules to follow.
Ideally, these taxes would be difficult to avoid, have a high compliance rate, and are easy to
collect. But the situation is actually different. Sales tax has a very high level of avoidance.
Sales tax is also a form of consumption tax.