Adding value to your tax
N. RAVI KUMAR
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What is the basic concept of the new taxation system? And ultimately is it advantageous to the consumer?
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Around 130 countries across the world have adopted it over the last few decades.
PHOTO: RAJU V.
NEW RULES FOR SHOPPING: How much more should I pay?
Value added tax, exemption, input tax credit ... confused with these new taxation terms?
Well, it's not surprising as even for adults the concept of Value-Added Tax (VAT) and associated terms seem difficult to comprehend. But this would be easy, if one were to understand the basic concept of the new taxation system.
Value Added Tax (VAT) is described as one of the most progressive taxation systems. Around 130 countries across the world have adopted it over the last few decades. The high point of VAT is its potential to reduce the prices.
In India, it has been under consideration for sometime and VAT was launched in many states in April 2005. Tamil Nadu joined them on January 1 this year. Now only Uttar Pradesh and Puducherry remain out of the system. These two states continue to follow the general sales tax (GST) system, which has been replaced by VAT elsewhere.
What is it?
But what is VAT? It is a multi-point levy under which manufacturers pay tax on the raw materials and make a product (add-value) using them. The value-addition ranges from manufacturing, processing and packing.
The tax on the finished product is arrived at after deducting the tax paid on the raw material. This is known as Input Tax Credit. It is, however, applicable only on purchases made within the respective State.
Apart from the GST, the introduction of VAT in some states like Tamil Nadu means the abolition of the resale tax, surcharge and additional sales tax. Supporters of VAT say the tax under GST was relatively higher.
Further down the value chain, traders selling the finished product pay tax under VAT after deducting the tax paid on the price of the goods purchased by them.
There are only four tax categories under VAT. It includes the exempted (nil tax) products, and those that attract one, four and 12.5 per cent tax. There are, however, some products, including petrol and diesel, on which special and higher rates apply.
For the consumer
Value Added Tax is a consumption tax, which is levied at each stage of production based on the value added to the product at that stage. It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer.
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