Value added tax in India or VAT
VAT is introduced in India in April 2005. It replaced the existing sales tax with VAT Act 2005.
Earlier some states such as Gujarat, Tamil Nadu, Rajasthan, Madhya Pradesh, Chhattisgarh, Jharkhand, Uttarakhand, and Uttar Pradesh have opted out of VAT but adopted later.
It is a method of tax collection as well as the name of a state-level tax in India. It is collected at every level of value-added during production and distribution.
This addition of value continues till it reaches the final consumer. From production to sale the value is added at many points.
The vat does not have a cascading effect on the prices of goods and also does not increase inflation because the tax is imposed and collected at different points of the value addition chain.
It kind of tax is highly suitable for the Indian economy.
Objectives of value added tax in India
One of the important objectives is to improve the purchasing capacity and living standard of the poor. Due to Single point tax, indirect tax collection methods lead to Cascading effect and an increase in Price which impacts a lot of poor people.
But VAT does not create Cascading Effect nor increase inflation which is good for the poor.
Another objective is to bring uniformity at the state level tax, as India is a federal nation that enabled both the states and Centre to impose and collect taxes. Yes, there Centre taxes are uniform throughout the country and state taxes such as Sales Taxes, State Excise, Entertainment taxes, etc are non-uniform between the states.
In order to bring uniformity among the state taxes and also Single Market, VAT was imposed.
Also to a large-scale Tax evasion, VAT is applied at several points till it reaches the final consumer, and also the complexity of Taxation was minimized as many indirect taxes of the Centre were merged as Single VAT.
Value-added tax examples are CENVAT, State VAT, and also GST.
Finally, GST was introduced in July 2017 merging 17 of already existing central and states indirect taxes when VAT collection was growing at a rate of 15% per annum.