Explain how sales tax incentives cause problems for VAT system.

Value added tax (VAT) regime is based on the value addition to the goods. Under VAT, the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period. Thus, here the tax credit is passed at each stage through issuance of tax invoice. Sales tax incentives like fiscal exemption from tax or subsidy are against the principles of VAT as dealers effecting exempted sales are neither allowed to avail input tax credit nor allowed to pass on the credit because of which the VAT chain gets broken.