VAT or Value Added Tax is another name of sales tax which is charged on sale of goods. But, we can define the VAT as a multi-point tax on value addition which is collected at different stages of sale with a provision for set-off for tax paid at the previous stage/tax paid on inputs.  In simple words the VAT is a tax which is added on additional price which the seller collects from the purchaser.  For example, M/s XYZ Limited purchased a computer for Rs.40000/=. He paid Sales Tax @ 5% on Rs.40000/= i.e. Rs.2000/=. Now, hhe sold the computer for Rs.50000/= and charged Sales Tax @ 5% on Rs.50000/= i.e. Rs.2500/=. In this case, it is clear that M/s XYZ collected Sales Tax Rs.2500/= against the payment of Rs.2000/=. So, Rs.500/= shall be called VAT.

Types of VAT (Value Added Tax)

VAT is divided in two parts as under:-

INPUT VAT:- It is called as Tax Credit also. When the sales tax is paid on purchases of goods for resale purpose then it shall be treated as INPUT VAT. For Example, M/s Morning Place purchased some goods for resale purpose for Rs.10000/= and paid sales tax Rs.500/= on the goods. In this case, This amount of Sales Tax Rs.500/=, shall be treated as INPUT VAT.

OUTPUT VAT:- When the sales tax is collected on sale of goods, it will be called as OUTPUT VAT. For Example, M/s Morning Place sold the goods for Rs.12000/= and charged Rs.600/= as sales tax. This amount of sales tax i.e. Rs.600/= shall be treated as OUTPUT VAT.

Note: VAT INPUT and VAT OUTPUT are charged in case of local purchase or sale only. Local Purchase or Local Sale means the purchase or sales made within a state.