Advantages and Disadvantages of Value Added Tax

Advantages and Disadvantages of Value Added Tax

Advantages and Disadvantages of Value Added Tax

Value Added tax refers to the tax applied to value-added as per prescribed rate. In fact, it is a multi-stage indirect tax imposed on the value added at different stage starting from production to distribution process. It is a consumption tax placed on a product whenever a value is added at each stage of the supply chain, from production to the point of sale.

Advantages of VAT

Value Added Tax is becoming popular throughout the world because of its following advantages –

  • Encourage personal savings and investment: One of the best reasons for instituting a value-added tax is that the system encourages personal savings and investment.
  • Help to make up revenue: VAT is transparent and has a minimum burden to consumers as it is collected in small fragments at various stages of production and distribution. VAT is based on value added not on total price. So, price does not increase as a result of the VAT.
  • Economic advantages: Since VAT is camel through the retail level, it offers all economic advantages of a tax that includes the entire price within its scope, at the same time the direct payment of tax is spread out.
  • Governmental opportunity: VAT gives the government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous repine.

Disadvantages of VAT

The main disadvantages which have been identified in connection with the value-added tax are:

  • Burden: The ‘Value Added tax’ has been criticized as the burden of it’s relies on personal end-consumers of products and is, therefore, a regressive tax.
  • Difficult and Costly: Revenue from a value-added taxes are frequently lower than expected because they are difficult and costly to administer and collect.
  • Increases in inflation: VAT increases inflation. In developing countries, some businessmen seize almost any opportunity to raise prices, and the introduction of VAT certainly offers such an opportunity.

VAT is relatively complex to understand. The calculation of value added at every stage is not an easy task. To implement the VAT successfully, customers, need to be conscious, otherwise, tax evasion will be widespread.