Value Added Tax in India is a state multi point tax on value addition which is collected at different stages of sales with a provision for set-off for tax paid at the previous stage. i.e. tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales-purchase) which equivalent is to wages plus interest, other costs and profit. VAT intends to tax only the value added at each stage and not the entire invoice value of the product.
Who are liable to pay VAT
The Value Added Tax (VAT) is based on the value added to the goods and the related VAT liability of the dealer is calculated by deducting input 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 the gross amount turnover not exceeding 5 lakh. The state will have the flexibility to fix the threshold limit to 10 lakh.
How to calculate VAT liability
Every dealer up to the retailer level is required to be registered with the Sales Tax department to avail the credit of the input tax. However there would be the threshold turnover level. The retailer with turnover below the threshold can opt not to register but pay a nominal composition tax. However such dealer is not entitled to take credit of prior stage tax, nor they can pass credit to the buyers.
Advantages of VAT
Update: VAT has been replaced by GST. You can known more about Goods and Services Tax in India.