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Value Added Tax (VAT)

Value Added Tax (VAT)


  • Taxes form an integral part of a country’s economic structure.
  • These are important to run a country smoothly and without many road-blocks.
  • Different taxes are imposed at various stages while selling different types of goods and services.
  • One such type of widely consumed tax structure that has a global reach is Value Added Tax or VAT system.

History of VAT

  • The basic concept of VAT was originally proposed by Dr. Wilhelm von Siemens who was an industrialist of German origin.
  • This proposal was laid down in the year 1918 but was adopted years later on 10th April 1954 by Maurice Laure who was the Joint Director of the France Tax Authority, the Direction Generale des Impots.

What is Value Added Tax (VAT)?

  • A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale.
  • The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.

VAT Tax Calculation

  • VAT, that falls under indirect tax, is payable to the Government only through the manufacturers of various goods and services. As it is not a type of direct tax, a proper and precise calculation of VAT for a transparent tax payment procedure becomes important.
  • There is a simple formula to calculate VAT by subtracting the input tax from the output tax.
  • Input tax is payable by the seller of goods and services for purchasing raw materials required for manufacturing.
  • Output tax is received by the seller at the time of sale of goods and services. So we can easily conclude that: VAT = OUTPUT TAX – INPUT TAX

Benefits of VAT

  • As VAT is levied at all levels of purchase and sale of goods and services, any form of tax evasion becomes tough, thus, helping in promoting transparency.
  • VAT when applied uniformly forms a large part of the revenue collection.
  • It strengthens the tax policy and solves the fiscal policy deficit.
  • A total of 160 countries out of 193 follow the VAT system for taxation.
  • VAT is a globally accepted tax system that encourages a good relation with other countries for foreign trade.
  • VAT keeps a thorough check on all the transactions that take place, thus the tax payment process becomes more efficient as well as easy.

Value Added Tax vs Income Tax

  • The VAT is similar to the income tax as it is based on the value of a product or service at each stage of production. However, there are some important differences.
  • A VAT is usually collected by the end retailer.
  • A VAT is usually a flat tax
  • For VAT purposes, an importer is assumed to have contributed 100% of the value of a product imported from outside of the VAT zone. The importer incurs VAT on the entire value of the product, and this cannot be refunded, even if the foreign manufacturer paid other forms of income tax.


  • VAT is an indirect tax levied at different stages of trade by the government.
  • The primary purpose of VAT is to ensure that there is no duplication or repetition of tax, thereby ensuring that no single entity is overburdened by it.
  • VAT is typically collected by the state government in which the final transaction takes place, putting the onus on respective state commercial tax departments to ensure that it is collected.
  • CENVAT is an adaptation of VAT, which came into force in the country in 1986 in the form of MODVAT (Modified Value Added Tax).
  • This MODVAT was converted into CENVAT in the early 2000’s with no major changes in its implementation or execution.
  • Today, MODVAT isn’t used as a term and CENVAT is the tax charged by the Central government on products or services at different levels of manufacture.


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