VAT to avoid the cascading effect :
VAT was developed to avoid cascading effect of taxes. The basic principle is that at every stage, tax should be paid only on value added at that stage and not on entire sale price.
‘Value added’ is the difference between sale price and cost of material and other inputs on which tax has been paid.
In the aforesaid example, ‘value added’ by B is only Rs 40 (150–110), In VAT, the idea is that B will pay tax on only Rs 40 i.e. value added by him.
Then, it would make no difference whether a product passes through 5 or 10 stages or even 100 stages, as at every stage, tax will be paid only on ‘value added’ by him to the product and not on total selling price.