Everything You Need to Know About Value Added Tax

Taxes are a crucial part of the economic structure of any country. These are a great source of revenue for the Government, which the higher authority uses to fund growth and development across the country.

There are other taxes that are imposed at different stages while selling goods and services. One such tax is Value Added Tax or VAT.

This piece focuses on the Value Added Tax, its usefulness, working procedure, and many other related things. Stay tuned!

Value Added Tax is a variant of indirect tax that is levied on goods and services and introduced into the Indian Taxation System on 1st April 2005.

VAT is a consumption tax that the Government imposes on a commodity for value added at every stage of the production and distribution cycle, i.e. from raw materials to final end result, meaning from production to sale.

Hence, Value Added Tax is an indirect tax that the consumers or end-users pay to the Government through producers against the goods and services they have purchased or availed.

There are two types of taxes, namely direct tax and indirect tax. Income tax is a direct tax that is imposed on the income of individuals or businesses who have to pay to the Central Government directly for the income earned in a financial year. On the other hand, there are other taxes, i.e. indirect taxes such as VAT, Goods and Services Tax (GST), that individuals pay indirectly to the Government. Both local and imported goods fall under the VAT system.

From the above discussion, individuals can clearly understand the meaning of Value Added Tax. Now let’s proceed to other sections to learn about the usefulness and other related things.

Reasons that motivated the VAT introduction in the Indian Taxation system were the presence of the double taxation system and the need to reduce the cascading effect of the contemporary taxation system (before 2005).

Cascading effect of a tax refers to a situation when taxation on a product is present at a multi-stage. Here, the taxation occurs on a value that includes tax paid by a buyer. Therefore, the end-user has to pay tax ‘on already paid tax’. VAT is important for various reasons. These are as follows,

• To modernise, streamline Indian taxation system
• To make the Indian taxation system transparent, uniform
• To reduce tax evasion

Individuals can understand the importance of VAT well if they know the working procedure of Value Added Tax.

The Government levies Value Added Tax on sale of goods and services, and producers pay it to the Government. However, the actual tax is collected from consumers who buy these goods and services.

Here, the authority decides the amount of value addition at each stage and imposes the tax on the same. As end-consumers pay the tax at the final stage while purchasing, previous buyers at earlier stages get reimbursement for the amount they paid.

When VAT came into the Indian Taxation system at the State level, it replaced the concept of Sales tax. States function with their own set of VAT laws. As a result, there are different VAT rates even for similar goods and services for different states as per the applicable law. 

As the basic knowledge regarding VAT in India is clear to individuals, let’s learn about the process of registering for it.

Here is a step-by-step guide on the registration process for VAT online,

Step 1 – Visit the official website of VAT in respective State.

Step 2 – Click on the registration tab. Enter required details in the relevant boxes. 

Step 3 – Upload essential documents. 

Step 4 – After verifying application form and documents, individuals will receive a permanent 11 digit unique VAT number which they can use for works related to VAT and its filing.   

Disclaimer: The above-mentioned steps are generic. Different States may adopt slightly different approaches to the VAT registration process.  

Note: Individuals who are registering on behalf of a corporation will be given a temporary VAT number. 

Enterprises (that sell goods and services) with a turnover of more than ₹5 lakh annually must register for VAT in their respective States.

Individuals must gather the following documents to complete the VAT registration process.

• PAN card 
• Proof of identity of promoters
• Address proof of business
• Additional security deposit or surety

Before applying for VAT registration, business persons must know the products or items that come under the VAT system. Read along!

Things where Value Added Tax is applicable are as follows-

• Items from unorganised sector, including khadi, salt
• Expensive products such as gold, silver, precious stones
• Items used on a daily basis such as cooking oil, tea, medicines
• Luxury items such as cigarettes and alcohol

Value Added Tax offers several benefits to enterprises as well as contributes to the growth of the Indian economy. However, there are some cons to such a taxation system. Read the following section to learn about this in detail.

   Below is a list of advantages of VAT,

• VAT closes tax loopholes.
• VAT promotes an improved accounting system.
• Due to uniform VAT rates, taxpayers need not visit the tax department for completing 100% self-assessment.
• As dealers conduct a self-assessment process, the Government can focus more on collection than administrative process.
• Consumers can pay lower prices as other taxes are no longer applicable on items.

• Claiming Input Tax Credit on service under VAT is not possible.
• VAT has not been able to abolish the cascading effect of tax completely.
• Tax evasion can still occur with fake invoices.
• Experts consider that VAT is regressive in nature as it is levied on expenses. Individuals with low income can get affected more than rich people. 

As stated earlier, VAT was introduced to abolish the cascading effect of tax. However, as time passed, the need of introducing a further uniform taxation system arose. Here, the GST (Goods and Services Tax) concept rightly fits in. Read on to learn about it in detail!

GST came into effect on 1st July 2007 and works following the ideology of ‘One nation, one tax’.

Under the VAT system, individuals have to pay tax on a product at every point of production and distribution cycle before it reaches the end-user. The end consumer finally pays this tax to the Government.

Under the GST system, the tax imposition occurs at every point of sale. In case of inter-state sales, the Government levies Integrated GST. On the other hand, in the case of intra-state supplies, CGST (Central GST) and SGST (State GST) are charged.

GST as a whole replaced the VAT system and subsumed all the indirect taxes. Under GST, both Central and State Governments get the power to levy taxes on goods and services supply and consumption.  

Now that individuals know what is Value Added Tax and important aspects related to it, they can easily calculate VAT and register for it online.