Indians often get confused about the taxes applicable to them. However, if you know certain taxes and their applicability, you will be clear about how taxation operates in India. You may have come across something like VAT. What is VAT and how is VAT applied? It is something to think about and learn about when you consider aspects of taxation in India.

What is VAT?

VAT stands for value-added tax. In India, this is a common tax, and comes under the category of “indirect taxes”. VAT is a tax which is levied on certain products and services in India. It is a tax paid to the Indian government by manufacturers and producers during each stage of the supply chain. It should be clear that VAT and GST are different taxes, and VAT is only applicable to products and services which are sold in a specific state. What this essentially means is that buyers and sellers must be present in the same state. At an individual level, if you open a demat account and invest in the stock market and make profits, VAT does not apply to you.

Delving into More Details About VAT

What is VAT tax? Now that you know the answer to this, you may be ready to learn some more about it. Taxation forms an integral part of an individual’s life in India, especially if someone is an investor. If you are an investor, you should know what taxes apply to you, and not get too concerned about taxes like VAT, if you wish to put your money into an upcoming IPO and make good gains, for instance. Nonetheless, VAT is charged as a tax on certain products you buy, so it impacts your spending and budgeting. Here are some key aspects of VAT to keep in mind:

• VAT is a tax levied on gross margins at all stages of the sales of products/goods. In this context, tax is assessed and it is collected at every point, beginning with manufacturers and ending till products reach retailers.
• VAT and its implementation is a multistage system of tax applicability. This system has a provision for tax collection at all points of sale. Therefore, such a system gets rid of the effect of “tax on tax”.
• In India, each state and every union territory complies with a different VAT regulation. Furthermore, the exemption threshold limit and the classification of goods which are exempted vary between states. Overall, VAT is a kind of taxation that has a state-wide implementation.

What is the full form of VAT? You know that it is called a value-added tax. You should also know that the compliance related to VAT mandates that taxpayers must report sales and purchases monthly, along with the exports, if any, before the VAT department of the given state. The details submitted by taxpayers then get verified and are subjected to an annual  VAT audit.

The Types of VAT - VAT Rates

The regulations and guidelines that apply to VAT vary from one state in India to another. The tax is collected by the governments at state levels and not by the central government. When you talk about the “types of VAT”, you are essentially speaking in the context of the different applicable rates of value-added tax, depending on the goods that fall within particular categories. Here are the types of VAT:

• Zero VAT Rate - Certain products are basic by their very nature and do not incur any VAT at all. Examples of such products are khadi cloth, salt, etc.
• VAT of 1% - Expensive Products typically have a rate of VAT on the lower side. These are products such as precious metals like silver, gold, platinum, and precious stones. Manufactured jewellery also does not incur a high rate of VAT. For such items, the rate of VAT is established at 1% in most Indian states.
• VAT of 4%-5% - Within this classification of VAT, goods produced for daily consumption are included. These items are essentials for living and include such products as tea, coffee, oil, medicines, etc. Most states have a VAT set at 4%-5%.
• The General Rate of VAT - A general VAT rate is applied to certain goods which cannot be classified under any fixed category. Products like cigarettes, liquor, etc, may be charged different VAT rates in different states and these vary from 12.5%-15%.

As everyone is a consumer of goods and services, VAT rates and the types of VAT are relevant. You should also know that the state governments collect VAT, but taxes are always forwarded to the central government finally. It is important to note, in India, broad categories of VAT are known as “standard” and “zero”. You may find, in some goods, different states charge a standard rate on particular goods.

Final Lines on VAT

It is interesting to note that the tax is called “value added tax” as this implies that a tax is levied on products and services for any value which is added at each stage in the cycle of production and distribution. Under the system of VAT in India, businesses must mandatorily register with the VAT department of the state where the business is established and functions. Businesses also have the responsibility to maintain adequate records of all transactions, plus file regular returns concerning VAT returns. As an individual and an investor, you should know that when you open a demat account with a brokerage to invest in stocks, in case you make profits, you do not have to pay any VAT. In case you invest in any upcoming IPO, VAT is not applicable either. For-profits made on investments, other taxes and regulations apply.

VAT is a major revenue source for the Indian government, helping to streamline the system of indirect taxation and thereby curb tax evasion. Nonetheless, it has faced criticism due to its complexity as well as the compliance burden it tends to impose on businesses, especially MSMEs (small and medium-sized enterprises).