Merits and Demerits of Value Added Tax (VAT)

Merits and Demerits of Value Added Tax (VAT)

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The value-added tax (VAT) is widely regarded as the most recent and efficient taxation innovation. It is assessed based on the goods and services' added value. The tax is theoretically broad because it covers the value that a company adds to each product at every stage of production and distribution. One type of sales tax is referred to as value added tax (VAT). As a hybrid of turnover tax and retail level sales tax, VAT has evolved into a multiple-stage tax. The turnover tax, on the other hand, is levied on the total value at each stage, whereas the value added tax (VAT) is levied only on that stage's value. In contrast to sales tax, which only applies to the final stage of production and distribution, VAT is applied at each stage of production and distribution. Numerous issues related to tax evasion are alleviated by VAT. As a result, compared to retail sales tax, value added tax (VAT) is more productive and less destructive.

The following are the main characteristics of the value-added tax (VAT):

1. A type of indirect taxation is VAT.

2. Since it covers the value that a company adds to each product at every stage of production and distribution, VAT is a general tax.

3. The value-added principle underpins VAT. Value added can be achieved by subtracting the cost of inputs from sales revenue or by adding payments to factors of production (such as wages, rent, interest, and profit).

4. VAT takes the place of sales tax and hotel tax, entertainment tax and contract tax.

5. The VAT system, which is based on self-assessment and offers tax credits and refunds, The catch-up effect of VAT prevents the cascading effect of sales tax.

Simply put, VAT is an indirect tax on various goods and services based on the value added amount at various stages of production and distribution. It is merely a sales tax administered in a different manner, not a truly novel tax. VAT is collected at each step of the production and distribution chain, even though the final consumer pays for it.

Advantages of the Value Added Tax (VAT) :

1. Tax evasion is less likely here than it is with other taxes. Due to its catch-up effect, VAT reduces tax evasion.

2. When compared to other indirect taxes, VAT is simple to administer.

3. Because it is collected in small amounts at various stages of production and distribution, VAT is transparent and does not impose a significant financial burden on consumers.

4. Value added, not total price, is the basis for VAT. Therefore, VAT does not result in an increase in price.

5. The taxpayers are heavily involved.

Disadvantages of the Value Added Tax (VAT) :

1. Because it is based on a full billing system, VAT implementation is costly.

2. Understanding VAT is relatively challenging. It's not easy to figure out the value added at each stage.

3. Customers must be aware of the VAT in order to successfully implement it; otherwise, tax evasion will be widespread.