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Since ages always a reform is made
for the benefit in the process of development. It was Chanakya who first
wrote that a government should tax its people like a shepherd shears his
flock or a bee gets nectar from a flower. But apparently that fiscal
wisdom died with him. Let us not experience the same with VAT in India.
It has a baggage full of benefits. Few advantages of VAT in India are
mentioned below.
It will be a virtual crime not to look to the other side of the coin of
the Indian VAT system. Disadvantages will always give birth to
amendments to the existing policy so that traders can ride jerk free on
it adding value to the existing Indian taxation system. We have also
discussed upon the friction of VAT below.
Advantages of VAT
In the advantages part we will first look after the broad coverage of
VAT in the Indian market. Then we will consider the level of security
the Indian VAT is having on our revenues. Obviously the selection of
items to be covered by VAT in India will be given a bullet to think upon
and at last we will check out the co-ordination VAT in India will be
having with our existing direct tax system.
1) Coverage
If the tax is carried through the retail level, it offers all the
economic advantages of a tax that includes the entire retail price
within its scope, at the same time the direct payment of the tax is
spread out and over a large number of firms instead of being
concentrated on particular groups, such as wholesalers or retailers.
If retailers do evade, tax will be lost only on their margins because
customers that are registered firms gain nothing if their suppliers fail
to collect tax, except delay in payment; they will pay more to the
government themselves. Under other forms of sales tax, both seller and
customer gain by evading tax. One particular advantage is that of the
widening of the tax base by bringing all transactions into the tax net.
Specifically, VAT gives the new government the opportunity to bring back
into the tax system all those persons and entities who were given tax
exemptions in one form or another by the previous regime.
2) Revenue security
VAT represents an important instrument against tax evasion and is
superior to a business tax or a sales tax from the point of view of
revenue security for three reasons.
In the first place, under VAT it is only buyers at the final stage who
have an interest in undervaluing their purchases, since the deduction
system ensures that buyers at earlier stages will be refunded the taxes
on their purchases. Therefore, tax losses due to undervaluation should
be limited to the value added at the last stage. Under a retail sales
tax, on the other hand, retailer and consumer have a mutual interest in
underdeclaring the actual purchase price.
Secondly, under VAT, if payment of tax is successfully avoided at one
stage nothing will be lost if it is picked up at a later stage; and even
if it is not picked up subsequently, the government will at least have
collected the VAT paid at stages previous to that at which the tax was
avoided; while if evasion takes place at the final stage the state will
lose only the tax on the value added at that point.
If evasion takes place under a sales tax, on the other hand, all the
taxes due on the product are lost to the government.
A significant advantage of the value added form in any country is the
cross-audit feature. Tax charged by one firm is reported as a deduction
by the firms buying from it. Only on the final sale to the consumer is
there no possibility of cross audit.
Cross audit is possible with any form of sales tax, but the tax-credit
feature emphasises and simplifies it and is likely to make firms more
careful not to evade because they know of the possibility of cross
check.
3) Selectivity
VAT may be selectively applied to specific goods or business entities.
We have already addressed essential goods and small business. In
addition the VAT does not burden capital goods because the
consumption-type VAT provides a full credit for the tax included in
purchases of capital goods. The credit does not subsidize the purchase
of capital goods; it simply eliminates the tax that has been imposed on
them.
4) Co-ordination of VAT with direct taxation
Most taxpayers cheat on their sales not to evade VAT but to evade
personal and corporate income taxes. The operation of a VAT resembles
that of the income tax more than that of other taxes, and an effective
VAT greatly aids income tax administration and revenue collection. It is
interesting to note that when Trinidad and Tobago set out to introduce
VAT it chose one of its top income tax administrators as the VAT
Commissioner.
It must be stressed once again that if properly implemented VAT can
ultimately lead to a reduction in overall rates of tax.
Revenues will not be sacrificed but would in fact be enhanced as a
consequence of the broadened tax base. This does not seem to be a bad
idea at all. |
