Introduction to VAT

VAT or Value Added Tax is nothing but our good old Sales Tax with the key difference that the cascading effect of Tax is (i.e. Tax on Tax) eliminated ( so they say!) . The VAT system also envisions reduction in the number of Tax evasion cases by creation of traceable 'Audit Trail'. The following table might shed some light on the real world situation,

Seller	Buyer	Cost	Value Addition	Sales Price	Tax Rate	Invoice Value	VAT			Sales Tax Payable
							Tax payable	Tax Credit	Net
A	B			1,000.00	4%	1,040	40.00	0.00	40.00	40.00
B	C	1,040.00	100.00	1,140.00	4%	1,186	45.60	40.00	5.60	45.60
C	D	1,185.60	100.00	1,285.60	4%	1,337	51.42	45.60	5.82	51.42
D	E	1,337.02	100.00	1,437.02	4%	1,495	57.48	51.42	6.06	57.48

VAT was implemented in India under 'Tax Credit' method. As Sales Tax is in the purview of State Governments, different states had drafted different Acts and Rules for the implementation of the same. To help states embrace VAT system of taxation, the Central Govt had promised to phase out the levy of CST(Central Sales Tax) in 3 years (i.e. 4% in 2005-06, 2% in 2006-07 and 0% from 2007-08 onwards). Yes, this still remains a promise.

In Kerala the VAT was introduced by enacting 'THE KERALA VALUE ADDED TAX ACT, 2003' and 'KERALA VALUE ADDED TAX RULES, 2005'. Through this blog, I plan to discuss various practical issues of VAT in the state of Kerala.

I would also suggest that for a more comprehensive understanding of the VAT - please go through http://en.wikipedia.org/wiki/Value_added_tax.