• Value Added Tax (VAT) is
a general consumption tax assessed on the value added
to goods and services.
•
It is a general tax that applies, in principle, to
all commercial activities involving the production
and distribution of goods and the provision of services.
•
It is a consumption tax because it is borne ultimately
by the final consumer. It is not a charge on companies.
•
It is charged as a percentage of price, which means
that the actual tax burden is visible at each stage
in the production and distribution chain.
•
It is collected fractionally, via a system of deductions
whereby taxable persons can deduct from their VAT
liability the amount of tax they have paid to other
taxable persons on purchases for their business activities.
This mechanism ensures that the tax is neutral regardless
of how many transactions are involved
Value Added Tax (VAT) is unanimously
acknowledged to be a major reform in the indirect
taxation system for the following reasons:
•
It eliminates the cascading effect of taxes;
•
It promotes competitiveness of exports;
•
It has a simple and transparent structure; and
•
It improves compliance.
Presently there are more than 120 countries in which
VAT is in force. Only the USA and India are amongst
the more populous countries that do not have a VAT.
Economists have generally shared the view that VAT
is best suited as a Federal or Central tax, and not
at the State-level. However, states and provinces
in a few large federal countries like Brazil, and,
to a lesser extent, Canada, have adopted VAT, with
varying degrees of success.
The implementation of VAT is closely linked to the
administration of other indirect taxes and impacts
the tax to GDP ratio. Most countries have taken several
years to implement VAT.
In India, an Empowered Committee of the Finance Ministers
of the States has been constituted for the purpose
of implementing a nationwide State-level VAT. The
Empowered Committee is indeed a unique experiment
in federal fiscal planning and has achieved much
in terms of building a consensus on many of the critical
issues relating to implementation of VAT in a relatively
short spell of time.
