The main characteristics of value added tax (VAT) are stated as follows:
1. VAT is a form of indirect taxation.
2. VAT is a broad-based tax as it covers the value added to each commodity by a firm during all stages of production and distribution.
3. VAT is based on value added principle. Value added can be obtained either by adding payments to factors of production (i.e. , wages+rent+interest+profit) or deducting cost of inputs from sales revenue.
4. VAT is a substitute for sales tax, hotel tax. contract tax and entertainment tax.
5. VAT is based on self-assessment system and provides the facility of tax credit and tax refund,
6. VAT avoids cascading effect existed in sales tax and contains catch-up effect.
In a nutshell, VAT is an indirect tax that is imposed on different goods and services on the basis of value added amount in different stages of production and distribution. It is not a genuinely new form of taxation but merely a sales tax administered in different form. Although it is borne by the final consumer, VAT is collected at each stage of production and distribution chain.
