What is a VAT – Value Added Tax | VAT e-Filing System – India – 2020

Value Added Tax, popularly known as VAT, is a tax applied to a commodity at any point of the supply chain which is focused on value added. It has already been widely enforced around the globe under various names, including Goods & Service Tax (GST) in India.

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Until 2017, VAT was a major source of tax revenue for all Indian States and Union territories, except Andaman and Nicobar Islands and Lakshadweep. Every State government levied VAT until it was replaced by GST in July 2017. GST is now being charged to the Center under various headings Central GST (CGST), State GST (SGST) and Integrated GST (IGST) and subsequently distributed to the respective consuming states. In addition, most Indian States are compensated by the Central Government for the revenue shortfall due to transition. Compensation shall be extended for a few years. While VAT is not currently being paid, disputes can be brought before various district and state level committees and courts.

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What is VAT in India

Value Added Tax shall be paid on the gross profit at each point in the selling of the product. Taxes are measured and obtained at all levels, from the producer to the seller. This is in contrast to the former sales tax, which was assessed and paid by the consumer at the end of the supply chain.

A dealer usually collects tax on his sales, reduces the tax paid on his purchase and deposits the balance with the government. It is also known as a consumption tax since it is ultimately borne by the final consumer. The tax paid moves through the chain to the customer and is not considered to be a payment to the dealer. Instead, It is a multi-point tax system, which provides for the collection of taxes paid on purchases at every point of sale. It therefore removes the cascading effect of taxes or the tax-on-tax effect.

The law on VAT varies for each State and territory of the Union. In addition, the state threshold for exemption and the list of exempted goods also vary from state to state. Compliance mostly involves taxpayers  reporting sales and purchases along with export details before the state VAT department every month. The information submitted shall be verified by the tax authorities and shall also be subject to a VAT audit once a year.

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VAT Rates in India

The requirements and regulations for the introduction of Value Added Tax differ from State to State, since the tax is collected by state governments. VAT in India is classified under four headings, which are as follows:

  • NIL:- Goods & Service falling within this category are exempt from VAT. These are mainly items which are basic in nature and which are sold in an unorganized sector. Examples of such times are khadi, salt etc.
  • 1%:- VAT is charged at 1% for items in this category. 1% VAT is typically charged on products that are fairly costly in nature. The reason why VAT is levied at 1% on expensive goods is that an increase in the rate of VAT will significantly increase the prices of items that fall within this category. Examples of items falling under this category include gold, silver, precious stones etc.
  • 4 – 5%- VAT is charged from 4% to 5% on certain items which are used on a daily basis. Examples of products that attract 4-5% VAT include cooking Oil, Tea, Medicines etc.
  • General:- Items that fall under the general category are subject to VAT of 12% to 15%. Items that fall under this category are mainly luxury goods such as cigarettes, alcohol etc.

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VAT Registration

The Registration of VAT is mandatory for companies which make more than Rs.5 lakh turnover by selling Goods and Service. All these undertakings are required to register in their respective operating states. In order to start paying VAT, Registration for VAT is necessary for companies. Upon registration, each trader shall be given a unique 11-Digit registration number which shall be used for any communication relating to VAT and its filing.

Business Standard

  • Who should Register for VAT?
    Any business with a turnover of more than Rs. 5 Lakh per year is expected to register for the payment of VAT.
  • Document required for VAT Registration:
    The following is a list of documents that need to be submitted while applying for VAT.

    • Copy of your PAN Card
    • Address the business Proof
    • Evidence of the identity of the Promoters
    • Extra Safe Deposit or Protection
  • How much time does it take to register for VAT?
    Generally, State Government will take about 15-20 Days to complete the registration process. This time may be different from one State to another.

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VAT Collection

The Value Added Tax Collection process can be safely categorized into two broad headings on the basis of the VAT Collection method.

  • Account-based VAT Collection
    In the account-based system of taxation, sales receipts are not used, rather the Value Added Tax is measured. Value Added shall be measured as the difference between sales and permissible purchases. Most countries do not use this method of computing and collecting VAT, but Japan still uses this method for Tax Collection.
  • Invoice-based VAT Collection
    For the purposes of invoice-based VAT Collection, sales receipts or invoices shall be used to calculate the corresponding Value Added Tax. Traders give invoice containing different descriptions of the Value Added Tax earned while selling their Goods and Services. Most countries in the world today use the Value Added Tax Collection method based on invoices.
    Another way to categorize VAT collection is to classify it on the basis of the timing of the collection.
  • Accrual-based VAT Collection
    Accrual-based selection compares profits with the time period during which they are received and compares the cost of raw materials and expenditures to the time period during which they were made. This method is extremely complicated compared to the collection of Value Added Tax based on cash. It also, however, sheds substantial light on information about any business.
  • Cash-based VAT Collection
    Cash-based accounting is easier than accrual-based accounting. Emphasis is focused on the cash that is being collected instead of how all the bills are being charged. Where payment is issued, the date shall be reported as the date of receipt of the funds.

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Features of Value Added Tax in India

  • Similar Goods and Service shall be taxed equally. So a similar TV of all brands will be taxed the same thing.
  • It is levied at each stage of production and therefore makes the tax process easier and more transparent.
  • It’s decreases the likelihood of tax avoidance and encourages compliance.
  • Encourages transparency in the sale of Goods and Service to the lowest level.

Details of VAT through Videos

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Pros and Cons of a Value Added Tax

In addition to the tax claims, the supporters of Value Added Tax in the U.S. argue that replacing the existing income tax system with federal Value Added Tax would have other beneficial consequences.


  • Substituting VAT for other taxes would close the tax gaps.
  • It offers a greater motivation to make more money than a progressive income tax does.


  • It creates higher costs for companies.
  • It conflicts with the ability of the state and local governments to set their own levels of sales tax.
  • Passed-along costs result in higher prices – a particular burden on low-income consumers.

FAQ on Value Added Tax

Ques:- Does the it I pay as part of any transaction hit the government?
Ans:- Yes, Respective state governments are responsible for collecting VAT, which is then passed on to the Central Government.

Ques:- Why is it on my TV set in Uttar Pradesh different from that in Karnataka?
Ans:- VAT is subject to the rules and guidelines of the State Government and as such may vary slightly from one State to another even in the case of similar goods and services.

Ques:- Is it also levied on certain basic requirements such as salt and oil?
No, Many State Government in India have abolished the Principle of VAT on some required items.

Ques:- Is the it compliance rate better than the sales tax?
Ans:- Yes, Since VAT is imposed at any point of development, it provides less incentives for loopholes that can be abused and as such is easier in terms of compliance than the easy-to-comply with sales tax.

Ques:- Does It improve the cascading impact of the tax process?
Ans:- No, Rather it minimizes the chance of a cascading effect by levying the required amount of tax at each and every stage of production.

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Conclusion on Value Added Tax in India

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