“VAT or Value added tax is a tax collected at every point when value addition is done to a product”
It is a consumption tax, which is, even if the tax is 99% it’s burden is borne by consumer.
Illustration: Let’s say a company pays excise duty of 10% , obviously company will add 10% to the product price. Now assume co. pays 99% excise, this 99% will also be added to the product price which has to be paid by the customer. But when 99% tax is included, sale of that product will drastically go down and other taxes which co. was paying say corporate, wealth etc will go down as income of co. will go down.
To build a product C, we need to buy two products A and B from wholesaler.
10% tax is applicable to each item we purchase.
A price = 100 rs. Tax = 10 rs
B price = 100 rs. Tax = 10 rs
When we purchase A and B we have to give the wholesaler total of 220 rs.
The wholesaler is going to give receipt of 200 + 20 rs (VAT) = 220 rs
The wholesaler have to submit this 20 rs with govt & we have a receipt that says we paid 20 rs VAT.
Now Product C is created. We decide profit margin of rs 50 on C.
The customer who will purchase C have to pay:
RS 200 + Rs 50 + Rs 25 (10% tax on 250) = 275.
We have already given 20 rs as tax and a receipt is with us, Now 5 rs left to be submitted with govt.
When we submit this 5 rs, we have to show earlier tax paid receipt to authority.
Money received by govt = 10% of 250 = 25.
Who paid this 25 rs tax?
The customer who purchased C. This is the reason these type of tax are known as consumption tax.