Explanation: The value added tax (VAT) is a method of tax collection as well as name of a state level tax (at present) in India.

• A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax.
• The name itself suggests that this tax is collected on the value addition (i.e., production).
• VAT method of tax collection is different from the non-VAT method in the sense that it is imposed and collected at different points of value addition chain, i.e., multi-point tax collection.
• That is why there is no chance of imposing tax upon tax which takes place in the non-VAT method—single point tax collection.
• This is why VAT does not have a ‘cascading effect’ on the prices of goods it does not increase inflation—and is therefore highly suitable for an economy like India where due to high level of poverty large number of people lack the market level purchasing capacity.

Source: Ramesh Singh