The Impact of VAT in India

VAT is most certainly a more transparent and accurate system of taxation. The existing sales tax structure allows for double taxation thereby cascading the tax burden. For example, before a commodity is produced, inputs are first taxed, the produced commodity is then taxed and finally at the time of sale, the entire commodity is taxed once again. By taxing the commodity multiple times, it has in effect increased the cost of the goods and therefore the price the end consumer will pay for it.

The transaction chain under VAT assuming that a profit of Rs 10 is retained during each sale.

SALE 'A' OF CHENNAI @ Rs. 100/- »»	'B' OF BANGALORE »»	SALE @ Rs. 114/- »»	'C' OF BANGALORE »»
SALE @ Rs. 124/- »»	'D' OF BANGALORE »»	SALE @ Rs. 134/- »»	CONSUMER IN BANGALORE

Tax implication under Value Added Tax Act

Seller	Buyer	Selling Price (Excluding Tax)	Tax Rate	Invoice value (Incl Tax)	Tax Payable	Tax Credit	Net TaxOutflow
A	B	100	4% CST	104	4	0	4.00
B	C	114	12.5% VAT	128.25	14.25	0*	14.25
C	D	124	12.5% VAT	139.50	15.50	14.25	1.25
D	Consumer	134	12.5% VAT	150.75	16.75	15.50	1.25
Total to Govt.						VAT CST	16.75 4.00

*Note: CST Paid cannot be claimed for credit. CST is assumed to remain the same though it could to be reduced to 2% when VAT is introduced and eventually phased out.

VAT can be considered as a multi-point sales tax with set-off for tax paid on purchases (inputs) and capital goods. What this means is that dealers can actually deduct the amount of tax paid by him for purchase from the tax collected on sales, thereby paying just the balance amount to the Government.