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VAT or Value Added Tax is also called GST or Goods and Services Tax in some countries. It is a kind of tax that gets assessed incrementally. This gets levied on the cost of a service or product at every stage of production, sale, or distribution to the end customers.

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What is meant by VAT?

VAT is a consumption tax that gets paid on services and goods that gets levied at all stages of the supply chain. Here, value is included from the early production to a point of sale. A user’s amount of value added tax or VAT is formed on the price of the item minus the cost of materials that have been taxed already at an earlier stage.

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Not every locality requires VAT to become charged, and, in this context, most often exports become exempt. Commonly, VAT is implemented in the form of a destination-based tax. Here, the tax rate is formed on the consumer’s location and becomes functional to the sales cost. The terms GST, VAT, and the general consumption tax are used interchangeably. Value Added Tax raises nearly a 5th of the total tax revenues among the OECD (Organization for Economic Co-operation & Development) and worldwide.

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The Development of VAT

VAT was a creation of Europe, and in 1954, Maurice Lauré, a French tax authority introduced it. Most industrialized nations that comprise the OECD possess a VAT system, and here, the US becomes a remarkable exception. Based on one IMF (International Monetary Fund) study, a nation that gets to VAT at first feels the negative effect of lessened tax revenues.

However, in the long run, one study concluded that the adoption of VAT increased the revenue of govt. and it emerged as effective. In some corners of the globe, VAT goes through a negative connotation, and it hurt its supporters politically.

But in the succeeding years after VAT was implemented, every person accepted the tax.

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Benefits of VAT

  • Because VAT is acknowledged as a consumption tax, its revenue turns out to be constant all the time.
  • In comparison to other indirect taxes, VAT can be managed easily.
  • Because the VAT gets accumulated in little installments, consumers do not feel burdened paying VAT.
  • VAT can minimize avoidance because of its catch-up effect.
  • A huge amount of revenue gets generated on a lower tax rate via VAT.
  • Vat is also a neutral tax; hence, people can impose it on all kinds of businesses.

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