VAT means Value Added Tax. VAT is a form of Consumption Tax. Consumption tax refers to the tax borne by spending on goods and services, i.e. tax is levied on the basis of money spent on consumption. Thus, VAT is a consumption tax as it is ultimately borne by the final consumers and is assessed on the value added to goods and services. From the perspective of the buyer, VAT is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products. Thus VAT becomes a multi stage tax, levied only on the value added at each subsequent stage in the chain of production and distribution of goods and services. It is the market value added to the product at each stage of its manufacture or distribution. For instance, if a retailer buys a shirt for Rs 500/- and sells it in the market to the consumers for Rs 600/- then the Value Added Tax would apply to the difference between the two amounts, i.e. VAT would apply on Rs 100/- The difference would be the value added at the subsequent stage of selling. VAT is different form Sales Tax, as VAT is levied on both goods and services, whereas Sales Tax is applicable only in the case of goods. VAT applies only on sales within a state and thus the following are excluded and shall not be governed by the VAT Act: Sale in the course of Inter State Trade/Commerce which shall continue to be liable under the Central Sales Tax Act 1956. Sales which take place outside the State. Sales in the course of export or import.
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