What is VAT? Why VAT?

Introduction To VAT

A value-added tax (VAT) is a type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale. VAT is most often used in the European Union. The amount of VAT that the user pays is the cost of the product, less any of the costs of materials used in the product that have already been taxed.

For example, when a television is built by a company in Europe, the manufacturer is charged VAT on all of the supplies it purchases to produce the television. Once the television reaches the shelf, the consumer who purchases it must pay the applicable VAT.

Why VAT? i.e Significance of VAT.

  • Easy to Administer & Transparent and Less Litigation,
  • Abolition of Statutory Forms,
  • Deterrent against Tax Avoidance,
  • No Cascading(tax on tax) Effect,
  • Minimum Exemptions,
    6.Removal of Anomaly of First Point Taxation.
  • As compared to other taxes, there is a less chance of tax evasion. VAT minimizes tax evasion due to its catch-up effect.
  • VAT is simple to administer as compared to other indirect tax.
  • VAT is transparent and has minimum burden to consumers as it is collected in small fragments at various stages of production and distribution.
  • VAT is based on value added not on total price. So, price does not increases as a result of VAT.
  • There is mass participation of taxpayers.
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