Mar 16, 2009

Advantages of VAT over Sales Tax

· As VAT is a multi-point tax with set-off for tax paid on purchases, it prevents repeated taxation of the same product.

· Simple and Transparent – In the Sales tax system the amount of tax levied on the goods at all stages is not known. However, in VAT, the amount of tax would be known at each and every stage of goods sale or purchase.

· VAT has the flexibility to generate large and buoyant revenues, as it levies tax on value additions.

· Zero rating of tax on exports is possible in case of VAT.

· Fair and Equitable – VAT introduces uniform tax rates across the state so that unfair advantage cannot be taken while levying the tax.

· Procedure of simplification – Procedures, relating to filing of returns, payment of tax, furnishing declaration and assessment are simplified under the VAT system so as to minimize any interface between the taxpayer and the tax collector.

· Ability to provide same revenue to the Government with lower rates of tax.

· Tax does not become a cost of doing business.

VAT Rates

According to the White Paper, there are 550 categories of goods under the VAT system. They are classified into the following four groups, depending on the VAT rate:

VAT @ 4%

The largest number of goods (270) comprising of basic necessity items such as drugs and medicines, agricultural and industrial inputs, capital goods and declared goods are under 4% VAT rate.

Exempted from VAT

There are about 46 commodities under the exempted category. This includes a maximum of 10 commodities that each state would be allowed to select, from a broader approved list for VAT exemption. The exempted commodities include natural and unprocessed products in unorganized sector as well as items, which are legally barred from taxation.

VAT @ 1%

This is for a specific category of goods like gold, silver, etc.


The remaining commodities are under the general VAT rate of 12.5%.

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