What is VAT?

ISLAMABAD: The Value Added Tax (VAT) is a tax on value addition of a product along each stage of its manufacturing or distribution chain. In the end, VAT is effectively borne by the end consumer.

It comes under the definition of indirect taxes as the final tax bearer is the end consumer. Since this is a value addition based tax it is charged on a multipoint system regardless of destination, making it a federal or central tax, irrespective of the province or destination of sale of the product or service. The VAT is conventionally applicable to goods only and the whole purpose is to avoid evasion since it is charged on value addition at each stage.

This would then alone redefine VAT and the sales tax beneficiary. In case of VAT, it is the seller at every stage who deposits tax on value addition. In case of GST, the beneficiary is based on consumption destination, whereas in case of VAT it is split as it is deposited into each stage of production and distribution. The transition to VAT would overall improve documentation as at each stage of value addition, there will be a component of tax incurred and all such stages are then finally charged from the consumer.

The sales tax is undertaken as a single point based system of being levied on the sale and therefore in case of low or no reporting of sales, it has a greater possibility of evasion through undeclared sales. Since VAT is a multi-point based system charged at each stage of value addition or distribution chain, then it is difficult for retailers to avoid this tax and will need to pay the VAT charged to the end consumer.

The VAT is meant to be charged at different stages of value chains and it is considered as the best international practice to bring the whole value chain under the tax net. Instead of imposing GST at Stanford rate of 17 percent, the real effective rate of collection is not more than 3 to 4 percent but if imposed in it's real shape, VAT could increase tax collection significantly.