VAT in India
"A government should tax its people like a shepherd shears his flock or a bee nectar from a flower."
— Chanakya
Introduction
From the time a reform is always done for the benefit of the development. The income tax was first introduced in 1860. The main taxes collected by central governments are taxes on the sale or purchase of goods. VAT (Value Added Tax) is a novelty that has attracted international attention as more countries which adopt a different extent to restructure their tax systems.
Since the introduction of new economic policies of LPG (liberalization, privatization and globalization) in India under the government of Narasimha Rao, the debate on restructuring the financial system of India was launched. The Indian economy is competing with other nations due to globalization and its transformation to a market economy. The emphasis on new reforms is to expand> Tax net and make it easy for a layman can understand.
VAT was introduced in India in 2005. VAT (Value Added Tax) is levied on all goods and services. VAT will replace the present sales tax in India. VAT, in simple terms, is a multi point levy for each entity in the supply chain with the installation of input tax offset – that is, the tax paid when buying goods from a trader and the purchase of raw materialsmanufacturer. Only the value added in the hands of each of the institutions are subject to tax.
VAT in India
Each government is turning into a matrix of forms of public funding, with the budget deficit and rising public spending. The revenue of the Government of India, including most taxes. Over the last three years about 57% comes from customs and excise collections. Direct taxes such as taxes on corporate profits and contributed to40%.
Budget deficit
1990-1991 1996-1997 2004-05 2005-06
Revenue Deficit 4.2 3.6 3.9 2.7
Budget deficit 9.4 6.4 7.9 4.3
Primary Deficit 5.0 1.3 0.5 0.5
Source: RBI
Several sections are of the opinion that the business community was among the main culprits when it comes to tax evasion. Under the VAT system, no exemption will be granted and a fee will be levied at all stages of manufacture of a product. At each stage of value addition, thetax levied on the inputs can be claimed back from the tax authorities. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net.
In fact direct tax are suitable to design a progressive tax structure, given the extreme inequitable income distribution in developing countries. Studies on tax reforms reveal that the tax systems in developing economies have not yielded more revenue. Finally the impact of tax reforms is regressive.
Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime. In India Tax Credit method is followed. VAT can be computed by using either of the three methods detailed below
o The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.
o The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).
o Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales
Originally it was planned that VAT would be simultaneously be implemented across all the states. However a few states decided to opt out of VAT system. This has led to shift of trade between states due to differences in the rate structures between states having VAT system and those having sales tax system. It was expected that there would be loss of some revenue to the states in the initial years, but the Centre has come forward to compensate the states for the revenue loss.
Sales tax has always been one of the main contributors to both the State and the Central exchequers. While its basic role is that a generator of revenue may also be used as an engine for development and trade. The introduction of VAT in India for two reasons. First, will the fiscal consolidation strategy for the country to the macro level. Secondly, VAT will help India in international trade. Therefore, VAT is useful in the long run elasticity of revenue with its high income. This is a rational tax structure, practical and proven in many major economies.
Implementationof VAT created a furore. It was felt that cascading effect would increase. The outcry was due to poor communication and lack of information. In spite of such criticisms there was a good response to revenue collections form the states that had implemented it.
Problems /Defects in the tax structure
Cascading effects occur when taxable goods are produced using taxed inputs- a tax on tax. In India as inputs were subject to excise and no set off was available when computing the tax due to output sold ,cost of final product raised.
Till early 90’s services were mostly excluded from the coverage of excise duties.
No. of Acts and rules which often led to confusions and problems related to compliance and administration grew enormously.
Recommendations:
Replacing existing excise, sales etc and introducing a single tax
Switchover to the new system to be started up in Cycle
The reduced level of excessively high rates for certain products
The modernization and simplification of procedures
Strengthen inspection mechanisms and monitoring and rationalization of the classification systems.
exempted products to be in the tax net.