Value-Added Tax -- VAT -- leads to avoidance of multiple taxation and lowering of taxes for the manufacturers and traders and lowers prices of final goods for consumers.
How does VAT work? It is basically providing set-off for the tax paid at every stage of value-addition to the goods.
The VAT liability, according to the 'white paper' released on Monday, is calculated by deducting input tax credit from tax collected on sale during the payment period.
In the present regime, inputs worth Rs 100,000 are purchased for producing final goods worth Rs 200,000 in a month.
Then input tax is paid at 4 per cent and output tax is paid at 10 per cent. In this, the input tax works out to Rs 4,000 and output tax on sales works out to Rs 20,000.
Under the VAT regime, the levy on sales of final goods worth Rs 200,000 would work out to Rs 16,000 (output tax of Rs 20,000 minus Rs 4,000 set off as input tax).
The input tax credit will be given to both manufacturers and traders for purchase of inputs and supplies meant for, both, sale within the states as well as sale in other states.
The cascading effect of tax will come down after introduction of VAT, bring down the price level, and stop the unhealthy tax rate war and trade diversion among states.
