The following are the principles which govern value added tax (VAT):
1. Principle Of Transparency
VAT is transparent tax. It is an account based tax system. VAT has made tax system transparent. Tax evasion is not pervasive where accounting system is transparent.
2. Principle Of Removing Cascading Effect
VAT removes cascading effect. Cascading effect means tax on tax i.e. tax is charged on the value including tax. But VAT has removed this effect by not including the VAT in the cost price to the second stage of the distribution channel. But under sales tax system, sales tax paid at one stage is included in the cost price for another stage.
3. Principle Of Neutrality
Neutrality means not to discriminate one to another. VAT does not discriminate one economic activity against others. Tax rate of goods or services to be taxed are not discriminate by VAT. So, in this regard, VAT is neutral.
4. Principle Of Destination And Zero Rating
Under this principle, goods and services are taxed at consumption point, bot based on production. Goods and services that are exported are taxed at zero rate(i.e the taxpayers get refund of VAT earlier paid in purchasing raw materials and interrelated goods but they should not pay tax on added value.)
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