CONTENTS

Contents ............................................................................1
Name of the paper .............................................................2
Introduction.......................................................................3
Concept of VAT................................................................4
Advantages and disadvantages of VAT: ............................5
GST: Modified Value Added Tax .....................................6
Conclusion ........................................................................7
Contents

1
Name of the paper

2
INTRODUCTION
Introduction: Value Added Tax (VAT) is a tax on value added in the price of a commodity at
each stage of production and distribution. In other words, VAT for a dealer during a tax period is
calculated by deducting tax paid on purchases from tax paid or payable on sales effected by him
during the said period. It is an indirect tax. VAT was first introduced in Germany in 1954.
However, a full-fledged VAT was first initiated in Brazil in Mid-1960. Later on, it was adopted
by many developed and developing countries like Canada, Australia, Germany, Spain, Japan,
United Kingdom, Bangladesh, Pakistan, Sri Lanka and Nepal because of the simplicity and
rationality of the system. Presently, more than 160 countries of the world are under VAT regime.
In India, VAT has not yet been implemented entirely in the area of indirect taxes. However,
almost all States (including West Bengal) have introduced VAT from April 1, 2005. Though
VAT in India is till now a State level VAT, the States have decided that all their VAT
legislations would have common provisions in respect of all important matters. State level
VAT replaces the existing plethora of State laws such as those on sales tax, turnover tax,
purchase tax, entry tax, etc.

Salient features of VAT:

The salient features of VAT are discussed below:

 VAT is an indirect tax.

 It is essentially a form of multi-point sales tax (though in the global scenario it also
includes taxation of services).
 Tax is levied on value added in each stage of production - distribution chain.
 From the output tax payable by a dealer there is a provision of set off of input tax
paid by him.
 With the insertion of provision of input tax credit it eliminates tax cascading.

VAT is usually calculated as follows:

 If output tax rate and input tax rate is the same: In such a case specified rate is applied on
value added by each dealer in each stage of production-distribution chain during
each tax period.
 In any case : In any case i.e. (i) when output and input tax rate differs and (ii) when
output and input tax rate is same, VAT may be calculated by taking the difference
between output tax payable and input tax paid during each tax period.

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AVANTAGES AND DISADVATAGES OF
VAT
Concept of VAT: Value-added tax, popularly known as VAT, belongs to the family of sales
taxes. A general sales tax and turnover tax can be compared with value-added tax. A general
sales tax is a tax on sales transactions but it is applied at only one stage of business activity right
from the manufacturer to the retailer.

A turnover tax is imposed at each sale transaction. Consequently, a turnover tax tends to increase
the final sale value to the consumer cumulatively.

VAT is a tax not on the total value of the good being sold, but only on the value added to it by
the last seller. The seller is liable to pay a tax on the net value added by him in the process of
production, i.e. gross value minus the value of inputs or commodities purchased from other
firms.

The basic difference between VAT and a sales tax is that the tax liability under VAT is split up
into stages. VAT is distinguished from turnover tax where each transaction is taxed on its gross
value, in contrast to tax on net value added as in VAT.

A VAT can be designed to have different forms, exemptions, and rates. The popularity of VAT
with authorities is mainly due to its administrative advantages. It is much easier to assess tax
liability of a firm by using the credit method. There is also a greater scope for cross-checking of
returns submitted by firms hence it helps in checking tax evasion.

A general VAT is supposed to be neutral to the resource allocation forms of production and
business organisation. In contrast, a turnover tax encourages vertical integration of production so
as to avoid the intermediary sales and taxes, and to acquire a competitive advantage over others.

It is argued that VAT avoids cost-cascading effect. A conventional sales tax leads to
compounding of tax liability, while VAT does not. The use of VAT helps a country in
encouraging its exports. In order to get a competitive edge over others, a country may refund the
taxes paid on the export goods.

VAT’s applicability has serious limitations especially for underdeveloped countries. VAT is a
complicated system and needs honest and efficient government machinery to do cross checking
and link up various production activities and the resulting tax liability of each firm.

It is, therefore, necessary that the country adopting should also be sufficiently advanced in its
financial and economic structure and the firms should be in the habit of keeping proper accounts.

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The system is highly uneconomical; especially for the smaller firms it requires them to maintain
elaborate and costly accounts.

