CALCULATION OF VALUE ADDED TAX (VAT)
SUBJECT: PRINCIPLES OF TAXATION
VAT LIABILITY
The Value Added Tax (VAT) is based on the value addition to the goods and the related VAT
liability of the dealer is calculated by deducting input tax credit from tax collected on sales
during the payment period (say, a month).
The White Paper specifies that registration under the VAT Act is not compulsory for the small
dealers with gross annual turnover not exceeding `5 lakh. However, the Empowered Committee
of State Finance Ministers has subsequently allowed the States to increase the threshold limit for
the small dealers to `10 lakh, but the concerned States will have to bear the revenue loss on
account of increase in the limit beyond `5 lakh. VAT is so designed that high value taxpayers are
not spared and on the contrary small dealers are also hassle free from compliance procedures.
ADVANTAGES OF VAT SYSTEM IN INDIA
Various advantages of introducing VAT:
to encourage and result in a better-administered system;
to eliminate avenues of tax evasion;
to avoid under valuation at all stages of production and distribution;
to claim credit on tax paid on inputs at each stage of value addition;
do away with cascading effect resulting in non distortion of the business decisions;
permits easy and effective targeting of tax rates as a result of which the exports can be
zero-rated;
ensures better tax compliance by generating a trail of invoices that supports effective
audit and enforcement strategies;
contribution to fiscal consolidation for the country. As a steady source of revenue, it shall
reduce the debt burden in due course;
to help our country to integrate better in the WTO regime;
