VAT - The
Global Meaning
Globally, VAT is regarded as a
tax that is best levied by the Central government - a condition that
is difficult to meet in a federal finance system such as ours. It is
true that 123 countries have adopted VAT, but most of them have
unitary systems of government. VAT is a centrally-administered tax
with a revenue-sharing mechanism. It is hard to visualise VAT as a
revenue-neutral measure, or one where the states will not lose out
in relation to the present system, in a federal set-up.
If VAT is Centrally administered, the tax base is quite wide,
comprising imports, production and different stages of sales. If the
base is divided between the Centre and states, the chain is broken,
making tax evasion easier and affecting the states' tax base. In
countries where VAT is administered by a federal government, revenue
collection on imports accounts for a larger portion of total VAT
revenues. In an IMF study of 22 developing countries, it was
discovered that in about two-third of them, more than half the VAT
revenue was collected from imports. In Pakistan and Bangladesh, VAT
collection from imports was 64 per cent of the total proceeds from
the tax. As tax evasion on bulk imports is difficult, it also helps
in checking tax evasion at subsequent stages of the tax chain.
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