Value Added taxation

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

  • Deducting input tax credit from tax collected on sales during the payment period.
  • This input tax credit is given for both manufacturers and traders for purchase of input/supplies meant for both sales within the other state irrespective of their date of utilization or sale.
  • If the tax credit exceeds the tax payable on sales in a month, the excess credit will be carried over to the end of the next financial year.
  • If there is an excess unadjusted input tax credit at the end of the second year then the same will be eligible for a refund.
  • For all the export made out of the country, tax paid within the State will be refunded in full.
  • Tax paid on inputs procured from other states through an interstate sale and stock transfer shall not be eligible for credit.


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

  • Encourages a better administered system
  • Eliminates Tax evasion
  • Avoid under valuation
  • Avail Tax credit
  • Permits easy and effective targeting to tax rates
  • Ensures better tax compliance
  • Contribution to the fiscal consolidation to the country

Update: VAT has been replaced by GST. You can known more about Goods and Services Tax in India.

This post was last modified on April 15, 2019 5:21 PM

Juhi Patel: Juhi Patel is a Content editor, bringing out trending news and updates. She also contributes to Advices Academy and Nokia Android Phones