VAT stands for Value Added Tax, which is collected incrementally based on surplus value added to the price at each stage of production. It was launched or introduced into the Indian taxation system since April 5, in the year 2005.

In past, firstly George Wilhelm von Siemens, German industrialist proposed the idea or introduced the concept of Value Added Tax (VAT) in the year 1918. Maurice Laure, Joint Director of the France tax authority, was the first person, who launched and implemented the modern variation of VAT (Value Added Tax) on April 10 in the year 1954. VAT (Value Added Tax) is the most important source of state finance and accounting, which is about 50 percent of state revenues in France.

The state government decided the amount of VAT for the percentage of the end market price and this tax is introduced or implemented to those individuals whose business on huge profit of the services and goods it cam buy from the market.

In this system, tax is levied on the products at every point of sale where value has been added starting from raw materials to the final and retail purchase by a consumer. Every seller in the production chain charges as VAT tax to the buyer and remits to the governments.

Example of 10 percent VAT tax is as follows. A manufacturer buys raw materials from provider, who charges the manufacturer 10 percent VAT and pays to government. The manufacturer adds value through its manufacturing process to create component and sells to a company and charges 20 percent VAT of which manufacturer remits 10 percent of the 20 percent VAT to government. The company sells to retailer and charges 30 percent VAT of which 10 percent is paid to the government. As such at each stage only 10 percent is remited to the government.

The state government collected the VAT, which is difference between the sales earnings through the VAT and the VAT of goods and services in which the products depend. The variation in the tax because the value added through the business. So the whole tax levied at every phase in the economic chain of supply is a constant fraction.

At present, it is being applied in India and it is important to apply. But now from July 1 in the year 2007, G.S.T. which is Goods and Services Tax will be applicable or applied in our country.