Page 244 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Unit 14: Value Added Tax

14.4.1 Importance of VAT Notes

India, particularly being a trading community, has always believed in accepting and adopting
loopholes in any system administered by State or Centre. If a well-administered system comes
in, it will not only close options for traders and businessmen to evade paying their taxes, but
also make sure that they’ll be compelled to keep proper records of sales and purchases.

Under the VAT system, no exemptions are given and a tax will be levied at every stage of
manufacture of a product. At every stage of value-addition, the tax that is levied on the inputs
can be claimed back from tax authorities.

At a macro level, two issues make the introduction of VAT critical for India. Industry watchers
believe that the VAT system, if enforced properly, will form part of the fiscal consolidation
strategy for the country. It could, in fact, help address issues like fiscal deficit problem. Also the
revenues estimated to be collected can actually mean lowering of fiscal deficit burden for the
government. International Monetary Fund (IMF), in the semi-annual World Economic Outlook
expressed its concern for India’s large fiscal deficit – at 10 percent of GDP. Moreover any globally
accepted tax administrative system would only help India integrate better in the World Trade
Organization regime.

14.4.2 Advantages and Disadvantages of VAT

The advantages of VAT include the following:
1. Coverage: If the tax is considered on a retail level, it offers all the economic advantages of
a tax of the entire retail price within its scope. The direct payment of tax spreads out over
a large number of firms instead of being concentrated only on particular groups, such as
wholesalers & retailers.
2. Revenue Security: Under VAT only buyers at the final stage have an interest in undervaluing
their purchases, as the deduction system ensures that buyers at earlier stages are refunded
the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to
the value added at the last stage.
Secondly, under VAT, if the payment of tax is avoided at one stage nothing will be lost if
it is picked up at later stage. Even if it is not picked up later, the government will at least
have collected the VAT paid at previous stages. Where as if evasion takes place at the
final/last stage the state will lose only tax on the value added at that particular point.
3. Selectivity: VAT is selectively applied to specific goods & business entities. In addition,
VAT does not burden capital goods because of the consumption-type. VAT gives full
credit for tax included on purchases of capital goods.
4. Co-ordination of VAT with direct taxation: Most taxpayers cheat on sales not to evade
VAT but to evade their personal and corporate income taxes. Operation of VAT resembles
that of the income tax and an effective VAT greatly helps in income tax administration and
revenue collection.
Disadvantages of VAT are as under:
1. VAT is regressive
2. VAT is difficult to operate from position of both administration and business

3. VAT is inflationary
4. VAT favors capital intensive firms

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