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VALUE ADDED TAX


The value added tax (VAT) is a method of tax collection as well as name of a state level tax (at present) in India. A tax collected at every stage of value addition, i.e., either by production or distribution is known as value added tax.12 The name itself suggests that this tax is collected on the value addition (i.e., production).

Production of goods or services is nothing but stages of value additions where production of goods is done by the industrialists or manufacturers. But these goods require value addition by different service providers/ producers (the agents, the wholesalers and the retailers) before they reach the consumers. From production to the level of sale, there are many points where value is added in all goods. VAT method of tax collection is different from the non-VAT method in the sense that it is imposed and collected at different points of value addition chain, i.e., multi-point tax collection. That is why

there is no chance of imposing tax upon tax which takes place in the non- VAT method—single point tax collection. This is why VAT does not have a ‘cascading effect’ on the prices of goods it does not increase inflation—and is therefore highly suitable for an economy like India where due to high level of poverty large number of people lack the market level purchasing capacity. It is a pro-poor tax system without being anti-rich because rich people do not suffer either.


Need of VAT in India

Over 160 nations in the world have implemented the VAT system of taxation regarding collecting their indirect taxes. There have been valid reasons why India should move towards the VAT method of tax collection. We may see some of the major reasons:13

(i) Due to single point tax collection, Indian indirect tax collection system was price-increasing (having cascading effect on the price) which was highly detrimental to the poor masses. Implementation of VAT will improve the purchasing capacity and so living standard of the poor people.14

(ii) India is having a federal political system where side by side the central government, states have also been given power to impose taxes and collect them. At the central level, there had been uniformity of taxes for the economy. But there was no ‘uniformity’ at the state level taxes (i.e., state excise, sales tax, entertainment tax, etc.). This was detrimental to the development of a single market for Indian economy as a whole. India basically had many markets, but no Indian market as such. To bring in uniformity at the state-level taxes, VAT was a necessary step in India.

(iii) With the process of economic reforms, India moved towards the market economy. And for this, firstly India needed to have a single market. Without uniformity at the state level taxes (uniform VAT) this was not possible.

(iv) Indian federal design has resulted in economically weaker states and stronger centre. As VAT increases the total tax collection (experience of the world suggests so) it was fit to be implemented at the state level.

(v) India has been a country of high level tax evasion. By implementing VAT method of indirect tax collection, it becomes almost impossible to go for large scale tax evasion. To prove one’s level of value addition, the purchase invoice/receipt is a must which ultimately makes it cross-check the level of production and sale in the economy.15

(vi) If some of the state level taxes (which are many) are converted into state VAT the complexity of taxation will also be minimised. And at the end, it is possible to merge some of the centre’s indirect taxes with it, i.e., arrival of the single VAT.

Keeping all such things in mind, India started tax reform (Chelliah Committee and Kelkar Committee) and a certain level of sucess has been achieved in this area which can boost our motivation.

In the year 1996, the central government started collecting its excise duty on the VAT method and the tax was given a new name—the CENVAT.

The next proposal was to merge the states excise duty (imposed on intoxicants only) and their sales taxes into one tax—the state VAT or VAT. This could not take place due to states’ lack of political will. Ultimately, only sales taxes of the states were changed to be named VAT and was started to be collected on the basis of the VAT method (some states did not join it and some joined later). The experience has been encouraging.


Experience of VAT

A total number of 20 states/UTs switched over to VAT (from their existing sales tax) in April 2005. Rest of the states went for it by 2008–09. Majority of the states/UTs saw revenue buoyancy due to VAT in the very first year of its implementation while few states availed the Central compensation facility for their revenue losses, that too for hardly one or two years. Experience of implementing VAT has been quite encouraging—by the financial year 2016– 17, the tax revenues of the states and UTs were estimated to grow with an annual rate of around 16 per cent.

This way, the view that the VAT will increase the tax collections of states has been validated. Similar impact of the proposed GST is believed to have on the indirect tax collections of the states as well as the Centre.