The Indirect Taxation Enquiry Committee in its report in 1977 examined the feasibility of VAT
system. It came to the conclusions that under our administrative and other circumstances, we
should be cautious in adopting this tax form.

It recommended its adoption, on an experimental basis, in a phased manner, to a limited number

of manufacturing industries. VAT has been introduced by all States/UTs by now. Uttar Pradesh
is the latest which has introduced VAT on January 1, 2008.

To avoid double taxation and tax cascading and have a simple and progressive taxation system
for goods as well as services, it is proposed to introduce a combined national level goods and
services tax (GST). This is similar in concept to state VAT for goods.

Advantages and disadvantages of VAT:

 The advantages of VAT scheme are enumerated below:

a) It eliminates the cascading burden of taxation by allowing set off of the tax paid on inputs
against the output tax payable.
b) As a result of elimination of cascading burden of tax cost of goods is reduced.
c) It encourages industries, trade, and people because of the rationality of the scheme which
results in lowering the price of commodities.
d) It reduces the possibility of tax evasion as submission of relevant invoices is must to avail
the input tax credit.
e) It helps to widen the tax base and ensures better tax compliance.
f) It results in augmentation of revenue.
g) It helps the tax authority to cross check the declared transactions between dealers as
submission of invoices is a must for claiming input tax credit.
h) VAT is a single tax that replaces many state taxes like sales tax, additional sales tax,
turnover tax, surcharge etc.
i) No declaration form is required to be submitted for concessional rate of tax as the
provisions of set off of input tax makes the input zero-rated.
j) There is a great simplification of assessment procedure. If no specific notice is issued, the
dealer will be deemed to have been self-assessed on the basis of returns submitted by
him.
k) It enhances tax neutrality in the international trade.

 The alleged disadvantages of VAT are enumerated below:

a) The price of certain goods may increase because of levy of high rate of VAT especially
when the benefit of tax credit is not passed on to the ultimate consumer.

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 b) Compliance cost will be high as it is necessary to maintain all relevant invoices to avail
the benefit of input tax credit. Moreover, maintenance of accounts will become
cumbersome especially when the concern deals with various products under different
VAT rates and under exempted category.
c) High compliances cost may induce the dealers to evade tax, which in its return, reduces
the revenue.

GST: Modified Value Added Tax

The Goods and Services Tax (GST), which has replaced the Central and State indirect taxes such
as VAT, Excise duty, and Service tax, was implemented on July 1, 2017. The Goods and Service
Tax (GST) regime will put an end to the cascading effect of tax levied on various products,
beginning from the initial stage of production to reaching the ultimate end consumer.

The Value Added Tax commonly known as VAT is applicable on sale of goods and not
rendering of services. Whereas the Service tax levied on services rendered. However, Goods and
Service Tax have the application on both goods as well as on services, and it will have a uniform
pricing.

The GST structure has been designed with dual taxation regime; there will be only three
components:

 Central GST (CGST)

 State GST (SGST)
 Integrated GST (IGST)

The Credit of SGST cannot be avail against CGST and vice versa but both can be avail against
IGST. The GST framework works on the existing principles but is to some extent different when
it comes to calculating the sales made outside the state. The sales made outside the states are
managed by an integrated Goods and Service Tax model. This GST framework makes sure that
the correct apportionment of CGST and SGST, and the accurate flow of money between the
central and state exchequers.

Designed to be a single, comprehensive, destination-based taxation concept that will unify the
entire country in terms of how the tax is collected, GST has revolutionized the Indian taxation
system. The Goods and Services Tax (GST) intends to further eliminate the concept of “tax on
tax”.

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CONCLUSION
Conclusion: By implementing GST on goods and services, the Indian government is looking at
improving the economy by eliminating the cascading system of tax and streamlining the business
process in India. GST is much more than just a repackaged VAT, as the way GST is structured
solves most of the challenges encountered by the Indian businesses with the existing VAT
regime today.

From the global tax viewpoint, there is a very thin line between VAT and GST, to a point both of
these regimes are conceptually alike. But in India, the two tax regimes differ completely from
each other due to the ways they are implemented.

Though GST is set to replace the existing VAT system in the country, GST was a much-required
step in preparing the nation for a robust and data-driven tax system which is simple and promises
transparency at every level.