“A government should tax its people like a shepherd shears his flock or a bee gets nectar from a flower”.
— Chanakya
Introduction
Since ages always a reform is made for the benefit in the process of development. The first Income Tax was introduced in 1860. The main taxes collected by the State Governments are taxes on sale or purchase of goods. VAT (Value added Tax ) is a novelty which has claimed international attention as more countries are adopting it in varying degrees to restructure their systems of taxation.
Ever since the introduction of new economic policies of LPG (Liberalization, Privatization, Globalization) in India under Narasimha Rao’s government, the debate regarding the restructuring of Indian fiscal system also has been initiated . The Indian Economy is on race with other nations due to globalization and its transformation to a market economy. The emphasis on new reforms is to broaden the tax net and make it simple so that a layman can understand it.
VAT was introduced in the year 2005 in India. VAT (Value added Tax ) is levied on all goods & services .VAT will replace the present sales tax in India. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax – that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax.
VAT in India
Every government turns to an array of forms of public finance ,to aid the fiscal deficit and ever increasing public expenditure. The revenue of Indian government largely comprises of taxes. Over the last three fiscal years about 57% has come from customs and excise collections. Direct taxes such as corporate and income taxes contributed to 40%.
Fiscal Deficit
1990-91 1996-97 2004-05 2005-06
Revenue Deficit 4.2 3.6 3.9 2.7
Fiscal Deficit 9.4 6.4 7.9 4.3
Primary Deficit 5.0 1.3 0.5 0.5
Source: RBI
Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. Under the VAT system, no exemptions will be given and a tax will be levied at each stage of manufacture of a product. At each stage of value-addition, the tax 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 of a revenue generator, it can also be used as a driver of development and trade. The introduction of VAT in India is for two reasons. First it will form part of the fiscal consolidation strategy for the country at macro level. Second, VAT will help India in the International trade. Thus, VAT is beneficial in the long run with its high revenue-income elasticity. It is a rationalized tax structure, practiced and proven to be successful in many leading economies.
The introduction of 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 stages
Reduction in the level of unduly high rates on some commodities
Updating & simplification of procedures
Strengthening inspection and monitoring mechanisms and streamlining classification systems.
Exempted commodities to be in the tax net.
