What is Value Added Tax in India and How It is Calculated

If you’re curious about the full form of VAT tax, here’s your answer: VAT stands for Value Added Tax, meaning a tax collected at each stage of production and distribution of goods. While the Goods and Services Tax (GST) has replaced most indirect taxes since 2017, some goods still fall under the old VAT system.  
 
Here, we will help you understand the value added tax meaning, how it works and where it still applies today. Keep reading to get clear insights into VAT and its role in India’s taxation system. 

Value Added Tax (VAT) Meaning 

 It is a type of indirect tax that the Central Government levies on sold goods. VAT is collected starting from manufacturing till the sale is completed by the retailer. It works in such a way that the consumer at the end of the supply chain pays a higher tax amount.  

Value-added tax is a multi-point check system for collecting tax at each point of purchase. 

• When dealers collect the tax amount from the consumer, they pay back to the government.  

• Before paying the government, they deduct the tax paid for the purchase, which eliminates the tax-on-tax effect.  

• The VAT law changes depending on the state and Union Territory.  

• There are certain gods that are exempt from VAT.  

• The list of goods and their threshold limit varies from state to state.  

Also Read: Direct Tax vs Indirect Tax  

Understand How it Works

Knowing what is VAT and having a brief knowledge of input and output tax can give you a clear idea of how value-added tax works.  

1. Input Tax 

• It is the tax amount paid by the dealers during their purchases.  

• VAT is not only applicable to goods that are purchased for resale.  

• It is also applicable to capital purchases such as machinery and equipment.  

• Most of these purchase comes under value-added tax (VAT) application.  

• However, in most cases, companies can claim VAT credit.  

2. Output Tax 

• It is the tax amount paid by the consumer while purchasing taxable goods from dealers.  

• Anyone registered for VAT can collect the tax amount; it may be an individual, business or partnership.  

• If you make a sale more than the prescribed limit of ₹5 lakhs or ₹10 lakhs, depending on the state, you should opt for VAT registration.  

The registration of VAT means enrolling your company in the list of corporations that are eligible for tax returns. It is mandatory for all manufacturers involved only in the production of goods and services to register for value-added tax (VAT).  

VAT is different from sales tax, and is charged at various stages of the production process. On the other hand, sales tax is charged at the end user purchase of goods and services.  

What is VAT Registration? 

Here are some key points to remember when registering for VAT: 

• Mandatory for businesses selling goods that still attract VAT 

• Register with the local Commercial Tax Department 

• Submit ID proof, business proof, PAN, and bank details 

• Get a VAT registration number (TIN) 

• Legally collect VAT, claim input credit, and file VAT returns 

What is the Procedure for VAT Online Registration? 

• Visit your state’s commercial tax department website. 

• Create an account or log in as a new user. 

• Fill out the online VAT registration form with business details. 

• Upload required documents (ID proof, address proof, business proof). 

• Pay the applicable registration fee online. 

• Submit the application and note the acknowledgment number. 

• Schedule an inspection if required by the department. 

• Once approved, download your VAT registration certificate. 

Also Read: What is Advance Tax?  

VAT Rates in India 

• 1% – 5%: Essentials like food grains, medicines, and certain daily-use items 

• 12.5% – 15%: General goods like electronics, furniture, etc. (varies by state) 

• 20% and above: Specific goods like liquor and petroleum products 

• Varies by State: Each state sets its own VAT rates for certain goods not covered under GST 

How is VAT calculated? 

Using a simple calculation formula, you can calculate value-added tax: 

VAT= Output Tax – Input Tax 

For example, say a dealer pays a value-added tax of 10% on the purchased goods at ₹100. Then, s/he sold the product at ₹150 to you, collecting a VAT of ₹15 from you. Then, the input tax here is ₹10, and the output tax is ₹15. Hence, the dealer has to pay only ₹5 as VAT while purchasing the goods.  

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FAQs on Value Added Tax 

Can I claim VAT back on business expenses?  

Yes, you can claim VAT on business expenses after registering your business for VAT.  

Are there any exemptions from VAT?  

The VAT law changes depending on the state and union territory. Depending on the VAT law, some goods and the threshold limit for exemption are exempted from VAT.  

Where can I find more information or get help with VAT issues?  

You can get information from the Goods and Services Tax, CBIC, and Government of India and register any complaint related to VAT issues.  

What happens if I miss the VAT return deadline?  

In case of delays in filing the return, you shall be liable to pay ₹100 per day, for which the maximum amount is calculated quarterly.