Value added tax (VAT) is known as the most recent and effective innovation in the taxation field. It is levied on the value added of the goods and services. Theoretically, the tax is broad based as it covers the value added to each commodity by a firm during all stages of production and distribution.
Value added tax (VAT) is considered as one form of sales taxation. VAT is a multiple stage tax which has grown as a hybrid of turnover tax and retail level sales tax. Value added tax (VAT), however, differs from turnover tax as the turn over tax is imposed on the total value at each while VAT is imposed only on value added at that stage. VAT varies from sales tax in the sense that VAT is imposed at each stage of production and distribution whereas retail sales tax is imposed only at one stage, the final stage. VAT helps to minimize many problems related with tax evasion. Therefore, value added tax (VAT) is more productive and less destructive than retail sales tax.
The main features of value added tax (VAT) are stated as follows:
- VAT is a form of indirect taxation.
- VAT is a broad-based tax as it covers the value added to each commodity by a firm during all stages of production and distribution.
- VAT is based on value added principle. Value added can be obtained either by adding payments to factors of production (i.e. , wages+rent+interest+profit) or deducting cost of inputs from sales revenue.
- VAT is a substitute for sales tax, hotel tax. contract tax and entertainment tax.
- VAT is based on self-assessment system and provides the facility of tax credit and tax refund,
- VAT avoids cascading effect existed in sales tax and contains catch-up effect.
In a nutshell, VAT is an indirect tax that is imposed on different goods and services on the basis of value added amount in different stages of production and distribution. It is not a genuinely new form of taxation but merely a sales tax administered in different form. Although it is borne by the final consumer, VAT is collected at each stage of production and distribution chain.
Merits of Value Added Tax (VAT)
- 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.
Demerits of Value Added Tax (VAT)
- VAT is costly to implement as it is based on full billing system.
- VAT is relatively complex to understand. The calculation of value added in every stage is not an easy task.
- To implement the VAT successfully, customers, need to be conscious, otherwise tax evasion will be widespread.