VAT stands for value added tax. VAT is imposed on the value addition to products which ultimately paid by the end consumer. Over 120 countries worldwide have already introduced VAT and India is one of them to introduce it in 1st April 2005.
For a buyer, VAT is a tax on the purchase price of the product. Where as for a seller, VAT is charged on the value added to a product or material. It’s charged on the buyer and collected by seller. After such collection the seller has to deposit the amount with government of India after setting off VAT credit if any.
If you see the logic of charging Value Added Tax then you will find that ultimately it is the consumer who will pay it to the government. These sellers are just working like intermediary in collecting and depositing Value Added Tax on behalf of the government.
The value added to a product is derived by taking the selling price and then by deducting purchase price, cost of materials and other inputs used to make the product.
Each seller liable to charge Value Added Tax is required to register themselves under VAT. After such registration they can charge VAT on the product.
Value Added Tax is designed in such a way that the first seller pays the first point tax, then next seller pays only on the value addition and ultimately at the last point it will be equal to the VAT that has been charged on the first point.
We are waiting for Goods and Service Tax or GST which is yet to be introduced in India. Most of the counties have already implemented GST for their country. If it is passed in India then all states across the country will have one law and all other indirect taxes will not be there.