VAT is a multi-stage tax levied at each stage of the value addition chain, with a provision to allow input tax credit (ITC) on tax paid at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. VAT is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages. Thus, VAT will be without the problem of double taxation as prevalent in the earlier Sales tax laws.
The Value Added Tax aims to radically reform the conventional system of Sales Tax laws that was mingled with the horrible effects of double taxation. VAT is the most diversified and simple as well as transparent indirect tax system with inbuilt capacity to raise more tax revenue without distorting the existing tax structure and is yet able to widen the tax base. VAT system has the unique feature of preventing the scope of tax avoidance. VAT is more taxpayer-friendly than the conventional Sales Tax system. It does not exert any undue pressure of shouldering additional tax burden.
The main benefits of the VAT system are as follows:-
1. VAT system mitigates cascading effect and economic distortions.
2. There is a greater fairness and uniformity in this system.
3. There is a better tax compliance being less chances of tax evasion.
4. There is complete transparency of tax incidence in the sale of goods.
5. VAT system is more simple than the present system of taxation as there would be no dispute regarding taxable stage of sale and classification of goods taxable at a particular rate of tax and there would be minimum requirement of declaration forms.