Value added tax is levied on the sale of movable goods. Most of the Indian States have replaced Sales tax with a new Value Added Tax (VAT) from April 01, 2005. VAT is imposed on goods only and not services and it has replaced sales tax. VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid. VAT is applicable with slab rate of 0 % , 4% ,5%,8%,13.5% etc. VAT is a progressive and transparent system of taxation which eliminates the cascading impact of multiple taxation through a multipoint taxation and set-off principle. It promotes transparency, compliance and equity and therefore, is both dealer friendly and consumer friendly. After registration of VAT, the manufacturer or trader is allotted a unique 11 digit number which will serve as the VAT Number / TIN Number / CST Number for the business.
Mr. A, a registered dealer purchased good at Rs. 1,000 and paid 4%VAT tax on it, i.e., Rs. 40. The VAT paid by Mr.A can be claimed as input tax credit. On the good purchased, he did some value addition worth Rs. 500. The VAT liability after such value addition amounted to Rs. 60, i.e. 4% on Rs. 1,500. Since there is a credit of Rs. 40 on the initial purchase made, the same can be adjusted against Rs. 60. Only the balance amount of Rs.20 needs to be paid to the department.