Exemption or Zero Rating : Value Added Tax (VAT) India
Exemption or Zero Rating : Value Added Tax (VAT) India
Exemption in VAT means exemption from tax on the value added tax of a commodity at a particular stage of production distribution cycle. It does not allow input tax credit of all the earlier stages of cycle.
Zero rating means that a rate of zero tax is applied on the commodity. Rebate of all the earlier taxes paid (input taxes) is allowed to be taken by the firm. This tool is particularly used for relieving exports from the effects of all domestic taxes.
Exemptions are not desirable under VAT as it causes break in input tax credit chain. In cases of re-entry of exempted commodity as an input for a taxable commodity, the problem of cascading reappears. It also leads to loss of transparency as taxes imposed on these items on their earlier stages will remain embedded in the price.