How VAT works?

Tax is paid at every level where there is value addition to a product, but there is a set-off for tax paid at earlier levels of production. Thus the cascading effect of taxation is avoided. At present, raw material supplier pays a two to four percent tax before he sells it to the manufacturer. The manufacturer then adds value to it by making it a product.

In the process, he pays sales tax on almost all the raw material he uses to manufacture the product and adds his own profit to it. The product then goes to the wholesaler who does not pay sales tax on it but adds his margin and passes it on to the retailer. The retailer too does not pay any sales tax but adds his own margin and sells the product to the consumer. The consumer pays sales tax for every level of input plus the margins of the manu­facturer, whole-seller and the retailer.

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Under VAT, the manufacturer will pay sales tax on the raw material but this will be offset when he sells his product to the whole seller. Only tax on his value addition will be imposed. The wholesaler too pays tax on his value addition but the tax paid by the manufacturer is offset. Similarly, the retailer pays tax on his value addition but the tax paid by the wholesaler is set off.

The consumer finally pays the VAT, which will have four slabs of zero (for essential commodities), four percent on select products of daily use, 12.5 percent for most commodi­ties and 20 percent on items of conspicuous consumption (alcohol, cigarettes etc). There is a separate slab of one percent VAT on items such as gold and silver.

Impact of VAT:

i. On consumers. Consumers will be paying higher price as prices of few products may rise slightly (2-5%) in northern states. Even drugs may cost more nationwide.

ii. On Traders. Traders will now have to be heaviest as they will come in the tax net by having to declare their sales correctly. Moreover, there is less scope of tax evasion. iii. On Manufacturers. Implementation of VAT would be to the manufacturers mean no tax on raw material purchase and Inter-state movement of products and inputs becoming movement. iv.

On Government. Government revenue will be boosted up as there will be less tax evasion. Moreover, uniform rates will curb interstate rivalries for tax sops. Under VAT there is no tax on input: VAT is one of country’s most ambitious tax reform measures in 50 years and its introduction would mean a great help to the Fiscal Policy. It is expected to increase revenue buoy­ancy, as the coverage expands to value addition at all stages of production and distribution chain. Traders come in Tax net: At the conference of State Finance Ministers held in January 23, 2002 a final decision was taken that all states and Union Territories would introduce VAT from 1 April, 2003. However, the deadline was deferred and launching of VAT was post­poned and it is still a distant dream.

However, the Manmohan Singh government had decided to introduce VAT from 2005.