Meaning of Value Added Tax (VAT) :
The value-added tax belongs to the family to sales taxes. A general sales tax is a tax on’ sales transactions but it is applied at only one stage of business activity. We know that a production process involves many stages from the manufacturer to the retailer before the commodity finally goes in the hands of consumers. A general sales tax may be imposed at any one of these many stages. Usually it is collected either at the wholesale level or at the retail level.
The value-added tax, as the name clearly denotes, is a tax on the value added to goods in the process of production and distribution. It means that the added tax is imposed on the value that the business firms adds to the and services that it purchases from other firms. It adds value by or handling these purchased items with its own labor force or its machinery, building, or other capital goods. It then sells the resulting product or to other firms. Thus, the difference
and cost of the etc. that it has purchased from other firms is its value-added which is the tax base of the value-added tax.
A Value added tax is not on the total value of the commodity being sold, it is a tax levied only on the value-added to it by the last or manufacturer. The trader, therefore, is not liable to pay a tax on commodity’s gross value, but only on the net value, i.e., the gross value minus the value of commodity purchased from the other firms.
In its comprehensive form, the VAT may be defined as a tax which is to be paid by all sellers of goods and services, other than those specifically exempted, on the basis of the value added by their firms. The value added is computed as the difference between the actual or presumed value of sale or output and the value of goods and services purchased from other producers and used in the production of that output. Goods usually pass through several stages Of manufacture or processing before they are converted either into capital or consumer goods and sold to final buyers. At each stage of manufacture, an element of value is added and the final value of a product is the sum Of all the values added in the processes of production. The VAT taxes the value-added at each stage of production. It is a multi-stage tax that is collected in bits or infractions in the chain from the point of the first stage of production to the final supply to the consumer.
Merits of Value Added Tax (VAT)
The following are the main advantages of the VAT :
(i) A general VAT is supposed to be neutral to the forms of production and commercialization. In the case of a turnover tax, a tax is added at each sales transaction. Consequently, a turnover tax encourages vertical integration of production so as to avoid the intermediary sales and payment of taxes and also to acquire a competitive advantage over others. A VAT, on The other hand. is neutral between these processes of integration. It, therefore, helps the economy in adopting those forms of production which are economically more suitable.
(ii) Since in the case of a VAT the tax is divided into several parts depending on the Stages of production, the incentive to evade tax by anyone fim is reduced.
(iii) It encourages exports of the country. In order to get a competitive edge over others, a country may refund the taxes paid on the export goods. It is easy to separate the tax from the cost of production in the cost of a value-added tax. It is not easy in the case of other types of taxes as they get mlixed up with the cost of production since they are levied at the gross value of a commodity in each case.
Demerits of Value Added Tax (VAT)
The following are the important demerits of the value-added tax :
(i) It is not a simple and easy tax system to adopt, especially in an underdeveloped country.
(ii) It needs an honest and efficient Government tax administrative machinery to implement it. It is necessary that the country adopting this tax should be sufficiently advanced in its financial and economic structure and the firms should be in the habit of keeping proper accounts.
(iii) Its success largely depends on the cooperation of the tax-payers
because in this case tax evasion becomes a major possibility and a common practice.
(iv) This system is highly uneconomic, especially for the Smaller firms as it requires them to maintain elaborate and costly accounts.
(v) The argument that VAT induces efficiency is an untenable argument in an economy where speculative hoarding, non-competitive price rise, and similar other evil practices are quite frequent and common. In a seller’s market economy it can not be said that producers will raise their efficiency and reduce costs and prices as a, consequence of the imposition of a value-added tax.