ADVANTAGES OF A VAT SYSTEM:

1. Removes the cascading of taxes due to its inherent features of offering set-off of taxes paid already.
   

2. Encourages buyers to demand Tax Invoices from Suppliers ( to in turn claim input tax credit, when sold) thereby widening the tax base.
   

3. Usually accompanies by a lesser number of rates which makes administration much easier.
   

4. A properly designed system of VAT does not distort trade and production methods-i.e. it does not induce shifting of production bases, vertical integration or disintegration, or changes in constitution of the entity.
   

5. Encourage better compliance due to the availability of set off of taxes paid, and thereby less evasion.
   

6. Ensures transparency because the purchases knows exactly how much of taxes is included in the purchase value.
   

7. Improves economic efficiency with its neutrality with respect to forms of organisations, production facilities and location.
   

8. Particularly improves export competitiveness of local industries due to 'zero rating' of exports.
   

9. It creates an audit trail due to its inherent nature where the purchase invoice forms the basis for obtaining credit of tax. It also has a "self-policing effect" since it requires proper maintenance of purchase and sale documents to avail the credit.

While VAT as a system has its own advantages, it is not quite clear as to how effective this system could function in the Indian economy where 2/3rd of the industry is in the unorganised sector as contrasted to the western economies (where VAT is followed) in which right from production to retailing the entire operation is organised. There could also be undue demands on the dealers by way of requiring elaborate Book keeping procedures such as maintaining proper books of accounts, and maintaining not only sales invoices, but also purchases invoices. 

In the forthcoming sections, we shall be dealing with the present position of VAT transition in India, the features of VAT in some of the important states, issues arising out of VAT, issues impeding implementation of VAT, implications to the exporting community and other matters that one needs to be familiar with.