Assignment on the topic-

Article on “VAT”

SUBMITTED BY:

Sachi Srivastava,

BA.LL.B (Hons.) 4th YEAR

SUBMITTED TO:

FACULTY ASSOCIATE, STUTI TIWARI,

FACULTY- TAXATION LAW

 ARTCLE ON “VAT”

Value Added Tax (VAT) is an indirect tax charged on the value added to goods and services at
every stage of production and distribution. It is a consumption tax that is levied on the final
consumer of goods and services. VAT is a crucial source of revenue for many governments,
including the UK, which applies VAT at a standard rate of 20%.

How does VAT work?

Businesses registered for VAT charge VAT on their sales and may recover VAT paid on
purchases. The difference between the VAT charged and VAT paid is remitted to the tax
authorities. VAT is a self-assessed tax, meaning that businesses are responsible for calculating
and remitting the tax due.

For example, if a shoe manufacturer purchases raw material for £100, and incurs VAT of £20,
the total cost of the raw material including VAT is £120. The manufacturer then sells the
shoes to a retailer for £150, charging VAT of £30. The retailer then sells the shoes to a final
consumer for £200, charging VAT of £40. The VAT payable by the manufacturer is £10 (£30-
£20), the VAT payable by the retailer is £10 (£40-£30) and the total VAT payable by the final
consumer is £40 (£200*20%).

Types of VAT

1. Standard rate VAT: This is the default VAT rate applied to most goods and services. It is
currently set at 20% in the UK

2. Reduced VAT rate: This is a lower rate of VAT applied to certain goods and services
deemed to be essential. In the UK, the reduced rate is currently set at 5% for goods such as
domestic fuel and power, children’s car seats and sanitary products.

3. Zero-rated VAT: This is a VAT rate of 0% applied to certain goods and services determined
to be essential, including most food items and books. Zero-rated goods and services are still
VAT-able, and businesses can recover VAT paid on purchases related to zero-rated supplies.
4. Exempt VAT: This is a VAT rate applied to goods and services that are not subject to VAT.
Examples include healthcare, education, and financial services. Businesses that supply
exempt goods and services cannot recover VAT paid on purchases related to exempt supplies.

Why is VAT important?

VAT is an essential source of revenue for governments, providing funds for public services
such as healthcare, education, and infrastructure. VAT is also an effective tool for tax
compliance, as businesses are incentivised to keep accurate records of their transactions and
remit the VAT due to avoid penalties and fines.

Moreover, VAT is a progressive tax, meaning that it is levied on consumption and not income.
This makes it a more equitable tax compared to income tax, which can be regressive, as it
taxes low-income individuals at the same rate as high-income earners. VAT reduces wealth
inequality by redistributing spending power from the wealthy to the less affluent.

Challenges with VAT

While VAT is an essential source of revenue, it can pose challenges for businesses and
consumers. VAT creates a tax cascade, as goods and services can attract VAT at multiple
points in the supply chain, increasing the cost of production and distribution. The VAT
charged at each stage adds to the final cost of the product or service, leading to a high tax
burden on consumers.

Moreover, the VAT system is complex, and businesses may face challenges in navigating the
regulations and compliance requirements. Businesses may also face administrative burdens in
keeping accurate records and remitting VAT to the tax authorities. This can result in
additional costs to businesses, particularly small and medium-sized enterprises (SMEs).

VAT fraud is also a concern, as some businesses may engage in fraudulent practices such as
false VAT registrations, issuing fake invoices and submitting inaccurate VAT returns. VAT
evasion reduces government revenue, distorts competition and undermines the integrity of the
tax system.
Conclusion

VAT is an essential source of revenue for governments, providing funds for social and
economic development. VAT plays a vital role in promoting tax compliance and equity, as it
is a consumption-based tax that redistributes spending power. However, VAT can pose
challenges for businesses and consumers, particularly regarding the tax cascade and
administrative burdens. Addressing these challenges will require effective tax administration,
simplification of the tax system, and tackling VAT fraud and evasion.