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Home » Taxation » Value Added Tax (VAT) » The Impact of VAT in India

The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation. The existing sales tax structure allows for double taxation thereby cascading the tax burden. For example, before a commodity is produced, inputs are first taxed, the produced commodity is then taxed and finally at the time of sale, the entire commodity is taxed once again. By taxing the commodity multiple times, it has in effect increased the cost of the goods and therefore the price the end consumer will pay for it.

The transaction chain under VAT assuming that a profit of Rs 10 is retained during each sale.

Tax implication under Value Added Tax Act

Seller BuyerSelling Price (Excluding Tax)Tax RateTnvoice value(Incl Tax)Tax PayableTax Credit Net Tax Outflow
A B1004% CST 104 4 0 4.00
B C11412.54% VAT 128.25 14.25 0* 14.25
C D12412.5% VAT 139.50 15.50 14.25 1.25
D Consumer 13412.5% VAT 150.75 16.75 15.50 1.25
TotalVAT CST16.75 4.00

*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same though it could to be reduced to 2% when VAT is introduced and eventually phased out.

VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases (inputs) and capital goods. What this means is that dealers can actually deduct the amount of tax paid by him for purchase from the tax collected on sales, thereby paying just the balance amount to the Government.



taxation, direct taxation, indirect taxation, tax planing, tax, value added tax, vat, vat in india, vat act

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