The much heated debate on Value Added Tax (VAT) has come to an end. The implementation of VAT unfolds a new era of an improved and modernized tax structure, which promises to bring in increased transparency, compliance and additional revenues for the states. However, there are some issues that need to be addressed for the success of VAT.
April 1, 2005 marks the beginning of a new tax regime and the end of a 55-year old sales tax regime in India. State-level Value Added Tax or VAT, which is being touted as a more practical and taxpayer-friendly tax than the existing Central Sales Tax (CST), will be implemented in all states (with the exception of a few) from the said date. However, the announcement by the Finance Minister P Chidambaram and the Empowered Committee (EC) of State Finance Ministers, at the beginning of the year, about VAT implementation caused much chaos among various quarters of the business community.
According to the White Paper on State-level Value Added Tax, in the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. Besides, several states impose multiplicity of taxes like turnover tax, surcharge on sales tax, additional surcharge, etc. Once VAT is in place, all these taxes will be abolished. CST is also going to be phased out in the coming months. With the introduction of VAT, the tax burden will be rationalized and according to the White Paper, prices in general will also fall. Another attraction of VAT is that it will replace the existing system of inspection by a system of built-in self-assessment by the dealers and auditing. According to the EC, the tax structure will become simple and more transparent. This will improve tax compliance and also augment revenue growth. It is indeed a move towards greater efficiency, equal competition and fairness in the tax system. On the economic front, VAT is expected to bring a revenue of $10 bn a year. With this revenue, the UPA government has promised to fight poverty and cut the alarming fiscal deficit (which is currently at 10% of the GDP). Realizing the benefits of VAT, Brazil became the first country in the world to introduce it in the mid- 1960s, followed by the EU countries in the 1970s and subsequently VAT has been introduced in around 130 countries several federal countries. One of the prime examples of a country implementing VAT and reaping its benefits is Ireland, which like India, has emerged as a hub for Business Process Outsourcing (BPO) and for buying computer software. It carved a strategy of low corporate taxes of 10-16% on different activities and is cutting this further to 10-12.5%. Once the poorest country in EU, Ireland has now caught up with Britain. Other examples of the rags to riches stories, thanks largely to VAT, are Russia and Estonia. |
