Short Essay on Value Added Tax – In the last 10 years, tax rates have been revised and tax legislations have been modified to bring about fundamental rationalization in the tax regime in India and to make the tax system more transparent and enhance tax revenues.
One such reform constitutes the introduction of the Value Added Tax system from April 1, 2005 to form a part of the fiscal consolidation strategy of the country. Of the 28 Indian states, eight [did not introduce VAT. Haryana had already adopted it on April 1, 2004. It is chargeable at the rate of 12.5%.
The principle of granting tax credit (set off) underlying VAT ensures that when raw material passes through various manufacturing stages and the manufactured product I pass through various distribution stages tax is levied only on value added at each stage and not the gross sales price. This ensures the same commodity does not get taxed repeatedly.
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Thus tax burden is passed on once the goods are sold and the process continues till the goods are consumed by the end user. All tax paid on inputs or purchase of goods by trader and purchase of raw materials by manufacturer (input tax) shall be allowed to set-off against the tax collected on output or sales (output tax).
VAT Returns are filed every month or every quarter depending on the amount of VAT paid. If the input tax is greater than the output tax the difference can be carried over as a credit to the next VAT Return. VAT thus helps avoid the multiplicity of taxes and cascading tax burden. This will improve tax compliance, augment revenue growth and lower the fiscal deficit burden for the government.
Sales tax has .always been one of the major contributors to both the State and the Central exchequers. However this system of value added tax is considered to phase out the central sales tax. The present provision of CST and VAT cannot co-exist.
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Under the Exit Act, tax is collected at one stage of purchase or sale of goods. However under the Vat system, tax burden is shared by all the dealers in the supply chain. Also under VAT all exemptions as granted under the CST Act are dispensed with. A VAT is like a sales tax in that ultimately only the end consumer is taxed.
The biggest barrier before the government is not to bring into force a uniform sales tax structure in the Indian market but eliminate a complex tax structure which allows fraudulent practices like tax avoidance or evasion.
VAT system also makes provisions and prescribes simplified procedures as regards filing of returns, payment of tax, furnishing declaration and assessment, late payment or non-payment of tax, imposition of penalty in case of non-compliance. It assists in harmonizing complex mix of State tax rates across all States.