The Full form of VAT is Value Added Tax. VAT is a form of indirect taxes collected by the State Governments which is imposed only on tangible goods or products. One of the characteristic of VAT is that it is imposed at each and every stage of production starting from turning raw material into finished goods and at the point of sale. VAT is collected on goods or products sold within a state and applicable to some key products such as diesel, petrol, and alcohol for human consumption that are not taxable under the Goods & Services Tax (GST) Act. Introduced in 2005, VAT was a replacement for the earlier Sales Tax so that a uniform rate of tax for products and services was possible throughout the country.

However, the VAT regime did have some drawbacks. The key reasons for implementation of GST (Goods & Services Tax) as a replacement for VAT are: the applicable rate of Value Added Tax (being a state subject) for the same product or service tends to vary from state to state, it tends to increase the compliance burden on businesses because of the difference in rules and regulations of VAT from one state to another.