What is the full form of VAT?

What is VAT?

The full form of VAT is Value Added Tax. The tax is levied on goods and services that are related to each stage of the supply chain. Here the value is added from the point the production of a product is started to the point where the product is sold. VAT has to be paid on the basis of the cost of the product minus the cost of materials used to manufacture the product.

VAT is paid on the basis of consumption of a product and not the income. VAT is being used in 160 countries and charged on the basis of every purchase. It is simpler than the sales tax.

Types of VAT Rates

VAT rates are of four types and we will discuss them here.

Nil VAT Rate

Items that are sold by the unorganized sector and are of a very basic nature are out of VAT payment. Salt khadi, etc. come under this VAT rate type.

1% VAT Rate

Items whose selling price is very high come under the 1% VAT rate. The VAT percentage of these Items is low and they include gold, silver, and different types of precious stones.

4-5% VAT Rate

The goods that come under this category are the daily consumption goods like medicines, tea, coffee, oil, milk, etc.

Generate VAT Rate

General VAT rate is applied to those goods that cannot be categorized. Some of these goods are liquor, cigars, cigarettes, and many more. The VAT rate for these goods lies between 12.5% and 14.5%.

How does VAT work?

Gross margin is the factor on which VAT is levied. The tax is levied on manufacturing, distributing, and selling. VAT is different from sales tax as in the latter case, the tax has to be paid by the consumer after it is purchased by them.

VAT History

VAT was created in France and was launched in 1954 by Maurice Laure. The VAT system is used in the member countries of the OECD (Organization for Economic Corporation and Development). VAT has not been implemented in the US. IMF (International Monetary Fund) says that the VAT system was thought to be negative initially as revenue from tax is reduced. But later, the study revealed that revenue increased due to VAT.

VAT Collection in India

VAT is collected on the basis of the method of collection and timing of collection which are discussed below.

Method of Collection

This is divided into two

• VAT collection on the basis of account

  In this method, tax is collected on the basis of value added which is the difference between the revenues and allowable purchases.

• VAT collection on the basis of invoice

  This is a method in which VAT is calculated by using sales receipts or invoices. Traders have to provide receipts after selling products or services. Invoices consist of details of VAT collected.

Timing of Collection

This is also divided into two.

• VAT Collection on the basis of Accrual

  In this type of payment, the revenue has to match the time period in which it was earned. It also matches the cost of raw materials purchased in that period along with the time in which the raw materials were made. This VAT collection process is complicated but provides information about the business to its owner.

• VAT Collection based on Cash

  VAT calculation on the basis of cash is very simple. Cash is checked rather than checking the payment of bills. The date of every payment is recorded in the form of the date of receipt of funds.

VAT Registration and its Process

It is mandatory for producers of goods to register for VAT. In this process, the organization has to be listed in the government to become eligible to pay the VAT tax. VAT registration can be done online and offline. Let us look at both processes.

Offline Registration Process

VAT is collected and assessed by the Income Tax credit system in India. The value of the VAT lies between 4% and 12.5%. The tax depends upon the types of products and services. Here are the steps that you have to follow for VAT registration.

• Fill out the VAT registration form and submit it at the local VAT office

• The documents required for VAT registration should also be submitted

• The premises of your company will be inspected by the authorities within three days after submission of the form

• You will have to deposit the required fee after the completion of the inspection and its approval.

• A TIN and a VAT certificate will be provided to you within a day

Online Registration Process

• Navigate to the VAT website and click Registration

• Fill out the required details and also attach scanned copies of the required documents

• A temporary VAT registration number will be allotted to you

• You will get the permanent VAT registration number after the completion of the verification of the form and documents

Advantages of VAT

VAT has many advantages and some of them are as follows −

• VAT can be used to close different loopholes

• VAT helps in earning more money

• VAT can be easily calculated

• Avoiding the payment of tax becomes difficult after the launching of VAT

• No income tax is charged upon people which increases their earnings

Disadvantages of VAT

VAT has many disadvantages and some of them are listed below −

• Costs of businesses increase

• The price of the final product is high

• Keeping records of VAT is difficult for businesses

• Bookkeeping is difficult for international transactions due to different tax rates in other countries

Conclusion

VAT can be expanded to Value Added Tax. This is a tax which is levied at every stage of a product from manufacturing to distribution and then purchasing by the end consumer. This has increased the revenue for the government but has increased the cost for businesses. This has also increased the cost of the product to be purchased by the end user.

FAQs

Q1. What is the full form of VAT?

Ans. VAT stands for Value Added Tax.

Q2. What is the difference between VAT and Sales Tax?

Ans. VAT has to be paid at every stage from manufacturing to selling. Sales tax has to be paid by the end user only

Q3. Is VAT considered as beneficial for low and middle-income people?

Ans. No! VAT is not beneficial as it has increased the cost of the end product.

Q4. Does the payment of VAT reaches the government

Ans. Yes! The payment of VAT reaches the government. State administrations collect the VAT.

Q5. Which companies register for VAT?

Ans. Companies’ whose annual turnover is more than INR 500,000 yearly have to pay VAT.