Value added tax
Also called: VAT · Topic: Taxation: Direct and Indirect Taxes, GST and Global Tax Issues · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
Value added tax (VAT) is a tax on the value added at each stage of production and sale. Under the invoice-credit method, a seller charges tax on the full sale price and then subtracts the tax already paid on inputs, as shown on purchase invoices. So each stage pays tax only on the value it adds. This removes the cascading effect, where tax is charged on top of tax. States brought in VAT between 2003 (Haryana) and 2005 (most states). It was later subsumed in GST, which applies the same principle to all goods and services.
Example
A cotton grower sells cotton to a spinner for ₹100 and pays 10% tax, i.e. ₹10. The spinner sells yarn for ₹150, so the tax on the sale is ₹15. The spinner pays ₹15 − ₹10 credit = ₹5, which is 10% of the ₹50 value added.
Don't confuse with
- Old sales tax / excise without credit: each stage paid tax on the full value, including tax already paid earlier, so the tax cascaded.