Vat is consumption based tax :
You will find that actually tax is collected by Government only at final stage i.e. consumption stage. Till then,
the credit is passed on to next buyer. Thus, effectively Government does not get any tax revenue.
In the aforesaid example, if ‘D’ does not make any further sale, he cannot pass on the input tax credit to anysubsequent buyer or customer. Hence, that tax goes entirely to Government.
Hence, Vat is termed as ‘consumption based tax’.
In case of inter-state transactions, if goods are manufactured in ‘X’ State, sent to ‘Y’ State and sold in ‘Y’ State, the tax revenue will be collected only by ‘Y’ State and no revenue will accrue to ‘X’ State Government.
This does not make difference in respect of Central Taxes like excise duty and service tax (later it will be CGST and IGST) as wherever tax is paid, revenue goes to Central Government. However, this makes huge difference in respect of State Vat and SGST