Economy Basic Concepts Par 10 – Value added tax (VAT)

What is Value added tax (VAT)?

  1. It is an indirect tax imposed on value addition, in each state of economic activity (value of sales – Intermediate commodities)
  2. Since it is imposed on all the stages of production and distribution of goods and services, so it replaces all the domestic indirect taxes (except custom duty)

Advantages of VAT

  1. It reduces evasion because it enables officials to cross-check records of various firms.
  2. It encourages firms to purchase from those firms which have paid taxes in ordered to reduce their own tax liabilities.
  3. It reduces the effective burden of tax on firms which encourages tax compliance
  4. It eliminates the cascading burden of multiple taxations
  5. Promoters specialization – Because of tax liabilities under tax not affected by the number of stages in the product distribution process. It does have anti specialization bias unlike in excise (tax liabilities)
  6. It unifies the indirect tax system across the states
  7. It enables allocation of resources on the basis of comparative advantage of various states or region, i.e. each state would produce those commodities in which it is most efficient.

Limitation of VAT

  1. It is highly resourced intensive, required to centralise record of indirect taxes, maintenance of record by a firm in a specific format and trained tax offices.
  2. The process of estimation of value addition is quite complex

CENVAT (Central VAT)

  1. It was adopted in India in 1986 and was known as MODVAT renamed in budget 2000 – 01. It was imposed on the recommendation of Mr L K Jha Committee.
  2. It was imposed only on the manufacturing state so it replaces excise.
  3. Central government experimented it for its own taxes, that’s why he it does not involve sales tax which is state domain

It is imposed on production and distribution of goods and also on production and distribution of services 

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State level VAT

It was adopted in 2008, imposed on the distribution stage by the central government traders have to pay than reimbursed.

Background Behind state-level VAT

  1. It started with the conference of Chief Ministers of Indian State and Prime Minister, which was held in 1999.
  2. In 2000, the empowered committee of State Finance Ministers which was chaired by Sushil Kumar Modi was evolved to make the consensus.
  3. It published the provision on white paper on VAT in January 2005.
  4. It was not adopted by all state government, because traders were apprehensive of the provisions.
  5. The last state who adopted it was Uttar Pradesh

Limitation of the state-level VAT

  1. Taxes paid of one state cannot be reimbursed in another state.
  2. The central sales tax have not been abolished
  3. It will lead to distortion of resource allocation

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