Value Added Tax, or VAT, is levied on top of the cost of a product or service and generates revenue for a government.
Value Added Tax, popularly known as ‘VAT’, is a special type of indirect tax in which a sum of money is levied at a particular stage in the sale of a product or service.
In 1954, the value added tax system was initiated by the then joint director of the tax authority of France, Maurice Laure. VAT came into effect for the first time on 10th April, 1954.
From its inception, the value added tax system was imposed on all major sectors of France - the first country to use this system. Once instituted, it was immediately clear that revenues collected from the VAT system constituted a substantial share of the government’s revenue in the French economy.
Not surprisingly, due to the ease of payment and ready comprehensibility, the value added tax system has been adopted by different nations across the world.
VAT is intended to be levied - or charged - whenever there is some value addition to raw material. The taxpayers on the other hand, will get credit for the amount of tax paid off at the stages of procurement. The value added tax system has proven to be effective in avoiding problems that normally might arise out of the double taxation of goods and services.
The value added tax system is designed to address various problems associated with the conventional sales tax system. In sales tax, there is no provision for input tax credit, which means that the end consumer may pay tax on an input that has already been taxed previously. This is known as cascading and leads to increases consumer tax and price levels, which increases the rate of evasion and can be detrimental to economic growth.