Why VAT replace from the Sales Tax

In this article we will tell you why VAT replace from the sales tax. Here’s the complete detail.

Before we go into depth about why VAT replace Sales tax, we must define the term of VAT.


VAT is an abbreviation of Value Added Tax. It was firstly introduced in France on 10th April, 1954 and it was extended over a time period in all countries and their business sectors.  In India, VAT is treating such  as substitute of Sales Tax. As per indian law, the manufacturer and importer are liable for Sales Tax. However,in the case of VAT, all the entities of supply chain are liable for Value Added Tax. In that case, VAT is paid on the purchasing of goods by trader and purchasing of Raw materials by Manufacturer.

For example: If a dealer “A” purchases a good in Rs. 100 from another dealer “B” and B has been charged Rs. 10, which means, the total amount of purchasing good is Rs. 110. On the other hand, A sells their good to another dealer “C” in Rs. 120, where A charges a tax of Rs 12 at 10 percent. However,  C will be payable an amount of tax of only Rs. 2 because C will be liable for paying the amount of  only the difference between the amount of tax payable and tax collected. The difference(between the amount of tax payable and tax collected), is called a VAT (Value Added Tax), which is payable by all entities of supply chain.

On April 1, 2002 the new tax regime “VAT”(Value Added Tax)  was introduced in India, in place of Sales Tax.  VAT (Value added tax) isWhy VAT replace from the Sales Tax not only given transparency in revenues, it also increases  competition of Delhi businesses. Therefore, here are the following advantages of VAT(Value added tax) over Sales tax:

1. Value Added Tax is a multi-point tax with set-off for tax paid on purchases, it prevents repeated taxation of the same product.

2. Value Added Tax generates revenues for government, which is equivalent to the amount of sales tax revenues. However, VAT also generates more revenues since it is administered in different stages of production, i.e. Distribution chain.

3. Value Added Tax is proven to be more simple and transparent compared to sales tax. The amount of tax is levied in the goods in all stages of sales tax and we would not know about the amount of tax. On the other hand, the amount of tax would be known at each level of buying and selling of goods.

4. Zero rating of tax is not possible in exporting any goods in the case of sales tax . This is possible only in the case of  Value Added Tax.

5. Value added tax provides more revenues compared to sales tax at lower rate of tax.

6. In Value Added Tax, The procedure of filing return, assessment, payment of tax, etc. are very simple compared to sales tax. Therefore, in VAT system, the interface among taxpayer and tax collector is minimal.

7. Value Added Tax is proven to be Fair and Equitable for taxpayers because it is introduced from different tax rates to the state. Therefore, no individual can take unfair advantage, while levying the Tax.

8. VAT is more flexible as compared to sales tax for generating revenues, while levying the Taxes.

Post Author: fn007

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