Merits of VAT
- Reduced tax evasion
- Increased tax compliance
- VAT brings certainity as it is simple
- VAT is transparent as tax charged is clearly shown in invoice
- Cheaper exports as in case of exports, VAT is refunded
- System promotes better accounting system as record of tax paid on purchases required to be maintained
- VAT is tax neutral.(There is no distinction between labor intensive industries and capital intensive industries as input of both purchases and capital goods is available)
Demerits of VAT
- TAX Evasion is possible through bogus invoices(fake invoices)
- Increased compliance cost as records of all purchases and sales required to be maintained.
- VAT system is distorted(not properly followed) due to various exemptions/concessions)
- VAT is a consumption based tax(it is collected more by the state which consumes more goods and not by state which produces more)
- Since, it is tax on expense, it is regressive in nature. It affects poor more as they spend more proportion of their income then the rich