The Value Added Tax or VAT is levied by the Government on every value that contributes to making a complete product in order to get the due owed to them by the businesses. Unlike Sales Tax it does not increase the price of the commodity and is not borne by the consumer alone but by the producers as well.
VAT can be collected either by accounts or invoice. The invoice method is more popular and is used in most countries today. It can also be accrual or cash based, cash based being preferred as it is not as complex as accrual.
Paying a VAT is more convenient than any other tax as the method is simple and it saves any extra accounting work. It is also very hard to evade and so is an important revenue source for the country.
There are various disadvantages of the VAT. It is a regressive tax, its collection is an expensive process and it can be evaded under certain circumstances through a practice called Carousel Fraud.
Each country has its own VAT system. In India, the power to decide VAT rate in a state rests with the state itself, though the general rate is 12.5 percent. Two states in India, however, are yet to implement VAT collection.
VAT is lowered in certain cases where discounts are offered especially to people building new houses. Registration for VAT payment is essential in all businesses and there are certain rules to be followed while paying this tax.